Glossary
401(k) plan A retirement plan into which you can contribute a portion of your current salary, usually before taxes. Contributions can grow tax-deferred until you withdraw them upon retirement.
403(b) plan A retirement plan similar to a 401(k), except it’s offered only by hospitals, schools, and nonprofit employers.
adjustable-rate mortgage (ARM) A mortgage set up with an interest rate that can change at specific intervals as determined under the initial contract.
adjuster An individual who inspects damage as reported on an insurance claim and determines a settlement amount for the claim.
advance health-care directive A legal document that spells out your wishes regarding health-care decisions and appoints someone to make health-care decisions on your behalf.
affidavit of domestic partnership A written, sworn document stating that two people live together in a long-term relationship and agree to share each other’s financial responsibilities and be accountable for each other’s common welfare.
annual fee A charge you agree to pay to a bank or credit card company for the privilege of holding its card.
arbitration The hearing and determination of a dispute between parties by a third party.
balanced mutual fund A mutual fund wherein the primary objective is to buy a combination of stocks and bonds. These middle-of-the-road funds balance their portfolios to achieve both moderate income and moderate capital growth. These funds tend to be less volatile than stocks-only funds. On average, balanced funds tend to be invested as 45 percent bonds and 55 percent stocks.
bankruptcy The legal status of a person or other entity who is unable to repay owed debts to creditors.
bear market An extended period of general price decline in the stock market as a whole.
beneficiary The person who is named to receive the proceeds from an investment vehicle, trust, or contract. A beneficiary can be an individual, a company, or an organization.
blue-chip stock Stock of large-cap companies that generally comes with a lower-than-average risk.
bond A debt instrument. The issuer promises to pay the investor a specified amount of interest for a period of time and repay the principal at maturity.
bond fund A mutual fund that invests in bonds and passes current income to its shareholders, with capital gains as a secondary objective. Some bond funds purchase long-term securities providing a relatively high current yield but varying substantially in price with changes in interest rates. Other funds choose short-term securities having lower yields but fluctuating little in value.
budget A schedule of income and expenses, commonly broken into monthly intervals and typically covering a 1-year period.
bull market An extended period of generally rising prices in the market as a whole.
capitalized cost In leasing, the cost a leasing company pays for a vehicle.
career counselor A certified individual who can help you clarify your career goals, assess your abilities and aptitudes, provide information about different careers, develop an individualized career plan, help you create a résumé, and teach you skills and strategies for job hunting.
cash neutral A strategy that does not require net cash for a transaction but instead relies on simultaneous buying and selling.
cash value life insurance Insurance for which part of the premium is used to provide death benefits, and the remainder is available to earn interest. Cash value life insurance is a protection plan and a savings plan that charges significantly higher premiums than term insurance.
certificate of deposit (CD) A type of savings investment in which money is invested for a specified amount of time and the investor is guaranteed a certain amount of interest.
certified financial planner (CFP) A designation indicating that a financial planner has completed extensive training, passed a rigorous test, is certified by the Certified Financial Planner Board of Standards, and held to a high standard of integrity.
certified public accountant (CPA) A designation by the American Institute of Certified Public Accounts indicating that an individual meets certain work experience requirements and has passed an exam.
churning and burning To trade securities very actively in a brokerage account to increase brokerage commissions rather than customer profits. Brokers may be tempted to churn accounts because their income is directly related to the volume of trading undertaken by their customers. Churning is illegal and unethical.
co-payment The amount the insured person is responsible to pay at each time of service under a health insurance contract.
collateral Something of value put up as security for a loan to ensure the lender won’t lose the money loaned.
collision and comprehensive coverage Types of auto insurance that pay to repair or replace your car if it’s in an accident, regardless of whether or not the collision is your fault.
commercial bank Financial institutions, either chartered by the federal or state governments, that take deposits, loan money, and provide other services to individuals or corporations.
commingling The unethical practice of a financial adviser mixing his or her own funds with those of clients, making it difficult to determine who owns the funds.
compound interest Interest paid on interest from previous periods in addition to the principal. Essentially, compounding involves adding interest to principal and any previous interest to calculate interest in the next period. Compound interest may be figured daily, monthly, quarterly, semiannually, or annually.
consumer confidence A measure of how consumers feel at a given time about the current state of the economy.
cosigner Someone who assumes responsibility if you can’t pay off your credit card debt. Also known as a guarantor.
credit history The record of an individual’s past events that pertain to credit previously given or applied for.
credit report An extensive document that details your credit history.
