When you begin taking control of your money and reading about personal finance, you may come across finance terminology you aren’t familiar with.
This can end up frustrating you or lead to mismanagement of your funds. And we certainly don’t want that!
Below you’ll find a reasonably comprehensive list of financial definitions to help you grasp numerous money-related terms.
Words in color link to articles we’ve written on the term. Since we’ll add to this financial glossary as time goes on, bookmark it or pin it for easy reference.
These definitions are for informational and educational purposes only. Please discuss any specific financial questions with an investment professional.
- 401(k) Plan – A popular, tax-advantaged retirement plan offered by many employers.
- 403(b) Plan – Similar to 401(k), but for employees of non-profit organizations, such as public school teachers and government employees.
- 457(b) Plan – A deferred compensation retirement plan, available for specific state and local governments and some tax-exempt non-governmental organizations.
- Accredited Investor (Individual) – Someone who’s made at least $200,000 ($300K with a spouse) or more annually for the prior two years and is likely to make the same or more in the current year. Or someone with a net worth more than $1,000,000 (alone or jointly with a spouse) excluding the value of their primary home.
- Accredited Investor (non-individual) – A trust, with total assets exceeding $5 million, that was not formed specifically to purchase subject securities, whose purchase is directed by a sophisticated person. Or an entity with equity owners who are all accredited investors.
- Accrued Interest – Interest that has been earned but not yet paid out.
- Adjustable-Rate Mortgage (ARM) – A home loan with an interest rate that can change periodically based on certain economic conditions.
- Adjusted Cost Basis – A tax accounting term that represents the net cost of some asset (Original cost – Depreciation +Capital Expenditures).
- Adjusted Gross Income (AGI) – The sum of any earnings – salary, wages, interest, dividends, etc. – less specific deductions, detailed on your federal income tax return.
- After-tax Investment Account – A tax-advantaged account funded with already-taxed contributions. The tax-advantage part comes from not having to pay taxes on any earnings on your invested funds.
- Alternative Investment – An investment that strays from typical investments (think stocks and bonds) such as commodities or cryptocurrency.
- Amortization (debt) – The spreading out of a debt/loan into principal and interest payments over a specific period of time, i.e. a mortgage would be amortized over a 20 or 30-year period. More interest and less principal is paid in the early years of the loan. As payments progress the amount of interest paid decreases and the amount paid towards principal increases.
- Amortization Schedule – The amortization schedule details the amount of interest and principal being paid on a loan with each scheduled payment made. It clearly shows the rate at which the loan balance decreases. How quickly it decreases depends on the term of the loan.
- Annual Percentage Rate (APR) – The interest rate you pay over the course of one year for some form of credit.
- Annual Percentage Yield (APY) – The rate of interest you will earn in a year when interest compounds. Or the rate of interest you will pay on a debt when using compound interest.
- Annual Rate of Return – The yearly rate (percentage) of gain or loss an investment incurs.
- Annual Report – A company’s report about its financial performance and activities from the previous year. The report is legally required to be sent to all major stockholders as well as be made available to the general public.
- Annuity – A fixed amount of money paid periodically which entitles the investor to a series of cash flows in the future.
- Appreciation – The increase in the value of an investment or asset.
- Arbitration – The use of a third-party person to settle a dispute between two or more persons.
- Arrears (debt) – The amount of money past due on a loan, lease, or other financial agreement.
- Assessed Value – The value placed on a home by local governments used to calculate property taxes.
- Assets – Items of monetary value owned by an individual or business.
- Asset Allocation – Spreading out your investments among various asset categories such as cash, stocks, bonds, real estate, etc. to minimize financial risk. Typically expressed as a percentage i.e., 70% stocks, 25% bonds, 5% cash.
- Asset Class – A group of investments with similar characteristics and behaviors in the marketplace.
- Audit – An inspection of a company’s or individual’s financial accounts.
- Average Daily Balance – The sum of the outstanding balances on a credit account each day during a billing cycle, divided by the number of days in the billing cycle. For a savings account, the average daily balance is the sum of all deposit balances in a given period, divided by the number of days in the period.
- Balance – The amount available in an asset account, or the amount owed on outstanding debt.
