Personal Finance Glossary, Plain-English Definitions

4

4% rulealso: safe withdrawal rate, Bengen rule: A retirement-withdrawal heuristic suggesting retirees can withdraw 4% of their portfolio in year one, adjusted for inflation thereafter, with high odds of lasting 30 years.
401(k)also: 401k, 401 k: An employer-sponsored U.S. retirement plan that lets employees contribute a portion of pay on a pre-tax or Roth basis, often with employer matching.
403(b)also: 403b: A tax-advantaged retirement savings plan available to public-education employees, certain non-profit workers, and some ministers.
457(b) planalso: 457b, 457 plan: A deferred-compensation retirement plan for state, local government, and certain non-profit employees.

5

50/30/20 rulealso: 50/30/20, 50-30-20 rule: A budgeting framework that splits take-home pay into 50% needs, 30% wants, and 20% savings and debt repayment.

A

ACH transferalso: ACH, Automated Clearing House: An electronic bank-to-bank money transfer processed through the U.S. Automated Clearing House network, typically settling in 1–3 business days.
Annual percentage yieldalso: APY: The total interest earned on a deposit account in a year, including the effect of compounding.
Annuity: An insurance contract that converts a lump sum or stream of premiums into guaranteed periodic payments, often used to fund retirement income.
APRalso: annual percentage rate: The yearly cost of borrowing money, expressed as a percentage and including most fees.
Asset allocation: The division of an investment portfolio across asset classes such as stocks, bonds, and cash, calibrated to the investor's goals and risk tolerance.
ATM fee: A surcharge charged for using an automated teller machine outside the cardholder's bank network, typically $2.50–$5 per withdrawal.
Authorized user: A person added to another cardholder's credit-card account who can use the card and inherits the account's history on their credit report.

B

Backdoor Roth IRA: A legal strategy for high earners to fund a Roth IRA indirectly by making a non-deductible Traditional IRA contribution and immediately converting it to a Roth.
Balance transfer: Moving credit-card debt from one card to another, usually to a card with a 0% promotional APR, to reduce interest cost.
Bankruptcy: A legal process administered by U.S. federal courts that helps individuals or businesses unable to repay debts obtain relief through liquidation (Chapter 7) or restructuring (Chapter 13).
Bondalso: bonds, fixed income: A debt security under which the issuer owes the holder a debt and is obligated to pay them interest and to repay the principal at maturity.
Brokerage accountalso: taxable brokerage: A taxable investment account at a securities firm used to buy and sell stocks, bonds, ETFs, mutual funds, and other securities.

C

Capital gains tax: A tax on the profit realised from the sale of a capital asset such as a stock, bond, or property.
Cash equivalentalso: cash equivalents: Short-term, highly liquid investments readily convertible to cash with minimal price risk, such as Treasury bills and money-market funds.
Catch-up contribution: Additional retirement-account contributions allowed for workers aged 50 and over, above the standard annual limit, to accelerate savings near retirement.
Certificate of depositalso: CD, CDs: A time deposit at a bank that pays a fixed interest rate for a fixed term, with penalties for early withdrawal.
Chargeback: A reversal of a credit-card payment initiated by the cardholder's bank, typically for fraud, billing errors, or undelivered goods.
Checking account: A demand deposit account at a bank or credit union that allows frequent withdrawals via check, debit card, or electronic transfer.
Compound interest: Interest calculated on both the original principal and accumulated interest from previous periods.
Consumer Financial Protection Bureaualso: CFPB: A U.S. government agency that supervises financial-products companies and enforces consumer-finance laws.
Consumer Price Indexalso: CPI: A U.S. measure of the average change over time in prices paid by urban consumers for a market basket of goods and services, published monthly by the Bureau of Labor Statistics.
Credit bureaualso: credit reporting agency, CRA: A company that collects consumer credit information and sells it to lenders in the form of credit reports. The three U.S. nationals are Equifax, Experian, and TransUnion.
Credit report: A detailed record of a consumer's credit history compiled by a credit bureau, listing accounts, balances, payment history, and inquiries.
Credit union: A member-owned, not-for-profit financial cooperative that provides banking services to a defined membership group.
Credit utilizationalso: utilization ratio, credit utilisation: The percentage of your available revolving credit that you are currently using, a major input to FICO and VantageScore.

D

Debt avalanchealso: avalanche method: A debt-payoff strategy that targets the debt with the highest interest rate first while paying minimums on the rest.
Debt snowballalso: snowball method: A debt-payoff strategy that targets the smallest balance first to build psychological momentum.
Debt-to-income ratioalso: DTI: Monthly debt payments divided by gross monthly income, used by lenders to assess a borrower's capacity to take on additional debt.
Disability insurance: Insurance that replaces a portion of income if the policyholder is unable to work because of illness or injury.
Discretionary income: Income remaining after taxes and essential living expenses, available for savings, investing, or non-essential spending.
Diversification: An investment strategy that spreads capital across many uncorrelated assets to reduce idiosyncratic risk without sacrificing expected return.
Dollar-cost averagingalso: DCA: Investing a fixed dollar amount on a regular schedule regardless of price, reducing the impact of short-term volatility.

