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A glossary of select financial terms.
- 401(k)
- A defined contribution plan offered by an entity to its employees, which allows employees to defer income for retirement purposes. In some cases employers will match their employee’s contribution dollar-for-dollar. Taking a distribution of the funds before a certain specified age will trigger a penalty tax. The name 401(k) comes from the Internal Revenue Code section that describes the plan.
- 529 Savings Plan
- A state-sponsored program designed to help parents and others finance college expenses. Section 529 plans are subject to contribution limitations and investment guidelines. Withdrawals from the account federal income are tax free if used for qualified higher education expenses*, and anyone can contribute to a Section 529 plan regardless of income level. In most cases, the money is invested in a portfolio of stocks, bonds, or mutual funds and the proceeds can be used only for education—withdrawals for non-educational purposes will trigger federal income taxes and a 10% tax penalty.
- Annual Percentage Rate (APR)
- A term used to present the percentage relationship of the total finance charge to the amount of the loan. The APR reflects the cost of the mortgage loan as a yearly rate. It could be higher than the interest rate stated on the Note because it includes, in addition to the interest rate, loan discount points, miscellaneous fees and mortgage insurance.
- Annual Percentage Yield (APY)
- The percentage rate reflecting the total interest to be earned based on the interest rate and an institution’s compounding method, assuming funds remain in the account for a 365-day year.
- Annuity (Fixed)
- An annuity is a contract under which a series of payments are promised to a person in exchange for a single payment or series of payments.
Deferred Annuity—Allows a person to accumulate money over time on a tax-deferred basis, and then allows a choice of several payout options.
Immediate Annuity—Allows a person to convert a sum of money into a guaranteed series of payments for a period equal to the greater of the person's life or a certain number of years.
- Assets
- Any item of economic value owned by a person or entity. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities and owner’s equity.
- Asset Class
- A type of investment, such as stocks, bonds, real estate or cash.
- Balanced Investment Strategy
- A method of portfolio allocation designed to provide both income and capital appreciation while avoiding excessive risk.
- Beneficiary
- An individual, institution, trustee or estate which receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust or other contract upon the death of a certain person.
- Bonds
- Debt obligation that is issued by a government or business firm with a term that usually exceeds five years. Generally, a bond is a promise to repay the principal along with interest on a specified date(s). It is often secured and has priority over shareholders if the company becomes insolvent and its assets are distributed.
- Certificate of Deposit (CD)
- Short- or medium-term, interest-bearing, FDIC-insured savings instrument. CDs offer higher rates of return than most other bank deposit products, in exchange for tying up invested money for the duration of the certificate's term. Money removed before maturity may be subject to an early withdrawal penalty. CDs are low risk, low return investments and are known as ‘time deposits’ because the account holder has agreed to keep the money in the account for a specified amount of time—anywhere from three months to five years.
- Compound Interest
- Interest that is determined by adding the interest earned in the current period to the principal and computing the next period's interest on this "compounded" total amount.
- Coverdell Education Savings Account
- An investment vehicle designed to help parents or others fund a child's education. Contributions to the account are not tax deductible, but earnings used to pay qualified education expenses are not taxable. Generally, the account is transferable among family members. However, there are several restrictions attached to this account. The entire account has to be disbursed by the beneficiary's 30th birthday and any withdrawals after this date or for expenses that are not qualified education expenses will be subject to federal income taxes and a tax penalty.
- Custodial Account
- An account which is administered by one person or entity (the custodian) for the benefit of another person, usually at a bank, mutual fund or brokerage.
- Debt Financing
- Financing by selling bonds, bills or notes to individuals or institutions.
- Diversification
- A portfolio strategy designed to reduce exposure to risk by combining a variety of investments, such as stocks, bonds and real estate, which are unlikely to all have the same volatility. The goal of diversification is to reduce the risk in a portfolio. Volatility is typically limited by the fact that not all asset classes or industries or individual companies move up and down in value at the same time or at the same rate. Diversification helps reduce both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions.
- Equity Financing
- Financing by selling ownership interests to investors.
- Estate
- A person’s assets and liabilities.
- Estate Planning
- The preparation of a plan of administration and disposition of one's estate using a will, trusts, gifts, power of attorney, etc.
- Homeowners Insurance
- Property insurance policy providing coverage for loss or damage to a home, usually a single-family dwelling. Coverage is also provided for loss or damage to the insured's personal property—furnishings, clothing, other goods, for example—and for personal liability arising from bodily injury or property damage to another person. Homeowners insurance is required by most mortgage lenders.
- Inflation
- The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar falls because a person won't be able to purchase as much with that dollar as he or she previously could.