- Balance Transfer – A transfer of some or all existing credit card debt to a new credit card account.
- Balanced Fund – A fund with investments in both stocks and bonds, focused on achieving both long-term growth and income.
- Balloon Mortgage – A loan in which only interest payments are made over the duration of the loan, with the principal due upon maturity. Usually a short-term loan.
- Bankruptcy – Legal process in which a debtor seeks relief from the money they owe and cannot payback.
- Barter – The act of exchanging one item or service for a different good or service.
- Basis Point – Interest rates, investment expenses, and yields are typically expressed in basis points. One basis point or bps is one-hundredth of one percent – 0.01%.
- Bear Market – An economic condition in which share prices are falling and there is large selling of equities.
- Benchmark – A group of securities such as the Dow Jones Industrial Average or the S&P 500 Index, whose performance is used as a standard to measure the market performance of investments.
- Beneficiary – Someone who is in line to receive a benefit, like from a trust or life insurance policy.
- Billing Cycle – The period from one billing date to the next billing date for a credit account.
- Blue Chip Stock – A term coined for large and consistently profitable companies, like Wal-Mart and Amazon.
- Bond – A debt instrument where the issuer (borrower) promises to pay back the lender (bond purchaser) at a specific rate over a certain amount of time.
- Bond Fund – A fund investing primarily in bonds/debt instruments.
- Bond Rating – A rating or grade given to a bond, intending to indicate its’ credit quality.
- Borrower – An individual or organization who borrows money with the promise of paying it back under a debt or loan agreement.
- Broker – A person or platform that purchases and sells goods and assets, like stocks.
- Budget – A spending plan created by factoring planned income, expenses, savings, and investing.
- Bull Market – An economic condition in which share prices are rising and there is a large purchasing of equities.
- Callable Bond – A bond that can be repaid before maturity. They usually pay a higher rate due to this risk.
- Capital Gain (Loss) – The amount of money made (lost) between the purchase and sale of some investment.
- Cash Flow (+/-) – The money one has after subtracting costs from earnings.
- Certificate of Deposit (CD) – A low-risk, secure investment sold by institutions that require money to be held on deposit for a certain amount of time before it can be withdrawn.
- CD Ladder – A CD ladder consists of several certificates of deposit, each with a different maturity date, so you are not tying all of your money up into one CD account. For example, let’s say you have $6000. You can deposit the money in three different CDs. You put $2000 each into a 1-year, 2-year, and 3-year CD.
- Co-Borrower – An individual, who along with another individual borrows money. They equally benefit from the loan and are equally responsible for repaying the debt. Not to be confused with a co-signer. A Co-Signer does not receive the same benefits as the borrower but is liable for repayment of the debt if the borrower does not meet their loan obligations.
- Collateral – Assets that are pledged to a lender if the borrower is unable to meet required payments in the future.
- Collection Agency – A company that specializes in debt collection – the collecting of funds on past-due debt obligations.
- Commission – Money paid to a broker for gains on the funds they manage.
- Common Stock – A purchasable share of ownership in a corporation which can entitle the owner to dividends and voting rights.
- Commodity – Raw materials in a market that are not distinguished between producers, like coffee or oil.
- Compensation (Employment) – Wages, salaries, or other financial benefits made by companies to their employees.
- Compound Interest – Interest earned under a compounding model is interest that’s not paid out. Instead, the interest earned is added to the principal balance of the investment.
- Conservator – A court-appointed individual or organization assigned to manage and protect the estate of a protected person.
- Consumer Debt – The amount owing by a consumer, or consumers, on either consumable products or those that do not increase in value over time (not investments).
- Consumer Price Index (CPI) – An economic measure of the current average prices of goods and services.
- Co-Signer – Someone who agrees to pay a debt if the original borrower is unable to meet the required payments.
- Cost of Borrowing – The total of interest and any fees incurred when borrowing money.
- Credit – The potential a borrower has to secure goods or services before paying for them.
- Credit Bureau – A company that gathers the credit information of individuals and firms and makes this information available to lending institutions (banks).
- Credit Counseling – A guidance process used to help individuals with debt repayment or settlement. Credit counseling or debt counseling organizations provide education, counseling, and assistance to help those in need of their services learn to budget, eliminate debt, and manage their money.
