Glossary Terms : Mon Savvy
401(k)
An employer-sponsored retirement plan that allows employees to contribute a portion of their pre-tax salary, with investments growing tax-deferred. Many employers offer matching contributions.
Active Income
Income earned from performing a service, such as salaries, wages, commissions, or tips, which requires direct effort and time. It is typically taxed at ordinary income rates.
Amortization
The process of paying off a debt over time in regular installments, where each payment covers both principal and interest. An amortization schedule shows how the principal balance decreases with each payment.
Annuity
A financial product sold by financial institutions that accepts and grows funds from an individual and then pays out a stream of payments at a later date. Annuities are primarily used for retirement planning and income generation.
Appraisal
A professional assessment of a property's value, performed by a licensed appraiser, typically required by lenders before approving a mortgage. It ensures the loan amount doesn't exceed the property's worth.
Asset Allocation
The process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, based on an investor's risk tolerance and time horizon. It's a core component of long-term investment strategy.
Asset Protection
Strategies used to safeguard one's wealth and assets from potential creditors, lawsuits, or other claims. It's an important part of comprehensive financial planning, especially for high-net-worth individuals.
Asset Under Management (AUM)
The total market value of assets that a financial institution or individual manages on behalf of clients. This figure often determines management fees charged by advisors.
Auto Insurance
Insurance that protects vehicle owners against financial loss in the event of an accident, theft, or other damage to their vehicle. It's often legally required and covers liability for damages caused to others.
Automated Savings
Regularly scheduled transfers of money from a checking account to a savings or investment account, often set up automatically. This 'set it and forget it' approach helps build consistent savings.
Automated Teller Machine (ATM)
An electronic banking outlet that allows customers to complete basic transactions, such as cash withdrawals, deposits, and balance inquiries, without the aid of a branch representative. ATMs are widely accessible.
Bank Statement
A periodic summary of all transactions, deposits, withdrawals, and balances in a bank account, typically sent monthly. It helps reconcile records and monitor spending.
Bear Market
A financial market where prices are falling or are expected to fall over a sustained period, typically defined by a decline of 20% or more from recent highs. It's characterized by investor pessimism and economic slowdowns.
Bond
A debt instrument where an investor lends money to a government or corporation for a defined period at a fixed interest rate. Bonds are generally considered less risky than stocks and provide predictable income.
Broker
An individual or firm that executes buy and sell orders for securities or other financial products on behalf of clients. They typically earn commissions for their services.
Budget
A detailed plan for managing income and expenses over a certain period, typically a month. It helps individuals track where their money goes and make informed spending decisions.
Bull Market
A financial market where prices are rising or are expected to rise over a sustained period. It's characterized by investor optimism, economic growth, and increasing asset values.
Capital Appreciation
An increase in the value of an asset or investment over time, typically measured from its purchase price to its current market price. This profit is realized when the asset is sold.
Capital Gains
The profit earned from the sale of an asset, such as stocks or real estate, that has increased in value. These gains are often subject to taxation, with different rates for short-term versus long-term holdings.
Cash Flow
The total amount of money being transferred into and out of a business or household. Positive cash flow indicates more money coming in than going out, signifying financial health.
Certificate of Deposit (CD)
A savings account that holds a fixed amount of money for a fixed period, earning a fixed interest rate. Withdrawing early usually incurs a penalty, making them suitable for funds not needed immediately.
Certified Financial Planner (CFP)
A professional designation indicating expertise in financial planning, requiring rigorous education, examination, experience, and ethical requirements. CFPs provide comprehensive financial advice to individuals.
Checking Account
A bank account that allows easy access to funds for daily transactions, such as making payments or withdrawals using a debit card or checks. It typically offers limited or no interest.
Closing Costs
Fees paid at the closing of a real estate transaction, beyond the property's price, including lender fees, title insurance, and appraisal fees. These costs can add significantly to the overall expense of buying a home.