- Individual Retirement Account (IRA)
- A tax-deferred retirement account for an individual that permits individuals to set aside up to $4,000 per year (for tax year 2005 and an additional $500 for those 50 or older), with earnings tax-deferred until withdrawals begin at age 59 1/2 or later (or earlier, with a 10% tax penalty). Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to a traditional IRA. Such contributions are deductible from income in that year and interest accumulates tax-deferred until the funds are withdrawn. All others can make contributions to traditional IRA on a non-deductible basis.
- Liability
- A legal obligation, debt, claim or potential loss.
- Liquid
- Easily convertible to cash.
- Life Insurance
- Insurance providing for the payment of a stipulated amount to a designated beneficiary upon the death of the insured.
- Long-term Care Insurance
- Insurance designed to provide coverage for necessary medical or personal care services provided outside of a hospital setting, such as in a nursing home or in the insured’s home.
- Medicaid
- A program, funded by the federal and state governments, which pays for medical care for those who can't afford it.
- Medicare
- The Federal Health Insurance for the Aged program, provided under the Social Security Act.
- Money Market Account
- Like other savings accounts, money market accounts are insured by the Federal government. Money market accounts offer many of the same services as checking accounts although transactions are somewhat more limited. These accounts can be a convenient place to store money that is to be used for upcoming investments or has been received from the sale of recent investments. They are very safe and highly liquid investments, but may offer a lower interest rate than other investments.
- Mutual Fund
- A mutual fund brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.
- Net Worth
- Total assets minus total liabilities of a person or entity.
- Pension
- Post-retirement benefits that an employee receives from his/her employer’s retirement plan.
- Permanent Life Insurance
- Life insurance that provides continuing coverage for the insured’s entire life, rather than for a set number of years. Permanent life insurance may accrue values that the owner can withdraw or use to increase the death benefit.
- Person
- As used in this glossary, person means a natural person (a human being) or a legal entity such as a corporation, partnership, trust, etc.
- Portfolio
- A collection of investments all owned by the same individual or organization. These investments often include stocks, bonds and mutual funds.
- Principal (Amount)
- The amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest). Also considered the original amount invested or deposited.
- Private Mortgage Insurance (PMI)
- Insurance against a loss by a lender in the event of default by a borrower (mortgagor). A private insurance company issues this insurance. The premium is paid by the borrower and is included in the mortgage payment.
- Rate of Return
- The annual rate of return on an investment, calculated as a percentage of the total amount invested.
- Renters Insurance
- Property insurance providing coverage to an individual living in a rented dwelling, apartment, or other location owned by someone else. Coverage is provided for loss or damage to the insured's personal property—furnishings, clothing, and other goods, for example—and for personal liability arising from bodily injury or property damage to another person.
- Rollover
- A tax-free transfer of a distribution from a qualified retirement plan into an IRA or other qualified plan within a specific time frame (60 days). (Or, a movement of funds from one investment to another.) Rollovers can happen when an employee leaves a job with an employer who offered a retirement plan such as a 401(k).
- Roth IRA
- A type of IRA, established by the Taxpayer Relief Act of 1997, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. Contributions are not tax deductible, but withdrawals, subject to certain rules, are not taxed at the federal level.
- Social Security
- The disability or retirement programs established under the federal Social Security Act of the Railroad Retirement Act.
- Stock
- A security that signifies an ownership interest (called equity) in a corporation, and represents a claim on its proportional share in the corporation's dividends and net assets. In a corporation with a single class of stock, ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he or she owns 5% of the company.
- Tax-deferred
- Deferral of taxes on income until a later date. Examples of tax vehicles include IRA, 401(k), Keogh Plan, annuity and employee stock ownership plan.
- Term Life Insurance
- Life insurance that provides coverage for a fixed number of years. Unlike permanent life insurance, a term life insurance policy does not usually accrue additional values that the owner can withdraw or that can increase the death benefit.
- Treasury Note
- A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of between 2 and 10 years.
- Trust
- A means for one person, called the trustee, to own and control property for the benefit of him/herself or for another person, called the beneficiary.
Living Trust—Established during the lifetime of the person who created it.
Testamentary Trust—Created by a person’s will and therefore comes into existence after a person’s death.
- Uniform Transfers to Minors Act
- A law enacted in most states that permits an adult (the custodian) to own property for the exclusive benefit of a minor until the minor reaches an age specified in the law (age 21), at which time he/she becomes the owner of the property.
- Variable Annuity
- A life insurance annuity contract which provides future payments to the holder, usually at retirement, the size of which depends on the performance of the portfolio's securities.
- Will
- A legally enforceable declaration directing the disposal of a decedent's probate property.