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15-Year Rule – A catch-up distribution allowed for employees with a 403(b) plan who have been working for the same employer for a cumulative period of 15 years or more.
401(k) Plan – A tax-advantaged, employer sponsored, retirement account where employees contribute a portion of their income, with the employer usually matching a portion of the employee contribution. This type of plan is usually taxed on withdrawal of funds.
See: Traditional 401(k), Safe Harbor 401(k), SIMPLE 401(k), Roth 401(k).
403(b) Plan – A retirement plan for public schools, IRC 501(c)(3) tax exempt organizations, and employees of qualifying religious organizations. A 403(b) plan is a tax-advantaged account that allows for pre-tax contributions and employer contributions that are taxed at withdrawal.
457(b) Plan – A government or tax-exempt IRC 501 organization retirement plan where contributions and earnings are tax-deferred. Contributions are made with pre-tax dollars, and employers can also match a portion of employee contributions. 457(b) plans are not qualified retirement plans, and thus, not subject to the 10% penalty on early withdrawals.
529 Plan – Savings plan for children’s future educational expenses. The contribution limit per individual to a plan is $15,000 annually, or $75,000 prorated over five years to avoid gift tax consequences; there is no limit to how many people can contribute to one plan, however, account balance limits exist and vary by state. The savings in this plan are invested and earnings can be withdrawn tax free as long as they’re for qualified expenses. Qualified expenses include the child’s: primary, secondary, public, private, religious, and collegiate school tuitions; apprenticeships registered with the Secretary of Labor under the National Apprenticeship Act; books, supplies, and equipment; and room and board for students enrolled a minimum of half-time.
529A ABLE Account – Tax-deferred savings account for people who also generally qualify for Supplemental Security Income (SSI) and/or Social Security Disability Insurance (SSDI). Investments grow tax-deferred and withdrawals for qualified expenses are tax-free. Qualified expenses can include: housing, education, and transportation. Similar to a 529 Plan, ABLE plans are state regulated, with a contribution limit per individual of $15,000 annually and total contribution limits differing by state.
Above-the-Line Deduction – Deductions off your gross income, that once subtracted, result in your adjusted gross income.
Acceleration Clause – Prevalent in real estate contracts, including mortgages, an acceleration clause forces a borrower to fully pay an outstanding loan if they fail to meet the contract requirements, e.g., missing an installment payment.
Accredited Investor – A person or a business that’s entitled to invest in riskier ventures. These are usually high-net worth individuals or entities who the SEC deem to have a lesser need of regulatory protection.
Accrued Interest – Accumulated interest that has not been paid or collected.
Active Investor – A “hands-on” investor, usually looking to beat the market’s average return. Requires active participation in fund management.
Active Participant – Someone who has benefited under certain retirement plans through contributions or accrued benefits.
Activities of Daily Living (ADL) – Activities that help determine type of coverage usually given by Medicare, Medicaid, or other long-term care insurance. The basic ADLs are: eating, bathing/showering , dressing, using the toilet, walking and general movement.
Actual Cash Value – The replacement cost of an item subtracted by the depreciation the item had accumulated at the time of replacement.
Add-On Interest Loan – A type of loan where the interest is calculated at the beginning of the loan and added onto the principal, as opposed to being calculated after every payment made.
Adjustable-Rate Mortgage (ARM) – Also known as variable-rate mortgage, this is a type of mortgage whose interest rate may vary period to period, whether it’s annually or on a monthly basis. The changes on interest rate are based on the ARM Margin and changes to the financial index associated with the loan.
Adjustable Life Insurance – A term life and whole life insurance hybrid that includes a savings component that grows with a guaranteed minimum interest rate.
Adjusted Capitalized Cost – The final price paid for an auto lease; the gross price minus down payment and any other rebates or discounts.
Adjusted Gross Income (AGI) – Gross income after subtracting above the line deductions.
Adoption Tax Credit – A tax benefit for those who adopt children; covers up to an annual limit of expenses related to the adoption of a child. The amount changes annually, and carries over for five years if not fully utilized.
Advanced Medical Directive – A document outlining how medical decisions are to be made when the affected is unable to make such decisions. There are various types of directives, and they also vary in validity from state to state; some of the most common ones include: living will, medical power of attorney/ durable power of attorney for healthcare, health-care proxy, physician orders for life-sustaining treatment (POLST), do not resuscitate (DNR) orders.
Aggressive Growth Funds – Mutual funds that invest in growth company stocks, looking for high potential growth at the expense of greater risk.
Alimony Deduction – Some alimony or separate maintenance payments that are deductible by the paying spouse. No longer available after 2018.
All-Risk Policy – Also known as open perils policy. This type of insurance coverage will cover any type of peril or damage unless specifically excluded within the policy.
Alternative Minimum Tax (AMT) – This is used, specially with high earners, to limit the tax benefits they can receive so these benefits won’t be taken advantage of and to ensure high earners pay their share of taxes.
American Opportunity Tax Credit – A tax credit that applies to the first four years of a student’s post-secondary education qualified expenses. The maximum tax credit is 100% of the first $2,000 of expenses, and 25% of the second $2,000, or, a maximum of $2,500. The tax credit is given per student, thus a household with multiple students may claim the credit for each individual student.
Amortization – In personal finance, amortization is the process of paying off a loan by the maturity date in installments.
Annual Percentage Rate (APR) – This is the annual percentage rate of interest paid by borrowers. It does not take compounding interest into consideration.
Annual Percentage Yield (APY) – Percentage earned on an investment, also known as real rate of return. Takes compound interest into consideration.
Annuitant – Person who is to collect benefits from a pension or annuity investment.
Annuity – Contracts formed between individuals and insurance companies where the individual pays a certain amount of money and the insurance company promises to disburse payments back to the individual. These are typically used during retirement, in order to receive a stream of income. There are three basic types of annuities: fixed, variable, and indexed.
Any-Occupation Policy – Type of disability insurance that only covers those workers completely rendered unable to perform any type of job they would be qualified for. Benefit accessibility is more restricted, as opposed to an own-occupation policy.
Appreciation – When an asset gains value over time, it appreciates.
