Financial Terms You Should Know

Finances are a basic part of everyday life. So why is the vocabulary so confusing and convoluted? 

To get your money matters in order, from assets to yields, here are the basic financial terms to know. 

• 1099 – The IRS 1099 form is a series of informational tax documents you should receive from any individual or entity that pays you money. There are different types of 1099s for independent contractors, dividends, IRA withdrawals and others.

• 401(k) – This employer-sponsored retirement savings plan grants employees a tax break on their financial contributions, which are deducted automatically from the employee’s paycheck and invested in their choice of funds. 

• Adjusted gross income – Used to calculate your annual income tax liability, adjusted gross income is your yearly gross income (e.g., salary, dividends, passive income) minus adjustments to income like alimony, HSA deductions, educational expenses and self-employment fees, among others.

• Amortization – Often applied to large debts like mortgages, amortization is the process of separating the debt into equal installments to be paid over time. 

• Annual percentage rate (APR) – APR is the total interest amount you’ll owe during the year, expressed as a percentage of your loan balance. This figure includes the principal and additional fees, but not any compounding interest. 

• Annual percentage yield (APY) – Expressed as a percentage of growth, the annual percentage yield is the rate of return you’ll see on an investment in a year, including compounding interest. 

• Annuity – An annuity refers broadly to a regularly occurring series of payments. Usually, annuities are long-term insurance contracts that provide a source of income for retirees. You invest monthly, then receive a fixed stream of payments in return.

• Appreciation – A good sign for investors, appreciation means the value of an asset has increased with time.

• Asset – An asset is any resource an individual or corporation owns that has financial value, whether it’s cash, stocks, bonds, mutual funds or property.

• Audit – An audit is an independent examination that confirms whether an organization’s financial records are accurate and properly documented. It can be conducted internally by the organization's own staff, externally by certified public accountants or by the IRS.

• Balance – Dependent on context, a balance could mean:

• The available funds in an account, usually checking or savings. 

• The amount of money still to be paid on an account or loan, used in accounting and in reference to a credit card or mortgage balance. 

• Balance transfer – Used as a frequent form of debt consolidation, a balance transfer is when you move your debt from one card or account to another (usually one with lower interest rates). 

• Bankruptcy – This last-resort legal declaration is a way for people with insurmountable debts to start over financially by either liquidating available assets or creating a debt reorganization plan. How does bankruptcy work?

• Beneficiary – Anyone who profits from something is a beneficiary of that thing. Often, beneficiaries are receiving disbursements from life insurance policies, retirement funds, wills and trusts.

• Bonds – For the borrower, bonds are massive, sometimes multi-part loans granted to large-scale corporations and governmental entities. For bondholders, they’re fixed-income investments with predetermined interest payments from the organization. 

• Broker – A broker facilitates transactions between buyers and sellers, and profits by taking a commission for each deal. 

• Budget – Made by individuals and businesses alike, budgets are spending plans that estimate both expenses and revenues over a set period of time. A budget is just a plan for your money and can be flexible based on your financial situation.

• Capital Gain – As an asset increases in value over time, the capital gain is the profit made upon its sale, usually treated as taxable income.

• Capital Loss – For an asset that has depreciated in value, the capital loss is the financial loss incurred upon the sale of the asset — the difference between the original purchase price and its sale price. 

• Cash Flow – The money coming into and out of a business each month — its revenue and expenditure, respectively — is considered the company’s cash flow.

• Certificate of Deposit (CD) – Like a temporary savings account, a certificate of deposit is a financial product with a fixed term and a fixed interest rate. At the end of the term, you withdraw your original investment plus interest. Is a CD the right investment for you?

• Charge – Used in many different contexts, a finance charge usually refers to the cost of borrowing money on a line of credit. The charge can include flat fees, accrued interest and transaction fees.

• Closing Date – Used almost exclusively in reference to buying property, the closing date is when the once-pending sale is officially complete, and the associated loan begins accruing interest.

• Collateral – When securing a loan, the lender will request some form of collateral — usually property or other assets — as a security measure. If the borrower were to default, the lender would seize their collateral.

• Collections – There are several meanings of the word collections depending on its context:

• The receipt of payment, either for goods or services or to repay a loan.

• The conversion of accounts receivable into cash.

• The shift of past-due payments to a collection agency, which will attempt to recover the funds owed to the business or lender.

• Commission – A commission is compensation granted either in addition to regular salary for exemplary performance or as a service fee for an intermediary like a stockbroker or investment banker.

