15 Finance Terms First-Time Employees Need to Know
A cheat sheet for knowing your worth
By Courtney Jordan
Going from college to corporate will introduce you to a whole new world of lingo(read: ridiculous business jargon). It may also mean your first experiences with a real paycheck. Regardless of your industry, there are terms every adult (we use that term loosely) should know in order to to properly understand the paperwork required in employment and begin to prepare for their financial future. We’ve put together a cheat sheet of language that will help you make sense of your new financial world…and maybe impress your boss.
Base Wage Rate:
A.K.A. base pay. This is the rate of monetary compensation that you’ll make to do your job without accounting for any additional bonuses, overtime, or benefits. This will typically be expressed either in an hourly rate or as your annual salary. It is important to understand the distinction between this number and your total compensation package when evaluating a job offer against your budget.
Total Compensation Package:
This is your total annual package awarded from your employer. This includes both direct and indirect pay. Along with your base pay this may also include health and dental insurance, accidental and disability insurance, bonuses and incentives, 401k contributions, flex spending accounts, stock options, and other perks. While the money in your paycheck is important, comparing total compensation packages is vital when deciding on job offers.
Earning Potential:
Just like it sounds, this is the most amount of money you are capable of earning in any given role. This number can differ drastically depending on your industry. Hopefully you’re in one of these.
Pay Grade:
Pay grade scales are determined as a system of compensation within a company that defines the amount of pay for the roles of its employees. These grades are often established by the responsibilities, authority exercised in a role, and length of time within that position.
Net Worth:
This is the big one, and it’s something you need to know in order to make informed financial decisions in almost any aspect of your life. Your net worth is the sum of all your cash and the value of everything you own.
Consider these categories: checking accounts, savings accounts, retirement accounts, investment accounts, and the market value of any owned property. Property can include your home/condo/apartment, car or vehicle, land, boat, jewelry, art…you get the picture. From that number, subtract all your debts. This includes student loans, credit card debt, and the balance on your mortgage and car loans. What’s left is your net worth. If you have more money than you owe, you have a positive net worth and if you owe more than you have, you have a negative net worth. Here’s a calculator…because math.
Keep in mind: The general trend of your net worth is more important than the actual number, so don’t worry too much if you’re in the red as long as you’re making progress towards a positive number.
401K:
This is a savings plan for your retirement. This type of plan (named for the tax code that governs it), is sponsored by your employer. These plans allow employees to direct a percentage of their paychecks to a special savings account devoted to their retirement. In many cases, your employer will also contribute to this account. Although it may seem like an eternity away, it’s important to participate in this early. Here’s a planning cheat sheet for some bathroom reading.
Stocks:
When a company is publicly traded, they sell pieces of ownership of the company in the form of stock, or shares of the company’s earnings or assets. There are two main types of stocks to know:
- Common: the owner of this type of stock is typically entitled to a vote in the shareholders’ meetings, giving them a voice in the direction of the company. They are also typically entitled to dividends (payouts from the company’s earnings in the form of cash or stock).
- Preferred: owners of this type of stock generally do not have voting rights, but are considered to have a higher stake in the company’s assets and earnings, meaning they receive higher dividends and preferred payouts if the company were to fold or be sold.
Why do you care? This is the major portion of any investment portfolio, including your 401K.
Bonds:
Think of these as IOUs. When a company raises funding, one way that they collect money is to issue bonds to investors, rather than borrowing from a bank. The investor pays an amount to the company and in return receives a bond, which includes a decided-upon interest rate and period of time that the company has until the investor collects.
Why do you care? The typical 401K is a mixture of both stocks and bonds. Understanding the function of both helps you create the portfolio that makes the most sense for your financial goals.
Asset Allocation:
This is the dividing of an investment portfolio depending on your time horizon (time you plan to spend investing your money to achieve an outcome) and risk tolerance (your ability and/or willingness to lose money in order to gain a greater return). The balance of stocks, bonds, and cash within the portfolio can be adjusted according to your goals at any given point in your life. For steps on getting started, read more here.
Incentive Pay:
This is additional pay on top of your base pay that is given as monetary reward for good performance, often known as pay-for-performance. This could come in various forms (a bonus, commission, or company profit-sharing), could change depending on your role and be given at different points in the year depending on your company. The specifics are likely laid out in your total compensation package, and should entice you to deliver positive results.
Exempt vs. Non-Exempt:
(This is a two-for-one.) All employees governed by the FLSA fall into one of these categories. The real difference is overtime.
Non-Exempt: this means that your employer must pay you one-and-a-half times your hourly wage for each hour worked over 40 hours per week.
Exempt: this means your employer is not required to pay you overtime for hours worked over 40 per week. An exempt employee must essentially be paid the same week-to-week for the job they do regardless of the number of hours worked.
Note: These standards update frequently. Here’s a quick video to explain.
Deductible:
This is the amount of money you have to pay out of your own pocket for health care before your insurance kicks in. For example, you may find that an annual physical at your doctor requires a $10 copay with one plan, but $20 with another. This number can vary, and some plans don’t have deductibles at all. You will want to consider the coverage of all these plans when choosing your policy, but it’s common that your deductible will be lower if you are paying a higher premium.
Term Life Insurance:
Life Insurance protection may be offered to you in a number of different formats (term, whole, universal). These options may have similar pay-out benefits, but could differ vastly in their monthly fees and coverage. Perhaps the most common is Term Life Insurance, which offers compensation for your dependencies should you die, but only for a specified period of time (usually 30 years max). The premium for this kind is typically very low compared to other, more long-term offerings, but do not build cash value over time.
Note: The premium on these plans can increase with age, but are usually an appropriate option for a young person starting their first job.
Net Income:
A.K.A. take-home-pay. This is the amount of money you have after deductions and taxes. Typically, you may see ‘gross income’ listed on your paychecks. This number may seem pretty good to you, but it isn’t the amount you’re actually taking home. Your net income is the amount after your employer takes out social security, Medicare, and applicable state and federal taxes. In addition to that will be any contributions to your 401k, insurance, etc. This is important to consider in your budgeting ahead of time, so you’re aren’t shocked by the reality of your paycheck.
Tax Bracket:
If not for Nicki and Beyoncé in Feelin’ Myself, I may never have wondered what a tax bracket was. Tax brackets are ranges of income that determine the rates at which individuals are taxed. In general, those falling into lower income brackets are taxes less and those in higher income brackets are taxed more. Here’s the deets to figure your’s out.
Now, equipped with this knowledge, you’ll be ready to take on the corporate world and live the infamous words of Jay-Z: “I’m not a business man, I’m a business, man.”
