Here are 50 personal finance terms you should know
401(k)
An employer-offered defined-contribution plan that allows you to contribute money directly from your paycheck, usually pretax but sometimes after tax, into a tax-advantaged account for retirement.
Adjusted gross income
Adjusted gross income is your gross income minus certain adjustments, such as deducting student-loan interest, alimony payments, or contributions to some types of retirement accounts. AGI is part of the process of calculating your total taxable income.
Amortization
The process by which the amount due on a loan is reduced over time. Generally a higher proportion of each payment goes toward interest when you begin paying off the loan, with an increasing proportion going toward principal over time.
Annual Percentage Rate
Annual percentage rate, APR, is the total amount it will cost you to borrow money, be it through a loan, credit card, or other instruments, each year. It takes the amount of interest you'll owe and adds it to any other relevant fees.
Annual Percentage Yield
Annual percentage yield, APY, represents the total amount of interest you'll earn on an investment or savings account in a year, including the effects of compound interest
Asset allocation
The mix of different financial vehicles (such as bonds, stocks, ETFs, cash, mutual funds) that an investor can spread their money across. It's important to maintain an asset allocation that's in line with your risk tolerance.
Bear market
A way of describing the state of the stock market that indicates that stocks are declining in value overall.
Bonds
A type of investment that is essentially a loan from the investor to the bond issuer (the US government or a corporation, for example). The bond issuer pays back the invested money, with interest, at specified intervals of time. Bonds carry less risk than stocks.
Bull market
A way of describing the state of the stock market that indicates stocks are increasing in value.
Capitalized interest
The interest periodically added to the total balance of a loan. For student loans, this often happens at the end of the initial grace period or after forbearance or deferment ends.
Closing date
The date that marks the end of a credit-card billing cycle. On the closing date, whatever the balance is on your card will be what you owe on your next bill.
Collateral
A borrower's item, property, or asset that a lender accepts as a guarantee of a loan. If the borrower fails to make loan payments, collateral can become the property of the lender.
Compound interest
A method of calculating interest where you earn a percentage not just of the principal amount but the principal plus any previously earned interest.
For example, say you have a balance of $1,000 and are earning an annual interest rate of 6%. At the end of the first year, you'll earn $60 in interest. The following year you'll earn your 6% interest on the total new balance of $1,060. At the end of the second year, you'll have a total of $1,123.60.
Credit report
The annual reports performed by each of the three credit bureaus (TransUnion, Equifax, Experian) that show all your credit accounts in one place, including your account history and any new accounts.
Credit score
The three-digit score assigned to your credit profile based on your debt history. A high credit score demonstrates your trustworthiness to lenders, indicating that you are likely to repay your debts.
Credit utilization
The percentage of your available credit that you are using. In other words, your total outstanding credit-card balance divided by the total of all your credit cards' credit limits.
Debt-to-income ratio
The total amount of your monthly liabilities (mortgage, credit card debt, student loans, and any other money you owe on a monthly basis) divided by the amount that you earn each month before taxes.
Deductible
The amount you must pay out of pocket before your insurance coverage kicks in and covers the rest.
Default
When you stop making payments on a loan, that loan can go into default. The exact definition of default depends on the type of loan and the loan servicer.
Deferment
A loan status that allows you to pause payments on your student loans temporarily. Generally if you have a subsidized loan, interest will stop accruing on your balance until you resume making payments.
Defined-contribution plan
A type of investment vehicle, such as a 401(k), that allows employees to contribute tax-advantaged money to an account to use during retirement.
Diversification
The process of investing your money in various investment vehicles and asset classes. A diversified portfolio is less risky because if a certain type of asset loses value, your whole portfolio won't go downhill.
Dividends
The payouts companies make on a recurring basis to the investors who own their shares. Dividend payments typically come out of a company's earnings.
Down payment
The lump sum of money you pay toward buying a home when you take out a mortgage. Making a down payment of at least 20% of the price of the home prevents you from having to pay private mortgage insurance, an extra fee that protects the lender.
Equity
Your ownership of an asset after you've accounted for the debt you owe on it. For example, if you bought a house with a mortgage, your equity in the home is the home's value minus your outstanding loan balance.
Exchange-traded fund
An ETF is a diversified group of securities often tied to an index, such as the S&P 500. These funds are traded like stocks.
Federal loans
Loans backed by the US government that generally have better interest rates than other loans.
Forbearance
A loan status that allows you to pause payments on your student loans or mortgage temporarily. Generally, interest continues to accrue on your balance during forbearance, so you will end up paying more than you would have originally.
Gross income
The total amount of income you earn — both wages and any other income — before taxes, insurance, and retirement contributions are taken out.
(Roth) Individual retirement account
A Roth IRA is a tax-advantaged retirement-savings plan that is not tied to an employer. A traditional IRA allows participants to contribute money pretax, which is then taxed upon withdrawal in retirement. Roth IRA participants contribute post-tax funds, which can be withdrawn tax-free in retirement.
Itemized deductions
If you take individual tax deductions, like deducting your mortgage interest or certain business expenses, rather than the standard deduction, it's known as itemizing.
Loan consolidation
Replacing two or more loans with one larger loan. Consolidation can simplify your debt situation and possibly reduce the interest rate or monthly payment.
Mortgage
A loan you take out to buy a piece of property, where the piece of property is the collateral. That means if you fail to make payments, the lender can seize the property.
Net income
The total income you end up with after all deductions.
Net worth
The total value of all of your assets — wage income, investments, property — minus the total amount of your debt.
Premium
The amount you pay monthly to maintain insurance coverage.
Principal
The dollar amount of money you deposited into an account or borrowed, not including interest.
Private loans
These are loans from lenders other than the US government. Private loans generally have less favorable terms than federal loans.
Rebalancing
Periodically buying and selling assets to keep the proportion of stocks, bonds, and other assets in your investment portfolio in line with your preferred amount of risk.
Refinance
To replace a loan, such as a mortgage, with a different loan that has a better interest rate or other more favorable terms.
Return on investment
ROI is a measurement of how much a particular asset has grown in value since you bought it relative to how much you paid for it.
Risk tolerance
The measure of how much market fluctuation an investor is willing to take on in their investment portfolio. Risk tolerance depends on many factors, including how close a person is to retirement, what other goals they may use the money for, and their general disposition.
Standard deduction
The portion of your income that is not subject to taxes if you choose not to itemize deductions. The standard deduction is often the best choice for people with simple tax situations.
Stock
A type of investment that, when purchased, gives you partial ownership of the company. Also known as a share.
Subsidized loan
A US government-backed student loan for students at a certain threshold of financial need. Students are not required to pay interest on the subsidized loan balance while in school, during the grace period after graduating, and during any period of deferment.
Tax credit
A factor that reduces your final tax bill directly.
Tax deduction
A factor that lowers the amount of income you pay taxes on, which in turn can reduce the amount of taxes you pay.
Tax-deferred
A tax treatment for certain types of accounts in which any earnings on the money are not subject to taxation until withdrawal. The money in some retirement accounts, like traditional IRAs and 401(k)s, grows tax-deferred.
Unsubsidized loan
A US government-backed student loan for which no demonstration of financial need is necessary. Students with subsidized loans will be charged interest throughout the borrow and repayment periods.
Withholding
The amount of money withheld from your paycheck based on how many allowances you claim. Your marital status and whether you have children will affect your allowances. If too much is withheld from your paycheck, you'll get a tax refund. If too little is withheld, you'll owe.
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