Most people want to build wealth. Between groceries, kids, housing, retirement and entertainment, money is an essential part of life. To make the most of your money, our credit counseling advice is to take to learn some basic financial literacy terms. Check to see if you know the following financial lingo and what it really means.
10 Financial Literacy Terms
Think about the following financial literacy terms. Once you have thought about each one, scroll down to read more about them. Finally, compare your answers to the ones we have provided to evaluate yourself.
- SMART Goals
- Liquid Assets
- Credit Counseling
- Debt Management Plan
- Reverse Mortgage
- Charged Off Debt
- Estate Planning
Definitions to the Financial Literacy Terms
Budget- A budget plan is a chart that shows you the flow of money in your everyday life. It calculates money coming in and money going out- income and expenses. Typically, line items are grouped together in budget categories. For example, rent, utilities and insurance would all fit under the “Housing” category. Additionally, you may have goals and dreams but if you don’t set up guidelines for reaching them and you don’t measure your progress, you may end up going so far in the wrong direction you can never make it back.
SMART Goals- When setting financial goals, make sure your goals are SMART. This ensures that your financial goal will not be too broad, vague, or so far in the future that the goal will fall to the wayside. SMART stands for:
APR- APR stands for annual percentage rate. It is the yearly rate of interest that you will pay on your personal credit card debt. They can change from year to year because issuers frequently offer special promotional or introductory rates. This is especially true for balance transfers (see below). APR will also increase as a result of missing or making late payments.
FICO- FICO is a company that developed an algorithm to calculate consumer credit scores, known as FICO Scores. This is the credit score most frequently relied upon by lenders to assess creditworthiness, but it is not the only credit score there is. There are hundreds of credit scoring methods that each provide a different score and change constantly. FICO is the top brand of credit score and is the easiest for consumers to monitor themselves.
Liquid Assets- A liquid asset is very easy to access and won’t lose value once it’s converted to cash. Since you never know when an emergency is going happen, it’s important your emergency fund is highly liquid. Basically, don’t invest your emergency fund; put it in a savings account that doesn’t have fees or restrictions for accessing your funds.
Credit Counseling- Credit counseling is a one-on-one session with a certified credit counselor and someone wanting additional input or help managing their finances. The session will go through your current finances, analyze it and provide ways to meet your financial goals. These goals could include eliminating credit card debt or avoiding foreclosure. Some outcomes of credit counseling advice include financial education, entering into a debt management program, managing your own debts or filing for bankruptcy.
Debt Management Plan- A debt management plan (DMP) is a service offered by a credit counseling agency where you will make one monthly payment to the credit counseling agency. Then that money is distributed out to your creditors. Additional benefits you may receive could be lower interest rates and waived fees. Additionally, you will end up paying the unsecured debt in a shorter amount of time. A credit counseling agency like American Consumer Credit Counseling can help to evaluate your needs and if you would benefit from a DMP.
Reverse Mortgage- Reverse mortgage solutions allow the homeowner to borrow against the equity in their home to receive a lump sum cash payment, monthly payments or a line of credit. Homeowners receive payments on the proceeds of the loan, rather than making payments toward the payoff of a mortgage. Some seniors can find great relief at this access to cash while still living at home.
Charged Off Debt- The creditor does not expect to collect the balance that’s owed. Rather they transfer the account to an accounting category such as ‘bad debt’ or ‘charged to loss’. These accounts are usually turned over to collection agencies. This is the most adverse status reported on accounts.
Estate Planning- Estate planning is a way to legally protect yourself and your loved ones if tragedy or death occurs. Who will make medical decisions for you if you are incapacitated? Who gets the house when you die? What about paying for your children’s education? There are a few main documents in an estate plan:
- Power of Attorney
- Living Will/Health Care Proxy
- Trust (not everyone will need this)
These are just a sampling of financial literacy terms which cover a variety of topics. Use this list to test yourself and your knowledge.
If you’re struggling to pay off debt, ACCC can help. Schedule a free credit counseling session with us today.