29 Money Misunderstandings That Are Losing You $$

Illustrated by Tristan Offit.
Recently, I was reminiscing about my financial education. Or maybe I should put that in quotes: “financial education.” In 10th grade, we created a budget based on what we guessed our salary would be for our dream job, breaking it up in a spreadsheet for everything from rent to entertainment. Never mind that a 15-year-old is a pretty poor judge of what a twenty-something would actually be buying (not to mention that, in 2005, I had no way of knowing how much of my future budget would go to Uber) — the exercise was too simple. There were no spaces on the spreadsheet for retirement accounts, emergency funds, stock options…you know, the real stuff that you need to learn about as soon as you open your own bank account.

And while I’ve picked up a lot of useful financial knowledge and habits in the decade since that class — still waiting on my merit badge for contributing 20% of every paycheck to savings — there are plenty of terms I’m still hazy on. And the worst part of that knowledge gap? It’s costing me money.

I asked Priya Malani, Refinery29’s resident financial expert, what common terms millennials often misunderstand in ways that hit them where it hurts (their wallets). Ahead, we’ve provided definitions on everything from interest to stock options — no confusing jargon in sight.
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Illustrated by Tristan Offit.
What It Is: As you may already know, a checking account is an account to help you manage day-to-day cash flow. Income causes cash to flow in, bill payments cause cash to flow out. Your paycheck should direct deposit into your checking account, which is linked to your debit card. Checking accounts are not intended to earn interest. Think of your checking account as your centralized money headquarters.

Why It's Important: Since it’s not earning interest, it’s not maximizing your cash and should only be used for your monthly expenses. You don’t really need more than one checking account. If you want to separate out your fixed expenses so you don’t accidentally spend your rent money on barre class, utilize a sub-savings account (more on those later) to automatically deduct enough to cover your fixed expenses each month. When the bills are due, you can make a one-time transfer back to the main checking account and pay from there.
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What It Is: A savings account is meant to hold extra cash savings (the money you don’t need to pay rent or bills). Unlike a checking account, a savings account earns interest.

Why It's Important: First of all, not having one means you’re losing out on interest. We recommend setting up an auto-transfer from your checking account into your savings account, so that a portion of each paycheck automatically gets saved. Unlike a checking account, the number of times you can withdraw money from a savings account is capped (typically at six withdrawals per month), so it’s not smart to set it up to pay your bills from your savings account.

To maximize savings, we also recommend setting up sub-savings accounts (no additional cost at most online banks) to keep your saving goals organized and on target. This is where you can create an account to safeguard your rent money and other fixed expenses until the end of the month, as well as other things you might be saving for (travel, holiday gifts).

It’s a good idea to keep your savings account at a different bank than your checking account so you’re not tempted to touch the funds for anything other than their intended purpose.
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What It Is: When looking for a home for your savings, keep your eye out for a high-yield savings account. Most often, online banks offer savings accounts with higher-than-average interest rates ranging from 0.75%–1.05% versus rates as low as 0.01% at brick-and-mortar banks.

Why It's Important: Not all savings accounts are created equal, so be sure to shop around before finding a home for your cash. In general, it’s a good idea to look for an interest rate that’s at least 0.75%. Some of our favorites are Ally, CapitalOne360, and Amex. You can use magnifymoney.com to objectively compare savings accounts that work for your situation.
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What It Is: Up there with the SnapChat puking-rainbow filter, online banks are one of biggest wins of the Internet age. Unlike their dinosaur predecessors (the brick-and-mortar banks) online banks are more millennial-friendly and, bonus, way greener (think paperless everything).

Why It's Important: It's easy to ignore online banks since they don't have physical locations — but just because you can’t see them doesn’t mean they don't exist! The lack of overhead is why they can offer higher interest rates than traditional banks, which is why they're often the perfect place for your savings. You should store your emergency fund at an online bank as well. For those who are wondering, yes, online banks are FDIC insured up to $250,000 per account.
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What It Is: Three months of fixed expenses you could live on if a disaster happened. Your fixed expenses include things like rent and utilities, and should be the smallest amount of money you'd need if you really had to tighten your belt and save — no dinners out or Uber bills.