ARM Margin – A fixed rate added to the variable rate of a loan to determine the whole interest rate of an adjustable-rate mortgage.
Arrears – Generally, amounts due after contractually obligated to be paid. Overdue payments.
Assessed Value – Value usually used by a government body to determine property taxes. This value is usually determined through inspections of the property and by comparing similar home sales.
Asset Allocation – An investment strategy that balances an individual’s portfolio based on their goals and their risk tolerance.
Asset Class – Asset classes are how assets are grouped together with other assets that are similar. The three main types of asset classes are equities, fixed income, and cash equivalents.
Assumable Mortgage – Type of mortgage received when purchasing a property and having the previous mortgage transferred to the buyer, as opposed to the buyer obtaining their own mortgage.
Automatic Enrollment Plan – Retirement plans where employees are automatically enrolled to contribute to the plan; the employer also chooses the percentage amount that is contributed from employees’ paychecks.
Balanced Fund – A type of Mutual Fund that has a varied blend of stocks, bonds, and occasionally a money market component. These are put into a single portfolio and contain a balanced level of equity and debt.
Balloon Loan – A type of loan wherein the principal balance of the loan is not fully repaid by the end of the loan’s life. The remaining principal balance is paid off in full at the end of the loan. This type of loan is attractive to short term borrowers because the interest rates on balloon loans are typically low and they can use proceeds from the sale of an asset to cover the remaining principal.
Basis Point – Term used to describe a percentage change equal to 1/100th of a percent.
Bear Market – Opposite of a Bull Market; defined as a period of time when market prices are falling for a prolonged period of time.
Beneficiary – Someone who is set to benefit from distributions from an insurance policy, trust, will, or other designated accounts. Beneficiaries are established to give direction on where one’s assets will transfer upon their death or account termination.
Biweekly Mortgage – A typical mortgage allows for monthly payments however a biweekly mortgage allows for a payment every two weeks.
Blue Chip Stock – Blue Chip Stocks are publicly traded companies that are large and well-established. They are generally not growth-oriented but offer investors a safe investment. Some of the biggest blue chip stocks of 2020 were Johnson and Johnson, JP Morgan Chase, and The Walt Disney Co.
Bond Rating – Bonds receive a rating based on their credit quality by independent bond rating agencies. A rating of AAA shows the highest quality of bond while a rating of D shows a bond that is not sound and is almost guaranteed to default.
Bull Market – Opposite of a Bear Market; defined as a period of time when market prices are rising for a prolonged period of time.
Bump-Up CD – a bump-up certificate of deposit allows the owner of the CD to make a one time “bump-up” to take advantage of rising interest rates.
Bunching Deductions – Bunching your deductions means to pay two years worth of deductible costs in Year 1 so that you can take an itemized return in Year 1 and then take a standard deduction in Year 2.
Cafeteria Plans – A plan that allows employees to receive compensation through either cash or fringe benefits. Most common are Health Savings Accounts, and Flexible Spending Accounts.
Capital Accumulation – One of the cornerstones of a capitalist economy. The goal of capital
accumulation is to generate a return on an initial investment through rent, capital gains, appreciation, or interest.
Capital Assets – Includes most personal and investment assets. Other types of assets include Section 1231 assets and ordinary income assets.
See: Section 1231 Assets, Ordinary Income Assets.
Capital Gain – A capital gain is a profit from the sale of an investment, property, or other asset.
Capital Loss: A capital gain is a loss from the sale of an investment, property, or other asset.
Capitalized Cost Reduction – A capitalized cost reduction is a payment made at the beginning of a financing period. A down payment is a type of capitalized cost reduction because it is an amount paid at the beginning of the loan in order to reduce the cost of financing.
Cash Equivalents – Generally, any funds readily available or that will mature in 12 months or less; e.g., a money market fund, savings account, or certificates of deposit maturing in 12 months or less.
Cash Value Life Insurance – A permanent life insurance plan that, unlike traditional life insurance plan, does not expire after a given time period. Due to this they are generally more expensive, however there are certain benefits that help offset the higher cost.
Catch-Up Contribution – Those aged over 50 years old are able to make an additional $1,000 catch up contribution to a 401k or IRA on top of the standard $6,000 contribution limit. For 403(b) plans, the catch up contribution is a maximum of $6,500.
Callable Bond – A callable bond allows the bond’s issuer to redeem the bond before it reaches its maturity date so that they can pay off their debt early.
Cash Surrender Value – In the event that an insurance policy is voluntarily terminated, the cash surrender value is the value paid to the policyholder.
CD Ladder – A strategy where an investor buys multiple CD’s with staggered expiration dates. This strategy is useful because it helps mitigate interest and reinvestment risks.
Certificate of Deposit (CD) – A CD is a product sold by banks and credit unions that guarantees an interest rate premium in exchange for the purchaser of the CD leaving a lump sum deposit untouched in the bank or credit union for a predetermined time period.
Chapter 7 Bankruptcy – This type of bankruptcy looks to eliminate one’s debt by selling their assets and distributing that money to their creditors.
Chapter 13 Bankruptcy – This type of bankruptcy gives the debtor a payment plan that allows them to keep their assets while they repay their creditors within a certain time frame.
Charitable Remainder Trust – A trust that distributes assets to its beneficiaries for a period of time, and after, the remainder as a charitable donation in order to reduce taxes.
Cliff Vesting – A vesting schedule that grants an employee the full plan’s assets after being employed for a certain period of time, usually three years. See: Vesting Schedule
Closed-End Lease – This type of lease doesn’t leave the lessee with any obligations to purchase the asset at the end of the agreement.
Co-Borrower – Someone, usually a co-signer, who usually has a better credit history that allows them to qualify for a loan the original borrower would not have been able to qualify for.
Co-Signer – An individual who guarantees a debt will be paid in case the borrower is unable to make the loan payments.
COBRA – A group health plan provision for employers who employs more than 20 people working over 50% of the calendar year; these health plans require employers to continue providing coverage to employees and qualified beneficiaries despite the occurrence of certain qualifying events, most commonly: normal termination, reduction of hours, death of employee, qualified child reaches age disqualifying them from the plan.
Codicil – A document where changes to a will are written.