- Credit Rating – A score or grade representing an individual’s or organization’s ability to repay a financial commitment/obligation.
- Credit Repair – Steps one would take to improve their credit score or dispute errors on their credit report.
- Credit Report – An overview of borrowing and repayment history that can impact the cost of borrowing money in the future.
- Credit Score – The numerical expression of a borrower’s historical ability to pay back debts. A popular measure is a FICO® Score, which simply is a compilation score by the company FICO ( Fair Isaac Corporation).
- Creditor – A person or company that has loaned out money to a borrower.
- Creditworthiness – The ability of a potential borrower to pay back a loan or credit card balance.
- Currency – Items exchanged as a form of payment for a good or service, typically physical coins or paper money, more recently digital.
- Debt – Some amount of borrowed money that must be paid back.
- Debt Consolidation – A form of refinancing where one large loan is taken out to pay off several smaller loans. This is done to decrease the interest paid in each period.
- Debt Settlement – The negotiating of debt balances with creditors to reduce the debtor’s amount owed.
- Debt-to-Income Ratio (DTI): A form of measure comparing debt payments to income. The higher the ratio the greater the debt burden.
- Debtor – A person or company that is paying back money to some lender.
- Deductible – The amount of money an insurance policyholder has to pay before the insurance company will pay any of the expenses.
- Deduction – Expenses that are eligible to decrease taxable income.
- Deed – A legal document showing ownership of an asset or property.
- Default – When a loan is not repaid according to terms outlined in the promissory note it is considered in default.
- Deflation – A general decrease in prices for goods and services which, in turn, increases the purchasing power of money.
- Delinquent – When a loan payment is not made by its due date specified in a loan agreement it is considered delinquent.
- Demand for Payment – A legal letter/document detailing a debt obligation, including the amount owed, how and when the debt should be repaid and the consequences of non-payment.
- Depreciation – The financial amount of value lost on an investment over time.
- Derivative – A financial instrument whose value is based on the current value of some underlying asset, such as a stock or commodity.
- Devaluation – A reduction in the value of something such as a government-defined currency or company stock.
- Discretionary Income – Any income remaining after paying for taxes, and mandatory or necessary expenses.
- Diversification – Spreading out investments to gain exposure in different markets and instruments.
- Dividend – A payment one receives from the ownership of a share of a company.
- Down Payment – The initial payment towards an investment that requires some form of financing.
- Earnings – Money/income received by an individual (i.e., employee or stockholder) or a company.
- Emergency Fund – Money saved to avoid an unexpected life event from having drastic consequences on one’s finances. Saving recommendations range from $1,000 to 6-months or more of expenses.
- Employee Benefit – A form of employee compensation not in the form of wages, salaries, commissions, or other cash payments.
- Employee Stock Options – An award given to an employee allowing them to purchase the company’s stock at a future date.
- Equity – The value of ownership in an asset, determined by subtracting liabilities from the asset’s total value.
- Escrow – A financial arrangement between two-parties who enlist a third party to hold funds or assets in safekeeping pending the completion of a transaction or obligation.
- Exchange Rate – The rate at which one country’s currency exchanges for another’s.
- Exchange-Traded Fund (ETF) – An investment fund holding certain assets that can be traded on the stock exchange. The value of the ETF is based on the value of the assets it owns.
- FDIC – Federal Deposit Insurance Corporation – A government entity that provides deposit insurance up to $100,000 per account, to depositors in U.S. commercial banks and savings institutions.
- Federal Funds Rate – The target interest rate set by the Federal Reserve that they wish to have banks charge each other to borrow money from one another overnight to maintain their required “reserve” in the central bank.
- FICO Score – See Credit Score
- Fiduciary – a person or entity with the power and obligation to act for another under circumstances which require total trust, good faith, and honesty.
- Financial Advisor – A professional money manager, usually with a credential such as Certified Public Accountant or Certified Financial Planner.
- Financial Asset – Some investment that one expects to increase in value over time, like property.
- Financial House – A metaphor for thinking about the structure of a sound and secure financial life.
- Financial Liability – Some instrument that states you must pay money over time, like a loan.
- Financial Services Industry – A category of businesses, such as banks, insurance companies, advisory firms, etc. that provided financial products and services to consumers and companies.
