When it comes to figuring out your finances, there can be some pretty confusing terminology to wade through. At times, the terminology can make many people want to avoid thinking about money altogether. That's the worst stance to take unless you're a multimillionaire who spends around $50,000 a year. Here are some terms that you might want to learn.
Line of Credit vs. Credit Card
Both lines of credit and credit cards allow people to spend a bank's or another lender's money for a fee, or interest. Credit cards and lines of credit both provide people with a fixed limit that they can spend. Credit cards are unsecured, which means you have no collateral backing up the spending you put on the card. On the other hand, many lines of credit will have collateral like a car or a house tied to them. Credit cards tend to come with low minimum payments that will vary monthly based on the outstanding balance, but a line of credit will usually have a fixed monthly payment unless you borrow more money against it. Lines of credit are common for businesses while individuals will frequently use them for big purchases. A line of credit can be obtained in a couple of ways. For example, there are many companies who can offer an online credit line for assistance during personal unexpected emergencies, or you can apply for one through your bank or other financial institution.
Cost of Living vs. Discretionary Expenses
Your cost of living can vary depending upon how luxuriously you want to live. Driving a used Toyota Camry will cost less than driving a new Porsche. The cost of living can also vary based upon where you choose to live. The cost required to live in Manhattan, New York, will likely be quite a bit more than the cost of living in Manhattan, Kansas. The cost of living will include basically everything you spend in certain core budget areas to live comfortably. Included in the cost of living would be things like housing, clothing, food and transportation. Discretionary expenses are those expenses that are not necessary. For example, a meal at a restaurant or a movie ticket would be discretionary expenses. Most people will have less available for discretionary expenses than they do to take care of their cost of living. Saving some of your discretionary income for a rainy-day fund or for retirement is key to building wealth over time.
Fair Market Value vs. Market Value
The terms fair market value and market value sound very similar. However, there is a key difference. The market value of an item is basically the most probable price that a seller can expect to extract from a buyer at a given time. Pressure to buy or sell can affect the market price that might be agreed to by the parties. Fair market value is a more precise term. When related to property transfers, the fair market value is the amount that a willing buyer and a willing seller would agree to when they have a reasonable understanding of the facts regarding the property and while they are also under no pressure to buy or sell.
Understanding these terms and others tied to money will help you feel more comfortable when dealing with your finances. A greater understanding of personal finance will also prepare you to handle credit and property transfers. The more you know about money, the more likely you'll be to build wealth over time.