Coinsurance – The percentage based costs an insured must pay after meeting their deductible. Common in property insurance. Sometimes paired with copayments. See: Copayment.
Commodity – Usually, raw materials that can be traded through futures contracts. Sometimes it may also include foreign currency or indexes being exchanged.
Community Property – Property owned equally between spouses regardless of who invested more on the property.
Compound Interest – Interest calculated using the principal and interest previously accumulated.
Comprehensive Auto Insurance – Insurance that covers an individual’s car from damages in addition to those caused by collisions; some examples include: vandalism, damages caused by animals, or those caused by natural disasters.
Comprehensive Health Insurance – A comprehensive insurance provides a wide range of coverage for an individual’s health needs, as opposed to a supplemental or limited policy. See: Supplemental Health Policy
Conservator – Someone legally responsible for another’s person and/or estate in an event the person is unable to make decisions themselves.
Consumer Price Index (CPI) – A measure of common consumer goods averaged together that is usually used to assess costs of living and periods of inflation or deflation.
Contents Insurance – Insurance that covers items within one’s home that is usually not covered by a homeowner’s insurance.
Copayment – A fixed amount the insured pays after meeting their deductible. Usually paired with deductibles, sometimes with coinsurance, and common in health insurance. See: Deductible, Coinsurance.
Counter-Cyclical Stock – Stock that performs opposite to the overall market.
Coverdell Education Savings Account (Coverdell ESA) – A tax-advantaged education plan that allows contributions of up to $2,000 annually per beneficiary. Withdrawals are tax-free if used for qualified education expenses. A Coverdell ESA can also be used for private primary and secondary education. Withdrawals must be made by the student by age 30 to avoid penalties, taxes, and other fees.
Credit Life Insurance – A type of insurance usually taken together with new debt that would cover that debt if the borrower were to die.
Credit Rating – Similar to credit score, but applies not only to individuals, but businesses too.
See: Credit Score
Credit Score – A measurement that aggregates an individual’s bill payment history, outstanding debt, and longevity of credit history to numerically quantify their borrowing risk.
Creditor – The entity to whom one owes money.
Current Assets – Cash and cash equivalents.
Current Liabilities – Credit card debt and any other short-term debt due in 12 months or less.
Current Ratio – Measures the ability to pay short-term obligations. This number is found by dividing current assets by current liabilities.
Custodial Account – An account opened up by one person for the benefit of another.
Cyclical Stock – Stock that reacts in accordance with the rest of the economy and the market.
Day Trading – Purchasing and selling securities within the trading day; actively participating in the stock market.
Death Benefit – Payout of a life insurance or annuity to the individual marked as beneficiary by the policyowner.
Decreasing Term Insurance – A policy whose payout amount shrinks throughout the policy’s life.
Deductible – For insurance purposes; amount that an insured pays before insurance begins making payments. For tax purposes; see: Tax Deduction.
Deed – Legal document that transfers ownership of land from one person to another.
Deferred Annuity – An annuity contract that promises to pay at a later date.
Defined-Benefit Retirement Plan – Type of retirement plan where benefits are predetermined based on a formula, regardless of investment performance, thus, the employer is the one that takes the investment risk. These are usually pension plans.
Defined-Contribution Retirement Plan – Retirement plans like 401(k)s where employees contribute to the plan and also bear any investment risks.
Depreciation – The loss of value of a property over time due to normal wear and tear.
Derivative – Financial securities whose value depends on an underlying asset, a common example is stock.
Devaluation – Lowering the value of currency with purpose, usually to remain competitive in the global market.
Discount Bonds – Bond sold for less than its face value.
Discretionary Income – Disposable income; remaining income once mandatory and necessary
payments are met.
Diversification – Mixing of asset types and investments within a portfolio to limit risk exposure.
Dividend – Payments made to shareholders from a company’s earnings.
Dividend Yield – The amount of money a company pays in dividends to stockholders compared to the price of the stock.
Do Not Resuscitate (DNR) Order – Directs medical personnel to not perform CPR on you in an
emergency. Does not cover any other medical directions, only CPR consideration.
Dollar-Cost Averaging – Investment strategy where investments are spread over time in an effort to avoid short-term volatility.
Dread Disease Rider – An addition to a life insurance policy that allows the policyholder to use a part of the death benefit towards the treatment expenditure of the highlighted illnesses. This is usually reserved to cover expensive medical costs.
Durable Power of Attorney – Used to designate an individual to act on someone’s behalf. Durable power of attorneys stay in effect even if the principal was to become incapacitated and unable to act for themselves.
Durable Power of Attorney for Health Care – Also known as medical power of attorney, or healthcare power of attorney; it’s a legal document that gives someone else the power to make medical decisions on your behalf when you’re unable to do so.
Earned Income Credit (EIC) – Tax credit for low income households that lowers taxes due and can also result in a refund.
Earnest Money – Deposit on a home that allows a buyer extra time to conduct financing and property research before finalizing the purchase of a home.
Emergency Fund – Optimally, three to six months of non-discretionary expenses are what encompass an emergency fund.
Employee Stock Options – Compensation that allows an employee to exercise the option to purchase the company’s stock at a specified price for a certain period of time, regardless of the fair market value of the stock.
Endowment Life Insurance – A life insurance with a savings factor used to save for an individual child’s college education. If the individual dies before the policy matures, the child also receives the benefits which can be used for college expenses.
Employee Retirement Income Security Act (ERISA) – Federal law that protects employees’ retirement assets from being misused, and sets standards for how benefits accrue and vest.
Exchange-Traded Fund (ETF) – A fund traded in the stock market that tracks a specific sector or index of the market. Usually cheaper than purchasing individual stocks or mutual funds.
Expected Family Contribution (EFC) – Amount a student’s family is expected to contribute toward a student’s education. Considers family size, number of family members concurrently attending college, income, assets, and uncommon financial burdens.
Extended Repayment Plan – 25 year federal student loan repayment plan available for loan balances over $30,00. Payments for this plan can be fixed or graduated, but are usually lower than both Standard Repayment Plans and Graduated Repayment Plans.
Face Value – The dollar value of a security. With stocks and bonds, it’s the stated value of the security, as opposed to the market value.
