Personal finance terms are far too often overly complex. Some people use these terms to sound smart. Others do not understand the terms well enough to make them simple.
Here is a handy, dandy resource of simplified personal finance terms.
PERSONAL FINANCE TERMS A-B
Amortization
The loan reduction process over time. Interest will bite you in the fanny for quite some time.
Annuity
A financial instrument guaranteeing a set future payment amount.
Asset
Something owned with financial value. Assets can be tangible or intangible. Common asset examples are homes, cars, investments, and cash.
Asset Allocation
Mixing asset classes to spread risk and maintain proper risk tolerance. Asset classes include, but are not limited to, equities, fixed income, cash, real estate, cryptocurrency, commodities, and precious metals.
Bankruptcy
The clearing or restructuring of financial obligations through legal action. The two most common types for individuals are Chapter 7 (liquidation) and Chapter 13 (restructure).
Bear Market
When the stock market is decreasing and you can “barely” stomach the insanity.
I will see myself out.
Beneficiary
A person who gets your stuff when you die.
Choose wisely.
Bonds
It’s basically an IOU. Companies and government entities sell bonds and pay interest (typically quarterly). When the bond comes to maturity then the principal is paid.
Financial products are risky — including bonds.
Budget
“A budget is telling your money where to go instead of asking where it went.”
— John C. Maxwell
Bull Market
When the stock market is increasing in value — and that’s no bull.
PERSONAL FINANCE TERMS C—D
Capital Gain
It’s the profit realized when an asset has grown in value and sold. The difference is capital gain.
Cash Flow
The activity of a person’s money as inbound income and outbound expenses.
Certified Financial Planner
A personal finance designation. A person with the CFP qualification has mastered many concepts to assist clients in creating robust financial plans.
Coinsurance
Out of pocket costs for insurance after deductibles are paid.
Compound Interest
Interest calculated on principal and previously earned interest.
“Compound interest is the most powerful force in the universe. Yea, I never said that.”
— Albert Einstein
Copay
The flat fee that is paid when visiting a doctor or pharmacy.
Cosigner
A sucker who guarantees a loan for an unqualified borrower.
Credit History
A historical record of how a person has managed their credit. This is a large component of calculating a credit score.
Credit Report
A one-stop document for your debt and loan history. It’s recommended that credit reports are reviewed at least annually.
Credit Utilization Ratio
Divide the total credit card balance by the credit card limits. Credit utilization makes up to 30% of a person’s credit score.
Crypto-Currency
It is a digital currency independent of fiat money. The most common crypto is Bitcoin.
Debt Consolidation
Combining multiple loans into one larger loan in an effort to simplify payments and reduce interest expense.
Debt to Income Ratio
The total amount of your monthly debts (mortgage, student loans, etc.) divided by monthly gross income equals the debt to income ratio.
Lenders prefer lower debt-to-income ratios.
Deductible
The amount paid before insurance benefits begin. Higher deductibles often lead to lower premiums.
Defined Benefit Plan
An employer-sponsored retirement plan is similar to a pension. Most of these are now extinct.
Defined Contribution Plan
A type of investment vehicle where employees can contribute funds for retirement.
Depreciation
A monetary decline in the value of an asset over time. New automobiles drastically decrease in value in the first few years of use. Homes, for the most part, increase in value.
Diversification
“Don’t keep your eggs in one basket.”
— My Grandma
Dividends
Cash payouts from profits to stockholders.
Dollar-Cost Averaging
A strategy of purchasing investments at a set amount irrespective of the price. Kind of the opposite of marketing timing.
Dow Jones Industrial Average
An index of thirty publicly traded companies is believed to represent the overall US stock market. When stock updates are given, “The Dow” is one of the key numbers provided.
Emergency Fund
Established savings account that is designed for use during a legitimate emergency.
Half-price on Gucci or Prada bags are not legit emergencies.
Sorry.
Escrow
A type of sinking fund used to save money for real estate taxes and house insurance. Escrow can be a DIY job or can be outsourced to your mortgage company.
Estate Planning
Financial preparation for those left behind after your death. It includes wills, life insurance, appointing executors, and naming beneficiaries.
This can be complicated and getting competent legal help is highly recommended.
