Financial Terms Glossary

Master the financial vocabulary behind everyday money decisions with simple explanations of 95 common personal finance terms.

95 Terms Defined

95 of 95 terms

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401(k): An employer-sponsored retirement account that lets you invest part of your paycheck before taxes, often with a matching contribution.; Read definition
529 Plan: A tax-advantaged investment account for education costs, where growth and withdrawals for qualified expenses escape federal tax.; Read definition

A

Adjustable-Rate Mortgage (ARM): A mortgage whose interest rate is fixed for an opening period and then adjusts periodically against a benchmark index.; Read definition
Adjusted Gross Income (AGI): Your total income minus a specific set of adjustments — the figure most tax breaks are measured against, not your salary.; Read definition
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
Annuity: An insurance contract that converts a lump sum into a stream of payments, typically for retirement income you cannot outlive.; 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

Balance Transfer: Moving credit card debt onto a new card with a promotional low or 0% rate, so payments attack the balance instead of the interest.; Read definition
Bear Market: A decline of 20% or more from a recent market high, and the stretch of falling prices that follows it.; Read definition
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
Bull Market: A sustained stretch of rising prices, conventionally dated from a 20% recovery off the previous market low.; 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
Capital Loss: The loss from selling an investment for less than you paid, which offsets capital gains and up to $3,000 of ordinary income a year.; Read definition
Capitalization: When unpaid interest is added to your loan balance, so you begin paying interest on that interest.; Read definition
Certificate of Deposit (CD): A deposit account that locks your money in for a fixed term at a fixed rate, with a penalty for taking it out early.; Read definition
Closing Costs: The fees and prepaid items due when a property sale or refinance completes — typically 2% to 5% of the loan amount for a buyer.; Read definition
Collateral: An asset you pledge to a lender that it can seize if you stop paying — the thing that makes a loan secured.; 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
Cost Basis: What you originally paid for an investment, adjusted over time — the figure your taxable gain or loss is measured against.; 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
Credit Utilization Ratio: The share of your available revolving credit you are currently using — one of the largest single inputs to a credit score.; Read definition

D

Debt Avalanche Method: A payoff strategy that attacks your highest-interest debt first, which costs the least in total interest.; Read definition
Debt Consolidation: Replacing several debts with a single new loan, ideally at a lower rate and with one payment instead of many.; Read definition
Debt Snowball Method: A payoff strategy that clears your smallest balance first, using early wins to build momentum regardless of interest rate.; Read definition
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
Default: Failing to meet the terms of a debt for long enough that the lender declares the loan broken and pursues recovery.; 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
Equity (Including Home Equity): The share of an asset you genuinely own — for a home, its market value minus everything still owed against it.; 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

FDIC / NCUA Insurance: Federal backing that protects deposits up to $250,000 per depositor, per institution, per ownership category.; Read definition
FICO Score: The credit scoring model used in the large majority of US lending decisions, ranging from 300 to 850.; Read definition
Fiduciary: Someone legally obliged to act in your financial interest ahead of their own, rather than merely recommending something suitable.; Read definition
FIRE (Financial Independence, Retire Early): A strategy of saving an unusually large share of income to build a portfolio big enough that continuing to work becomes optional.; Read definition
Fixed-Rate Mortgage: A mortgage whose interest rate is locked for the entire term, so the principal and interest payment never changes.; Read definition
FSA (Flexible Spending Account): An employer account funded with pre-tax salary for medical or dependent care costs, which you generally must spend within the plan year.; Read definition

G

Grace Period: A window after a due date, or after a purchase, during which no interest or late penalty is applied.; Read definition
Gross Income: Your total pay before any taxes, benefits, or contributions are deducted — the figure lenders and tax rules start from.; Read definition

H

Hard Inquiry (Hard Pull): A lender's review of your credit report when you apply for credit — recorded on the report and worth a few points for about a year.; Read definition
HELOC (Home Equity Line of Credit): A revolving credit line secured by your home that you draw on as needed, usually at a variable rate.; Read definition
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
HSA (Health Savings Account): A tax-advantaged account paired with a high-deductible health plan, where contributions, growth, and medical withdrawals are all untaxed.; 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

Lifestyle Creep: The tendency for spending to rise alongside income, so a raise improves how you live without improving your finances.; Read definition
Liquidity: How quickly an asset can be turned into cash at close to its full value, without forcing a discount.; Read definition
Loan-to-Value (LTV) Ratio: The size of a loan measured against the value of the property securing it — the number that drives mortgage insurance, rate, and approval.; Read definition