- Fixed Interest Rate – An interest rate that will not change over time for any reason.
- Flexible Spending Account (FSA) – A tax-advantaged savings account offered by an employer allowing employees to save for eligible out-of-pocket health-related expenses or for qualified dependent care expenses.
- Foreclosure – The process of a lender legally taking possession of a mortgaged property when the borrower fails to make required payments to them.
- Fraud – The intentional act of using false or misleading information by an individual for personal or financial gain.
- Futures – A contract that allows one to purchase an asset at a set price and date.
- Garnishment – A legal process in which money is seized from a borrower that has not paid back some debt. For example, the IRS can garnish one’s wages for unpaid taxes.
- Grace Period – A specific length of time after a debt payment’s due debt in which a payment may be made without incurring a late fee or penalty.
- Gross Income – The sum of all of an individual’s income streams (wages, interest payments, etc.) before deductions and taxes.
- Guarantor – Another word for co-signer, a guarantor is someone who pledges to pay some debt should the initial borrower stop meeting their obligation to the lender.
- Guardian – A court-appointed individual who acts as the decision-maker in the health and welfare matters of a protected person.
- Health Savings Account (HSA) – A tax-advantaged savings account for medical expenses. It allows you to save for health care expenses while reducing your taxable income.
- Heir – An individual who inherits an asset due to entitlement by law or by the terms of a will.
- Home Equity – The market value of a home, less any outstanding loan balances against it.
- Home Equity Line of Credit – A revolving line of credit secured by the equity in a home.
- Home Equity Loan – Essentially a second mortgage in which you borrow money using the equity in a home as collateral for money borrowed.
- Hyperinflation – A very swift increase in prices for goods and services. An exceedingly high rate of inflation.
- Identity Theft – When someone steals your personal information through a data breach, phishing, malware, or another method, and uses it to commit fraud.
- Income – Earnings created in exchange for time worked or the use of a resource.
- Index Fund – A mutual fund with a compilation of assets constructed to match the performance of a specific market index, such as the S&P 500.
- Individual Retirement Account (IRA) – A personal retirement account that is tax-exempt until the owner starts to withdrawal the money.
- Inflation – A general increase in prices for goods and services which, in turn, reduces the purchasing power of money.
- Interest Rate – The amount you must pay to borrow money from a lender.
- Investment – An asset that (hopefully) appreciates or produces income.
- Investment Grade – A credit rating of stocks or bonds which signals little risk to an investor.
- Investment Policy Statement – A written explanation of your investment philosophy and the logic and strategies you’ll use to reach specific goals and objectives.
- Joint Account – An account with two or more owners, each having legal rights to the funds in the account.
- Joint Debt – Debt incurred by two or more individuals or organizations, based on their combined credit applications, incomes, assets, and credit history.
- Joint Tenancy with Full Rights of Survivorship – A common form of joint ownership, in which a co-owner is automatically granted ownership of an asset when the co-owner dies.
- Judgment – Monetary, or non-monetary, payment that is court-ordered after some lawsuit.
- Jumbo CD – Certificate of deposit with a high required minimum deposit (i.e., $100,000) and typically paying a higher interest rate.
- Jumbo Loan (non-conforming) – A large mortgage exceeding the maximum loan amount set by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA), for loans they will buy from lenders – currently $484,350 (or higher in some areas). The cost of obtaining a jumbo mortgage may be higher than the cost of obtaining a conforming mortgage.
- Junk Bond – Investment in some debt that is considered risky, rather, that has a greater chance to not be repaid.
- Land Contract – A real property legal agreement between a seller and a buyer. The seller retains legal title to the property until the terms of the contract are met in full, while the buyer is typically granted possession of the property for most purposes other than legal ownership.
- Layaway – An agreement between a retailer and a consumer in which the seller holds an item for a buyer when a deposit is made and payments received over a period until the item is paid in full.
- Lease – The lender pledges some asset to a borrower for a specified period of time. The borrower must pay periodically and return the asset at the end of the agreement.
- Leverage – Using debt to increase exposure to some investment.
- Liabilities – A legal responsibility, usually to pay some amount of money in the future.