Exchange Traded Fund (ETF)
A bucket of investments tied to a specific index. ETFs are passively managed. They are similar to mutual funds.
PERSONAL FINANCE TERMS F—H
FAFSA
The most painful aspect of sending your children to college.
FICA
I will leave this explanation to Rachel from New York.
Seriously, just another government Ponzi scheme.
FICO Score
A FICO score is similar to a Thermos or a Kleenex. It’s the most popular brand and is usually the catch-all for any credit score.
FICO scores range from 300 to 850. Lenders, employers, and insurance companies all use the score for various reasons.
Flexible Spending Account (FSA)
Savings account for certain qualified medical expenses. Contributions to an FSA are pre-tax and reduce overall tax liability.
FSAs are a “use it or lose it” prospect. If the funds aren’t used by a specific time then the balance will be forfeited.
Gig Economy
Earning money without being a formal employee. Some of the most popular gig companies are Fiverr, Shipt, AirBnB, Uber, and Wag.
Grace Period
An established time to allow for payment before interest is charged or penalties incurred. Here’s an article I wrote on the responsible use of credit cards.
Most credit card companies extended grace periods on purchases. Cash advances accrue interest, immediately.
Health Savings Account (HSA)
The triple threat of all savings accounts!
Pretax contributions are made to savings accounts that grow tax-free and are not taxed when used for qualified expenses.
BOOM!
HSAs usually only work with a high-deductible plan.
Homeowner’s Insurance
The transference of risk for losses and damages of a home to a policyholder. Mortgage companies require adequate coverage.
PERSONAL FINANCE TERMS I—L
Identity Theft
Thieves love to steal identities and do damage. This is a multi-billion dollar a year business.
Watch your back. Use a shredder. Lock down your passwords. Opt-out (link to do it) of all credit card offers for at least five years.
Consider issuing a credit freeze.
Index Funds
Investments that mirror or comprise those of a particular index like the S&P 500, The Dow 30, or the Russell 1000.
Index funds are passively managed, typically have much lower fees, and do well against actively managed funds.
Inflation
When the government prints more money (inflates the money supply) and blames business owners for being greedy.
Insurance
The transference of risk to a third party for a set premium.
IRA
An IRA is an Individual retirement account.
Itemized Deductions
Cash outflows are grouped together and used as a deduction for income tax. Itemized deductions must exceed the standard deduction to be financially viable.
Last Will & Testament
Who gets what and when you give up the ghost.
It’s highly recommended to find a competent professional in your state of residence.
Liabilities
Loans that are still owed. Some of the most common liabilities are house payments, car payments, credit card bills, and student loans.
Assets — Liabilities = Net Worth
Liabilities are not living expenses such as groceries or utilities.
Liquidity
The ability to gain access to cash. Checking and savings accounts are liquid. Stocks can be sold and might be liquid.
Living Will
Your wishes in a legal document in the event you become incapacitated.
Long-Term Disability Insurance
An insurance policy offering protection against a long-term disability.
Social security also offers disability protection.
PERSONAL FINANCE TERMS M—P
Market Timing
A fool’s errand.
Mr. Market, according to Benjamin Graham, is irrational and euphoric.
Good luck fighting him on his own turf.
Medicare
Health insurance for those 65 and older.
Monetize
Taking something that you love to do and finding a way to make money from it.
Money Market Account
Liquid savings account that might have a slightly higher rate than the pittance your bank pays.
Mortgage
A loan to buy a house. Most mortgages amortize for thirty years. Lenders typically offer 20-year, 15-year, and 10-year mortgages.
The quicker the repayment the lower the interest rate.
Mutual Fund
A professionally managed fund that uses pooled money to purchase investments. Mutual Funds provide automatic diversification.
NASDAQ
Most of the information about the NASDAQ is super boring and nerdy.
It’s an index of 3,000 + technology (primarily) companies including Apple, Intel, Amazon, and Netflix.
Net Income
Your salary minus all of your expenses. This can be calculated monthly, quarterly, or annually.
Net Worth
Assets — Liabilities = Net Worth
Online Savings Account
Companies that do not have brick & mortar branches and offer much higher savings rates than their branch counterparts.
Companies such as American Express, Discover, and Synchrony fall into these categories.