Fair Credit Billing Act (FCBA) – Federal law created to protect consumers from unfair credit billing practices. Sets a guideline for how consumers may dispute credit card charges.
Fair Debt Collection Practices Act (FDCPA) – Federal law that limits the actions allowed to debt collectors attempting to collect debt.
Fair Market Value – Value of an asset in the current market.
Federal Deposit Insurance Corporation (FDIC) – An agency set by the federal government that
protects up to $250,000 of assets within a U.S. bank account. Does not protect from stock market losses or other investment losses.
Federal Estate Tax – Federal taxes paid on the transfer of your gross estate to your beneficiaries. There’s different strategies to minimize or eliminate estate taxes. See: Gross Estate
Federal Pell Grant – Only available for students that have not obtained a bachelor’s or other
professional degree. Award qualification and amount is strictly based on the EFC amount.
Federal Perkins Loan Program – Ended September 30th, 2017; loan available for students with
extremely low EFC amounts. These were loans with low interest rates that required repayment nine months after leaving school or dropping below half-time attendance.
Federal Supplemental Education Opportunity Grant (FSEOG) – $100 to $4,000 awarded to students with low EFC amounts, prioritizing Federal Pell Grant recipients and those with the lowest EFC amounts. These grants do not need to be repaid.
Federal Work Study – Part-time jobs provided to students with financial need. This program is available to all; full and half-time, undergraduate, graduate, and professional students.
Fiduciary – An individual or organization that may act on behalf of another person. Requires the individual or organization to legally and ethically act in the person’s best interest.
Financial Industry Regulatory Authority (FINRA) – The regulatory body of brokers and broker-dealer firms within the United States.
Fixed-Rate Loans – A loan whose rate of interest does not change, usually resulting in equal monthly payments throughout the life of the loan, and thus, lower risk of default.
Fixed Annuity – A contract that pays a fixed rate of interest on the funds invested.
Fixed Expenses – In personal budgeting, fixed expenses are usually expenses that will not disappear, or can be hard to change, regardless of employment or income status.
Flexible Spending Account (FSA) – Health savings accounts where pre-tax money is saved and is used for qualified healthcare expenses. This money must be used within a plan’s year or it will be lost, although some plans offer a grace period or a carryover up to a certain amount.
Floater Policy – Covers personal property that is easily moveable usually not within the range of a homeowner’s insurance. This type of policy is used as complementary coverage to what a homeowner’s insurance is unable to provide.
Foreclosure – Occurs when a lender recovers as much as possible from a defaulted borrower by taking ownership of the property and selling it to recuperate losses.
Free Application for Federal Student Aid (FAFSA) – Application sent to colleges of applicant’s choice which is then used to calculate the Expected Family Contribution (EFC) to determine the federal aid the applicant qualifies for. The financial aid is based on the financial need of the applicant, which is calculated by subtracting the EFC from the chosen school’s tuition.
See: Federal Pell Grant, Stafford Loan, Parent Loans for Undergraduate Students (PLUS), PLUS Direct, Federal Perkins Loan Program, Federal Supplemental Education Opportunity Grant (FSEOG), Federal Work Study, Income-Driven Repayment (IDR) Plans.
Front-End Ratio – Also known as mortgage-to-income ratio, is a percentage that indicates how much of an individual’s income is used up in mortgage payments. This is one of the ratios used by lenders to determine how much to lend.
Full Retirement Age – Age one must reach in order to begin receiving full benefits from different plans or Social Security benefits. The age varies by type of retirement plan, or in the case of Social Security benefits, year of birth.
Future Value – The prospective value of an asset based on specific assumptions.
Futures Contract – Contracts for the sale or purchase of a specified commodity or security asset, with a predetermined price and date of sale.
Gap Insurance – Insurance that complements auto insurance when its compensation is unable to cover all of the losses.
Garnishment – Money legally withheld from one’s paycheck, usually claimed by creditors.
Graduated Payment Mortgage (GPM) – Mortgage payments that begin small and grow with time, usually preferred by low-income home buyers.
Graduated Repayment Plan – 10 year federal student loan repayment plan where repayments start lower than the Standard Repayment Plan, but increase every two years.
Graduated Vesting – Vesting schedule where an employee receives an increasing percentage of the benefits an employer has invested in retirement accounts as years of service continue. See: Vesting Schedule
Grantor – Entity or individual that creates a trust. Also known as settlor, trustmaker, or trustor.
Gross Domestic Product (GDP) – A measure of a country’s total market value of goods and services produced. It’s used to measure the economic health of a country.
Gross Estate – Total current value of an individual’s assets at the time of their death.
Gross Income – Total income before taxes and deductions are taken.
Group Term Life Insurance – Insurance available for a group of people, offered by an employer as part of employee benefits.
Growing-Equity Mortgage (GEM) – Type of fixed-rate mortgage that has increasing monthly payments. The increased payment results in faster principal payments, a shorter loan, and usually, saving on interest.
Guarantor – Someone who promises a payment will be satisfied in case of default from the borrower, using their own assets as collateral. Also known as surety.
Health-Care Proxy – Functions the same way as a healthcare power of attorney; this is a legal
document that allows another person to make medical decisions on your behalf when you’re unable to make such decisions.
Health Maintenance Organizations (HMOs) – Health insurance providers that create a network of doctors that are then all available under the provider’s umbrella to the individuals covered.
Health Reimbursement Arrangement (HRA) – Plan provided by employers that reimburse employees for qualified medical expenses, and sometimes insurance premiums too.
Health Savings Account (HSA) – Savings account where pre-tax money is placed and used for
qualifying medical expenses. Can help lower overall healthcare costs, but is only available to those in a High- Deductible Health Plan (HDHP).
See: High-Deductible Health Plan
Hedge Fund – Investments available to accredited investors that look to create returns through active investment. These funds are less regulated and more expensive than traditional investment vehicles. See: Accredited Investor
Heir – Individual that is to legally receive an asset from another person once they die.
High-Deductible Health Plan – HDHP; a health plan with higher out of pocket costs. These types of plans tend to have a lower monthly premium, but higher deductibles, but they’re usually combined with an HSA in order to save by paying health costs with pre-tax money.