- Lien – A creditor’s right to secure a debt against the property of a borrower. When a debt obligation is not met, the property may be sold to cover the outstanding balance due.
- Line of Credit – A specific amount of credit extended to a borrower that can be used at any time up to the maximum available limit. For example, a borrower may receive a $10,000 line of credit and use $5,000 of it immediately, and another $5,000 in six months.
- Liquidity – The measure of how fast an asset can be converted into cash without losing value.
- Marginal Tax Rate – The tax rate one would pay on each additional dollar of income in a progressive income tax system.
- Market – A mechanism for bringing together buyers and sellers of a particular item or service.
- Market Economy – An economic system that allows supply and demand to determine the prices of goods and services.
- Maturity (Date) – The day in which the final payment of a security is due.
- Medicaid – A state and federal program that provides those with low income some medical coverage.
- Medicare – A federal program providing some medical coverage for those 65 and older, or those of any age with a disability.
- Money – Currency or other items a seller will accept in exchange for an item or service.
- Money Market Deposit Account – An interest-bearing account provided by a financial institution.
- Money Market Mutual Fund – A higher-interest rate account with check-writing abilities, available through mutual fund companies and brokerages. Unlike a Money Market Deposit Account, it is not FDIC-Insured. They are typically used to house funds you’re waiting to invest in the market.
- Mortgage – A type of loan used to purchase residential or commercial real property.
- Mortgage-backed Security – A collection of mortgage debts packaged and sold to investors who want exposure to real estate but do not want to buy and sell actual properties.
- Mutual Fund – An investment fund that pools together investors’ money to purchase a diverse portfolio of holdings.
- NASDAQ – An electronic stock market existing for the sale and purchase of securities in a speedy and transparent manner.
- Need – Something essential for human life – food, water, shelter, clothing, etc.
- New York Stock Exchange (NYSE) – The NYSE is the largest market that exists for the buying and selling of securities. It allows buyers and sellers to transact with each other in an auction market style.
- Net Income – The amount of money an individual has after taxes and deductions have been subtracted from wages and other income streams.
- Net Worth – Your net worth is the value of everything you own (assets) minus the value of everything you owe (liabilities).
- No-Load Fund – A mutual fund, whose shares are sold without fees or commission charges.
- Open Enrollment – Time of year when employees – or other recipients of healthcare coverage – can make changes to their benefits for the upcoming year.
- Opportunity Cost – When you make a decision you’re choosing one option and saying “no” to a different option. The value of the option you do not select is known as your opportunity cost.
- Options – A contract that gives the right to the owner to purchase an asset at a certain price agreed upon today.
- Overdraft – Withdrawing more money than one has in a bank account, usually accompanied by fees from the bank.
- Payday Loan – A short-term loan with a high-interest rate that a borrower pledges to pay back when they receive their next paycheck (wages).
- Pension – A fixed sum paid at regular intervals to an individual typically following their retirement.
- Personal Loan – A personal use loan not secured by any property.
- Portfolio – The combination of all your investment assets – stocks, bonds, precious metals, real estate, cash, etc.
- Power of Attorney – A legal document allowing an individual to make decisions, including financial ones, on behalf of another individual.
- Predatory Loan – Predatory loans are secured or unsecured loans containing terms and conditions heavily favoring a lender. These loans are often detrimental to the borrower.
- Preferred Stock – A stock that is a mix of equity and debt in a company. It has different features than common stock such as it is higher in the order of repayments in the case of bankruptcy and holders do not have voting rights.
- Prime Rate – A favorably low-interest-rate the most creditworthy borrowers receive.
- Principal – The original amount of money invested or borrowed. You then pay or receive interest based on the principal amount.
- Progressive Income Tax – An graduated income tax system that taxes a larger percentage of income as the income rises. For example, 10% of your income is subject to tax if you are unmarried and earn under $9,875 in 2020. While a single individual earning $40,000 in 2020 will be taxed 10% on the first $9,875 of earnings and 12% on the next $30,125. While a single earner of $100,000 will face additional tax brackets as high as 24%.
- Qualifying Life Event (QLE) – Significant events, which may include marriage, divorce, the birth of a child, or losing health insurance coverage, which allow one to make changes to specific benefits.
