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A thorough glossary of personal finance terms

A thorough glossary of personal finance terms

401k plan

A traditional 401k plan is a retirement savings and investment plan offered by employers to their employees. Many employers like it because it costs less than a traditional pension plan; many employees like it because it can be more lucrative and gives them more control over their retirement income.

403b plan

The 403b plan, named for section 403b of the Internal Revenue Code, is a type of retirement plan that is eligible to receive special tax benefits. The money contributed to a 403b comes from before-tax dollars. These dollars are deducted from one's paycheck before they are taxed.

457 plan

A 457 plan is a type of defined contribution retirement plan. There are two types of them: governmental and non-governmental. They were traditionally offered to state and local public employees (governmental), but were later expanded to include some nonprofit organizations (non-governmental).

529 plans

U.S. states have pre-paid tuition programs allowing families to save for a student's higher education. These are 529 plans, which qualify for special tax treatment if the funds are used for qualified expenses at a post-secondary school that meets U.S. Department of Education standards for student aid eligibility.


Annuities are essentially insurance policies with a twist. While life insurance pays a death benefit and protects from the risk of dying prematurely, annuities' distinction is that they can ensure a source of income for as long as a person lives; annuities protect one from the risk of outliving one's assets. The other attractive aspect of annuities is that their values grow on a tax-deferred basis. An annuity is an insurance contract and can be offered only by a licensed insurance agent.

Asset allocation

Asset allocation is a technique used to balance the risk of a portfolio in such a way as to avoid taking too much risk for a given level of expected return.

Asset location

Asset location refers to the placement of investments in taxable or tax-sheltered accounts.

Asset management account

An innovation in deposit accounts introduced in the 1980s is the asset management account, also known to some as the central asset account. This type of account combines into one account many features of financial institutions, and often some investment and additional bookkeeping features. These include checking, savings, credit and debit cards, ATM access, lines of credit, and even brokerage services.

Automatic savings

An automatic savings or investment plan is a plan that deposits money into one account from an existing account on a regular basis. It goes by other names, such as automatic withdrawal plan and automatic deduction plan.


Bankruptcy refers to a federal code of laws and rules designed to help provide a fresh start to individual or business debtors facing more debt than they can afford to pay. Bankruptcy permits the debtor to work out a more affordable plan to repay some or all of the debt, or to have some or all of the debt erased or "discharged." Both the "work-out" and debt discharge options are subject to strict rules and limitations, but bankruptcy gives debtors protections and benefits they would not otherwise have.

Bear market

In this market, stock prices are falling, and the view is that they will continue falling. The economy also slows down, and unemployment and inflation rise.


When you invest in a bond you are lending money to the US government, a corporation (like IBM or Amazon), or a municipality (like the city of Chicago or Denver). In other words, these entities are borrowing money from you to help them pay for programs, new projects, and ongoing business operations.


A budget is merely a way to identify cash coming in and how we spend it. It can be a valuable tool for planning future spending and for making investment and borrowing decisions. When used to make decisions about future spending, saving, and investments, it is called cash-flow management.

Bull market

Bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is strong and jobs are plentiful. Inflation is low.

Car insurance

If you have a car, truck, minivan, or other vehicle, you most likely already have auto insurance on it. It's required in some form or other in nearly every state. You can supplement liability coverage — which pays for damages that you cause to someone else — with other forms of coverage.

Cash investments

Cash investments are low-risk, low-return and highly liquid investment options. When an investment is liquid, it means the investor can easily withdraw or redeem their money in a very short period of time (e.g., the same day). The most common type of cash investment is a savings account at a bank or credit union. The money you deposit in this account is guaranteed to not lose value, offers a low rate of interest, and can be withdrawn at any time.

Certificates of deposit (CDs)

Certificates of deposit (CDs) are timed deposits offered by many financial institutions. Credit union certificates may be called certificate accounts or just certificates. (We will call them CDs for this article). They come with some stringent rules.

