81 terms, explained
Financial Glossary
Money has a language of its own. Here are the terms behind our calculators — defined plainly, with no jargon hiding more jargon.
A
Adjustable-Rate Mortgage (ARM) A mortgage with a low fixed rate for an initial period that then adjusts periodically based on a market index. Rates & Loans AGI (Adjusted Gross Income) Your gross income minus specific "above-the-line" adjustments, used to determine eligibility for many tax breaks. Tax Amortization The process of paying off a loan in equal periodic payments, each split between interest and principal. Rates & Loans Annuity A contract with an insurer that converts a sum of money into a stream of income, often for life. Retirement APR (Annual Percentage Rate) The yearly cost of borrowing, including the interest rate plus most fees, expressed as a single percentage. Rates & Loans APY (Annual Percentage Yield) The yearly return on savings, including the effect of compounding, expressed as a percentage. Rates & Loans Asset Allocation How you divide a portfolio among stocks, bonds and cash — the biggest driver of long-term risk and return. Saving & Investing
B
Balloon Payment A large lump-sum payment due at the end of a loan whose earlier payments were kept artificially low. Rates & Loans Beneficiary The person or entity you designate to receive the proceeds of an insurance policy or retirement account. Insurance Break-Even Point The sales volume at which total revenue equals total costs — where a business stops losing money. Personal & Business Budget A plan for your money that compares income against expenses over a period, usually a month. Personal & Business
C
CAGR (Compound Annual Growth Rate) The steady annual rate that would grow an investment from its starting value to its ending value over a period. Saving & Investing Cap Rate (Capitalization Rate) A rental property’s annual net operating income divided by its price — a measure of return before financing. Saving & Investing Capital Gains Tax Tax on the profit from selling an asset for more than you paid for it. Saving & Investing Cash Flow The money moving in and out of a business or budget over a period — the lifeblood of any operation. Personal & Business Cash-on-Cash Return A rental property’s annual pre-tax cash flow divided by the actual cash invested. Saving & Investing Closing Costs The fees and charges, beyond the down payment, paid to finalize a real estate purchase or loan. Rates & Loans Compound Interest Interest earned on both your original money and the interest it has already accumulated. Saving & Investing Conforming Loan A conventional mortgage within the FHFA loan limit, so Fannie Mae or Freddie Mac can buy it. Rates & Loans Conventional Loan A mortgage not insured or guaranteed by a government agency such as the FHA, VA or USDA. Rates & Loans Cost Basis The original value of an asset for tax purposes, used to calculate gain or loss when you sell. Saving & Investing Credit Score A number (typically 300–850) that summarizes your creditworthiness for lenders. Credit & Debt Credit Utilization The percentage of your available credit you’re using — a major factor in your credit score. Credit & Debt
D
Debt Avalanche Method A payoff strategy that targets your highest interest rate first to minimize total interest. Credit & Debt Debt Snowball Method A payoff strategy that targets your smallest balance first for quick, motivating wins. Credit & Debt Debt-to-Income Ratio (DTI) Your total monthly debt payments divided by your gross monthly income, used by lenders to assess borrowing capacity. Credit & Debt Deductible The amount you pay out of pocket before your insurance begins to pay. Insurance Diversification Spreading investments across many assets so that no single one can sink your portfolio. Saving & Investing Dollar-Cost Averaging Investing a fixed amount at regular intervals regardless of price, to smooth out market timing. Saving & Investing Down Payment The upfront cash you pay toward a purchase, with the rest financed by a loan. Rates & Loans
E
Effective Tax Rate Your total tax divided by your total income — the average rate you actually pay. Tax Emergency Fund Savings set aside to cover unexpected expenses or a loss of income, typically three to six months of costs. Personal & Business Employer Match Money your employer adds to your retirement account based on what you contribute — effectively free money. Retirement Equity The portion of an asset you truly own — its value minus any debt secured against it. Rates & Loans Escrow An account your lender uses to collect and pay your property taxes and homeowners insurance on your behalf. Rates & Loans Expense Ratio The annual fee a mutual fund or ETF charges, expressed as a percentage of your invested balance. Saving & Investing
F
