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Financial Glossary
Advertising: Media messages created to promote the purchase of a product or service
Amortization: The way interest and principal are paid off over the lifetime of a loan
Annual percentage rate (APR): The yearly percentage of a debt paid in interest and service fees; APR varies if installment payments are made
Annual percentage yield (APY): The percentage of an investment returned at the end of a year; APY varies if the amount is compounded over shorter terms
Asset: A valuable possession, such as personal property, business equipment, real estate, or stocks
Automated teller machine (ATM): A cash machine; a terminal that allows deposits, withdrawals, and other transactions with one’s financial account
Balance: Amount of money in an account
Bank: For-profit financial institution that maintains accounts, offers loans, and provides other financial services
Bankruptcy: Legal release from some or all debts in exchange for losing some assets; personal bankruptcy is part of credit record for 10 years
Beneficiary: The person or group that receives assets after a person’s death
Bond: An agreement to lend money to an organization (including a government) for repayment with interest at a certain time
Budget: A plan for maintaining cash flow; a record of income and expenses
Business plan: A company’s mission, structure, staff, activities, and budget
Capital gain: Income from selling something for more than its purchase price
Capital loss: Loss from selling something for less than its purchase price
Career: A certain profession for which someone studies
Cash flow: The balance of income and expenses over a certain period of time
Certificate of deposit (CD): A financial instrument that allows you to invest money for a specific period and established return
Charitable gift: Money provided to support a cause
Closed-end credit: A loan for a specific purpose with an established interest rate and repayment plan (for example, a mortgage or car loan)
Collateral: Assets a borrower offers to a lender in case of default
Collection agency: Business that secures payments from debtors in default
Comparison shopping: Seeking the best- quality products and services for the lowest price
Compensation: Money and benefits paid as wages or for an injury or loss suffered
Complaint: An expression of dissatisfaction with a product or service, including a request for a solution to the problem
Compounding: Adding earned interest to the principal amount before calculating more interest
Contract: A legal agreement that binds two or more parties
Credit: The use of another’s money with an agreement to repay it with interest at a later time (easy-access, closed-end, and open-end)
Credit card: A card that accesses open-end credit, paying for goods or services in exchange for future repayment with interest
Credit counseling: Assistance with money and debt management
Credit report: A borrower’s credit history, detailing debts, delinquencies, bankruptcies, and liens
Credit score: A rating of how likely a person is to pay back a loan
Credit union: A not-for-profit cooperative that functions much like a bank, providing financial services to member-owners
Debit card: A card allowing users to transfer money from their accounts at automated teller machines or for purchases
Debt: An amount of money owed
Deductible: An uninsured dollar amount, specified in an insurance policy, for a specific claim
Default: Not meeting an obligation or agreement to pay back a loan
Deflation: A general lowering of prices (See also inflation.)
Dependent: Someone who depends on someone else for the resources to live
Deposit: Money placed into an account
Disposable income: The income one receives after taxes
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Diversification: Selecting a wide range of investments in order to reduce risk
Dividend: Money earned from corporate stock or credit-union share accounts
Down payment: Money paid up front for a loan
Earned income: Employment income, including tips and commissions
Easy-access credit: Short-term loans available regardless of credit history but at high interest rates (for example, payday and pawn-shop loans and rent-to-own)
Electronic funds transfer (EFT): Shifting funds from account to account electronically
Emergency fund: Money saved for unemployment or unexpected bills
Employee benefit: Compensation other than wages or salary (for example, insurance, memberships, and child care)
Employer-sponsored retirement savings plan: Tax-deferred retirement programs, such as 401(k) or 457 plans
Entrepreneur: A person who starts and runs a business
Equal Credit Opportunity Act: A federal law that forbids lending discrimination due to race, gender, age, religion, marital status, national origin, or need for public assistance
Equity: Common corporate stock
Estate: Financial assets and liabilities left after a person’s death
Ethics: The moral principles that shape a person’s actions
Expense: Money paid for goods and services (See also fixed expenses and variable expenses.)
