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Back to Financial Basics
Scores, percentages, acronyms, and more—financial terms can sometimes make things seem more complex than they need to be. Don’t let those SAT vocabulary words be an obstacle to confidently talking about your money. Here’s your translation guide for money terminology.
401(k)
This is a type of retirement plan offered by companies that are tax-deferred. Often, your company will match some amount of your contributions to your 401(k).
APR
APR stands for Annual Percentage Rate. This refers to how much interest you’re paying on the money you borrow on an annual basis.
Assets
Assets refer to your items of economic value (house, car, etc.).
Bankruptcy
Bankruptcy simply means that you owe more money than you are capable of paying. While it can help get out of a nasty financial hole, do your homework before you decide because it will stay on your record for 10 years.
Beneficiary
A beneficiary is a person or group of people who are designated to receive the money and/or benefits under a trust, will, insurance policy, etc.
Bonds
Bonds are representative of money you’re lending to a company or institution (also known as the issuer). The issuer pays a set interest rate during the life of the bond and promises to repay the principal when it reaches maturity or comes due after a set period.
Capital gain
This refers to the profit you get from selling an investment for more than you initially paid for it.
Capital loss
Not as enjoyable as capital gains. This refers to the loss you take from selling an investment for less than you originally paid for it.
Certificate of deposit (CD)
A CD is a savings product offered by banks and credit unions that has a fixed interest rate and maturity date.
Checking account
A checking account is an account at a bank or credit union that allows you to make deposits/withdrawals and pay bills. This type of account doesn’t typically earn interest, but is great for your everyday use.
Compound interest
Compound interest means that you earn interest on the interest you earn, resulting in exponential growth instead of linear growth.
Credit score
A credit score is an estimate of how likely you are to repay debt and pay your bills based on information from your credit accounts (aka credit reports).
Credit union
Credit unions are not-for-profit institutions that distribute profits among all members in the form of better interest rates and fewer fees.
Debt consolidation
Debt consolidation is a strategy to simplify your debt payments by merging debts from multiple sources into one loan with one monthly payment.
Deductible
The deductible refers to the amount of money an insured individual needs to pay before the insurance company will contribute to an expense they cover. Deductibles differ based on the type of insurance.
Direct deposit
Direct deposit is the method of money being electronically sent to your bank account, credit union account, or prepaid card. Many people receive their paychecks through direct deposit.
Down payment
The down payment is an initial payment made when something is bought using credit, like a house or vehicle. The bigger your down payment, the less you must borrow.
Emergency fund
An emergency fund is money, typically in a savings account, that’s been set aside to use as a financial safety net for unexpected expenses. Some examples of times to use an emergency fund include medical bills, car/home repairs or a loss of income.
FAFSA
FAFSA stands for the Free Application for Federal Student Aid. This form is used to determine how much money a student is eligible to receive in federal financial aid in the pursuit of higher education.
FICA
The Federal Insurance Contributions Act (FICA) is a law that requires taxes to be deducted from your pay to contribute to Social Security and Medicare. Your employer also contributes on your behalf.
Gross income
Your gross income is the total compensation you’ve earned before taxes and deductions are taken out.
Health savings account
An account at a bank. insurance company, or other financial institution that lets you set aside pre-tax money, sometimes directly from your paycheck, to pay for eligible medical expenses.
Homeowner’s insurance
Covers a home’s structure and the personal belongings inside in the event of a loss or theft; helps pay for repairs and replacement.
Income tax
Federal, state, and local taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Includes both personal and business or corporate income taxes. Not all states and localities have income taxes.
Inflation
Inflation refers to a general increase in prices over time that correlates with a decrease in the buying value of money.
Interest rate
The interest rate refers to a percentage of the principal sum (either lent or borrowed) that is charged as interest on the outstanding loan. Banks and credit unions also pay you an interest rate for depositing your money in certain types of accounts (like a savings account).
Liability
A liability is something that is a financial disadvantage. Common types of liabilities include money owed, debt or obligations.
Liquidity
Liquidity refers to the amount of money a person or company has on hand or is easily available for use.
Maturity date
The maturity date is the set date when the principal amount of debt—loan, bond, certificate of deposit (CD), etc.—is due to be paid in full.
Mortgage
A mortgage is a type of loan used to purchase a home (or land or other real estate property).
Mutual fund
A mutual fund is a professionally managed investment program funded by money from shareholders. Mutual funds use the money from investors to buy securities, including stocks, bonds, and short-term debt. As investors purchase shares in mutual funds, each shareholder has a part ownership in the mutual fund and its generated income.
Net income
Your net income is the amount of income you receive in your paycheck. This money is after taxes and other deductions are taken out of your gross income and is also called take-home pay.
Net worth
Your net worth is calculated by deducting your debts from your total assets.
Principal
The principal amount is the initial sum of money that was lent or invested, on which interest is paid. In lending, the principal is the amount borrowed where you agree to pay back the principal plus interest collected over time. In investing, the principal is the amount you put in the investment with the expectation that interest will be paid to you as income.
Roth IRA
A Roth IRA (Individual Retirement Account) is an account that you fund through your own contributions with after-tax dollars. Since the contributions are made after-tax, you don’t pay any taxes on the funds you accumulate over time. Make sure to talk with a tax advisor before starting this type of account.
Savings account
A savings account is an account at a bank or credit union that earns interest. It’s used to set aside or save money.
Stocks
Stocks are a type of investment that represents a portion of ownership in a company. Stocks are also known as equities.
Tax deduction
A tax deduction is an expense that you can subtract from your taxable income, ultimately reducing the amount of taxes you owe. Some examples include charitable donations or business expenses. Talk with a tax advisor for more information.
Traditional IRA
A Traditional IRA (Individual Retirement Account) is an account that you fund through your own contributions with pre-tax dollars. Earnings on these accounts are tax-deferred, meaning that you don’t owe taxes until you withdraw funds (typically at or during retirement). Talk with a tax advisor for more information.
W-4
A W-4 form is a document completed by employees so that their employer knows how much income tax to withhold from their paycheck.