Financial Glossary

Quick reference for common financial terms. Click on any term to see its definition.

A

APR (Annual Percentage Rate) : The yearly interest rate charged on loans or credit cards. Includes fees and other costs, making it more accurate than the simple interest rate.

APY (Annual Percentage Yield) : The yearly return on savings/investments, accounting for compound interest. Higher APY = more money earned.

Asset : Anything you own that has monetary value (cash, investments, property, etc.).

Asset Allocation : How your investments are divided among different asset classes (stocks, bonds, cash).

B

Bond : A loan you make to a company or government. They pay you interest, then return your principal at maturity.

Brokerage Account : An account that lets you buy and sell investments like stocks, bonds, and mutual funds.

Budget : A plan for how you'll spend and save your money over a period of time.

C

Capital Gains : Profit from selling an investment for more than you paid. Long-term (held >1 year) is taxed lower than short-term.

Compound Interest : Interest calculated on both the initial principal and accumulated interest. The "snowball effect" that makes money grow exponentially over time.

Credit Score : A number (300-850) representing your creditworthiness. Higher scores get better interest rates.

Credit Utilization : The percentage of your available credit that you're using. Lower is better (under 30%).

D

Deductible : The amount you pay out-of-pocket before insurance kicks in.

Diversification : Spreading investments across different assets to reduce risk. "Don't put all your eggs in one basket."

Dividend : A portion of a company's profits paid to shareholders. Can be reinvested or taken as cash.

E

Emergency Fund : Money set aside for unexpected expenses (3-6 months of living expenses recommended).

Equity : Ownership. In a home, it's the value minus what you owe. In investing, it means stocks.

ETF (Exchange-Traded Fund) : An investment fund that trades like a stock. Often tracks an index and has low fees.

Expense Ratio : The annual fee charged by a fund, expressed as a percentage. Lower is better (under 0.2% is good).

F

FICO Score : The most common credit score, ranging from 300-850.

Fiduciary : An advisor legally required to act in your best interest, not just sell you products.

401(k) : Employer-sponsored retirement account. Contributions are often matched by your employer (free money).

G

Gross Income : Your total earnings before taxes and deductions.

H

HSA (Health Savings Account) : Tax-advantaged account for medical expenses. Triple tax benefit: deductible contributions, tax-free growth, tax-free withdrawals for medical.

I

Index Fund : A fund that tracks a market index (like the S&P 500). Low fees, broad diversification.

Inflation : The rate at which prices increase over time. Reduces purchasing power of money not invested.

Interest : The cost of borrowing money, or the return on lending/saving money. Expressed as a percentage.

IRA (Individual Retirement Account) : A retirement account you open yourself (not through an employer). Traditional or Roth.

L

Liability : Money you owe (debts, loans, etc.).

Liquidity : How quickly an asset can be converted to cash. A savings account is liquid; a house is not.

M

Marginal Tax Rate : The tax rate on your last dollar of income. Not the same as your effective (overall) rate.

Mutual Fund : A pool of money from many investors, managed by professionals. Often has higher fees than ETFs.

N

Net Income : Your earnings after taxes and deductions. "Take-home pay."

Net Worth : Assets minus liabilities. The single most important number in personal finance.

P

PMI (Private Mortgage Insurance) : Insurance you pay if your down payment is less than 20%. Protects the lender, not you.

Portfolio : Your collection of investments.

Premium : The amount you pay for insurance coverage (usually monthly).

Principal : The original amount borrowed or invested, not including interest or returns.

R

Rebalancing : Adjusting your portfolio back to your target asset allocation.

Roth : A type of retirement account where you pay taxes now but withdrawals are tax-free in retirement.

S

S&P 500 : An index of 500 large US companies. Often used as a benchmark for the overall market.

Stock : Ownership share in a company. Value goes up or down based on company performance and market sentiment.

T

Tax Bracket : The range of income taxed at a particular rate. US uses marginal brackets.

Tax-Advantaged : Accounts with special tax benefits (401k, IRA, HSA, etc.).

Traditional : A type of retirement account where contributions are tax-deductible now but withdrawals are taxed in retirement.

V

Vesting : The process of earning ownership of employer contributions. "Fully vested" means it's all yours.

Volatility : How much an investment's value fluctuates. Higher volatility = more risk (and potentially more reward).

Y

Yield : The income return on an investment, usually expressed as a percentage.