E

Emergency fund: A reserve of cash kept in a liquid account to cover unexpected expenses or income loss, typically 3 to 6 months of essential outgoings.
Envelope systemalso: envelope budgeting, cash envelopes: A cash-management system where spending categories are funded with physical or digital envelopes that cannot be exceeded.
Estimated tax: Quarterly tax payments made by self-employed individuals and others without sufficient withholding to cover income, self-employment, and other taxes throughout the year.
Exchange-traded fundalso: ETF, ETFs: A pooled investment fund that trades on a stock exchange like a single share, typically tracking an index.
Expense ratio: The annual fee a fund charges its investors, expressed as a percentage of assets under management.

F

FDIC insurancealso: FDIC, FDIC-insured: U.S. federal deposit insurance, currently up to $250,000 per depositor per insured bank, that protects savings if the bank fails.
Federal funds ratealso: fed funds rate: The target interest rate set by the Federal Reserve at which depository institutions lend reserve balances to each other overnight, a primary U.S. monetary-policy tool.
Federal Reservealso: the Fed, Federal Reserve System: The central bank of the United States, responsible for monetary policy, bank supervision, and financial-system stability.
FedNow: A real-time payments service operated by the U.S. Federal Reserve that settles transfers between participating banks within seconds, 24/7/365.
FICO scorealso: FICO, FICO credit score: A consumer credit score developed by Fair Isaac Corporation, ranging from 300 to 850, used by most U.S. lenders.
Financial independencealso: FI: The state of having enough investment income or savings to cover living expenses without needing to work for money.
FINRAalso: Financial Industry Regulatory Authority: A non-governmental self-regulatory organisation overseeing U.S. broker-dealers, registered representatives, and securities firms.
FIRE movementalso: Financial Independence, Retire Early: A lifestyle movement focused on aggressive saving and investing (commonly 50–75% of income) to retire decades earlier than traditional retirement age.
Fixed expensesalso: fixed costs, recurring expenses: Predictable, recurring outflows whose amount does not vary month to month, such as rent, insurance premiums, and subscriptions.
Form 1099also: 1099: A series of IRS information returns used to report income other than wages, including freelance income, interest, dividends, and capital gains.

G

Grace period: The interest-free interval between a credit-card statement date and its payment due date, typically 21 to 25 days.

H

Hard inquiryalso: hard pull: A credit check triggered by a new credit application that is recorded on a consumer's credit report and may temporarily lower their score.
Health Savings Accountalso: HSA: A tax-advantaged U.S. account paired with a high-deductible health plan, used to save for qualified medical expenses.
High-yield savings accountalso: HYSA, high yield savings: A savings account, usually offered by an online bank, that pays a substantially higher annual percentage yield than the national average.

I

Index fund: A mutual fund or ETF designed to track a market index such as the S&P 500, offering broad diversification at low cost.
Inflation: The rate at which the general level of prices for goods and services rises, eroding the purchasing power of money over time.
Internal Revenue Servicealso: IRS: The U.S. federal agency responsible for collecting federal taxes and enforcing the Internal Revenue Code.
Itemised deductionalso: itemized deductions: Specific expenses (such as mortgage interest, state and local taxes, and charitable contributions) that taxpayers may subtract from adjusted gross income instead of taking the standard deduction.

J

Joint account: A bank or brokerage account shared by two or more people, with each owner having equal rights to deposits, withdrawals, and management.

K

Kakeibo: A Japanese household budgeting method that pairs four spending buckets with weekly mindful journaling.

M

Marginal tax rate: The tax rate paid on the next dollar of taxable income, determined by the taxpayer's top tax bracket.
Mega backdoor Roth: A strategy that funnels after-tax 401(k) contributions into a Roth account, allowing contributions far above standard Roth IRA limits.
Minimum payment: The smallest amount a cardholder must pay each billing cycle to keep an account in good standing, usually 1–3% of the balance plus interest.
Money market accountalso: MMA, money market: A deposit account that combines features of savings and checking, often paying tiered interest based on balance.
Mutual fund: A professionally managed pooled investment vehicle that collects money from many investors to buy a diversified portfolio of securities.

N

NCUA insurancealso: NCUA: Equivalent of FDIC insurance for credit-union members, administered by the National Credit Union Administration.
Net incomealso: take-home pay, net pay: Earnings after taxes, payroll deductions, and benefits, the figure deposited into a worker's bank account.
Net worth: The total value of an individual's or household's assets minus the total value of their liabilities, a single-number snapshot of financial position.

O

Online bankalso: digital bank, neobank: A bank that operates primarily or exclusively through digital channels, typically passing branch-cost savings on as higher deposit rates and lower fees.
Overdraft feealso: overdraft: A fee charged when an account is debited for more money than is available in the balance.

