If you want to be a Financial Independence Freak, you need to know some basic terms. The following list is taken and abbreviated from an article written by Jennifer Ryan Woods published on June 8th, 2015 for Forbes.com. I have added some extra tidbits to each term.
Saving is something that our American society generally does not do. Americans instead seem to live by the premise of “let’s spend everything we make – and then some!” This is why so many Americans are in debt (mostly credit cards) and don’t have enough available money to pay for an emergency such as a medical bill or an unexpected, mandatory car maintenance. Don’t be normal. Be a freak and save like crazy, but without depriving yourself of the things you really want.
It is essential to know the purpose of a budget and how it works. Simply put, a budget lists all your money coming in and all your money going out. It can be “actual” with numbers from the past month/year, or it can be “projected” with estimates for the numbers for the next month/year. If you keep track of your spending, an actual budget is easy to put together, and making a projected budget is much more accurate based on past numbers. In my opinion, keeping track of all of your income and spending is more important than putting together an actual budget because the spending log allows you to see exactly how much you spend in different categories and allows you to alter future spending accordingly.
Car loans and college loans are part of ordinary American life. But not for you. Never take out a car loan. Only take out a college loan if absolutely necessary. Mortgages (loans for houses, condos, etc.) will be something that you will use. They allow you to leverage your money in an investment. This type of loan is not only OK, but encouraged for the right investment.
Some debt is good. Most is bad. Debt on items that cost you money (a car, for instance) is always bad. You are paying money (interest) to have a good that costs you money. Good debt is money owed on a good (a real estate investment, for instance), which makes you more money than what you are paying in interest. If your mortgage costs you $100 a month in interest, but the property makes you $300 a month then you are actually making $200 a month by having that debt. I’ll take that kind of debt all day.
Borrowing money almost always costs you in the form of interest. Buying a primary residence property (a house you plan to live in) will allow you to borrow money at a very low interest rate compared to when you borrow money on a credit card (by purchasing something that you will pay for later) which will typically charge a very high interest rate. Most people are unaware of how important interest is. We all need to understand how interest works, how it is calculated, and how it can make what seems to be a good deal a bad deal.
6. Credit/Credit Card
Simply put, only use a credit card when you can pay off the balance EVERY month. But using them is key to building a high credit score. So use it to buy things intelligently, and then pay your entire balance. Repeat monthly.
Taxes are taken out of your paycheck without your permission, but you have no choice. When you file your income taxes each year (between January and April), you can get some of that money back, or you may owe more. A tax professional can tell you if a college student should be included on their parents’ tax return or not.
There are many, many different types of investments. Anyone who understands personal finance will agree that investing some/most/all of the money you’ve saved is critical to building wealth. How, when, and where to invest is not so universally agreed upon, however.
9. Credit Score
Having a good credit score is vital for financial independence. You will need to keep your credit score healthy to have opportunities in the future. This is the last term on the list, but maybe the most important.