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8 Money Management Terms Every Young Adult Needs to Know

Financial terms

As a high school or college student, you can study everything from Shakespeare's plays to microbiology. But you typically don't study basic money management — arguably the most important skill you'll need to gain as you grow into a financially savvy adult.

If you want to ace your finances as much as your finals, start by learning these basic money-related terms.

 

1. Checking Account

A checking account is designed to store your money for daily expenses and paying bills. Here are the types of things you can do with a checking account:

  • Deposit cash and checks, or take advantage of something called direct deposit, which means your employer has your paycheck automatically deposited into your bank account every payday. 
  • When you need cash, just visit an ATM or bank branch to make a withdrawal.
  • Pay for things using the money in your checking account by writing a check, using a debit card, or transferring funds digitally through services like Zelle.

 

2. Debit Card

A debit card is a plastic card that's associated with your checking account. It looks like a credit card but works differently. Swiping your debit card pulls money directly from your checking account to cover the transaction, instead of buying items on credit. If you charge an amount that's larger than your current balance, the transaction will be denied — or your balance will go negative and you may be charged an overdraft fee.

 

3. Overdraft

An overdraft occurs when you withdraw more funds from your checking account than you presently have. For example, if your checking account balance is $15 and you make a purchase for $20 with your debit card, you'd overdraft by $5. When opening a new checking account, you may be asked if you want to opt-in to allow this overdraft coverage.1 Overdrafts can help you complete a purchase, but overdrafts can come with high fees — up to $35 per occurrence.2 You can also opt-out of overdraft coverage and simply have transactions denied if they exceed your balance.3

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Just one overdraft fee can cost you $35+ — but what does it mean to "overdraft" anyway?

4. Savings account

Like a checking account, a savings account is a type of bank account where you can store extra funds. However, instead of using this account to manage day-to-day transactions, you put money in a savings account long term. Your savings account can be used to save for something specific, like a security deposit for an apartment or a vacation, or be set aside as an emergency fund that you grow over time. No matter how you use your savings, you should look for a savings account that offers high interest and will help your money grow. If you plan on saving your money for three months or more, consider putting your money into a certificate of deposit (CD) to access a higher rate of savings.

 

5. Interest rates

Understanding interest rates is key when evaluating bank products. It can be a bit confusing, though, since the interest rate on a bank account or loan might be expressed as "APY" or "APR," which aren't exactly the same things. Here's the difference:

Annual Percentage Yield (APY)

When you keep money in an interest-bearing bank account, the bank pays you interest as an incentive for letting them hold your money. That's because banks make money by lending out your deposits — and they want to encourage you to save your money with them. Interest rates on bank accounts (such as saving accounts, CDs and money market accounts) are often expressed as an annual percentage yield (APY), which is the percent of the balance you will earn each year once compounding interest is factored in.

For example, if you have a savings account with a $1,200 balance that offers 1% APY and compounds annually, you would earn $12 per year in interest. If the interest is paid monthly, the bank would pay you $1 in interest each month. If your balance goes up or down during the following month, the interest you receive for that month will change as well.

Annual Percentage Rate (APR)

When you borrow money, the lender will charge you interest on the money you owe them. You may also owe some fees for taking out the loan as well. The annual percentage rate (APR) lets you know the percent of the loan that you will pay for interest (plus any fees or other costs associated with the loan) on an annual basis. This amount will then get added to the amount you borrowed to calculate the total amount you owe. How much you borrow, how long you will take to pay the loan back (called the loan term or loan duration) and other factors like your credit score may impact your annual percentage rate.

 

    6. Credit Card

    A credit card works similarly to a debit card in that it lets you make purchases by swiping a card. But unlike a debit card, which pulls money directly out of your checking account, a credit card effectively allows you to borrow money and pay it back later. Your credit limit is the total unpaid balance you're allowed to have at one time and is determined by the card issuer when you apply. Using a credit card also affects your credit score, which is a three-digit number that tells creditors and lenders how responsible you are when borrowing money. Paying your credit card bill on time every month and keeping your balance low will help develop a strong credit history and build a good credit score, while missing payments and maxing out your card will hurt your credit score.

     

    7. Debt

    Debt is the broad term for any money you owe a creditor or lender. Debt can include money you owe on your credit card or on an existing loan, such as a car loan or student loan. You need to be careful when acquiring debt, because borrowing too much could saddle you with high payments you can't afford, leading to an unmanageable budget and a poor credit score. However, debt can also be a helpful tool for borrowing money when you don't have all the cash up front, such as paying for a college education or buying a car or a home. It's important to consider how debt payments will fit into your budget and what kind of return on investment you'll get by spending that money. For example, a college education may help you get a better paying job and ultimately earn more during your working life, and owning a home may cost you less over time than renting.4

     

    8. Budget

    To manage your money wisely, you need to know where it's coming from and where it's going. That's what a budget is for. In its simplest form, a budget tracks all your income and expenses. The goal is to have money left over after you subtract your expenses from your income. This is money you can use to save for an emergency fund or large purchase (such as a vacation or a car). If your expenses are more than your income, you'll need to tweak your budget to cut expenses in certain areas to at least break even — otherwise, your debt will keep growing and become more costly over time. You can create a budget with pen and paper or a spreadsheet.

    Get more tips for managing your money

    Important disclosure information

    1. Subject to approval. Back
    2. FDIC.gov, "FDIC: Overdraft and Account Fees," published December 2021, accessed May 14, 2024. Back
    3. Exceptions may apply. Talk to your bank for details. Back
    4. Amelia Josephson, "The Average Salary by Education Level," SmartAsset. Published April 16, 2022, accessed May 14, 2024. Back