Checking account

Checking accounts offered by banks and credit unions are designed to be used for spending money. They don't make the best savings vehicles for that reason, and many of them do not even pay interest or dividends. That's why many thoughtful consumers don't load their checking accounts with money; they place it elsewhere in order to gather earnings.

Compound interest

Compound interest (or dividends in the case of credit unions) is interest paid on interest as well as principal.

Cost-benefit analysis

One way to make a decision on spending money on something you want to buy or do is to use a cost-benefit analysis. Under a cost-benefit analysis, you examine the potential costs and benefits of that purchase.

Cost of attendance

This is the estimate of what families can expect to pay for one year of school, including tuition, fees, room and board, books, supplies, and even transportation.

Coverdell education savings account

The Coverdell education savings account is a way to save money for a child's qualifying education expenses. It falls under the same section of the tax code as does the individual retirement account, so it shares the misnomer "IRA." Because it falls under rules similar to those of IRAs, the account has tax-savings benefits to encourage persons to save for education expenses.


Credit is a loan of money. The loan may be for a short or long term. Sometimes the loan requires a formal application process; other times, it is made by the use of a simple plastic credit card — once the borrower's creditworthiness has been established.

Credit card

A credit card is a small plastic card that draws on a line of credit made available by a bank or credit union. Cardholders can use the card to purchase goods and services from merchants who accept that card.

Credit union

A credit union is not a bank or a savings and loan association. A credit union is a cooperative financial institution, owned and controlled by its members. Credit unions typically serve groups who have something in common, such as where they live, work, or attend church.

Debit card

A debit card is a plastic card that gives the cardholder electronic access to a bank account in his or her name at a financial institution. It also goes by the name of check card or bank card. The purpose of a debit card is to pay for goods and services with funds taken (debited) from that account. The funds are transferred immediately from the account to the vendor.


A deferment lets you out of making loan payments for a certain length of time for a specific reason, such as economic hardship, unemployment, or being enrolled in school. To get one, you must contact the lender of your loan and fill out some forms. If you are currently in default, you cannot qualify for a deferment unless you first pay off a certain amount of the outstanding balance.

Defined-benefit plan

A defined-benefit pension plan is a retirement plan that defines the amount of money you will receive at retirement. It is what commonly comes to mind when you hear the word "pension."

Defined-contribution plan

A defined-contribution plan defines the amount that can be contributed. Contributions may be made by you, your employer, or both. The benefit is not defined, however. Rather, the performance of the investments in the plan ultimately determines the amount of benefit you will get. The risk is therefore borne by whoever makes the contributions.

Examples of defined-contribution plans include 401ks, 403bs, 457bs, and individual retirement accounts. Many Keogh plans also fall into this category.

Dental insurance

Dental insurance is insurance that provides coverage for dental expenses, such as those rendered by dentists, orthodontists, periodontists, and other medical care providers. Traditional health insurance rarely covers dental expenses; thus the need for separate dental policies.

Direct Plus Loans

These loans are for graduate students or the parents of college students. They aren’t based on financial need, but a credit check is required. The maximum amount that can be borrowed is the cost of attendance. It’s worth comparing these loans against the cost of a loan from a private lender, especially if you have good credit and a steady income.

Disability insurance

In exchange for you or your employer making premium payments, disability insurance provides you with benefits that make up some of the income you lose when you can't work due to a medical condition.


Diversification means dividing your investments among a variety of assets. Diversification helps to reduce risk because different investments can rise and fall independently of each other. The combinations of these assets more often than not will cancel out each other's fluctuations, therefore reducing risk.

Dollar cost averaging

Dollar cost averaging is the practice of purchasing the same dollar amount of shares of an investment each period of time. When the price of the investment is up, you buy fewer shares. When the price is down, you buy more shares. To turn this practice into habit, it can be helpful to make the payments on the same day each period.

This differs from buying the same number of shares each time.

