Appreciating asset
Something that gains monetary value over time. Examples include: real estate, stocks and bonds. When investing, we want to choose things that will grow in value over time.
APR (annual percentage rate)
The annual rate charged for a loan, including interest and fees. It’s important to know that your credit card may have a different APR for regular purchases, balance transfers, or cash advances. You should be able to find the rates on your monthly statements.
Asset
Something that has positive financial value. For example, cash in a bank account, stocks or bonds, a house, or retirement accounts. Even some personal belongings like: jewelry, art, or other valuables.
Asset allocation
The process of dividing your investment portfolio among different assets. For example, if 60% of your investments are in stocks and 40% are in bonds, your asset allocation is 60/40. You can also divide your stock asset allocation into different categories like - domestic stocks, international stocks, real estate stocks.
Available credit
Your credit limit minus purchases made this month. If your credit limit is $10,000 and you’ve spent $2,000, then your available credit is now $8,000 until you make a payment.
A
Balance Sheet
A financial statement showing the balance of assets and liabilities. In companies, it’s used to show investors the financial standing of the company. For individuals, it can be used to evaluate your financial health by looking at all of your assets, liabilities and equity (in things like your home).
Billing cycle
Length of time between the last statement’s closing date and the next statement’s starting date. Billing cycles are usually used to schedule payments. For example, my credit card billing cycle is March 7-April 7 and I am responsible for paying any charges during that 1 month period.
Bond
A type of debt, in which you are lending money to the issuer (usually the US government, sometimes a municipality or a corporation), in exchange for a specific interest rate. For example, if you invest $10,000 in a government bond at 3%, you are lending the government $10,000, and you expect to receive back a total of $10,300. Bonds are usually long term (20-30 years) and the interest that you receive is paid to you every 6 months. You receive the full principal ($10,000) back when the bond matures, or expires.
Buying power (also called purchasing power)
How much of something you can buy with a specific amount of money. As prices increase, your money buys less. For example, 50 years ago the average price for gas was $0.39/gallon, today it is around $3.15/gallon. $1 buys less gas today than it did 50 years ago.
B
Capital
The money a business (or person) has available to pay for things that generate income (like investments), including regular operations and future growth. This can be cash, or non-cash things that can be easily sold (like a car).
Capital gains tax
A tax you pay when you sell an investment. The amount taxed depends on how long you owned the investment and how much it grew in value during the time you owned it. Short-term (1 year or less) can be taxed up to 37%, whereas long-term (more than 1 year) is taxed up to 20%. Capital gains taxes do not apply to retirement accounts, since they have different tax rules.
Cash
Physical currency in the form of bills and coins that can be exchanged for goods and services. This can also be money that is easily accessible in a checking or savings account, which can be withdrawn immediately and for the full amount.
Cash advance
Short term, cash loan from your credit card provider. Universally considered a pretty bad idea, the fees include: service fee, cash advance fee, APR around 30%, and no grace period (meaning charges begin the day you take out the cash). Although there are times in all our lives when we may need some cash, this can be a very costly way to get it. It’s best to try all other avenues first: pull as much as you can from your checking account, borrow from friends & family, or maybe even consider a personal loan.
Cash back
Money that you receive as a bonus for using certain credit cards. For example, some credit cards offer 1% cash back on all purchases, meaning for every $1 you spend you get $0.01 of free money. This is meant as a reward for using their credit card. But be cautious that you are not overspending on credit cards for the cash back. It can be a nice bonus, but not a reason to spend.
Cash equivalents
Money that can be quickly converted into cash, if necessary. For example, short-term bonds or bank CDs can be quickly turned into cash to pay debts.
Certificate of Deposit (CD)
A type of savings account that pays a fixed interest rate for a specific period of time. Interest rates are usually higher than an average savings account, but CDs “lock up” your money for a set period of time and cannot be withdrawn without a penalty. After the set amount of time, you get back your original investment, plus interest.