credit score A number based on data in your credit report that represents your overall creditworthiness. See also FICO score.
credit union A nonprofit, cooperative financial institution providing credit to its members who share a common bond, such as an employer or trade. Credit unions often pay slightly higher rates of interest on passbook-type savings accounts and charge lower rates on consumer loans.
customer service representative (CSR) A front-line bank employee who opens checking and savings accounts, certificates of deposit, and so forth.
debit card A card you use for purchases that deducts money from your checking account, unlike a credit card, which requires you to pay for purchases at a later date.
debt settlement An agreement that allows you to pay less than you owe to a creditor in order to settle your debt. Debt settlement usually is very detrimental to your credit score and credit history. Also known as debt arbitration or debt negotiation.
deductible The amount the insured person must pay before an insurance company pays a claim.
depression A critical downturn in economic activity that lasts for 2 or more years and is characterized by high unemployment, diminished available credit, reduced trade and commerce, high rates of bankruptcies, debt defaults, and other factors. See also Great Depression.
disability The inability to work because of a physical or mental condition.
discretionary expenses Expenses incurred for nonessentials; money spent as a person chooses.
disposition charges Expenses charged to the lessee at the end of the lease for selling the vehicle or property leased.
diversification The acquisition of a group of assets in which returns on the assets are not directly related over time. Proper investment diversification, requiring a sufficient number of different assets, is intended to minimize risk associated with investing.
dividend A share of a company’s net profits, distributed by the company to a class of its stockholders, and paid in a fixed amount for each share of stock held. Dividends are usually fixed in preferred stock; dividends from common stock vary as the company’s performance shifts.
durable power of attorney A legal document that enables you to designate another person to handle your financial transactions should you become incapacitated and unable to do so.
dwelling coverage The part of your homeowner’s insurance that covers the structure in which you live.
emergency fund Money saved for use to cover routine and nonroutine expenses in the event that you would lose your job or become unable to work, thereby losing your income.
employed part-time for economic reasons People who want to work full-time but can’t find full-time jobs.
employer-sponsored benefit plan A benefit or package of benefits an employer provides for employees.
equity The value of your ownership in property or securities. The equity in your home is the difference between the current market value of the home and the money you still owe on the mortgage. The term equity is used interchangeably with stocks.
escrow The holding of assets (for example, securities or cash) by a third party that delivers the assets to the grantee or promisee on the fulfillment of some condition. Some parts of mortgage payments are held in escrow to cover expenses like taxes and insurance. Down payments are also held in escrow until settlement.
exchange A marketplace for the purpose of trading financial instruments such as securities, derivatives, and commodities. An exchange can be an electronic platform or a physical location. Exchanges are for the purpose of assuring fair and orderly trading.
exchange traded fund (ETF) A group of securities representing a mutual fund that are traded in the stock market throughout the day at the market value at that time.
executor Someone who oversees the distribution of your property and ensures the terms of your will are followed after you die. If you don’t have an executor, the court will appoint someone to do the job. Also known as a personal representative.
Fannie Mae A security issued by the Federal National Mortgage Association (FNMA) that is backed by insured and conventional mortgages. Monthly returns to holders of Fannie Maes consist of interest and principal payments made by homeowners on their mortgages.
fee-only adviser A financial adviser who is paid a fee by clients rather than earning commission from the sale of a particular product.
FICO score A scoring model used to determine credit risk for those seeking mortgages. FICO mortgage scores range from 300 to 850, with higher scores pointing to lower credit risks. The FICO score is used by the three national credit bureaus: TransUnion, Equifax, and Experian. See also credit score.
finance charge A fee you pay when you borrow money or use credit.
financial adviser A professional who guides individuals to arrange and coordinate their financial affairs. Also known as financial consultant or financial planner.
fixed expenses Expenses such as rent, utilities, and car payments that occur on a regular basis.
fixed-rate mortgage (FRM) A mortgage in which the annual interest charged does not vary throughout the period of the loan.
foreclosure When a lender claims a property on which the loan has been defaulted.
Freddie Mac A security issued by the Federal Home Loan Mortgage Corporation (FHLMC) that is secured by pools of conventional home mortgages. Holders of Freddie Macs receive a share of the interest and principal payments made by the homeowners.
full-service broker A broker who offers a range of services such as retirement planning, investment advice, tax planning, and estate advice. Full-service brokers receive higher commissions and fees than discount brokers.
gap insurance Insurance purchased to pay the difference between the value your auto insurance pays if a leased vehicle is stolen or totaled and the amount required to terminate the lease.