M

Marginal Tax Rate: The rate applied to your next dollar of income — the number that matters for almost every tax decision at the margin.; Read definition
Market Capitalization (Market Cap): A company's share price multiplied by its shares outstanding — the standard measure of how large a public company is.; Read definition
Money Market Account (MMA): A federally insured bank account that pays savings-level interest while offering check-writing or debit access.; Read definition
Mortgage Points (Discount Points): Upfront fees paid at closing to buy down your mortgage rate, with each point costing 1% of the loan amount.; Read definition
Mutual Fund: A pooled investment holding a portfolio of securities on behalf of many investors, priced once a day after the market closes.; Read definition

N

Negative Amortization: When a payment is too small to cover the interest due, so the shortfall is added to the balance and the debt grows.; Read definition
Net Worth: Everything you own minus everything you owe — the single clearest measure of your overall financial position.; Read definition

O

Opportunity Cost: The value of the best alternative you gave up by choosing something else — the part of a decision's cost the price tag never shows.; Read definition
Out-of-Pocket Maximum: The most you can pay for covered care in a plan year, after which your health plan covers 100% of further costs.; Read definition
Overdraft Protection: A bank service that covers transactions exceeding your balance, either by linking another account or by charging a fee to advance the money.; Read definition

P

PMI (Private Mortgage Insurance): Insurance that protects the lender when you put down less than 20%, added to your payment until you build enough equity.; Read definition
Preapproval: A lender's conditional commitment to a loan amount after reviewing your finances — stronger than a prequalification, short of an approval.; Read definition
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
Refinancing: Replacing an existing loan with a new one, usually to lower the rate, change the term, or convert equity into cash.; Read definition
REIT (Real Estate Investment Trust): A company that owns income-producing property, trades like a stock, and must pay out most of its profits as dividends.; Read definition
Required Minimum Distribution (RMD): The amount the IRS obliges you to withdraw from tax-deferred retirement accounts each year once you reach the qualifying age.; Read definition
Robo-Advisor: An automated service that builds and maintains a diversified portfolio for you based on a short questionnaire, for a low annual fee.; Read definition
Roth IRA: A retirement account funded with after-tax dollars where qualified withdrawals, including all growth, come out tax-free.; Read definition

S

Safe Withdrawal Rate: The share of a portfolio you can spend in the first year of retirement, rising with inflation thereafter, without running out.; Read definition
Secured Credit Card: A credit card backed by a refundable cash deposit that sets your limit, used to build or rebuild a credit history.; Read definition
Sequence of Returns Risk: The risk that poor investment returns early in retirement permanently damage a portfolio, even if the long-run average is fine.; Read definition
Sinking Fund: Money set aside a little each month for a known irregular expense, so the bill arrives already paid for rather than as a crisis.; Read definition
Standard Deduction: A flat amount subtracted from your income before tax is calculated, taken instead of itemizing individual deductions.; Read definition

T

Target-Date Fund (TDF): A single fund that holds a whole diversified portfolio and shifts automatically from stocks toward bonds as its target year approaches.; Read definition
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
Tax Credit: A dollar-for-dollar reduction of the tax you owe — worth substantially more than a deduction of the same size.; Read definition
Tax-Loss Harvesting: Deliberately selling losing investments to realize losses that offset taxable gains and a limited amount of ordinary income.; Read definition
Term Life Insurance: Life insurance that covers a fixed number of years and pays out only if you die within them, which is why it is cheap.; Read definition
Traditional IRA: A retirement account where contributions may be tax-deductible now and withdrawals are taxed as ordinary income later.; Read definition
Treasury Bills (T-Bills): Short-term US government debt sold at a discount to face value, maturing in a year or less and backed by the Treasury.; 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

VantageScore: A credit scoring model built jointly by the three credit bureaus, using the same 300–850 range as FICO but weighing inputs differently.; Read definition
Vesting: The schedule on which employer contributions or equity grants actually become yours to keep if you leave.; Read definition

W

Wash-Sale Rule: An IRS rule disallowing a capital loss if you buy a substantially identical security within 30 days before or after the sale.; Read definition
Whole Life Insurance: Permanent life insurance that never expires and builds a cash value, at a premium many times that of comparable term coverage.; Read definition
Withholding: The income tax your employer deducts from each paycheck and sends to the government on your behalf during the year.; Read definition

Z

Zero-Based Budgeting: A budgeting method where every dollar of income is assigned a job in advance, until income minus assignments equals zero.; Read definition

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