Checking account
An account used for regular, daily expenses. This is usually where you deposit your paycheck and there are rarely transaction limits. Debit cards are typically linked to checking accounts.
Compound interest
Interest that grows more interest, which grows more interest. For example, if you invest $1,000 and get a 5% return, you’ll receive $50 in interest ($1,000 x 0.05 = $50). Now you have $1,050. If you invest $1,050 and get a 5% return again, you’ll receive $52.50 in interest ($1,050 x 0.05 = $52.50). Now you have $1,102.50. Each time you reinvest the money, it will grow a little more because of the interest you’ve made.
Credit
The ability to borrow money, with the understanding that you will pay it back later, usually with interest. It can be a powerful tool to achieve goals like: owning a home, buying a car, or starting a business, that require large amounts of money that you wouldn’t be able to afford in cash. Having a good credit score is an important part of qualifying for credit.
Credit limit
Maximum amount you can charge on a credit card determined by factors like: income, debt, payment history and credit reports. Pro tip: Call your bank and ask for a credit limit increase. Having a higher credit limit can help you increase your credit score (as long as you pay off the balance monthly). Whether you just got a raise at work, or have been a long time customer, most banks will increase your credit limit upon request as long as you have good payment history.
Credit score
A number between 300-850 that tells money lenders how “trustworthy” you are with money (i.e. - how likely you are to pay back a loan). Higher credit scores = lower interest rates. Generally, a credit score of 740+ is considered very good. You can check yours for free at annualcreditreport.com.
C
Depreciating asset
Something that loses monetary value over time. For example, a car will slowly lose value from the day you buy it. Other examples are: furniture, machinery and technology (like your phone or computer). See also: appreciating asset.
Dividend
A portion of company profits that is paid to its shareholders, usually per quarter (every 3 months). Not all companies pay dividends, but many do. You usually receive a specific dollar amount for every share you own. For example, $0.15 per share.
D
Equity
Assets minus liabilities. For example, the market value of your home (asset) minus the amount due on the mortgage (liability) is your home equity; basically the amount of your home that you actually own. In a business, it is the amount of money left if a business was sold and all of its debts were paid.
Expense ratio
The percentage of money a fund uses for management and administrative costs. You want this number to be as low as possible. I pay 0.035% for my index fund in my 401k. This means I pay $0.35 in fees for every $1,000 invested.
E
Foreclosure
When a borrower fails to make mortgage payments, this is the legal process in which the lender (usually the bank) takes control of the property and forces a sale, in an attempt to recover the balance of the loan. (In layman’s terms, you are evicted from the house, and the bank sells it to try and make back the money from the loan that you are no longer paying).
F
Gig economy
When a labor market relies on temporary or short-term positions, instead of full-time employment. Examples of gig economy jobs include: ride share driver, food delivery, freelance writing, or online tutoring. These positions are usually part-time, with flexible hours and short-term contracts. They are often called “side-hustles”.
G
Hard inquiry (also known as hard pull)
When someone reviews your credit report to evaluate whether you are a trustworthy person to lend money to. A hard inquiry does impact your credit score temporarily and the inquiry appears on your credit report (usually for around 2 years). A hard inquiry may be done by lenders before you’re approved to: buy a house, a car, take out student loans, or apply for a new credit card. See also: soft inquiry.
High-yield savings account
A savings account where you can earn high interest on your savings, allowing your savings to grow faster with no additional effort from you. High-yield savings accounts are easily accessible, meaning you have immediate access to the money, making them a great place to put your emergency savings.
H
Index fund
Money is pooled together to invest in stocks, bonds, or other securities. Index funds are highly diversified and passively managed, meaning there is no manager selecting specific investments. Instead, investments mimic a financial index, making them a low cost investment and generally a very good option for the “set it and forget it” investor.
Inflation
General increase of prices for goods & services over time. Inflation is the reason gas was cheaper 50 years ago than it is today. However, it’s important to note that inflation grows at different rates in different sectors. For example, home prices have inflated much faster than salaries, making it more challenging for young people to purchase homes.