Dow Jones Industrial Average

The Dow Jones Industrial Average tracks the performance of 30 blue chip US stocks. Originally an average computed with pen and paper, the Dow has evolved over the years to take into account various changes in the market and individual stocks. The Dow today doesn't simply add up the prices of its stocks and divide by 30. Instead, the divisor is altered to account for such changing factors as mergers, substitutions, stock dividends, and splits.

Emergency fund

An emergency fund is an account set aside to gather money for emergency use. The emergency itself may be anything, but it's wise to plan for the worst, which means loss of your ability to earn income. Conventional wisdom says to save for three to six months' worth of your daily expenses, though others suggest more, especially during periods of economic uncertainty.

Employee benefits

Employee benefits, also called fringe benefits or perks, are forms of non-wage compensation provided to employees in addition to their normal wages or salaries.

Employee stock ownership plans

An employee stock ownership plan (ESOP) is an employee benefit plan that allocates company stock to employees. By receiving company shares, employees gain partial ownership of the company they work for, including voting rights.

Employer retirement plans

Employer retirement plans are exactly what their name suggests: offered by your employer, these investment plans help you accumulate money that can provide you an income in retirement.

Estate planning

Although one's "estate" is adequately defined as his or her property, there is no precise definition of estate planning. Your estate plan can be viewed as a series of steps to be taken so that, after you die, your property will be handled in a way that recognizes your values and wishes regarding your survivors and any charitable interests you may have.

Estate sale

An estate sale is a method to liquidate a family or state's belongings. Generally larger than yard sales, estate sales are most commonly used when downsizing, moving, divorcing, filing for bankruptcy, or after a death.

Exchange-traded funds (ETFs)

Like mutual funds, exchange-traded funds (ETFs) are baskets of securities. Like stocks, ETFs trade on an exchange. Unlike regular mutual funds, ETFs can be bought and sold throughout the trading day. They can also be sold short and bought on margin. Anything you might do with a stock, you can do with an ETF.

Expected family contribution

This is the number that the school uses to decide how much financial aid a student is eligible to receive.

Federal Direct Subsidized Loans

Loans that can be taken out by students with financial need. Because they are subsidized, the government pays the interest on the loan while you’re in school and for six months after you graduate.

Federal Direct Unsubsidized Loans

Similar to Subsidized Direct Loans, except they are not based on financial need and you have to pay interest on them from the start. If you don’t pay the interest while you’re in school, it accrues and gets added to the principal of your loan.

FICO score

The FICO score boils your credit history down to a three-digit number that instantly tells a lender whether you are creditworthy. This score dictates what terms — if any — you will be offered in a mortgage. Pioneered by the Fair, Isaac Corporation, this score and similar ones used by other credit reporting services rely on several factors.


A fiduciary is a financial advisor or institution who must do what's in your best financial interest rather than place their own interests first.


The term finance is used to describe all activities used to generate capital for trade or commerce. These include raising money by investing (buying and selling) in stocks, bonds, or other investments, and using credit for the purpose of making money. Finance is an important part of the study of economics.

Financial action plan

A financial action plan is a plan that directs how you will manage your money in order to make progress toward your goals. Simply knowing what you want will not get you there: you need a real plan to make it happen. And it should be written down, with clear goals and actionable steps that can be measured in some way. When a plan is written with concrete, measurable steps, you can gauge whether or not it has succeeded. Another benefit is that the concrete, actionable steps take the hunches and the guesswork out of your planning.

Financial planning

Financial planning is the method of managing one's finances in order to achieve one's goals and dreams. While everyone already does it to some extent, the term in its professional use involves a set of procedures that individuals can use methodically.

Flexible spending account (FSA)

A flexible spending account (FSA) is an employee benefit authorized by the IRS code that allows you to save before-tax dollars on certain healthcare and dependent care costs. To get one, your employer must offer this benefit and you must sign up, designating what amount of money you want to be deducted from your pay on a yearly basis.