Why It's Important: Not having one can be catastrophic — even if you have money in other places, like investments. You should absolutely have your emergency fund in place before you consider investment options. But if you are overestimating how much you need in your emergency fund beyond fixed expenses, you're also losing out on investing some of that money elsewhere.

If you’re having a hard time coming up with additional savings to build up your emergency fund with, we recommend the app Digit. It will automatically sneak money out of your checking account that you won’t miss. Every few months you can sweep money over from Digit into your online emergency fund until it’s fully funded.
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Illustrated by Tristan Offit.
What It Is: We’ve talked about it a lot, but here's the plain-and-simple definition: The additional money your cash earns from being parked in the bank. Here’s how it works: When you deposit money in your bank account, the bank uses it to make other investments (yes, this is legal) and they pay you a bit of money, a.k.a. interest, to compensate you for using your money.

Why It's Important: Weird but true: You can earn interest and still lose money. Here’s why: Inflation averages 3% a year, so even at the best online banks that pay 1% interest, you're still losing 2% each year. In order to minimize your loss, you want to keep no more than your emergency fund and short-term savings (those sub-savings accounts we mentioned earlier) in cash (or in other words, not invested).
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What It Is: Your net worth isn’t just the current balance in your bank accounts. To find it, add your assets (the value of your home, if you own it; your bank accounts; your investments; and even any physical objects, like an art collection). Then add up all your liabilities (your mortgage, student loans, credit-card debt). Subtract your liabilities from your assets — that’s your net worth. If your net worth is negative, work to pay off your debts so that your assets outweigh your liabilities.

Why It's Important: Having a murky view of your net worth can make it tough to make smart financial moves. Here’s a concrete, specific example: Pretend you own a home (an asset) that’s worth $250,000. If your mortgage (a liability) is $200,000, you’d have a positive net worth of $50,000. That’s a much better situation than living in a home that’s worth $150,000 and having a $200,000 mortgage, which is definitely possible in a negative real-estate market.
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Illustrated by Tristan Offit.
What It Is: Think of your credit score as your loan-repayment report card. The higher your score, the more reliable and safer you are considered to loan to. The lower your score, the less reliable and riskier you are considered. If you want a high credit score, the #1 rule is to pay back your loans (this includes your credit card balance) in full and on time. That alone will help your credit score climb.

Why It's Important: A good credit score is key for everything from buying a car to renting an apartment. But it can take time to build — that's why it’s a good move to start improving your credit score now, even if you don't anticipate needing a big loan in the near future.

If you’ve never taken out a line of credit, you can begin by using a “secured” credit card (which uses funds you’ve pre-paid) or apply with a co-signor, like your parents. If you use the card regularly and pay off the balance in full and on time, you'll begin to establish your credit score.

If your score isn't great and you want to improve it, here’s a simple trick: Instead of paying of your balance when the bill is due, pay it off more frequently, like twice a month or even every week. Also, pay attention to how much you're charging — keeping a low balance also improves your score. Try not to use more than 30% max of your available credit. So if you have a card with a $2000 limit, try not to carry a balance higher $600 at any given time. If you do go above that amount, pay it off, and start fresh.
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Illustrated by Tristan Offit.
What It Is: Your credit history is part of your credit report. It outlines your history as a borrower. If you’ve taken out loans or opened store cards (hello, Victoria’s Secret store card), it will be captured in your credit history.

Why It's Important: Opening a ton of credit cards doesn’t look great on your credit score, which is why it can be smart to turn down a store card offer, even if it does give you a discount. Plus, the more cards you have, the easier it can be to forget about them and their bill payment cycles, which again, can ding your score. In order to improve your credit score, you'll want to show a long and clean credit history.
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Illustrated by Tristan Offit.
What It Is: A store card is a credit card — plain and simple. Some can only be used at specific retailers and some are just regular credit cards that offer special deals and discounts at a particular store.

Why It's Important: A store card might seem like a huge money saver — who doesn’t love perks like free shipping and surprise 40%-off sales — but they’re designed to trick you into spending more at the store than you might have without the card.