Opportunity Cost
“You can’t ride two horses with one butt sugar bean.”
— Earl Smooter
Discretionary income spent on vacations can’t be used to pay down student loans. Money invested into a 401(k) is unavailable for that new car.
Passive Income
Once the heavy lifting is complete, income continues to be earned. For example, you write an eBook on your favorite subject. No additional work is required and royalties earned are passive income.
Stock dividends are passive income as well.
The crew from The Office are cashing large checks for re-runs. These payments are passive income.
Pre-Tax Contribution
Contributions made which lower taxable income. Contributions made to HSAs, FSAs, and a 401(k) are all pre-tax contributions.
Private Mortgage Insurance (PMI)
The penalty paid for making less than a 20% downpayment on a house.
Post-Tax Contribution
Contributions that don’t reduce a person’s tax burden.
PERSONAL FINANCE TERMS R—S
Rebalancing
Retirement funds ebb and flow. Perhaps your large-cap index fund is doing well but your international fund is not.
A rebalance takes some of the profits from the good and buys funds that are discounted.
Recession
There once was a joke that a recession is when your neighbor loses his job. A depression is when I lose my job.
A recession is when Gross Domestic Product (GDP) falls for two consecutive quarters.
Refinance
To finance something again usually with a lower interest rate. Cash-out refinancing can be done to convert equity into cash without selling your home.
Registered Investment Advisor (RIA)
A personal finance professional who advise clients on financial affairs. RIAs typically are compensated by fees and do not earn commissions.
Return On Investment (ROI)
A way to measure the efficiency of a specific investment.
A $299 course might seem expensive. If the ROI was 15x within the first year it might seem a bit more palatable.
Risk Tolerance
When the stock market goes from bull to bear do you panic?
Not everyone can cope with wild swings. It’s helpful to determine your risk tolerance and remain within that area. There is no need to be a hero.
Rollover
The process of moving investments like a 401(k) when leaving a job. Take your time and do the rollover correctly. Keep Uncle Sam out of your wallet as much as possible.
Roth IRA
A type of IRA that provides the tax benefit on the back-end of an investment.
Withdrawals are not taxed.
Short-Selling
A market strategy of betting against a company. In short-selling, the expectation is that the company stock price will decrease in value.
Shorting can be profitable but can also be devastating.
Short-Term Disability Insurance
The transference of the risk of a short-term disability event to a third party in exchange for a premium.
Side Hustle
Just a fancy name for a part-time job.
Sinking Funds
A savings account designed to prepay asset purchases (automobile) or costly repairs (new roof). It can be as simple as a Christmas fund or as elaborate as a vacation home.
Social Security
A government-enforced Ponzi scheme that repays a pittance compared to the money invested by the employer and the employee.
S&P 500
An index that tracks 505 large companies in the United States.
Over the past fifty years, the S&P 500 has had an average annualized return of 9.4%.
Standard Deduction
The portion of income that is not taxed. Itemized deductions in excess of the standard deduction are more financially viable.
Stocks
When a person buys into a public company they purchase stock shares. Stocks are partial ownership in a company.
Stock Split
Let’s say you have a $100 bill. I have five, twenty dollar bills and we trade. You just completed a 5 to 1 stock split.
There is nothing magical about a stock split.
PERSONAL FINANCE TERMS T—Z
Target Date Fund
The brainchild of some Harvard MBA guaranteeing high fees and small returns.
Tax Credit
An amount that can be deducted on a tax return in order to lower a person’s tax bill. The child tax credit is one of the most common types.
Tax Refund
A free loan you gave to the government which they paid back without interest.
Nice job.
Term Life Insurance
A simple insurance policy that pays out a specific amount of money to the beneficiary when the insured person dies.
Time Value of Money
A bird in the hand is worth two in the bush.
Money today is worth more than the same amount in the future.
Traditional IRA
A pretax investment vehicle. Taxes are paid when funds are withdrawn.
Vesting
Some companies offer retirement matching funds. In an effort to coerce you to stay, vesting schedules are established. The money that the company contributes will vest according to that schedule.
If you quit before the vesting occurs the match stays behind.
W2
The tax form you get from an employer to complete your annual income taxes.