Formula investment plans

A formula investment plan is a systematic method of portfolio management. Formula plans divide an investor’s portfolio into two portions: speculative and conservative.

Fundamental analysis

Fundamental analysis determines the value of a security by analyzing the financial strength of its issuing company. All the information fundamental analysts need to analyze a stock can be found in a company's financial statements.

Hazard insurance

Hazard insurance protects the homeowner against the risk of damage to or loss of their home and property. Knowing the inclusions of your homeowners insurance helps you to avoid paying for the same coverage twice.

Health savings account (HSA)

An HSA offers a way to put aside money to pay for routine medical expenses and help you save money on taxes. HSAs are designed to fill in the gaps for insurance policies that cover larger medical bills.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a line of credit that uses your home as collateral. It is a revolving line of credit rather than a closed-end loan.

Home foreclosure

Foreclosure is a legal process by which a creditor — a bank, credit union, mortgage company, etc. — takes over a homeowner's property to satisfy a debt. Foreclosure occurs when the owner of the property fails to make payments on the mortgage per the contract that exists between the owner and the creditor. As a result of the foreclosure, the owner loses the right to the property.

HSA-qualified health insurance

The term "HSA-qualified" insurance refers to health insurance policies that meet certain requirements relating to deductibles, out-of-pocket expenses, covered benefits, and preventive care. Plans that meet these requirements are also called "high deductible health plans" or "HDHPs." However, not all policies with high deductibles make individuals eligible to contribute to an HSA.

HSA-qualified plans generally have lower premiums and higher deductibles but in most other ways resemble traditional health insurance plans. An HSA-qualified plan can be licensed as an HMO, a PPO, or other type of insurance plan.

Identity theft

Identity theft is a crime in which a person uses another person's personally identifying information without that person's permission in order to commit a crime. Motivations for committing identity theft are many; they can include buying things for free, destroying another person's life out of vengeance, avoiding taxes, and other reasons.

Independent contractor

An independent contractor is a person or business that provides goods or services to others under terms spelled out in a contract or other agreement. An independent contractor does not work regularly for an employer, as an employee does. Rather, he works for himself.

Index fund

An index fund is a mutual fund constructed to follow or emulate the performance of one of the market indexes. Simply stated, index funds contain the securities that make up major market indexes. They do not try to beat the market. Instead, they try to match their reference market index. An index fund that tries to match an index would hold the same securities that are in that index. The fund may weight the number of shares for each company it owns in proportion to the share price or company capitalization.

Individual retirement accounts (IRAs)

Individuals can set up their own accounts for retirement through individual retirement accounts (IRAs), either the traditional variety or the Roth variety. They can set them up in a variety of investments. You must have earned income in order to contribute to individual retirement accounts. The money contributed to a traditional IRA may be tax-deductible. Contributions to a Roth IRA are not tax-deductible.

Initial public offerings (IPOs)

The first time a corporation offers its stock for sale to the public is called an initial public offering (IPO). Many companies are privately held, and their stocks are not for sale to the public. However, when a company wants to expand, it often finds it advantageous to offer its stock to the public on the primary market. This way it can raise new capital or fund its future growth and operations.


Interest is the charge added to a loan that makes up the cost of money. Interest is usually expressed as a percentage of the loan principal. The principal is the original amount of the loan. The interest rate tells you what percentage of the unpaid loan will be charged each period. The period is usually a year but may be any agreed-upon time.


Some investments are better than others for generating income. Others are better for long-range growth. Some provide tax advantages. There are many different types of investments and each type has its own set of unique characteristics.

Investment risk

Investment risk is usually measured by how much the investment price varies. The risk is also compared to the variance of all similar investments.

Keogh plans

Keogh plans are retirement plans intended for self-employed individuals and employees of unincorporated businesses.