See: Deductible, Health Savings Account
High-Yield Savings Account (HYSA) – A savings account with a higher interest rate than regular savings accounts. While this type of account offers a higher return than a basic savings account, it doesn’t replace investments.
HO-1 – Basic home insurance, only insures the structure of a home from specific things listed within the policy.
HO-2 – Also known as a named peril policy; home insurance that protects a home and personal property from things specifically listed in the policy.
HO-3 – Most common type of homeowner’s insurance, also the most comprehensive.
HO-4 – Renter’s insurance. Covers personal property and can also cover liability and temporary living expenses if required.
HO-6 – Condominium insurance. Covers personal property and liabilities.
HO-8 – Homeowner insurance reserved for homes made with materials that are hard to acquire, or for those considered important architectural landmarks.
Home Equity – The value of a home based on the homeowner’s total possession of the home. Equity increases when the market value of the property goes up, and if a mortgage exists, when it’s paid down.
Home Equity Line of Credit (HELOC) – A line of credit received with home equity used as collateral. See: Home Equity
Home Equity Loan – A lump sum loan where one’s home equity is used as collateral.
Se: Home Equity
Homeowner Association (HOA) – A community of homeowners in an area that sets rules for properties and the people that live there. When purchasing a home, one’s automatically enrolled in their local homeowner’s association.
Housing Ratio – One of the metrics used by lenders to determine loan amounts for borrowers. A healthy housing ratio is 28% or less, and is calculated as monthly housing costs: principal, interest, property taxes, and HOI, divided by monthly gross income.
Hyperinflation – This is the extreme growth of the price of economic goods and services within a time frame. It occurs when inflation occurs at a growth of 50% or more within a month. See: Inflation
I Bond – U.S. government bonds that offer a combination of fixed interest rate and inflation protection.
Immediate Annuity – The opposite of a deferred annuity, this type of annuity offers income immediately after the annuity contract is created. See: Annuity
Income-Based Repayment (IBR) Plan – Federal student loan repayment plan where monthly payments are usually 10% of discretionary income with debt forgiveness after 20 years of repayment. Debt forgiven is considered taxable income in the year it was forgiven. PLUS loans are not eligible; the only exception being PLUS Direct.
Income-Contingent Repayment (ICR) Plan – Federal student loan repayment plan where monthly payments are the lesser of; repayment amount based on your income paid over 12 years, or 20% of discretionary income divided by 12. Debt is forgiven after 25 years, with the amount forgiven considered taxable income the year it’s forgiven.
Income-Driven Repayment (IDR) Plans – Federal student loan repayment plans for those looking to lower monthly payment amounts. Not available for parent PLUS loans.
See: Income-Based Repayment (IBR) Plan, Pay as You Earn Repayment Plan (PAYE), Revised Pay as You Earn Repayment Plan (REPAYE), Income-Contingent Repayment (ICR) Plan.
Indemnity Health Insurance – Offers the highest flexibility of doctor and health specialists, but comes at a higher cost.
Index Fund – A type of fund created for matching a specific market index. They usually have lower costs and risks when compared to investing in individual stocks. See: Exchange-Traded Fund, Mutual Fund
Indexed Annuity – A type of annuity that bases its interest rate on a specific market index.
Individual Retirement Account (IRA) – Tax-advantaged retirement account used by individuals for investing and saving towards retirement. See: Roth IRA, SEP IRA, SIMPLE IRA.
Inflation – The devaluation of a country’s currency over time.
Inflationary Risk – The risk that inflation will cancel or even undermine investment growth.
Inheritance Tax –Taxes paid, on the state level, on the amount received in an inheritance.
Insolvent – The position of being unable to pay debts, or when total debt exceeds total assets.
Installment Credit – Credit where fixed payments over a set period of time are used to repay the total loan.
Interest-Only Mortgage – Type of loan where interest payments are made first, and principal payments are made subsequently either in installments or as a lump sum.
Internal Revenue Code – Federal tax law and regulations.
Internal Revenue Services (IRS) – Government agency responsible for enforcing tax law and collection of taxes.
Intestate – Refers to a deceased individual without a will or any other document that states how their assets are to be distributed.
Investment Grade – Used on bonds; a rating system that defines a bond’s risk of default.
Investment Policy Statement – A document that establishes a client’s objectives and a general guideline on how the portfolio manager should reach those goals.
Irrevocable Living Trust – A type of trust that cannot be modified once created, but creates certain protections and tax advantages if used correctly.
Itemized Deductions – Expenses that can be subtracted from adjusted gross income in replacement of the standard deduction in order to reduce taxes owed. See: Standard Deduction
Joint-and-Survivor Annuity – Annuity contract that pays income until the second person in the contract passes. These are usually lower payments, but last longer than other annuities.
Joint Debt – Debt owed by co-borrowers. See: Co-Borrower
Joint Tenants with Rights of Survivorship (JTWROS) – Ownership type where all owners have an equal right to the asset, and ownership passes to the survivor(s) in the event of an owner’s death.
Jumbo Certificate of Deposit – A CD that requires a larger deposit, in return of a higher interest rate paid to the purchaser. See: Certificate of Deposit
Jumbo Loan – Loans usually used for luxury property purchases. These types of loans are not regulated by either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.
Junk Bond – High-interest, high risk bonds. Issued by struggling companies, these types of bonds offset their high probability of defaulting with lucrative interest rates.
Keogh Plan: A Keogh Plan is a type of retirement plan for self-employed individuals. Contributions to a Keogh must come from net earnings from self employment.
Kiddie Tax: found in Internal Revenue Code § 1, and states that some types of unearned income by a child are taxed at their parent’s marginal tax rate, regardless of if they are a dependent of the parents.
Land Contract – A contract between a buyer and seller for a piece of land. These contracts usually lay out financing terms and conditions of the sale.
Lapsed Policy – When a policy lapses, all the coverage or benefits of that policy are henceforth
terminated. This can occur through a lack of funds in a policy or the end of a policies life.
Large-Loss Principle – Refers to the idea of choosing to insure large, unlikely risks over small, more likely ones.