Great Depression The longest-lasting and most severe economic setback in U.S. history, starting with the stock market crash in October 1929 and lasting until 1939.
Great Recession An economic downturn that resulted from the burst of the U.S. housing bubble and caused a global recession. The recession officially started in December 2007 and lasted until June 2009 in the United States.
gross income All income except as specifically exempted by the Internal Revenue Code.
growth stock Stock that is expected to have above-average increases in revenue and earnings.
guarantor Someone who assumes the responsibility if you can’t pay off your credit card debt. Also known as a cosigner.
headhunter Someone who matches you with a company that’s looking for someone to fill a particular position. He or she also handles negotiations between a prospective employee and the company.
health maintenance organization (HMO) A type of health plan that restricts your choice of health-care providers and often costs less than a plan that does not restrict providers. See also preferred provider organization (PPO).
homeowner’s insurance Insurance obtained by a property owner to protect the property and its contents. It also provides liability coverage for accidents that occur on the property.
individual retirement account (IRA) A retirement savings plan in which you can contribute up to $5,500 per year. Funds can grow tax-deferred until you withdraw them at retirement. Contributions may or may not be tax-deductible depending on the income level and participation in other retirement plans.
interest The fee the bank charges you to use its money to finance what you buy with your credit card.
interest rate The specific percentage rate a bank or credit card company charges you for interest.
intestate The condition of dying without having prepared and executed a will to determine who receives your assets.
investment portfolio The listing and value of all your investments at a given point in time.
lease A contract under which someone obtains the use of an object, such as a vehicle or property, for a specified time and amount of money.
lending investment A loan you make with the understanding that you’ll get it back, plus interest.
liability coverage Insurance to cover costs resulting from damage to another person or another person’s property for which you are legally responsible.
load fund A mutual fund with shares sold at a price, including a sales charge (typically 4 to 9.3 percent of the net amount invested). Load funds are sold at a price exceeding their net asset value, but they are redeemed at their net asset value.
loan balance The total balance that remains on a loan you have.
long-term unemployed People who have been out of work for 27 weeks or more.
marginally attached to the labor force People who aren’t working but are not considered unemployed because they haven’t looked for work within 4 weeks.
market report A reporting of prices paid for various securities or commodities during a set period of time.
maturity date The date on which the principal and all remaining interest is due to be paid back on a loan.
misrepresentation A misstatement or omission of facts by a financial adviser that may negatively affect a client.
money manager A bank or business responsible for managing a securities portfolio for an individual or institution.
money market fund A mutual fund that sells shares of ownership and uses the proceeds to purchase short-term, high-quality securities such as Treasury bills, negotiable certificates of deposit, and commercial paper. Income earned by shareholders is received in the form of additional shares of stock in the fund (normally priced at $1 each). Although no fees are generally charged to purchase or redeem shares in a money market fund, an annual management charge is levied by the fund’s advisers. This investment pays a return that varies with short-term interest rates. It is relatively liquid and safe, but yields and features vary.
mortgage A loan for the purpose of financing property. The loan is secured by a lien on the property and comes with conditions regarding the length of time over which it will be repaid, the amount of interest you’ll pay on the loan, and other factors.
municipality A zoned area such as a city, borough, or township that has an incorporated government.
mutual fund An open-end investment company that invests its shareholders’ money in a diversified group of securities of other corporations. Mutual funds are usually professionally managed.
net worth The amount of wealth calculated by taking the total value of assets owned and subtracting all liabilities.
no-load fund A mutual fund sold without a sales charge. No-load funds sell directly to customers at net asset value with no intermediate salesperson charging a fee.
nondiscretionary expenses Expenses, such as mortgage payments and utility bills, an individual must pay.
nonroutine expenses Budgeted expenses, such as a furnace repair or unexpected medical expenses, that are not regular or customary.
personal finance Every aspect of one’s life that deals with money.
personal financial specialist (PFS) A credential earned by certified public accounts who specialize in helping clients plan all aspects of their wealth, including estate and retirement planning. PFS accountants must complete continuing professional education and pay an annual fee to use the designation, which is awarded to CPAs who complete study and pass an exam.
points Prepaid interest paid as a fee to a mortgage lender to cover the cost of applying for the loan; 1 point is 1 percent of the loan’s value.
preferred provider organization (PPO) Health insurance coverage that rewards you for using providers from a specific list of care providers. The difference between an HMO (health maintenance organization) and a PPO is that a PPO pays for the services of a nonspecified provider, but an HMO usually does not pay for such services. See also health maintenance organization (HMO).
premium The amount paid, in one sum or periodically, for a contract of insurance.
