Feel like cringing when people are tossing around key financial terms that sound really adult and you don’t know what they mean? You’re not alone, because there are lots of young people who are clueless when it comes to understanding what some of these mean. That’s why we’re here, though. Literally, it’s one of the reasons why KnewMoney started, because there isn’t a single place that just teaches us all of this finance stuff that we should know about.
When it comes to key financial terms, no matter how hard you may try to fake it till you make it, when it comes to actually understanding what’s behind those terms, that strategy just won’t cut it. This is especially true when it comes time for you to make decisions about your employee and/or job benefits and to know what you’re getting.
While there are a ton of financial terms to add to your money vocabulary, the following five are vital to your financial health, and making the most of your current employer’s offerings.
An employer contribution is the money your company puts into your retirement account. This doesn’t mean more money on top of your salary, however, so don’t be confused. Companies normally only contribute to your retirement if you do as well — and you should. This means the percentage of your paycheck you put into your 401k will be matched by the company. This sounds great right? Well, it is, but in some cases there are stipulations that say you won’t be able to take the full amount you (and the company) have socked away if you leave. Which brings us to…
When the employer contribution fully vests, it means you can keep all the money both now and when you leave. A vesting schedule tells you when you’re going to be able to have full ownership of your employer contribution. There are three types of vesting schedules.
Immediate. This is the best option for anyone, and means that, whatever money is matched by your company, is yours no matter when you leave your job.
Graded. This vesting schedule means you get to keep a percentage of your employer contribution over time. Ie: You get to keep 20 percent of your employer contribution each year for up to five years until you’re 100 percent vested. That means that, if you left the job after four years, you’d only get to keep 80 percent of your employer contribution.
Cliff. This is definitely the worst option. When you’re on a cliff vesting schedule, it means you don’t get to keep any of your employer contributions until you’re 100 percent vested with your company.
Just remember, any money you contribute to your 401k is all yours no matter what your vesting schedule is.
There are two different types of retirement savings accounts, ROTH and traditional IRAs. With traditional, you get a tax benefit this year, but you end up paying taxes on that money when you take it out during retirement. ROTH works the other way. You don’t get a tax advantage today because you’re depositing money post-taxes. However, this pays off when it’s time to use that retirement money because you won’t be taxed on it. Regardless of which savings plan you sign up for, the most important thing is to be saving for retirement period.
This is the person who will inherit your money when you die. It’s not a fun concept to think about, but it’s comforting to know that you’ve got things set up for the people you care about if something really bad happens. You will need their full legal name, address and social security number to make sure they’re in the books.
FSA – Flexible Spending Account
This is a tax deferred way to save for medical expenses. The money comes out of your pre-taxed paycheck and it’s pretty awesome to have money for doctors visits set aside. The only downside is that you have to use all the money in your FSA before the end of year deadline. Any money leftover is typically returned to your employer.
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