W4
It’s a tax form that you provide to an employer so they know how much money in taxes to withhold.
W9
Side hustlers and those in the gig economy need to complete W9s.
Whole Life Insurance
An expensive life insurance policy that should only be purchased as a last resort.
Withholding
How much your employer takes out of your check and gives to the government.
1099
Tax document received for getting paid to do work as a contractor or consultant.
401(k)
The subsection of the US tax code. It gives companies the ability to set up retirement accounts for their employees.
403(b)
Kind of like a 401(k) for public education organizations, not-for-profits, and self-employed ministers.
529 Plan
Section of the Internal Revenue Code that allows for tax-advantaged plans to save for future education costs.
Hopefully, you find these terms helpful and occasionally humorous.
I dare you to profit!
About Me
I am an expert and enthusiast assistant. My expertise is the result of years of intense practice and dedicated coaching, as scientific research reveals that true expertise is mainly the product of such efforts .
Personal Finance Terms
Amortization: This refers to the loan reduction process over time, where interest plays a significant role.
Annuity: A financial instrument guaranteeing a set future payment amount.
Asset: Something owned with financial value, which can be tangible or intangible, such as homes, cars, investments, and cash.
Asset Allocation: Mixing asset classes to spread risk and maintain proper risk tolerance, including equities, fixed income, cash, real estate, cryptocurrency, commodities, and precious metals.
Bankruptcy: The clearing or restructuring of financial obligations through legal action, with the two most common types for individuals being Chapter 7 (liquidation) and Chapter 13 (restructure).
Bear Market: When the stock market is decreasing.
Beneficiary: A person who receives your belongings when you die.
Bonds: Essentially an IOU, where companies and government entities sell bonds and pay interest, with financial products being risky, including bonds.
Budget: A budget is telling your money where to go instead of asking where it went.
Bull Market: When the stock market is increasing in value.
Capital Gain: The profit realized when an asset has grown in value and sold.
Cash Flow: The activity of a person’s money as inbound income and outbound expenses.
Certified Financial Planner: A personal finance designation, where a person with the CFP qualification has mastered many concepts to assist clients in creating robust financial plans.
Coinsurance: Out-of-pocket costs for insurance after deductibles are paid.
Compound Interest: Interest calculated on principal and previously earned interest.
Copay: The flat fee that is paid when visiting a doctor or pharmacy.
Cosigner: A person who guarantees a loan for an unqualified borrower.
Credit History: A historical record of how a person has managed their credit, which is a large component of calculating a credit score.
Credit Report: A one-stop document for your debt and loan history, recommended to be reviewed at least annually.
Credit Utilization Ratio: Divide the total credit card balance by the credit card limits, making up to 30% of a person’s credit score.
Crypto-Currency: A digital currency independent of fiat money, with the most common crypto being Bitcoin.
Debt Consolidation: Combining multiple loans into one larger loan in an effort to simplify payments and reduce interest expense.
Debt to Income Ratio: The total amount of your monthly debts divided by monthly gross income, with lenders preferring lower debt-to-income ratios.
Deductible: The amount paid before insurance benefits begin, where higher deductibles often lead to lower premiums.
Defined Benefit Plan: An employer-sponsored retirement plan similar to a pension.
Defined Contribution Plan: A type of investment vehicle where employees can contribute funds for retirement.
Depreciation: A monetary decline in the value of an asset over time.
Diversification: The practice of not keeping all investments in one type of asset.
Dividends: Cash payouts from profits to stockholders.
Dollar-Cost Averaging: A strategy of purchasing investments at a set amount irrespective of the price.
Dow Jones Industrial Average: An index of thirty publicly traded companies believed to represent the overall US stock market.
Emergency Fund: An established savings account designed for use during a legitimate emergency.
Escrow: A type of sinking fund used to save money for real estate taxes and house insurance.
Estate Planning: Financial preparation for those left behind after your death, including wills, life insurance, appointing executors, and naming beneficiaries.
Exchange Traded Fund (ETF): A bucket of investments tied to a specific index, passively managed and similar to mutual funds.
This is just a selection of the personal finance terms covered in the article. If you'd like to know about more terms or have specific questions about any of these concepts, feel free to ask!