Compound Interest
Interest calculated on the initial principal and also on the accumulated interest from previous periods. It allows savings and investments to grow exponentially over time.
Consumer Debt
Debt incurred by individuals for personal, family, or household purposes, rather than for business or investment. Common examples include credit card debt, personal loans, and auto loans.
Cost of Living
The amount of money needed to sustain a certain standard of living in a given location, including basic expenses like housing, food, taxes, and healthcare. It varies significantly by geographic area.
Credit Report
A detailed summary of an individual's credit history, including payment history, types of accounts, and outstanding debts. It's used by lenders to evaluate risk and by consumers to monitor their financial standing.
Credit Score
A three-digit number that represents an individual's creditworthiness, based on their credit history. It influences access to loans, interest rates, and other financial services.
Credit Union
A member-owned financial cooperative that provides banking and financial services to its members. They are often known for lower fees and better interest rates than traditional banks.
Credit Utilization
The amount of credit you're using compared to your total available credit, often expressed as a percentage. Keeping this ratio low is good for your credit score.
Debit Card
A payment card that deducts money directly from a consumer's checking account when used, functioning like cash without accruing debt. It provides convenient access to your funds.
Debt-to-Income Ratio (DTI)
A financial metric that compares an individual's total monthly debt payments to their gross monthly income. Lenders use DTI to assess borrowing risk and ability to manage debt.
Deflation
A decrease in the general price level of goods and services, often associated with a contraction in the money supply. While it makes goods cheaper, it can lead to reduced economic activity.
Direct Deposit
The electronic transfer of a payment directly into a bank account rather than a paper check. It's a common and convenient method for receiving paychecks, tax refunds, and government benefits.
Disability Insurance
Income protection insurance that pays benefits to policyholders who are unable to work due to illness or injury. It replaces a portion of lost income, helping maintain financial stability during unforeseen circumstances.
Disposable Income
The amount of money left over after taxes and other mandatory deductions from one's gross income. It represents the income available for discretionary spending and saving.
Diversification
The strategy of investing in a variety of assets, industries, and geographic regions to reduce overall risk in a portfolio. It aims to minimize the impact of poor performance from any single investment.
Dividend
A distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders. Dividends can provide a steady income stream for investors.
Dollar-Cost Averaging
An investment strategy where an investor divides the total amount to be invested across periodic purchases of a target asset, regardless of its price. This helps reduce the impact of market volatility and can lead to a lower average cost over time.
Down Payment
An initial payment made when buying something on credit or with a loan, representing a percentage of the total purchase price. It reduces the amount of the loan needed and can influence interest rates.
Early Withdrawal Penalty
A fee or penalty imposed for withdrawing funds from a savings or investment account, such as a CD or retirement account, before a specified maturity date or age. These penalties discourage premature access to funds.
Emergency Fund
Money set aside in an easily accessible account for unexpected expenses like job loss, medical emergencies, or major car repairs. It provides a crucial financial safety net.
Escrow Account
A neutral third-party account where funds or assets are held until specific conditions of a contract are met, often used in real estate for property taxes and insurance. It ensures timely payment of these recurring expenses.
Estate Planning
The process of arranging for the management and disposal of one's estate upon death, incapacity, or retirement. It includes creating wills, trusts, and powers of attorney.
Exchange
A marketplace where securities, commodities, derivatives, and other financial instruments are traded, facilitating transactions between buyers and sellers. Examples include the New York Stock Exchange.
Exchange-Traded Fund (ETF)
A type of investment fund that trades on stock exchanges, much like a stock, and typically holds a collection of underlying assets. ETFs offer diversification, lower expense ratios, and intraday trading flexibility.
Expense Ratio
The annual fee that all funds (like mutual funds and ETFs) charge their investors to cover operating expenses, expressed as a percentage of the fund's assets. A lower expense ratio means more of your investment goes to growth.
Fiduciary Duty
A legal obligation for an advisor to act in the best interest of their client, prioritizing the client's needs over their own. This standard requires transparency and loyalty in all financial dealings.