FHA Loan A mortgage insured by the Federal Housing Administration, allowing lower down payments and credit scores. Rates & Loans FICA The combined Social Security and Medicare payroll tax of 7.65% withheld from your wages. Tax Fixed-Rate Mortgage A mortgage whose interest rate — and principal-and-interest payment — never changes for the life of the loan. Rates & Loans FSA (Flexible Spending Account) An employer account that lets you pay medical or dependent-care costs with pre-tax dollars. Insurance Future Value What a sum of money, plus any contributions, will be worth at a future date after earning a given return. Saving & Investing
H
HECM (Home Equity Conversion Mortgage) The FHA-insured reverse mortgage that lets homeowners 62 and older turn home equity into cash. Rates & Loans HELOC (Home Equity Line of Credit) A revolving line of credit secured by your home equity, which you can draw from as needed. Rates & Loans High-Deductible Health Plan (HDHP) A health plan with a higher deductible and lower premiums that qualifies you to contribute to an HSA. Insurance HSA (Health Savings Account) A triple-tax-advantaged account for medical expenses, available with a high-deductible health plan. Insurance Human Life Value An estimate of the economic worth of a person’s future earnings to their family, used to size life insurance. Insurance
I
Index Fund A fund that passively tracks a market index, offering broad diversification at very low cost. Saving & Investing Interest The cost of borrowing money, or the earnings paid on savings, calculated as a percentage of the balance. Rates & Loans IRR (Internal Rate of Return) The annualized return that makes an investment’s cash flows break even in present-value terms. Saving & Investing Itemized Deduction Specific eligible expenses — like mortgage interest, state taxes and charitable gifts — subtracted from income instead of the standard deduction. Tax
L
M
Marginal Tax Rate The tax rate applied to your last (highest) dollar of income — the rate on additional earnings. Tax Medicare The federal health-insurance program for people 65 and older and some younger people with disabilities. Insurance Minimum Payment The smallest amount you must pay on a credit card each month to stay current. Credit & Debt
N
Net Operating Income (NOI) A property’s income after operating expenses but before mortgage payments and taxes. Saving & Investing Net Worth The value of everything you own minus everything you owe — the clearest snapshot of financial health. Personal & Business NUA (Net Unrealized Appreciation) A tax strategy for employer stock in a 401(k) that taxes its growth at lower capital-gains rates. Retirement
P
Pension An employer-funded retirement plan that pays a guaranteed income for life, based on salary and years of service. Retirement PMI (Private Mortgage Insurance) Insurance a lender requires when your mortgage down payment is under 20%, protecting the lender if you default. Rates & Loans Points (Discount Points) An upfront fee paid to a lender to lower your mortgage interest rate, with one point costing 1% of the loan. Rates & Loans Premium The amount you pay an insurer — monthly, quarterly or annually — to keep an insurance policy active. Insurance Present Value What a future sum of money is worth today, given a discount rate — the time value of money in reverse. Saving & Investing Principal The original amount of money borrowed, or the portion of a payment that reduces that balance. Rates & Loans Profit Margin The percentage of revenue left as profit after costs — profit divided by revenue. Personal & Business
R
Refinance Replacing an existing loan with a new one, usually to get a lower rate, a different term, or to tap equity. Rates & Loans Reverse Mortgage A loan for homeowners 62 and older that converts home equity into cash with no required monthly payments. Rates & Loans RMD (Required Minimum Distribution) The minimum amount you must withdraw each year from traditional retirement accounts, starting at age 73. Retirement Roth IRA An individual retirement account funded with after-tax money, whose qualified withdrawals are completely tax-free. Retirement
S
Self-Employment Tax The 15.3% Social Security and Medicare tax paid by the self-employed, covering both employer and employee shares. Tax Social Security A U.S. government program providing inflation-adjusted retirement income based on your earnings history. Retirement Standard Deduction A fixed amount you can subtract from income without itemizing, reducing your taxable income. Tax
T
Tax Withholding Income tax your employer deducts from each paycheck and sends to the government on your behalf. Tax Taxable Income The portion of your income subject to tax after deductions and exemptions are subtracted. Tax Time Value of Money The principle that a dollar today is worth more than a dollar in the future, because it can earn a return. Saving & Investing Traditional IRA An individual retirement account where contributions may be tax-deductible and growth is tax-deferred until withdrawal. Retirement
V
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