Financial Terms Glossary

The words that show up in every money decision, explained in plain English. No jargon defined with more jargon.

36 Terms Defined

36 of 36 terms

#

401(k): An employer-sponsored retirement account that lets you invest part of your paycheck before taxes, often with a matching contribution.; Read definition

A

Amortization: The process of paying off a loan through fixed regular payments, where each payment covers interest first and the rest reduces the balance.; Read definition
APR (Annual Percentage Rate): The yearly cost of borrowing, expressed as a percentage that includes the interest rate plus most lender fees.; Read definition
APY (Annual Percentage Yield): The yearly return on savings including the effect of compounding, which makes it the honest number for comparing deposit accounts.; Read definition
Asset Allocation: How you divide a portfolio among stocks, bonds, cash, and other asset types — the single biggest driver of its risk and return.; Read definition

B

Bond: A loan you make to a government or company that pays you regular interest and returns your principal on a set maturity date.; Read definition

C

Capital Gains: The profit from selling an asset for more than you paid, taxed at a lower rate if you held it longer than a year.; Read definition
Capitalization: When unpaid interest is added to your loan balance, so you begin paying interest on that interest.; Read definition
Compound Interest: Interest earned on both your original money and the interest already added to it, which makes balances grow faster over time.; Read definition
Credit Score: A three-digit number, typically 300 to 850, that lenders use to estimate how likely you are to repay borrowed money.; Read definition

D

Debt-to-Income Ratio (DTI): The share of your gross monthly income that goes to debt payments — a key test lenders apply when sizing a mortgage.; Read definition
Deductible: The amount you pay out of pocket on an insurance claim before your insurer starts covering costs.; Read definition
Depreciation: The decline in an asset's value over time from age and use — and, for businesses, the tax deduction that tracks it.; Read definition
Diversification: Spreading money across many investments so that a loss in any one of them does limited damage to the whole portfolio.; Read definition
Dividend: A share of a company's profits paid out to shareholders, usually in cash and usually every quarter.; Read definition
Dollar-Cost Averaging: Investing a fixed amount on a regular schedule regardless of price, which smooths out your average purchase cost.; Read definition

E

Emergency Fund: Cash set aside in an accessible account to cover unexpected expenses or a loss of income without taking on debt.; Read definition
Escrow: Money held by a neutral third party — either during a home purchase, or by your lender to pay property taxes and insurance.; Read definition
ETF (Exchange-Traded Fund): A fund holding a basket of investments that trades on an exchange like a single stock, usually tracking an index at low cost.; Read definition
Expense Ratio: The annual percentage of your investment that a fund charges to operate, deducted automatically from returns.; Read definition

F

FICO Score: The credit scoring model used in the large majority of US lending decisions, ranging from 300 to 850.; Read definition

H

High-Yield Savings Account: A federally insured savings account paying a much higher rate than a typical bank account, with full access to your money.; Read definition

I

Index Fund: A fund that mechanically tracks a market index rather than picking stocks, giving broad exposure at very low cost.; Read definition
Inflation: The general rise in prices over time, which steadily reduces what each dollar of savings can buy.; Read definition
Interest Rate: The percentage charged for borrowing money or paid for depositing it, quoted as an annual figure.; Read definition

L

Liquidity: How quickly an asset can be turned into cash at close to its full value, without forcing a discount.; Read definition

N

Net Worth: Everything you own minus everything you owe — the single clearest measure of your overall financial position.; Read definition

P

Premium: The amount you pay an insurer — monthly, quarterly, or annually — to keep a policy in force.; Read definition
Principal: The original sum borrowed or invested, separate from any interest charged or earned on it.; Read definition

R

Rebalancing: Periodically buying and selling to return a portfolio to its target mix after market moves have shifted it.; Read definition
Roth IRA: A retirement account funded with after-tax dollars where qualified withdrawals, including all growth, come out tax-free.; Read definition

T

Tax Bracket: An income range taxed at a particular rate — only the income inside that range is taxed at it, not your whole salary.; Read definition
Traditional IRA: A retirement account where contributions may be tax-deductible now and withdrawals are taxed as ordinary income later.; Read definition

U

Underwriting: The process a lender or insurer uses to verify your finances and decide whether to approve you, and on what terms.; Read definition

V

Vesting: The schedule on which employer contributions or equity grants actually become yours to keep if you leave.; Read definition

W

Withholding: The income tax your employer deducts from each paycheck and sends to the government on your behalf during the year.; Read definition

#

A

B

C

D

E

F

H

I

L

N

P

R

T

U

V

W

Get smarter about money — every week