Interest
A fee you pay to a lender in order to borrow money. For example, let’s say you borrow $10,000 at a 4% interest rate. $10,000 x 0.04 = $400. You’ll pay $400 in interest. The total amount you will pay for the loan is $10,000 + $400 = $10,400. (Important note: most interest is not a fixed 4% rate, it is compounding. See: compound interest.)
Investment
Something that is purchased (like a stock, bond, or home) with the hope (but never guarantee) that it will give you income, or increase in value over time.
I
Job
A paid task or piece of work. This could be full-time, part-time or gig work, but there must be an exchange of money.
J
Key performance indicators (KPI)
Specific, quantifiable measurements used to gauge performance. For example, in personal finance this could be your net worth, your credit score, or your amount of debt. These are specific numbers that can be tracked over time to measure success.
K
Large cap
Companies with a market capitalization (cap) value of $10+ billion. These are big companies with lots of revenue and you’ve likely heard of them (Google, Amazon, Meta, Microsoft). To invest in them, you can search for “Large Cap Index Fund” on your brokerage site. See also: small cap.
Late payment
When you miss the due date for your credit card payment. First, pay at least the minimum immediately to minimize damage to your credit score. Then, call your bank and request that they remove the late fees. If it’s the first time you’ve missed a payment, most banks will waive the fees.
Liability
Something that has negative financial value, does not give you income, and usually creates regular expenses. For example, credit card balances, student loans, car payments, amount due on a mortgage, or any other kind of debt. This is the opposite of “asset”.
Lifestyle inflation
When your spending rises to match your income. For example, you get a big raise at work so you move into a bigger, more expensive apartment. As your income increases, it’s natural to spend a little more. But you should always be aware of your spending habits, and make sure you’re using your increased income to reach other financial goals too, like emergency saving and investing for retirement.
Liquid Assets
Assets that can be quickly changed into cash. This can be literal cash, money in a savings account, or stocks and bonds that can be quickly sold. It’s important to have some liquid assets in case you need cash fast. See also: non-liquid assets.
L
Minimum payment
The smallest amount you can pay on your credit card to keep your account in good standing. This amount is usually around $25. But remember, paying only the minimum means you will gather debt, and you will be paying high-interest rates on that debt.
Money
An item symbolizing a perceived value that can be used in payment for goods and services. It’s important to remember that money itself has very little worth, but its value comes from what we receive in exchange for our money (our healthcare, home, clothes, cars).
Mutual funds
When money is pooled together to invest in stocks, bonds or other securities. Mutual funds are highly diversified and usually actively managed, meaning a portfolio manager will select the specific investments for the fund. See also: index funds.
M
Needs
Something necessary for survival: food, water, shelter and clothing. Be cautious to understand the levels between needs and “wants”. A coat in the winter is a need, but a designer jacket is a want. See also “wants”.
Net income
Amount of money you receive from your paycheck after all deductions are made. Ie - your paycheck minus taxes, healthcare, 401k contributions, and life insurance is taken out. This is also called take-home pay, because it is the amount of money you will receive in your bank account.
Non-liquid assets
Assets that cannot be quickly changed into cash (without a significant loss of investment). Examples include: your house, car, jewelry, and your retirement accounts (before the age of 59 ½). See also: liquid assets.
N
Overdraft
Having negative money in your account after a transaction. If you make a charge that is more than the balance of your account, the bank may allow the transaction to go through. The consequence is that you will definitely pay fees, and you could have your account closed.
O
Price
Amount of money given in payment. See also: value.
Principal
Original amount of money borrowed for a loan. For example, if you buy a car and take out a loan for $20,000, this is your principal. But in reality, you will pay more than $20,000 because of interest.
Profit
The amount of money made, minus expenses. For example, if you make $50 from selling lemonade, but it cost you $10 to buy the juice and cups, your profit is $40.