• Commodities – Interchangeable with other resources of the same type, commodities are basic goods like oil, silver, gold or corn that have an equivalent value across the market. 

• Compound interest – Referred to colloquially as “interest on interest,” this is the interest on a loan or investment based on the original capital as well as the interest that has accumulated on said capital. When does compound interest work for you and when does it work against you?

• Cosigner – A cosigner is another person — often a family member or partner with solid income and credit history — that shares the responsibility of loan repayment with you as a backup plan. By guaranteeing the loan, they’re responsible for repaying it if you fail to do so.

• Credit – Like a loan, credit is a contractual agreement wherein the borrower gets money, goods or services in exchange for repayment (plus interest, usually) to the lender at a later date. Learn how to use credit wisely to meet your financial goals.

• Credit history – This provides a record of a borrower’s financial history, including existing lines of credit and repayment habits. If your credit history isn't great, can you improve it?

• Credit report – Essentially a summary of your credit history, a credit report includes personally identifying details, your existing credit cards and loans, your total debts and the timeliness of your payments.

• Credit score – Based on the details of your credit report and other information, your credit score is a number between 300 and 850 that indicates your creditworthiness. Above 700 is considered good to exceptional.

• Credit utilization – Referring to either an individual card or across all accounts, credit utilization is the percentage of your credit currently in use, i.e., the ratio of your outstanding balance to your credit limit. Find out why credit utilization is so important to your credit score.

• Debt – Usually referring to money, debt is the amount owed by one party to another. Common debts include student loans, mortgages, business loans and credit cards. Learn about different ways to pay off debt.

• Debt-to-Income (DTI) Ratio – An indication of how much you owe versus how much you earn, your (DTI ratio is calculated by dividing total monthly debt payments by total monthly income, expressed as a percentage.

• Deductible – Short for tax-deductible, these are certain predetermined expenses that can reduce an individual or business’ adjusted gross income, thereby reducing their total taxes owed. 

• Default – When a borrower fails to pay back their debt according to the agreed-upon terms, the lender deems that their loan is in default. A defaulted loan may be sent to collections, with serious consequences to the borrower's creditworthiness to follow.

• Deferment – Beyond the general act of delaying or putting something off, loan deferment is a temporary pause on making payments. Sometimes, as with subsidized student loans, interest stops accumulating during deferment, too.

• Dependent – Anyone for whom you’re financially responsible (paying for at least 50% of their support) is considered a dependent for tax purposes. Dependents can be children, spouses, elderly parents or other relatives.

• Depreciation – The opposite of appreciation, depreciation is when the value of an asset declines over time. It’s also an accounting method that involves writing off portions of an expensive purchase over the asset’s useful lifespan. Depreciation affects businesses and average consumers.

• Deposit – The act of placing money in the hands of another entity, a deposit can refer to the funds kept in a bank account, the initial payment to secure an expensive asset like a home, or fixed-term investments.

• Discretionary income – Also called disposable income, this refers to the available cash flow left over after necessary expenses and deduction of taxes. How can you make your discretionary income improve your financial situation?

• Diversification – In investment management, diversification involves allocating funds to several different investment types and vehicles as a risk reduction strategy. It’s the financial opposite of “putting all your eggs in one basket.”

• Dividend – Dividends are regular distributions of profit from a company to its shareholders.

• Down payment – Usually reserved for expensive purchases like cars and homes, a down payment is an initial upfront payment that represents a percentage of the total purchase price. How does the amount of a down payment affect a loan?

• Earned income – Taxable earned income is money you worked for, including employee compensation and self-employment net earnings, as well as union strike benefits and disability retirement benefits before reaching retirement age.

• Equity – Equity is an individual’s degree of ownership in a company. Equity is also measured by subtracting the liabilities (debts) from an asset’s value to determine its overall worth.

• Expenses – Applied to individuals and businesses alike, expenses refer to all the necessary costs of operations, whether that’s rent and utilities for an individual or employee salaries and factory equipment for a company.

• Federal Reserve – Often called “the Fed,” the Federal Reserve is the central bank of the United States, created to stabilize the country’s economic system.

• Flexible spending account (FSA) – An FSA is a tax-advantaged savings account arranged through your employer. After contributing regularly to your FSA, you can then use those funds to pay for medical expenses with tax-free dollars.

• Finance Charge – Either a flat fee or a percentage of the amount borrowed, a finance charge is the cost of obtaining and using credit. This includes interest, service fees, late fees and other expenses.