FAFSA: Free Application for Federal Student Aid
Fair and Accurate Credit Transactions Act (FACT Act): A federal law that allows consumers one free credit report per year and helps victims of identity theft repair their credit scores
Fair Credit and Charge Card Disclosure Act: Part of the federal Truth in Lending Act, requiring credit-card companies to define APR, annual fees, penalty fees, and other key features on their application forms
Fair Credit Billing Act: A federal law that protects consumers during billing disputes with credit-card companies
Fair Credit Reporting Act: A federal law that grants consumers the right to review their credit reports, dispute inaccurate information, and have certain information removed after seven or ten years
Fair Debt Collection Practices Act: A federal law that protects consumers from abusive debt-collection practices
FICA: Federal Insurance Contributions Act—a federal act that funds Social Security
FICO: Fair Isaac Corporation—a group that calculates credit ratings
Finance charge: The amount of money paid in interest and service fees to obtain credit
Financial adviser: Someone who provides financial advice, such as a broker, an accountant, a bank employee, or a credit counselor
Financial goals: What a person wants to achieve financially
Financial literacy: Knowing how to manage financial resources
Financial plan: An outline of the financial goals and needs of a person, including earnings, savings, investments, insurance, and debt, often indicating net worth
Fixed expenses: Regular payments such as rent, mortgage, or car payments
Fraud: Intentional and illegal deception for financial gain
Garnishment: Part of a person’s wage set aside by court order to pay a debt
Grace period: The time after a due date during which no interest or penalty is charged
Gross pay: Wages or salary before deductions for taxes and other purposes
Identity theft: Fraud committed by using someone else’s name, identification numbers, or other personal information
Impulse buying: Buying something without thinking it through
Income: Money earned by working or investing
Individual retirement account (IRA): An account that allows the owner to save pretax dollars and pay taxes later when funds are withdrawn (See also Roth IRA.)
Inflation: A general rise in prices (See also deflation.)
Installment debt: Debt paid off in regular installments, such as a car loan or student loan, (See also closed-end credit.)
Insurance: A tool that manages risk according to specific terms for premium payments described in a policy document (for example, auto, disability, health, homeowners, liability, or life insurance)
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Interest: Money paid to get a loan, or money earned by lending
Investment: The purchase of stocks, bonds, or other securities to earn interest (at risk of loss)
IRA: See individual retirement account.
Job: Employment with duties and compensation (See also career.)
Lease: A contract that allows a person to use a resource for a specified payment and time period (for example, a car lease or a mineral-rights lease)
Liability: The amount of money a person owes or could owe in the future
Liquidity: The ability to be quickly converted into money without losing value (a bond is more liquid than real estate)
Living will: The written wishes of a person regarding medical care, enacted if the person is unable to make medical decisions
Loan shark: Someone who lends money at exorbitant interest rates
Medicaid: A state and federal program that pays health-care costs for those in need
Medicare: A federal program that pays health-care costs for seniors; managed by the Social Security Administration
Mortgage: A loan to buy real estate
Mutual fund: A pool of investor money invested in diverse securities
Net worth: The value of a person’s assets minus his or her liabilities
Open-end credit: A line of credit that allows a person to borrow money up to a certain limit and requires the borrower to regularly repay portions of the debt with interest (for example, credit cards)
Opportunity cost: The cost of foregoing one opportunity to pursue another
Overdraft: Withdrawing more money than an account holds
Pawn shop: A business that provides short-term, high-interest loans secured by personal property such as jewelry
Payday loan: A high-interest loan based on the borrower’s pay cycle (outlawed in some states)
Payment method: The way a payment is made (for example, cash, credit, debit)
Payroll deduction: Money withheld from a paycheck for taxes, insurance contributions, retirement-plan contributions, and so on
Penalty: Money charged for not following restrictions on an account or a loan
Pension Protection Act: A federal law that strengthens employees’ retirement security
Personal finance: How a person acquires and manages income and assets
Philanthropy: Giving money to help others
Point of sale (POS): Where a transaction occurs
Points: Percentage points (or tenths of a point) added to the prime lending rate due to a low credit rating
Portfolio: Assorted securities (stocks, bonds, mutual funds, real estate) an investor owns
Prime lending rate: The annual percentage rate offered to borrowers with excellent credit
Principal: Money originally invested, originally borrowed, or the amount remaining to be paid (less interest and finance charges)
Privacy: The right to keep personal information from being released to the public
Probate court: A government body that handles the will and estate of a deceased person
Profit: The amount of money that exceeds the expenses
Prospectus: A legal document that describes investments offered for sale
Rate of return: The percentage of an investment’s cost that the investment makes in a year (for example, a $30 share that makes a $3 dividend in a year has a 10 percent rate of return)
Record keeping: Accounting of personal finances
Rent: Regular payment made to use property
Rent to own: Renting a product over a period of time up to the final payment, at which point the renter owns the merchandise; total payments greatly exceed the purchase price
Repossession: The seller’s recovery of merchandise due to default on a loan
Retirement account: An account, such as a 401(k) or IRA, used to save for retirement
Revolving credit: See open-end credit.