Layaway – Layaway allows an individual to reserve an item while making payments over time to eventually purchase the item and take possession of it.
Lease – A lease is a contract that allows one party to borrow an item from another party for a specified period. Some lease contracts have options to buy out the leased property for a principal amount minus the amount in payments made.
Lender Buy-Down Mortgage – A mortgage borrowing technique where payments are made to the lending company in order to receive a lower interest rate at a future date.
Letter of Instruction – A document left by an individual that gives direction to anyone settling their estate after death. This document is not legally binding, rather an instruction sheet.
Level-Premium Term Insurance – Insurance coverage where premiums stay constant throughout the life of the plan while coverage increases throughout the life of the plan.
Liabilities – Anything that an individual or business is obligated to pay or perform.
Liability Insurance – Liability insurance protects an individual or company against any claims resulting from injury and damage to people or property.
Lien – A legal right to property or assets used as collateral for a debt.
Lifetime Learning Credit – A tax credit for students and parents that allows them to deduct up to $2,000 per year if under the income threshold.
Limited-Pay Whole Life Insurance – Life insurance that is paid out in full to a beneficiary upon the death of the policyholder.
Limited Power of Attorney – an authorization given to an account manager which allows the account manager to perform account related functions on behalf of the client.
Line of Credit – A credit company can extend a line of credit to a borrower which allows the borrower to use money covered by the lender so long as the borrower pays back the principal plus interest.
Living Trust – A document that is established during an individual’s lifetime that gives direction as to where their assets will go upon death.
Living Will – A legal document that outlines medical decisions to be made by doctors when you’re incapacitated and unable to make such decisions yourself.
Load Funds – A load fund is a mutual fund that comes with a commission charge for the managing brokers.
Loan-to-Value (LTV) Ratio – The LTV is used to determine the amount of down payment required to purchase a property. Most lending firms require at least a 20% down payment in order to acquire a mortgage loan.
Long-Term Care Insurance – Insurance coverage for people over age 65 that provides care for those who require constant supervision. Long-term care insurance offers more flexibility than medicare and other subsidised programs.
Long-Term Goals – Goals that have a date horizon more than 5 years in the future.
Long-Term Liability – Long-term liabilities are obligations that are due more than one year in the future. Long-term liabilities are classified differently than ordinary liabilities on balance sheets.
Lump-Sum Distribution – A one-time distribution of a lump sum payment as opposed to a distribution schedule, often subject to specific tax penalties. Things such as winning the lottery and pension plans often offer lump sum distributions.
Marginal Tax Rate – The marginal tax rate is the amount taxed on every dollar over the amount specified in an individual’s tax bracket.
Marital Deduction – The unlimited marital deduction allows a spouse to transfer an unlimited amount of money at any time free of tax. A common use of this tool is when one spouse dies and their estate is able to be transferred to the other spouse without a gift tax being applied.
Market Economy – A type of economy where there is unrestricted competition between firms and businesses and where supply and demand dictate production and price.
Market Risk – Investment risks that are not controllable by the investor and affect all asset lasses. These include: recession, interest rate changes, and political or socio economic turmoil.
Market Timing – A market trading strategy where investments are moved around different asset classes based on predictive methods such as technical analysis and financial indicators.
Marketability Risk – The risk that an individual or firm will have trouble selling or paying back debt on an asset without accruing a loss on the sale.
Matching Contributions – Some companies will offer matching contributions for employees contributing to a 401(k) or sponsored retirement plan.
Maturity Date – Maturity date is the date when the principal on any outstanding debt becomes due to the issuer and any interest payments cease to continue.
Maximum Taxable Yearly Earnings (MTYE) – If employed, the MTYE is the maximum social security tax withdrawn from salary earnings. This is usually handled by an individual’s employer but it is the duty of the employee to report it in their tax return.
Medicaid – A program in the US that provides medical coverage to families and individuals with low income that are unable to afford their own private medical plan. Medicaid covers long-term care, hospital stays, and health related costs.
Medicare Part A – Medicare Part A covers inpatient services such as hospital stays, hospice care, and nursing home costs. For most Americans, Part A is free because they paid medicare tax during their working years.
Medicare Part B – Medicare Part B covers outpatient services such as ambulance services, lab work, medical equipment, and doctors visits. Unlike Part A, Part B costs a monthly premium to the policyholder.
Modern Portfolio Theory (MPT) – A theory established in 1952 that looks to maximize expected returns for risk averse investors through a given level of market risk.
Modified Adjusted Gross Income (MAGI) – Used to determine whether one qualifies for certain tax benefits, from education tax benefits, to contributing to a Roth IRA. MAGI is your adjusted gross income with some exemptions and deductions added back.
Modified Life Insurance – Similar to an ordinary life insurance plan except that in the first three to five years the premiums are lower than a standard plan and in the remaining years the premium is higher.
Money Market Deposit Account – An account at a bank or credit union that accrues interest on invested capital.
Money Market Mutual Fund – A mutual fund that invests in short-term instruments such as cash and cash equivalents. This allows investors to have high liquidity with minimal risk and generally small returns.
Monte Carlo Analysis – An electronic algorithm that allows financial planners to run any number of simulations to assess the probability of success of various financial situations.
Mortgage-Backed Security – An investment composed of multiple home loans sold by the banks who issued the loans. Similar to a bond both in payments and credit classification and ratings.
Mutual Fund – A fund composed of money of multiple investors that is managed by professional money managers. Mutual funds invest in many different securities such as stocks, bonds, money market instruments, and other assets.
NASDAQ – One of the newer stock exchanges; electronically based and includes 3,000 firms, including some of the biggest tech companies in the country.
NYSE – The New York Stock Exchange is the world’s largest equities-based stock exchange in the world. The NYSE hosts some of the largest and oldest companies in the US.
Net Income – Found by taking revenue and subtracting cost of goods sold, expenses, interest,
depreciation, taxes and other costs.
Net Worth – Found by taking total assets and subtracting total liabilities; reflects the total wealth of an individual, company, or household.
No-Load Fund – A type of mutual fund where shares are sold without a commission charge by the managing firm. Since there is an absence of fees or charges, all of the money invested by an investor is working for the investor.