premium bond A bond for which the value has increased.
prenuptial agreement A written agreement by a couple to be married in which financial matters, including rights following divorce or the death of one spouse, are detailed.
principal The capital sum, as distinguished from interest or profit.
priority obligation Loans, fees, or bills that are essential and often mandated to pay. Child support is a priority obligation, for example.
property taxes Taxes assessed on real estate. Most common are municipal and school taxes. Also known as real estate tax.
recession A significant decline in economic activity that affects the entire economy and lasts for longer than a few months. See also Great Recession.
refinancing Reapplying for a new mortgage, usually to receive a lower interest rate. Refinancing is done for consolidation or additional funding.
residual value The value of a vehicle when it comes off a lease; the value you need to pay to acquire the vehicle.
revolving debt A type of credit agreement that lets you borrow against a predetermined line of credit when paying for something. Revolving debt is the type of debt used by credit card companies.
robo-adviser An online financial adviser that provides automated, algorithm-based advice to clients for lower fees than a human adviser would.
Roth IRA Introduced in 1998, an individual retirement account (IRA) in which the funds placed into the account are nondeductible. If held more than 5 years, all funds withdrawn are received tax-free.
routine expenses Expenses that occur on a regular basis, such as food costs, dental checkups, church contributions, etc. These expenses may vary in amount, but they occur on a regular basis.
savings and loan (S&L) The collective name for savings banks and savings and loan associations. S&Ls generally accept deposits from and extend credit primarily to individuals. Also known as thrift.
savings ratio The percentage of your gross income you’re able to save within a given time.
securities Investments that represent evidence of debt, ownership of a business, or the legal right to acquire or sell an ownership interest in a business.
SEP-IRA (Simplified Employee Pension IRA) A retirement plan for self-employed individuals and small business owners that enables them to save retirement money for themselves and their employees.
share Any of the equal parts of a company’s capital that are sold as stock to investors.
shareholder A person who owns shares in a corporation.
simple interest Interest paid on an initial investment only. Simple interest is calculated by multiplying the principal by the annual rate of interest by the number of years involved.
speculating Taking above-average risks to achieve above-average returns, generally during a relatively short period of time. Speculation involves buying something on the basis of its potential selling price rather than on the basis of its actual value.
spending ratio The amount of your gross income that goes toward a particular area of expenditures.
stock Shares of ownership in a company, including common stock of various classes and any preferred stock outstanding.
stock fund A mutual fund that limits its investments to shares of common stock. Common stock funds vary in risk, from relatively low to quite high, depending on the types of stocks in which the funds are invested.
stock market The organized securities exchanges for stock and bond transactions. Major exchanges are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the National Association of Securities Dealers Automated Quotation System (NASDAQ).
target date fund An age-weighted retirement plan that’s normally used by a company that wishes to have a specified sum available for an older employee (usually an owner) at the time of retirement.
tax-deductible An expense that can be used to offset gross income when calculating your taxable gross income.
tax-deferred Income that is earned but neither received nor taxed until a later date, when the funds are withdrawn or mature. Tax-deferred assets include those within an IRA, 401(k) plan, 403(b) plan, tax-deferred annuity, tax-deferred life insurance, and others.
term life insurance Life insurance in which the insurance company pays a specified sum if the insured dies during the coverage period. Term insurance includes no savings, cash values, borrowing power, or benefits at retirement. On the basis of cost, it is the least expensive insurance available, although policy prices can vary significantly among firms.
thrift A financial institution that derives its funds primarily from consumer savings accounts set up to provide personal mortgages. The term originally referred to those institutions offering mainly passbook savings accounts. The word thrift often refers to savings and loan (S&L) associations, but it also can mean credit unions and mutual savings banks. See also savings and loan (S&L).
tiered account system A type of bank account that pays higher interest if your account balance is consistently over a certain amount set by the bank, usually at least $1,000 but many times higher.
Treasury bill A short-term government security that’s purchased at a lower price than the redemption value.
Treasury note Intermediate-term (1 to 10 years), interest-bearing debt of the U.S. Treasury. Treasury notes are quoted and traded in 1⁄32 of a point.
underemployed A group of people who are skilled but working in low-paying or unskilled jobs.
unemployment compensation Temporary income you can get in the event that you lose your job due to circumstances that are not your fault.
uninsured motorist coverage Insurance that protects you in the event you are in an accident with an uninsured or underinsured driver.
variable expenses Expenses that are changeable, alterable.
warranty A statement of promise or assurance in connection with a contract or purchase.