Risk: The uncertainty of an investment; the likelihood of loss
Risk management: Calculating risk and minimizing loss through insurance, diversification, or other means
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Rotating credit: See open-end credit.
Roth IRA: An individual retirement account that takes after-tax contributions but permits tax-free withdrawals
Rule of 72: A tool to estimate roughly how long an investment at a certain interest rate will take to double: 72 ÷ annual rate of return = years to double
Salary: An annual payment sum for work, paid out weekly, biweekly, or monthly (See also wage.)
Saving: Keeping income for future spending
Savings account: An account that allows deposits and withdrawals and usually pays interest
Savings and loan association (S&L): A for-profit institution that pays dividends on deposits and issues mortgages
Savings bond: A loan made to the federal government for a specified term (a year or more), to be repaid with interest
Secured loan: A type of installment debt that requires collateral—money or valuable property offered to the lending institution in case of default
Securities and Exchange Commission (SEC): The federal body that oversees the buying and selling of securities
Security: A debt or equity obligation held by an organization (for example, stocks and bonds); a loan’s collateral
Share: One of the equal parts into which the capital of an organization is divided
Simple interest: Interest on principal without compounding previous interest
Social Security: A federal program that benefits retirees, funded by an income deduction (labeled FICA for Federal Insurance Contributions Act)
Standard of living: How comfortable someone is in terms of the value of goods and services he or she uses
Statement: A record of actions (deposits, withdrawals, transfers) on an account
Stock: Ownership in the assets and earnings of a corporation
Stored-value card: Card allowing purchase up to a set limit
Take-home pay: Total payment received for work minus deductions (for example, taxes, insurance premiums, retirement savings)
Tax: Payment made to government based on income, assets, and transactions
Tax credit: An amount subtracted from tax owed when the payer meets certain criteria
Tax deduction: An amount subtracted from taxable income when the payer meets certain criteria
Tax deferral: Postponing taxation of principal and/or earnings on an investment until withdrawal (usually retirement)
Tax exemption: Income that is free from taxation (for example, interest from municipal bonds)
Tip: Money paid in gratitude for service well rendered (a gratuity)
Title loan: A short-term, high-cost loan using the borrower’s car title as collateral
Transfer payment: Benefits paid by governments to citizens (for example, Social Security, welfare)
Trust: A contract that empowers a trustee to manage a trustor’s assets and allocate them to beneficiaries
Truth in Lending Act: A federal law requiring disclosure of the terms and cost of credit (for example, annual percentage rate and finance charges)
Truth in Savings Act: A federal law requiring disclosure of the terms and costs of interest-earning accounts (for example, annual percentage yield)
Unearned income: Income that does not come from work (for example, royalties, investment returns)
Unsecured loan: A type of installment debt that does not require collateral but often requires a substantial down payment—money paid up front
Values: Beliefs about what is valuable, meaningful, or needed
Variable expenses: Payments that change over time (such as food, clothing, and entertainment)
Wage: Payments made for work done, calculated hourly, daily, or by the piece and paid weekly, biweekly, or monthly (See also salary.)
Warranty: A document defining the conditions under which a product will be replaced or repaired by a manufacturer
Wealth: A person’s total assets, or positive net worth
Welfare: Assistance provided to the needy (often from the government)
Will: A document telling how a person’s estate should be distributed after death
Withdrawal: Money removed from an account