• Fixed Expenses – Usually larger payments, fixed expenses stay the same regardless of income for an individual or profits for a business. They include rent or mortgage payments, utility bills and other loan repayments.

• Forbearance – Another form of repayment relief, forbearance is an agreement that grants the borrower a temporary pause on mortgage payments to avoid foreclosure. If you're having trouble paying your debts, forbearance might be an option to consider.

• Forgiveness – Forgiveness is when a lender relieves you of your obligation to pay back a loan, either in part or in full. 

• Foreclosure – If a borrower defaults on their mortgage loan, the lender can attempt to recover their financial losses by repossessing the home in a legal process called foreclosure.

• Grace Period – A grace period is a time of financial relief from debt repayment. For example, the days after a credit card’s due date before any penalties are applied or the several months after graduating wherein no student loan payments are required are both examples of a grace period. 

• Gross Income – This is how much money you earn before taxes and other deductions are taken out.

• Guarantor – The guarantor of a loan is the person responsible for repaying the borrower’s debt if they fail to do so. Unlike a cosigner, the guarantor only becomes financially liable after the lender has exhausted all collections options from the primary borrower.

• Health savings account (HSA) – An HSA is a savings account specifically set aside for certain medical expenses. The funds are set aside pre-tax, which can save you money on deductibles and coinsurance.

• Home equity line of credit (HELOC) – A HELOC is a revolving line of credit, much like a credit card. However, this type of credit requires that you use your home as collateral for your loan, which could result in the loss of your house in the case of non-payment of the loan.

• Insufficient Funds – Insufficient funds is a banking status that means there isn’t enough money in your account to cover a purchase, transfer or scheduled bill payment. This can result in overdraft fees.

• Interest – Interest is the accumulation of money on a principal amount over time, calculated as a percentage of the existing balance. However, it can be used in two very different contexts: 

• The cost of borrowing money from a bank or lender.

• The reward for leaving your money on deposit with the bank.

• Interest Rate – Expressed as a percentage of the amount borrowed (or deposited), an interest rate is how much additional money you’ll owe (or earn) on your outstanding balance each period. 

• Invest – To invest is to put money towards something in hopes that it will yield profits down the line. You can invest in things like property, in the stock market and in individual companies, to name a few.

• Liabilities – The opposite of assets, liabilities are debts and other financial obligations that an individual or business owes. Examples are mortgages, business loans and credit card bills.

• Lien – A lien is a type of security interest on a loan wherein the borrower grants the lender or creditor the right to their property if they can’t repay their loan on said property.

• Liquidity – This refers to how quickly and easily someone can secure cash, usually by selling or trading — liquidating — their assets.

• Loan – A loan is a sum of money lent from one person or entity to another to be paid back later with interest. They usually involve a repayment schedule and consequences for defaulting.

• Loan Consolidation – This is a debt repayment technique that involves combining various debt sources into one convenient monthly payment. What are some options for consolidating multiple debts?

• Minimum Payment – This is the smallest amount you can pay on an account each period to remain in good standing with the financial institution.

• Money Market Account – Like a combination of checking and savings accounts, a money market account yields higher-than-usual interest rates and other perks, but may not be as flexible as a checking account.

• Mortgage – A mortgage is a specific type of loan that’s used to purchase or refinance a property.

• Mutual Funds – These are professionally managed pools of money from various investors and individuals used to purchase stocks, bonds and other profit-yielding securities.

• Net Income – Net income is, for individuals, the profit left over after taxes have been deducted and, in the case of businesses, after subtracting operational expenses and interest. It’s the amount of money you’ve earned after select portions of your income have been allocated to various financial obligations. 

• Overdraft / Overdrawn – An overdraft is when you write a check or attempt to make a payment that brings your account balance below zero (insufficient funds). If your account is overdrawn, you’re in debt to the bank.

• Points – In finances, a point is one of something, but the definition depends on context. A point could mean:

• A 1% change in the value of an investment like a bond or debenture.

• A $1 movement of stocks or stock indexes.

• A percentage difference between a mortgage rate and the prime interest rate (“prime plus two points” = “two percentage points above prime”).

• One one-hundredth of a cent in futures contracts and options.

• Post-tax Contribution – A post-tax or after-tax contribution is when the money paid into a retirement account or investment fund has already had income taxes deducted from it.

• Pre-tax Contribution – Alternatively, a pre-tax contribution is made before federal and municipal taxes have been deducted. These pre-tax contributions — for example, IRAs and 401(k) plans — lower the individual’s taxable income to incentive retirement planning.