P
Quote
The current cost of something. For example, in stocks, it is the last price of an asset. In insurance, an estimated cost of the policy based on the information you provided.
Q
Rate of return (also called return on investment, or ROI)
The amount of money you gained or lost from an investment, in the form of a percentage. For example, if you invested $1,000 in a bond and now you have $1,030, your rate of return is 3%. (($1,030-$1,000)/$1,000) x 100 = 3%.
Return
The amount of money gained or lost over a specific period of time. Since it’s normal for the stock market to go up and down short term, it’s important to look at the returns for 1 year, 3 years, 5 years (and longer, if available). The average return of the total market is about 7% over the last 30 years.
R
Savings Account
Account used to save money for larger expenses like vacation, a new car, or emergencies. These accounts are designed to hold your money for a longer period of time, and they often have transaction limits (i.e. - 6 transactions per month). They also help your cash grow by earning interest (see also: high-yield savings account).
Small cap
Companies with a market capitalization (cap) value of $300 million to $2 billion. These are smaller companies that aren’t as established in the market yet as large cap companies, but they can offer incredible growth opportunities. When companies do well, their value can increase rapidly, helping your investments grow more quickly. To invest in small cap companies search for “Small Cap Index Fund” on your brokerage site. See also: large cap.
Social Security
Retirement income provided by the government. During your working years, money is taken from each of your paychecks, along with taxes, to go into Social Security. When you reach 65, you can start withdrawing Social Security money from the government. You “pay into” Social Security during your working years, and you can take money out during your retirement years.
Soft inquiry (also called soft pull)
When someone reviews your credit report. This does not affect your credit score, and the viewing does not appear on your credit report. A soft inquiry may be done by an employer, rental agency, or credit card company (for special offers). See also: hard inquiry.
Stocks
Represents a small portion of a company. By buying stocks, you own a small portion of that company. Depending on your broker, this could be whole shares, or partial shares (like, 0.25 shares of Apple).
S&P 500
The Standard and Poor’s 500 (S&P 500) is a stock market index that tracks the performance of the 500 largest companies in the United States. When people talk about “The Market” they are often referring to the performance of the S&P 500.
S
Target date fund
Structured by a specific date (typically your retirement year) these funds are designed to be a “one stop shop” retirement fund. They auto-adjust investments, usually focusing on growth in the earlier years and are more conservative as you reach closer to retirement age. They are a good way to autopilot invest, but the expenses can be high, reducing how quickly your money can grow.
Treasury Bill (also called T-bill)
Similar to bonds, you are loaning the U.S. government money, in exchange for being paid interest. There are two main differences between T-bills and bonds. 1) T-bills are short-term, with expiration periods between 4 weeks and 1 year. 2) When you purchase a T-bill, it is “auctioned” at less than face value, but the difference is the “interest” received. For example, if you invest $1,000 in a T-bill, it may be auctioned at $995. Meaning you will pay $995, but receive $1,000. The extra $5 is your interest and it is paid in-full when the T-bill expires.
T
Unauthorized use
Any credit use by someone that does not have permission to use the card. It’s important to note that your credit card information can be stolen electronically, meaning someone could be using your card to make purchases even if the physical card is safely in your wallet. Make sure to carefully check credit card statements every month and immediately report any unauthorized charges to your credit card company.
U
Value
The usefulness, worth or significance of something, based on an individual’s opinion. This is how much you believe something is worth, which may be more or less than the price paid.
V
Wants
Something that is pleasant or desirable, but not necessary for survival. See also, “needs”.
W
Yield
The amount of money generated from an investment, over a specific period of time, usually expressed as a percentage.
Y
Zero% Balance Transfer
When you transfer a credit card balance from one card to another with 0% introductory APR. Transferring your credit card balance to a 0% intro APR card can help you save on interest and pay down debt faster. BUT, be very careful to understand the terms & conditions of transferring your balance. There are often fees involved, and the 0% is always temporary. So if you don’t pay off your total balance within the introductory period, you’ll end up still being in debt.