Financial Advisor
A professional who provides financial guidance to clients regarding investments, insurance, budgeting, and retirement planning. They help individuals and businesses make informed decisions about their money.
Financial Advisor Fees
The charges levied by financial advisors for their services, which can include AUM fees, hourly rates, flat fees, or commissions. Understanding these fees is crucial for evaluating the cost of advice.
Financial Discipline
The consistent practice of controlling one's spending and saving habits to achieve financial goals, often involving adherence to a budget and long-term financial plan. It's crucial for building wealth and avoiding debt.
Financial Goal
A specific objective that requires careful financial planning and saving to achieve, such as buying a home, funding retirement, or paying for education. Clearly defined goals guide financial decisions.
Financial Health
A broad term used to describe the state of one's personal monetary affairs, encompassing factors like savings, debt, income, and financial security. It reflects the overall stability and well-being of an individual's finances.
Financial Independence
The state of having sufficient personal wealth to live without having to work actively, meaning your passive income covers your living expenses. It signifies freedom from financial constraints and the ability to pursue passions.
Financial Literacy
The ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. It's crucial for making sound financial decisions and achieving financial well-being.
Fixed Expenses
Costs that remain constant regardless of the level of activity or production, such as rent, mortgage payments, or insurance premiums. These expenses are predictable and don't change month-to-month.
Frugality
The practice of acquiring goods and services in a restrained, economical manner, making wise use of resources. It often involves prioritizing needs over wants and seeking value for money.
Gross Income
The total amount of income received before any deductions for taxes, retirement contributions, or other expenses. It's the starting point for calculating income for tax purposes.
Health Insurance
A type of insurance that covers medical expenses, surgical expenses, and sometimes prescription drugs. It protects against high healthcare costs and provides access to necessary medical services.
High-Yield Savings Account (HYSA)
A type of savings account that offers a higher interest rate than traditional savings accounts, allowing your money to grow faster. It's an excellent option for growing accessible savings.
Home Equity
The portion of a property's value that the homeowner truly owns, calculated by subtracting the outstanding mortgage balance from the property's current market value. It can be a significant source of wealth.
Homeowners Insurance
A type of property insurance that covers losses and damages to an individual's residence and assets within the home, as well as liability coverage. It protects against perils like fire, theft, and natural disasters.
Index Fund
A type of mutual fund or ETF that seeks to track the performance of a specific market index, such as the S&P 500, rather than actively selecting individual securities. They are known for low fees and broad market exposure.
Individual Retirement Account (IRA)
A retirement savings plan that allows individuals to save money on a tax-deferred or tax-free basis, depending on the type. There are traditional and Roth IRA options.
Inflation
The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. It erodes the value of money over time.
Interest Rate
The percentage charged by a lender for the use of assets, or paid on a deposit or investment, over a specified period. It influences the cost of borrowing and the growth of savings.
Interest-Only Loan
A type of loan where the borrower only pays the interest due on the principal balance for a specified period. This results in lower initial payments but does not reduce the principal.
Life Insurance
A contract between an insurer and a policyholder where the insurer guarantees to pay a sum of money to beneficiaries upon the insured's death. It provides financial security for dependents and can cover funeral costs.
Lifestyle Creep
The tendency for spending to increase as income increases, often without a corresponding increase in savings or investments. It can make it harder to build wealth despite higher earnings.
Liquidity
The ease with which an asset can be converted into cash without affecting its market price. Highly liquid assets can be sold quickly and efficiently without significant loss of value.
Long-Term Care Insurance
Insurance that covers the costs of long-term care services, such as nursing home care, assisted living, or in-home care, which are typically not covered by standard health insurance. It helps protect assets from high care expenses in later life.
Market Volatility
The degree of variation of a trading price series over time, often measured by the standard deviation of logarithmic returns. High volatility means prices can change dramatically and unpredictably in a short period.