• Prime Rate – The prime rate or prime lending rate, is the rate of interest used by banks when lending money to their most-favored customers.

• Principal – In lending, the principal is the original amount borrowed and due to be repaid before any interest has accrued.

• Profit – Also called net income and earnings, profit is the positive amount of revenue earned after subtracting all business expenses. 

• Recession – In macroeconomics, a recession is a period of ongoing economic decline. It was originally recognized as two consecutive quarters but is now defined as lasting more than a few months with widespread effects across many sectors including real GDP, real income, employment, production and sales.

• Return (on investment) – Return on investment (ROI) is a measurement of profitability that indicates the revenue yield of your economic investment, either in financial assets like stocks or in a property or business campaign.

• Revolving Credit – Exemplified by credit cards and other open lines of credit, revolving credit is an account with a set limit that you can borrow from and repay over time. As you pay down your debt, you’ll have more available credit. How can using revolving credit make an impact on the health of your overall credit.

• Risk – Much like risk in non-financial contexts, it refers to the likelihood of failure. That could look like depreciation and financial loss on a stock portfolio (investment risk) or a borrower defaulting on a loan (credit risk).

• Roth IRA – This individual retirement account (IRA) is a way to guarantee financial security later in life. Roth IRAs differ from traditional IRAs in that they’re financed with post-tax contributions. This means they’re not tax-deductible now but are tax-free later, perfect for certain retirees.

• Secured credit card – Similar to a standard credit card in most ways, a secured credit card differs in that it requires an upfront cash deposit to guarantee your line of credit and reduce the lender’s risk. It can help people with bad credit scores rebuild their credit history.

• Securities – These are tradable, valuable monetary assets used to finance companies. This catch-all includes equity securities like shares in a company, debt securities like bonds and debentures, and derivative securities.

• Service charges – These additional fees allow you to access certain financial services like using an ATM, completing a wire transfer or taking out a cash advance.

• Share – Shares are small units that make up a company’s total capital. Investors can purchase shares, thereby becoming shareholders and owning a percentage of the company.

• Sole proprietor – A single person that owns a company is the sole proprietor of said company. Sole proprietorships are the simplest form of business ownership.

• Stock – Another type of financial asset, stocks are marketable securities that represent a percentage of ownership (or equity) in a company.

• Subsidized loan – Mainly reserved for federal student and home loans, subsidized loans have more lenient repayment terms, including no interest accrual or required payments during determined periods. 

• Taxes – Taxes are requisite financial obligations that fund government operations.

• Unearned income – This passive source of income includes any money coming in that the individual didn’t work for, including dividends, interest on investments, alimony, property ownership and unemployment income like Social Security benefits and pensions.

• Unsubsidized loan – Unlike a subsidized loan, this loan type begins accruing interest the moment you receive the money. Some unsubsidized federal student loans still have a post-graduation grace period before repayment begins, but don’t provide any assistance with paying interest both during and after school.

• Variable expenses – The opposite of fixed expenses, these are costs that change month to month and reflect an individual’s everyday spending habits (or the required but fluctuating expenditure of a business like overtime pay, marketing campaigns and purchasing inventory to meet retail demand). Learn how to manage variable expenses within your budget.

• W-2 – Form W-2, or the Wage and Tax Statement, is an official tax document that employers must give to their employees and the IRS. It’s a record of each employee’s annual earnings and tax withholdings.

• W-4 – Form W-4, or the Employee’s Withholding Allowance Certificate, is an IRS tax form that employees fill out and give to their employer, indicating how much tax should be withheld from each paycheck based on their dependents, allowances, marital status and more.

• W-9 – Form W-9, or a Request for Taxpayer Identification Number and Certification, is an official request for and record of an employee’s personally identifying information, including their TIN. This IRS tax form is usually then used to fill out a 1099 for independent contractors. 

• Withdrawal – A withdrawal is any time funds are removed from a bank account, pension, brokerage firm and so on.

• Withholding – This refers to the portion of an employee’s salary that is remitted directly to the corresponding tax agency rather than paid out on the employee’s paycheck.

• Yield – Expressed as a percentage, yield is the income earned on a particular investment, usually paid out to shareholders in the form of dividends. To calculate an investment’s yield, divide the dividends by the cost of purchasing the share then multiply by 100. 

Grasping the terms themselves is one thing but understanding them in context — and what to do about them — is another. Now that you’ve browsed our financial terms glossary, check out other helpful Tally resources that help you put these words to work.