Non-Discretionary Expenses – Expenses that can’t be ridden of regardless of employment status; e.g., utility bills, mortgage payment, car loan, food, and insurance premiums.
Open Enrollment – An annual window of time where a health insurance provider allows changes or modifications to an individual’s plan. The federal open enrollment period runs from November 1st to December 15th.
Opportunity Cost – The potential benefits missed by choosing one alternative over another. Opportunity costs are not seen so one must be careful to evaluate them when weighing alternatives.
Options – A way to buy or sell a derivative of a security, such as a stock, at a set price. A call option allows the holder of the option to buy the asset at a stated price while a put option
allows the holder of the contract to sell an asset at a stated price.
Ordinary Income Assets – Assets that can generate income that can be taxed at a federal income level if sold for a gain at time of maturity.
Own-Occupation Policy – A type of disability insurance that covers workers who become unable to perform in their specific occupation, regardless of whether they’re able to perform other types of jobs.
Parent Loans for Undergraduate Students (PLUS) – Loan given to a student’s parents to pay for a student’s education. Eligibility is determined by the parent’s credit score.
Pay as You Earn Repayment (PAYE) Plan – 20 year student loan repayment plan with monthly
payments of generally 10% of discretionary income. Only available to Direct Federal Loan and PLUS Direct students.
Payday Loan – Some lenders offer a “payday loan” which is a loan for a portion or entirety of the borrowers next paycheck. These loans are often offered at extremely high interest rates and provide short- term capital.
Payment in Arrears – Payments that are to be made after a service is rendered, common with utility bills like gas and electricity.
Pension – A type of retirement plan where an employer makes contributions during the employees tenure and those contributions are then distributed to the employee as a subsidised income after retirement.
Personal Liability Insurance – Insurance that provides protection to an individual from claims resulting from damage or harm to another individual or their property.
Personal Loan – A loan to an individual that can be used at the discretion of the borrower.
Physician Orders for Life-Sustaining treatment (POLST) – A form signed by both patient and
physician, physician assistant, or nurse, that allows patients to direct medical staff on how to approach said patient’s life-sustaining treatment.
PLUS Direct – Grad PLUS Loan for Graduate Students; loan available for graduate or professional degree seeking students that are enrolled at least half-time. Eligibility is dependent on the student’s credit score. Payments are required six months post-graduation or leaving school, or if dropping below half-time enrollment. Interest for this loan begins accruing when funds are received.
Portfolio – An assorted mix of stocks, bonds, and other real assets that is individualized for each person and tailored for their needs and interests.
Power of Attorney – A written statement by an individual allowing someone else to represent them in financial, private, and legal affairs.
Predatory Loan – The practice of lending money to individuals who are not likely to be able to pay it back in the time agreed upon in the contract. The lending company looks to take equity from the borrower and as a result, ruins the credit score of the borrower. Predatory lenders generally target minorities and residents in low income neighborhoods.
Preferred Stock – Classified higher than common stock and therefore receive preferential dividend status and in the event of liquidation, preferred stockholders are paid back before common stockholders.
Prepaid Tuition – A type of 529 savings plan that allows donors to contribute and fund a child’s college savings plan.
Prime Rate – The lowest interest rate that a bank can loan money at; usually reserved for the most credible borrowers.
Principal – The initial amount of a loan or debt without interest.
Pro Rata – Meaning “equal proportions or proportional”
Progressive Income Tax – Based on the taxpayer’s ability to pay; lower income brackets get a lower tax rate and higher earners are placed in a higher tax bracket.
Qualifying Life Event (QLE) – A big life event that can change health insurance coverage. QLEs may allow you to restructure a health insurance plan or sign up for a new one outside of open enrollment periods.
Real Estate Investment Trust (REIT) – Built like a mutual fund, REITs pool together the capital from multiple real estate investors. REITs allow individuals to invest in real estate without the burden of managing or financing physical properties.
Recession – A cycle of poor economic conditions; typically reflected by shrinkage in GDP and a downturn in financial markets.
Refinance – A restructuring of the terms and conditions of a loan or mortgage, typically at a lower interest rate for the borrower.
Reinvesting – Placing the profit on an asset back into the same place.
Repossession – When an individual fails to make payments on an asset such as a car, the bank or lender may repossess the item to cover the value of the outstanding loan.
Reverse Mortgage – Effectively a loan against the value of one’s residence. Unlike a traditional
mortgage, a reverse mortgage requires no payments but rather the sum of the loan is due at the homeowner’s life or when the house is permanently sold.
Revised Pay as You Earn Repayment (REPAYE) Plan – A repayment plan structured around interestas a percentage of annual income, usually divided over 12 months.
Risk-Seeking – Investors with a high risk tolerance; those willing to forego capital stability for potentially higher returns.
Risk Averse – A conservative investment outlook, preferred by those who value preservation of capital over potential higher earnings.
Roth 401(k) – In a Roth plan contributions are made with after-tax dollars, and distributions are tax-free as long as: the account is five years or older and withdrawals are made; if disabled, on or after death, or after reaching age 59½.
Roth 403(b) – In a Roth account, employee contributions are made with after-tax dollars, and thus, withdrawals are tax-free. See: 403(b) Plan
Roth IRA – An individual retirement savings plan that is tax-free upon distribution. Yearly contributions are maxed out at $6,000/year unless over the age of 50, then the max contribution is raised to $7,000/year.
Safe Harbor 401(k) – Similar to a Traditional 401(k), however, employer contributions are fully vested. See: Traditional 401(k)
Savings Ratio – Percentage being saved for retirement. Benchmarks are generally 10-12% of gross income for those under 32, and 20-25% for those starting after the age of 40. The ratio is found by adding annual savings and employer contributions, then dividing this amount by annual gross income.
Section 1231 Assets – Defined in the IRS code as a real or depreciable business property that is held for more than 10 years.
Secured Debt – A loan where the borrower has some kind of collateral to pledge to the loaner. This asset-backed loan is secured because it has secured collateral.
Security – A financial instrument that is negotiable and has some type of monetary value. There are generally three types of securities: equity, debt, and hybrid.