We recommend only signing up for store cards if you’re making a big purchase (think furniture-big, not just a new pair of shoes) to take advantage of any one-time discounts for opening the account, then paying it off in full and closing it.
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Illustrated by Tristan Offit.
What They Are: A financial adviser is a professional that may or may not be a personal finance expert (there's a difference!).

Why It's Important: A lot of times this is the generic title used for anyone who gives financial advice, which can lead to confusion. A lawyer can call herself a financial adviser, an insurance salesman can call himself a financial adviser, and a stockbroker can call herself a financial adviser. That said, when you hear the term, don’t automatically assume this is a professional with a comprehensive understanding of personal finance. A financial adviser can be helpful, even if you don’t have a ton of cash, but make sure their vision lines up with your goals (and you can afford their fee, of course!).
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Illustrated by Tristan Offit.
What It Is: A financial plan is a comprehensive look at your financial situation that also provides a game plan (list of recommendations) to get you from where you are to where you want to be. Whether you’re trying to get out of debt, saving for retirement, planning for a big trip, or all of the above, a financial plan is a great way to get advice on your situation as a whole rather than just in pieces.

Why It's Important: It’s easy to assume a financial plan is for someone who’s already wealthy, but even if it feels you’re living paycheck to paycheck, creating a strong plan in your twenties is a great way to set yourself up for financial security down the road. At my company, Stash Wealth, financial game plans are created specifically for millennials. It's called the Stash Plan™ and it might be a good place to start if you're thinking about it.
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Illustrated by Tristan Offit.
What It Is: A budget is a spending plan that sets out to create limits or ceilings on various spending categories like shopping, dining, entertainment, and travel with the hopes that if you follow it, you’ll be able to save something as well.

Why It's Important: As we’ve spoken about in many of our articles at Refinery29, budgeting does not work. Life is not that predictable and sticking to a budget feels very inflexible. We advocate for the Reverse Budget™ which recommends that you save first (and automatically) and then spend the rest. This way, with your savings out of the way, you can enjoy spending your hard-earned money guilt-free.
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What It Is: A shortcut for a complex mathematical equation, 72 is the magic number that helps you figure out how often your money doubles in the stock market, based on the expected rate of return. Okay, let’s break that down: Over the long-term (long-term being the key word), a diversified portfolio can expect to earn 7-8% annualized (year over year). To figure out how long it takes that portfolio to double, you divide the interest rate by 72. So 72 divided by 8 equals 9, meaning you can expect your investment to double every 9-10 years — $20,000 will be $40,000 in about a decade. A lower interest rate would take longer to double.

Why It's Important: A common roadblock to investing is that people think it’s just for those with a high net worth. But when you start early — even if it’s not with a ton of money — you maximize the number of doublings that will occur in your lifetime, thanks to this rule. Someone who starts investing when they are 25, can have 4-5 doublings by retirement, but wait 10 years and you're down to 3-4 doublings. Considering it takes the exact same amount of time for $20,000 to double as it does for $250,000, starting when you’re younger can make a significant impact on your bottom line down the road.
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What It Is: Compounding is when your interest earns interest. And when your interest earns interest, your money grows exponentially (i.e. fast!). We discussed interest earlier.

Why It's Important: There are two types of interest: simple and compound. Simple interest is when your investment earns a set amount like 5%. So, of example, $10,000 that earns 5% over two years is worth $10,500 after two years.

If the same $10,000 earned compound interest of 5% over two years, it would be worth $11,025 (10,000 x 1.05 x 1.05). When you begin investing, certain investments (prior to purchasing them) will ask you if you want to reinvest dividends — you always want to pick dividend reinvestment. In other words, you want your money to grow, and the money your money makes to grow.
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What It Is: Diversification is the opposite of putting all your eggs in one basket. The idea is to buy many investments (let’s say stocks) rather than one or just a few. When you buy a single type of investment (like a stock) and it does well, that’s great, but if it doesn’t do well, you’ve basically lost all your money.

