Financial Terms Glossary

Employer-sponsored retirement plan allowing pre-tax contributions up to $23,500 (2025), often with employer matching. Named after IRS tax code section.

The process of paying off debt through regular payments that cover both principal and interest, with more going to interest early in the loan.

Additional money added to your investment account each year beyond the initial investment. Regular contributions significantly boost long-term growth.

The percentage gain or loss on an investment over a 12-month period, including dividends and capital appreciation. Used to project future growth.

Annual Percentage Rate includes not just interest rate but also loan fees, providing the true cost of borrowing money annually.

The strategic distribution of investments across different asset classes (stocks, bonds, real estate) to balance risk and return based on goals and timeline.

Interest calculated on the initial principal and accumulated interest from previous periods. Einstein allegedly called it "the eighth wonder of the world."

How often interest is calculated and added to your account balance. More frequent compounding results in slightly higher returns over time.

The percentage of available credit you're using, significantly impacting credit scores. Keep below 30%, ideally under 10%.

Debt repayment strategy prioritizing highest interest rate debts first to minimize total interest paid over time.

Debt repayment method focusing on smallest balances first for psychological momentum, potentially costing more but increasing success rates.

Monthly debt payments divided by gross monthly income, used by lenders to evaluate borrowing capacity and financial stability.

The amount you pay out-of-pocket before insurance coverage begins. Higher deductibles typically mean lower monthly premiums.

Spreading investments across different assets, sectors, and geographies to reduce overall portfolio risk without sacrificing expected returns.

Investing a fixed amount regularly regardless of market conditions, reducing the impact of market volatility on your average cost per share.

Liquid savings covering 3-6 months of essential expenses, providing financial stability during job loss, medical emergencies, or major repairs.

The annual fee charged by mutual funds or ETFs, expressed as a percentage of your investment. Lower is better for long-term returns.

Savings accounts offering significantly higher interest rates than traditional banks, typically through online banks with lower overhead costs.

The starting amount of money you invest, also called principal. This is the base amount that will grow through compound interest over time.

The ratio of loan amount to property value, used by lenders to assess risk. Higher LTV ratios typically require mortgage insurance.

Private Mortgage Insurance required on conventional loans with less than 20% down payment, protecting lenders against default risk.

Prepaid interest paid at closing to reduce the mortgage rate. One point equals 1% of loan amount and typically reduces rate by 0.25%.

IRS-mandated withdrawals from traditional retirement accounts starting at age 73 to ensure taxes are eventually paid on deferred income.

Individual retirement account funded with after-tax dollars, allowing tax-free growth and withdrawals in retirement. No required distributions.

Fixed dollar amount that reduces taxable income, claimed by taxpayers who don't itemize deductions. Adjusted annually for inflation.

The percentage rate at which your last dollar of income is taxed. The US uses progressive taxation with marginal brackets.

Temporary life insurance providing death benefit for specific period (10-30 years). Much cheaper than permanent life insurance.

The process by which employees earn the right to employer retirement contributions over time, preventing job-hopping to collect benefits.