SEP IRA – A type of IRA that allows employers to contribute to employees’ accounts. These can be established by an individual or an employer. It also has a higher contribution limit than traditional IRAs, and all employer contributions are vested immediately.
See: Individual Retirement Account, Vesting Period
Series EE/ Series E Bonds – Government savings bonds that are low risk and guaranteed to double in value over 20 years of holding.
Short Sale – Occurs when a homeowner sells their property for a value lower than the remaining mortgage at the time of sale.
SIMPLE 401(k) – Similar to Traditional 401(k). However, only available to employers with 100 or less employees that received compensation of $5,000 or more the previous calendar year. Employer contributions are fully vested.
See: Traditional 401(k)
SIMPLE IRA – Similar to SEP IRAs, but can only be established by an employer, and with lower catch-up contributions limits.
Social Security Disability Insurance (SSDI) – Similar to SSI however SSDI is only available to
individuals who have paid into Social Security for 10 or more years.
Standard Deduction – A set portion of one’s income excluded from taxation in order to reduce taxes owed. The option of a standard deduction or itemized deduction is available when filing taxes. See: Itemized Deduction.
Supplemental Security Income (SSI) – A government program that distributes supplemental income to people who are unable to work due to a disability or those over the age of 65.
Stafford Loan – Federal student loan where repayment is delayed until six-months after leaving school, or when becoming a part-time student.
See: Subsidized Stafford Loan, Unsubsidized Stafford Loan
Student Loan Deferment – Allows you to stop or reduce payments due on student loans for a certain period of time, whether interest continues to accrue depends on the type of loan.
Student Loan Interest Deduction – Allows an individual with student loan debt to subtract up to $2,500 of the interest paid on qualified student loans.
Subsidized Stafford Loan – For this type of loan, the federal government pays interest on the loan while the student attends school, for six months after leaving, and during deferment periods. This type of loan is only given on a need basis, based off the EFC amount.
Sunk Costs – Refers to money that has already been spent and cannot be recovered.
Supplemental Health Policy – A health coverage policy that covers things beyond a standard health coverage policy. Examples of this are dental and vision plans.
Systematic Risk – Risk that is inherent in the market and cannot be diversified away. Things such as market fluctuations and recessions are examples of systematic risk.
Target Retirement Fund– Funds that are established like ETFs, however the target date is set as the client’s planned retirement age. These funds become more conservative as the fund gets closer to its target date in order to protect the retirement funds of its investors.
Tax-Advantaged – Some types of personal accounts are considered “tax-advantaged”, meaning they are given tax-deferred, tax-reduced, or tax-free status. Common examples are municipal bonds, 401(k) or 403(b) accounts, and 529 educational savings plans.
Tax-Deferred Savings Plan – Allows the owner of the plan to contribute to it tax-free, and the money is only taxed when withdrawn, typically after retirement age. This is advantageous because the individual will generally be in a lower tax bracket after retirement compared to when they were making contributions.
Tax Credit – The amount of money that an individual is allowed to subtract from the federal and state income taxes that they owe.
Tax Deduction – A reduction in one’s income that is taxable and are related to outside expenses that are generally related to outside income.
Taxable Income – The amount of income that is taxable by the government. It generally includes all income but can be reduced by expenses and deductions.
Tenants in Common – An agreement where two individuals share co-ownership of a property without a right of survivorship. This allows both individuals to name their own beneficiaries for their stake upon death.
Traditional 401(k) – In a traditional 401(k) plan, employees fund the account with their pre-tax wages, deducting the contribution from their payroll. If an employer also contributes, their contributions may have a vesting schedule.
Trust – A fiduciary relationship between a trustor and a trustee where the trustee guarantees to hold and protect the trustor’s assets and ensure they are distributed in the event that the trustor dies or becomes incapacitated.
Unearned Income – Unearned Income is any income that is not earned through employment wages. For example, any income earned from property is considered unearned income because it was not a result of direct employment.
Uniform Gift to Minors Act (UGMA) – Similar to an UTMA, a parent or guardian can transfer assets to a minor once they reach the age of 18 at a tax-free or reduced tax rate.
Uniform Transfer to Minors Act (UTMA) – allows a minor to receive gifts at age 18 without a guardian overseeing the transfer. Once the minor reaches 18 the gift becomes their property and is irrevocable by the guardian.
Unmanaged Fund – An unmanaged fund is a fund that is built to match parts or a whole financial market index. These funds allow one to buy partial shares in companies that make up larger markets and are usually less risky and volatile than buying individual securities.
Unsecured Loan – An unsecured loan is any loan that is not backed by a guarantor or protected by assets in event of default or bankruptcy.
Unsubsidized Stafford Loan – With this type of federal student loan, interest begins accruing when the applicant receives the funds. While not necessary to pay during deferments, the six month period after attending school, or while attending school, interest will continue to accrue.
Unsystematic Risk – Risk that is uniquely specific to a firm or industry and can be diversified away by investments in other industries.
U.S. Savings Bond – A U.S. Savings Bond is a bond offered by the U.S. federal government to help fund federal spending. Returns on U.S. Savings Bonds are generally however they have the backing of the U.S. government so there is almost a zero percent chance that they default.
Variable Annuity- a type of annuity where the value fluctuates based on the underlying assets (mainly mutual funds) that make up the annuity portfolio.
Variable Expenses – Unlike fixed expenses, variable expenses are not set and depend on daily
spending habits and decisions. Examples of variable expenses are eating out, shopping, or going to the theater.
Variable Rate – Any rate that can be altered due to a change in interest rates or other economic variables.
Vesting Period – A vesting period is described as the amount of time that an employee has to be working for an employer in order to own shares or options of that company’s stock. Vesting periods come in a wide variety of time periods depending on if they are for retirement benefits, employee pay, etc.
Vesting Schedule – An incentive program for employees of a company that offers shares or options of the company’s stock in exchange for loyalty to the company in terms of length of tenure.
Will – A will is a legal document created by an individual and their lawyer that spells out where and to whom the individual’s assets will transfer upon death. Items typically included in a will are property, investments, and cash assets.
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Yield – A yield is the realized revenue generated by an asset over a specified time expressed as a percentage based on the amount initially invested.
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