Mobile Banking
Using a smartphone or tablet to perform financial transactions through a dedicated banking app. Mobile apps offer similar functionalities to online banking with added portability and specific app features.
Money Market Account (MMA)
An interest-bearing account that typically offers higher interest rates than regular savings accounts and may include limited check-writing privileges. MMAs often require a higher minimum balance.
Mortgage
A legal agreement by which a bank or other creditor lends money at interest in exchange for taking title to the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt. It is used to finance the purchase of real estate.
Mutual Fund
A professionally managed investment fund that pools money from many investors to purchase a diversified portfolio of securities. It offers diversification and professional management for a fee.
Net Income
The amount an individual or business earns after deducting taxes and other expenses from gross income. For individuals, it represents the actual take-home pay after all deductions.
Net Worth
The value of all assets owned minus all liabilities owed, providing a snapshot of an individual's financial health at a specific point in time. It indicates an individual's overall financial strength.
Net Worth Statement
A formal document that lists an individual's assets and liabilities to calculate their net worth at a specific moment. It serves as a comprehensive financial snapshot.
Online Banking
Performing financial transactions and managing bank accounts through the internet via a bank's website. This convenient service allows users to manage accounts, pay bills, and transfer funds from anywhere.
Opportunity Cost
The value of the next best alternative that must be foregone when making a choice or decision. Understanding opportunity cost helps in making better financial decisions by weighing trade-offs.
Overdraft Protection
A service offered by banks that prevents transactions from being declined when there isn't enough money in an account, often by linking to a savings account or line of credit. It can prevent declined payments but may incur fees.
Passive Income
Earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved, requiring minimal ongoing effort. It's a key component of financial independence and wealth building.
Pension Plan
A retirement plan usually funded by an employer, providing a fixed income stream to employees after retirement for the rest of their lives. These are less common in the private sector today.
Personal Financial Statement
A document that outlines an individual's financial position at a specific point in time, including assets, liabilities, and net worth. It helps in assessing financial health and planning for the future.
Portfolio
A collection of financial investments owned by an individual or institution, which can include stocks, bonds, mutual funds, ETFs, and other assets. A well-diversified portfolio is essential for long-term financial success.
Power of Attorney (POA)
A legal document giving one person the power to act on behalf of another in financial or legal matters. It ensures financial affairs can be managed if one becomes incapacitated.
Premium
The amount of money an individual or business must pay for an insurance policy to maintain coverage. Premiums are typically paid monthly, quarterly, or annually.
Principal
The original amount of money invested or loaned, upon which interest is calculated. It's the base figure for financial calculations and the amount repaid in a loan.
Principal and Interest (P&I)
The two main components of a standard loan payment, where principal reduces the outstanding balance and interest is the cost of borrowing. As the loan amortizes, the principal portion of the payment increases while the interest portion decreases.
Private Mortgage Insurance (PMI)
An insurance policy that protects the mortgage lender if the borrower defaults on their loan, typically required when a homebuyer makes a down payment of less than 20% of the home's purchase price. It adds to the monthly mortgage payment.
Rebalancing
The process of adjusting a portfolio back to its original target asset allocation by selling some assets that have grown and buying more of those that have lagged. It ensures the portfolio stays aligned with the investor's risk tolerance and goals.
Refinancing
The process of replacing an existing loan with a new loan, typically to obtain a lower interest rate, different loan terms, or to consolidate debt. It can reduce monthly payments or total interest paid.
Renters Insurance
Property insurance that provides coverage for a policyholder's personal belongings and liability within a rented property. It protects tenants from losses due to theft, fire, or other perils not covered by the landlord's policy.
Required Minimum Distribution (RMD)
The amount that must be withdrawn from most tax-deferred retirement accounts each year once the account holder reaches a certain age. RMDs ensure taxes are eventually paid on deferred income.
Retirement Age
The age at which an individual plans to stop working and begin drawing retirement benefits or pension income. This can vary based on personal circumstances and financial planning.