Life insurance

Life insurance exists to protect other people who normally depend on your income. Although some forms of life insurance let you cash it in early for yourself if you so desire, it is not actually designed for you; it's meant to be used by certain others after you die.

Lifestyle planning

Lifestyle financial planning considers a person's desires, dreams, strengths, needs, and goals and fashions them into the overall financial equation in order to bring those goals within reach.

Market timing

Market timing has long been viewed as a way to "beat the market" because it selects the best time to be in it and when to be out. There is much controversy over the results. The goal of market timing is to avoid major drops in market prices and enhance an investment account's value.


Medicare is the nation's largest health insurance program, providing high-quality health care to people 65 and over (as well as limited other groups of disabled people). Medicare is administered by the Centers for Medicare and Medicaid Services (CMS), part of the Department of Health and Human Services (HHS).


Most fundamentally, something becomes money when it is used as a medium of exchange. That is, it is universally accepted in exchange for goods and services. In addition, money serves as a store of value in that it would have present and future purchasing power: the ability to buy goods and services.

Money market deposit account (MMDA)

A money market deposit account (MMDA) is a type of savings account offered by financial institutions that pays interest or dividend rates that are higher than those offered by traditional savings and checking accounts, and competitive with certificates of deposit.

Money market funds

Money market funds are a convenient way to invest in short-term, interest-bearing securities. Because these instruments are short-term, money market funds are considered cash equivalents and often have higher returns than bank savings and checking accounts.


A mortgage loan is essentially a secured loan that uses the home as collateral. Mortgages are typically paid in monthly installments over several years — usually 15 or 30 (40-year mortgages do exist, but they are not offered by every lender).

Mutual funds

A mutual fund is an investment company that raises money from investors to invest in stocks, bonds, and other securities. It is a portfolio made up of several individual investments. When those investments gain or lose value, you gain or lose as well. When they pay dividends, you get a share of them.


NASDAQ is an acronym for the National Association of Securities Dealers Automated Quotations system. The NASDAQ is primarily a phenomenon of the over-the-counter (OTC) securities market, that segment of the secondary market for securities where trades are negotiated directly between buyers and sellers, as opposed to being sold by outcry auction as they are at an exchange.

Payroll taxes

Payroll taxes include federal, state, and local income taxes, federal and state unemployment taxes, and Medicare and Social Security taxes. They are automatically taken out of your paycheck every time you are paid, based on a flat, fixed tax rate for state and local income taxes and Medicare and Social Security taxes. For federal income taxes, the rate depends on your tax filing status and the number of withholding allowances you designate when you fill out federal tax withholding forms.

Peer-to-peer lending

Peer-to-peer (P2P) lending is the lending of money that occurs directly between parties without the involvement of a traditional financial institution. As such, it is very old and rather common. Its modern form was made possible by the Internet, and it has evolved to become a business activity of its own, with a profit motive.

Personal finance

Personal finance is economics on the family and individual levels. Get a basic introduction to it in this tutorial. Learn about goal-setting, financial action plans, various investments, and how small, everyday choices impact your financial life.

Predatory lending

Predatory lending occurs when a business takes advantage of you by charging higher-than-normal interest rates, unreasonable fees, and certain other charges on loans that you take out. It is a form of high-cost borrowing. Predatory lending can occur on many different kinds of loans and financial products, including mortgage, car, payday, tax refund, car title, and home equity loans; and credit cards and debit cards.

Real estate investment trust (REIT)

A real estate investment trust, or REIT (pronounced "reet"), is a company that owns, manages, and/or operates real estate in order to earn profits for shareholders.

Roth IRA

The Roth IRA is a type of individual retirement account. The principal difference between the Roth and a traditional IRA is that while contributions to a traditional IRA are tax-deductible (except in certain cases) and withdrawals are taxed, contributions to a Roth IRA are taxed, but qualified withdrawals are not taxed. For some investors, the inability to deduct their contributions is a tiny price to pay for tax-free withdrawals that could be quite substantial after years of having grown in an account. Of course, as in the traditional IRA, the earnings of a Roth are tax-free while they accumulate.