- Real Estate Investment Trust (REIT) – An investment company that owns and operates income-generating properties.
- Recession – A decline in economic activity signaled by a decline in spending and a falling GDP in two consecutive quarters.
- Refinance – Replacing one debt for another debt with different terms.
- Reinvesting – The practice of using money earned from an investment, i.e., dividends, interest, distributions, to purchase additional shares of the investment in lieu of receiving the earnings in cash.
- Repossession – The process of a creditor seizing property when a borrower fails to pay a loan according to its terms.
- Reverse Mortgage – A loan using the equity of a home as collateral until it is repaid, usually occurring when the house is sold. Generally, a reverse mortgage is more costly than a home equity loan and no payments are made until the end of the loan.
- Risk Tolerance: A person’s capacity for how much risk they are willing or able to withstand for a possibly larger reward.
- Secured Debt – A loan backed by property, a vehicle, or other collateral.
- Security – A financial instrument, which one trades, that represents the existence and repayment of some debt.
- Settlement – An agreement between a creditor and a debtor in which the creditor will accept a lower payment on outstanding debt and give up their right to any future payments.
- Short Sale – The sale of real property at a value less than the amount of the current debt obligations (liens) against it. A short sale must have approval by all lien holders in advance.
- Social Security – A government system that supports people with insufficient or no income.
- Stock – A stock or security is a financial asset an individual buys as an investment. Investing money in a company’s stock means you’re buying a small portion of the company.
- Stock Exchange – A market that exists to allow the buying and selling of securities.
- Stock Market – A place, such as an institution, organization, or association, for trading securities. Buyers and sellers come together in person or electronically to trade assets.
- S&P 500 – An index that tracks the performance of 500 large companies on the U.S. Stock Exchange. Considered a good representation of the overall performance of the economy.
- Tax-Advantaged Account – A type of savings plan or financial account, that provides a tax benefit such as tax-deferral or tax exemption.
- Tax-Deferred Savings Plan – A pre-tax investment account that defers your tax payments on amounts you contribute until a later date.
- Tax Return – A form that taxpayers define annual income and personal circumstances. It is sent to the government to assess taxes they may need to pay.
- Taxable Income – The amount of income that is taxed by the government.
- Tenants in Common – Joint ownership is when two or more individuals own an asset, without rights of survivorship if one owner dies. The percentage of ownership by each individual does not have to be equal, and it can be freely transferred to another individual during the owner’s lifetime and or via a will upon their death.
- Term – Length of time between the disbursement of funds for a loan and the date the loan funds are to be paid back in full.
- Trust – A separate legal entity created between you and a trustee (which can be yourself), who faithfully and wisely manages any assets in the trust for your benefit and the benefit of your heirs. Trusts can hold all real assets – money, real estate, bonds, stocks, vehicles, business interests, jewelry, furniture, and other investments or personal property.
- Unearned Income – Income such as interest, dividends, capital gains, alimony, or other forms of passive income an individual did not actively work to earn.
- Unmanaged Fund – A fund, such as an index fund or ETF with very low management fees because it does not have a management team making any investment decisions.
- Unsecured Loan – A loan approved without the need to provide any form of collateral in the case of default.
- United States Savings Bond – A U.S. savings bond is a debt security issued by the United States Department of the Treasury to raise funds for its government’s borrowing needs. They are safe long-term investments backed by the full faith of the U.S. government.
- Variable Expenses – Costs for products or services that you have some control over. Opposite of fixed costs such as rent or a car payment which remains the same each month.
- Variable Rate – An interest rate that can change based on various economic or contractual circumstances.
- Vesting Period – The period of time that must pass before a retirement plan participant (employee) has full rights to the possession of any employer contributions and earnings if the employee resigns, retires, or is dismissed from the employer.
- Volatility – A measure of the amount and frequency of fluctuations in the price for a given security or market. Assets with high volatility are generally considered higher risk because of price unpredictability.
- Want – Something that is desirable, but non-essential for the existence of human life.
- Wealth – The total value of assets owned by an individual.
- Will – A document which states what will happen to an individual’s assets when they die.
- Withdrawal – Removing money from an asset account.
- Yield – The amount of money made on some investment, usually stated as a percentage of the original investment.