Why It's Important: If you’re not diversifying, you’re putting your investments at a greater risk. Having a well-diversified portfolio ensures that you'll be protected if the market takes a plunge.
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What They Are: Exchange-traded funds (ETFs) allow you to put money in many investments at once. (Instant diversification, yay!) These are usually titled according to theme. So, for instance, if you wanted to own a slice of companies like Apple, Microsoft, and Facebook, you would by a U.S. Tech ETF and you’d instantly own little pieces of those companies and tons more. (There are other themes like country, industry, size of company — and they get even cooler and more specific, like a socially responsible investing ETF.)

Why It's Important: Cherry-picking your own stocks for diversification can be tough and exhausting, especially if you don’t have deep knowledge of the stock market. ETFs are a great way for millennials to start investing, since they do the diversification for you.
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Illustrated by Tristan Offit.
What They Are: You’ve heard this term a ton, but plenty of people are hazy on what, exactly, stocks are. To put it simply, when a company gets big enough, it “goes public” — meaning it divides its value into lots of tiny title pieces (shares of stock). Then, then company sells ownership of those pieces on the stock exchange.

Why It's Important: Stocks come up so commonly when we talk about investing, they can seem like a natural place to start. But when you’re just beginning, you’d need to buy shares in lots of different companies to achieve proper diversification — and that can get expensive. Buying an ETF exposes you to lots of companies in one investment, which is way more cost-effective.
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Illustrated by Tristan Offit.
What They Are: Unlike a stock, which is purchasing a stake in the company’s performance, a bond is a way of giving a company a loan. When a company issues bonds, it’s usually because it's trying to raise funds for a project. You can purchase the bonds and in return the company promises to pay you back with interest. The U.S. Government also issues bonds that work in pretty much the same way.

Why It's Important: While bonds may sound like a safer investment than stocks, there’s no guaranteed return on your investment. It may have a set interest rate, but the value of the bond will fluctuate in the market, affecting your total rate of return.
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What It Is: Think of Mutual Funds like the parents of ETF’s. They’ve been around for awhile, and allow you to gain exposure to lots of investments at once. Like ETF’s, mutual funds are grouped by theme, like emerging markets or financial industry. But unlike ETFs, mutual funds are usually actively managed by a professional or team of professionals.

Why It's Important: Mutual funds can be a good investment strategy, but because of higher fees and taxes, ETFs are usually the best bet when you’re starting out.
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What It Is: An employer-sponsored retirement plan. Check with your HR office for the specifics of yours.

Why It's Important: Like all investing, we recommend starting early (remember the rule of 72!). But there’s another reason why a 401(k) is a smart investment, no matter your current salary: Contributing reduces your tax liability, meaning you’re paying fewer taxes the more you contribute to your account.

For example, if you make $50,000 and contribute 10%, or $5,000, to your 401(k), you only have to pay taxes on $45,000 of income in that year — pretty cool, right? If you’re just barely in a higher tax bracket, contributing more to your 401(k) could actually save you money by bumping you down to the lower bracket.
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What It Is: When you start a new job, you’ll probably receive a benefits package. It will state whether or not your employer offers a retirement plan. If they do, sometimes they elect to match part of your contribution. Here’s how it works. Let’s say your salary is $50,000 and you contribute 6% of your salary to your 401(k) account, if the employer match is “50% of 6%” your employer will add an additional $1,500 to your account ($50,000 x 0.06 x 0.5).

Why It's Important: If you don’t contribute to your retirement plan and your employer offers a match, you’re essentially losing out on cash that’s being offered to you for free. If at all possible, try to contribute as much as you can so you max out on the match.
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What It Is: A Roth IRA is generally a self-funded retirement account — employer ones are generally a 401(k) or a 403(b). A lot of people mistake a Roth IRA for the investment itself, but it’s just the holding tank for your retirement savings.

Why It's Important: If you have the means to max out your employer match and still have money to invest, opening a Roth IRA is generally a better investment than upping your contribution to your employer-sponsored retirement account.