Second mortgage

A second mortgage is a financing technique that has become an increasingly common option. Second mortgages are obtained from banks, credit unions, and financing companies. To obtain a second mortgage, you must have a good credit score, be able to make both the first and second mortgage payments, and have a steady income.

Simple interest

Simple interest is the amount of interest earned on the original amount of money invested. Simple interest is paid out as it is earned and does not become part of an account's interest-bearing balance.

Simple IRAs

The savings incentive match plan for employees (SIMPLE IRA) is sponsored by employers and is a replacement for salary reduction simplified employee pensions (SARSEPS). The employer may set up IRAs for individual employees.

Simplified Employee Pension Plans (SEP IRAs)

A simplified employee pension is an IRA to which employers can contribute. Contributions must be based on a written allocation formula and must not discriminate.

Social Security

Social Security benefits are based on average lifetime earnings and the amount of time you've worked. All who pay Social Security taxes can get Social Security benefits when they retire. By paying Social Security taxes, you are also eligible to receive disability and death benefits, in addition to Medicare benefits. However, you must earn enough Social Security credits to qualify.

Socially responsible investing

Very broadly, socially responsible investing (SRI) weaves values-based, nonfinancial criteria into the investment process. But that definition is pretty broad. The SRI label can apply to various, even complex, investing strategies.


A share of stock represents a share of ownership in a company. When you buy shares of stock, you are entitled to a share of its assets and earnings.

Tax deferral

"Tax-deferred" means that any earnings that build up in your plan are not taxed currently, as in other kinds of investments. Your earnings are free from taxation while they are in the plan. Once you draw them out, either at retirement or before, your earnings from these plans may be subject to taxes.

Tax shelter

Although it sounds like a specific place, a tax shelter is any investment strategy that enables you to legally decrease or avoid taxation. Actual tax shelter investments sometimes require a large investment with a degree of risk. The goal of many shelters is to create offsetting losses to other taxable income.

Technical analysts

Technical analysts use security pricing and trading history to identify the strength and direction of market trends. The familiar charts and graphs we see in the financial news are examples of the tools technical analysis provides for active security traders to predict future trading patterns.

Term life insurance

Term life insurance is a life insurance policy that provides coverage at a fixed rate of payments for a limited period, called the term. Term is the original form of life insurance.

Traditional IRA

The traditional individual retirement account (IRA) is a popular retirement plan for many investors. Besides helping build your retirement nest egg, the contributions you make may be tax-deductible.


A trust is a creature of the law in which one party — the trustee — has legal ownership of any form of property that has been transferred to him, her or "it" (e.g., a bank) by the person creating the trust. The trust creator is called the grantor (or settlor).

Unemployment insurance

Unemployment insurance, or UI, is money paid to people who have lost a job (or sometimes, had their hours cut) through no fault of their own. UI is temporary income meant to help make ends meet while people look for another job.

Value investing

Value investing means investing in stocks that are currently trading for less than their book, or intrinsic, values. (The term can be applied to any other investment that sells in the market for less than its book value.)

Value stock

A value stock is one that is worth more than its current market price indicates: that is, one that is undervalued. Over the long term, a value stock may prove to be a good bargain for the investor who purchases it.

Vision insurance

Vision insurance is insurance that provides coverage for eye care services, such as those rendered by ophthalmologists, optometrists, and opticians. It is not traditional health insurance. Health insurance is typically limited to injuries and disease. But health insurance does not usually cover lenses and other forms of vision correction. Vision insurance fills in the gap created by this void.


Everyone should have a will. Even people of modest means should at least have a simple will, for two reasons:

  • To name an executor (sometimes also referred to as a "personal representative") to wrap up their affairs, and

  • To specify "who gets what" from their property, to avoid family squabbles.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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