P

Pay-yourself-firstalso: pay yourself first, PYF: A budgeting principle where savings and investment transfers are automated before any discretionary spending occurs.
Pensionalso: defined-benefit plan: A retirement plan in which an employer commits to making regular payments to the employee after retirement, with benefits based on salary, years of service, and a formula.
Plaid: A financial-data network that connects consumer apps to U.S. and Canadian bank accounts via secure API integrations.

R

Required Beginning Datealso: RBD: The IRS deadline by which a retirement-account owner must start taking required minimum distributions, currently April 1 of the year following age 73.
Required minimum distributionalso: RMD, RMDs: The minimum amount the IRS requires you to withdraw annually from most tax-deferred retirement accounts after a certain age.
Robo-advisor: An automated digital investment-management service that builds and rebalances a portfolio using algorithms based on the investor's inputs.
Roth IRA: A U.S. retirement account funded with after-tax dollars; qualified withdrawals in retirement are tax-free.
Routing numberalso: ABA routing number, ABA number: A nine-digit code that identifies a U.S. bank for processing checks and electronic transfers.

S

S&P 500also: S and P 500, Standard & Poor's 500: A stock market index of 500 of the largest U.S. publicly-traded companies, weighted by market capitalisation.
Savings rate: The percentage of disposable personal income that an individual or household saves rather than spends.
Secured credit card: A credit card backed by a refundable cash deposit that becomes the credit limit, used to build or rebuild credit.
Securities and Exchange Commissionalso: SEC: The U.S. federal agency that regulates securities markets, enforces federal securities laws, and protects investors.
SEP IRAalso: Simplified Employee Pension: A simplified employer-sponsored retirement plan that lets self-employed individuals and small-business owners make pre-tax contributions on behalf of themselves and employees.
Series I bondalso: I bond, I bonds: A U.S. savings bond that combines a fixed interest rate with an inflation-adjusted rate, designed to protect purchasing power.
SIMPLE IRA: A retirement plan for small employers (100 or fewer employees) allowing both employer and employee contributions with lower setup costs than a 401(k).
Sinking fund: Money set aside in regular instalments to pay for a known future expense such as car registration or annual insurance.
Social Securityalso: Social Security Administration, SSA: A U.S. federal program providing retirement, disability, and survivor benefits funded by payroll taxes.
Soft inquiryalso: soft pull: A credit check used for pre-approval, background screening, or self-checks that does not affect the consumer's credit score.
Solo 401(k)also: one-participant 401(k), individual 401(k): A 401(k) plan designed for self-employed individuals with no employees other than a spouse, allowing both employee and employer contributions.
Standard deduction: A fixed dollar amount the IRS lets taxpayers subtract from gross income instead of itemising deductions.
Sweep account: A bank or brokerage account that automatically moves uninvested cash into an interest-bearing or money-market option at the end of each business day.

T

Target-date fundalso: TDF, lifecycle fund: A mutual fund that automatically rebalances its asset allocation to grow more conservative as the investor approaches a target retirement year.
Tax bracket: A range of taxable incomes subject to a specific marginal tax rate under a progressive income-tax system.
Tax-loss harvesting: Selling investments at a loss to offset capital gains and up to $3,000 of ordinary income, reducing the investor's tax bill.
Term life insurancealso: term life: Life insurance that provides coverage for a fixed period (the term) and pays a death benefit only if the insured dies within that term.
Traditional IRA: A U.S. retirement account funded with pre-tax dollars; contributions may be tax-deductible and withdrawals are taxed as ordinary income.
Treasury billalso: T-bill: A short-term U.S. government debt obligation with maturities from a few days to 52 weeks, sold at a discount to face value.
Treasury bondalso: T-bond, U.S. Treasury: A long-term debt security issued by the U.S. federal government, backed by its full faith and credit.

U

Umbrella insurance: Personal liability insurance that provides coverage above the limits of underlying home, auto, or boat policies.

V

VantageScore: A credit-scoring model jointly developed by the three U.S. credit bureaus, also ranging 300 to 850.
Variable expensesalso: variable costs: Outflows that fluctuate with activity or behaviour, such as groceries, fuel, and dining out.

W

W-2 formalso: W2: An IRS form U.S. employers must send each employee and the IRS reporting annual wages and taxes withheld.
Whole life insurance: A permanent life-insurance policy that provides lifelong coverage and accumulates a cash-value component that grows on a tax-deferred basis.
Wire transfer: A near-real-time electronic transfer of funds between bank accounts, typically same-day domestic and 1–5 days international, used for high-value or time-sensitive payments.

Z

Zelle: A U.S. real-time peer-to-peer payment network operated by major banks, transferring money directly between U.S. bank accounts within minutes.
Zero-based budgetingalso: zero-based budget, ZBB: A budgeting method where every dollar of income is assigned a job until income minus allocations equals zero.