It’s a smart strategy because of its singular tax treatment. Your contribution is taxed going in (meaning you can contribute straight from your take-home pay). Then that money, as well as its growth, is never taxed again. That may not sound like a big deal, but trust us, it is! Once you’ve maxed your employer’s match, take advantage of a Roth IRA next (if eligible).
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What They Are: Some companies issue stock options (also known as ESOs or Employee Stock Options) to their employees as a form of additional compensation. What you’re really getting here is the right to buy into the success (or failure!) of the company. The word "option" basically translates to “the right to buy.” An employee with stock options has the right to buy company stock according to the terms and conditions of the stock options.

Why It's Important: You have to actively choose to exercise your stock options — you don’t automatically start receiving stocks just because they’re offered to you, so don't assume you're passively benefitting from this perk.

That said, it’s still an investment, like other stocks. You’ll then have to sell the stock for a higher price than you paid — including taxes you might have to pay — to make money.
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What It Is: A vesting schedule is a common practice with stock options. Here’s how it works: Let’s say you receive a holiday bonus of 100 stock options that vest over 4 years, 25% per year. That means that after year one, you own 25 stock options, after year two, you own 50 stock options, after year three you own 75 stock options, and after year four, you own them all. The vesting schedule helps employers retain talented employees. If you leave before the four years are up, you’ll get to keep whatever amount has vested.

Why It's Important: Knowing the vesting schedule can help determine how you might want to plan your career. In the above example, if you leave your company after the first year, 25% of the options are yours. But you'll surrender 75% of them back to the company. If you’re being generously vested, it may make sense to plan on sticking it out at a company until your stock options vest.
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What They Are: How much taxes you owe is based on your gross income (or adjusted gross income, to be more precise). The higher your AGI, the more you pay in taxes. Deductions are special circumstances that you may be eligible for that ultimately lower your AGI.

Why It's Important: We all receive something called the “standard deduction” on our federal taxes but, beyond that, there are other deductions you can take to lower your overall income — you just need to make sure you know what they are. This is where it can be helpful to work with an accountant on your taxes, so he or she can help determine if it’s smarter to take a standard deduction or itemize your deductions based on your individual circumstances.

One common tax deduction is mortgage interest. If you own a home and are paying down your mortgage, part of the payment is principal and part of it is interest. You get to deduct the amount of interest you pay from your AGI. For some other deductions, click here.
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What They Are: Your employer is responsible for separating taxes from your paycheck and paying them to the IRS. When starting a new job, you’ll have to fill out a form called a W-4. It informs your employer how much taxes to withhold from your paycheck. One of the variables on this form that you control is called allowances. The more allowances you claim, the less will be taken out of your paycheck. The fewer allowances you claim, the more will be taken out of your paycheck.

Why It's Important: Picking too many or too few allowances means that your bill at tax time won’t be accurate. Ideally you want to pick the correct number of allowances so that you neither owe or are owed money at tax time.

Some people like to claim fewer deductions because they’ll get a tax-time refund. While this may sound like a good deal (who doesn’t love a lump-sum refund?!), it means you’ve essentially given the government an interest free loan for the entire year! Use this calculator to help figure out the right number of allowances for your situation.
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What It Is: The amount your employer takes out of your paycheck is called tax withholding. If you’re an entrepreneur, you may be doing this for yourself. If your employer is taking it out for you, you can only access that money if you then qualify for a refund.

Why It's Important: Again, you want to make sure your W-4 is as accurate as possible when you start your new job. And if you have a side hustle where you’re making money up front, it’s up to you to pay taxes yourself — or else you’ll wind up with a bill from the IRS. This is another time where it can be helpful to consult with a financial adviser familiar with your particular income stream.
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What It Is: Like a 401(k), this is a savings account set up for you by your employer. Also like a 401(k), contributions are made to this account pre-tax and lower your overall taxable income. But whereas 401(k) funds are meant for use in retirement, FSA funds are meant to be used for qualifying health care and dependent care (like child care) costs.

Why It's Important: One drawback to the FSA is that if there are any unused funds in your account at the end of the year, you may lose them. In other words, unused funds don’t roll from year to year unless your employer offers a grace period, but even then, you may only get an additional 2.5 months to use the funds. That said, try to approximate how much you might use in a given year — from the price of contacts to physical therapy appointments to daycare costs — and let that estimate help guide your contribution decision. For more details, check out this R29 article.
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