Risk Management
The process of identifying, assessing, and controlling threats to an individual's or organization's financial well-being. In personal finance, it means protecting against potential financial losses through insurance, diversification, and emergency funds.
Risk Tolerance
An investor's willingness to take on financial risk in pursuit of investment returns, influenced by factors like age, financial goals, and personal comfort with market fluctuations. It's a key factor in determining appropriate investment strategies.
Robo-Advisor
A digital platform that provides automated, algorithm-driven financial planning services with little to no human intervention. They offer cost-effective investment management for various financial goals.
Roth IRA
An IRA that allows after-tax contributions and tax-free withdrawals in retirement, provided certain conditions are met. It's particularly beneficial for those who expect to be in a higher tax bracket later.
Rule of 72
A quick estimation method to determine how long it will take for an investment to double at a given annual rate of return. You divide 72 by the annual interest rate to get the approximate number of years.
Savings Rate
The percentage of income an individual saves rather than spends, indicating how much of their earnings are being put towards future goals. A higher savings rate accelerates progress towards financial goals.
Securities and Exchange Commission (SEC)
A U.S. government agency that regulates the securities industry to protect investors and maintain fair, orderly, and efficient markets. Its primary mission is to enforce federal securities laws.
Sinking Fund
A fund established by periodically setting aside money for a specific future expense, such as a down payment on a house or a major vacation. It helps avoid taking on debt for planned purchases.
Social Security
A federal insurance program that provides benefits to retirees, the disabled, and survivors, funded through payroll taxes. It serves as a foundational component of many Americans' retirement income.
Stock
A type of security that represents ownership in a corporation, giving the holder a claim on the company's assets and earnings. Stocks offer the potential for capital appreciation and dividends.
Student Loan Debt
Money borrowed to pay for education-related expenses, including tuition, housing, and books, which must be repaid with interest. It can be a significant financial burden for many individuals.
Tax Credit
A direct reduction in the amount of tax owed, meaning it reduces the tax bill dollar-for-dollar, unlike a deduction which reduces taxable income. Tax credits are generally more beneficial than deductions.
Tax Deduction
An amount that can be subtracted from gross income to reduce the amount of income subject to tax, thereby lowering the overall tax bill. Common deductions include mortgage interest and student loan interest.
Term Life Insurance
A type of life insurance that provides coverage for a specific period, or 'term,' typically 10, 20, or 30 years. It's generally less expensive than whole life insurance and does not build cash value.
Traditional IRA
An IRA that allows pre-tax contributions, which can be tax-deductible, and tax-deferred growth. Withdrawals in retirement are taxed as ordinary income.
Trust
A legal arrangement where assets are held by a trustee for the benefit of another party, the beneficiary. Trusts can provide asset protection, estate tax benefits, and privacy.
Variable Expenses
Costs that change depending on the level of activity, consumption, or usage, such as groceries, utilities, or entertainment. These expenses fluctuate from month to month and require careful budgeting.
Vesting Period
The amount of time an employee must work for a company to gain full ownership of employer-contributed retirement funds. Before vesting, funds may be forfeited if the employee leaves.
Whole Life Insurance
A type of life insurance that provides coverage for the entire life of the insured and includes a savings component, building cash value over time. It offers a death benefit and a cash value that grows tax-deferred.
Will
A legal document that specifies how an individual's assets should be distributed after their death and may name guardians for minor children. It's a cornerstone of estate planning.
Wire Transfer
An electronic transfer of money from one bank account to another, often used for large sums or international transactions. It's a fast way to send funds, though it typically involves fees.
Yield
The income return on an investment, typically expressed as an annual percentage rate, representing the cash flow received relative to the investment's cost. It indicates how much income an investment generates.
Yield Curve
A line that plots the interest rates of bonds (of equal credit quality but differing maturity dates) at a given point in time. It helps investors understand market expectations for future interest rates.
