401(k)/403(b) plans Popular types of defined-contribution Cashier’s check A type of check that is written to a specific
retirement plans. They allow employees to contribute into payee but charged against a bank instead of an individual
their accounts, which may feature a range of investment account.
options. Certificate of deposit (CD) A contract between an individual
Accreditation An official recognition that a school or program and a financial institution that specifies the time that the
meets a certain standard. individual will leave a certain amount of money deposited
Adjustable rate mortgage Mortgage with a rate that may go in the account and the interest rate earned.
up or down. The rate change occurs at some preset time— Certification An official document or record that states that a
for example, after one year. person has met some standard for training or knowledge.
Adjusted gross income Total income minus certain allowable Check A written order from an individual to a bank that
amounts such as contributions to some retirement accounts, instructs the bank to pay money to another party.
alimony payments, and interest paid on student loans. Check register A small ledger provided by a bank for keeping
Annual fee Charged by credit card companies for the privilege track of an account balance.
of using their card. Checking account An account into which a person deposits
Annual percentage rate (APR) The interest rate that shows money and from which a person withdraws money by writ-
what a borrower is actually paying with all the costs of ing checks or using a debit card.
financing factored in. COBRA The Consolidated Omnibus Budget Reconcilation Act.
Annual percentage yield (APY) The interest rate that shows It allows an individual temporarily to continue health insur-
what an account will earn annually with compounding fac- ance coverage at group rates.
tored in. Coinsurance The share of costs for covered insurance services
Annuity A situation in which there are equal cash flows occur- that an individual is required to pay out of pocket. Often
ring at equal intervals for a fixed period of time. called a co-pay.
Apprenticeship On-the-job program in which a person may Collateral Assets that have been pledged against a loan repay-
receive formal training. ment.
Asset Something owned. Commission Fee charged by a brokerage firm for carrying out
Asset allocation The process of spreading investments among a transaction.
asset classes—diversifying investments. Compensation Money earned and benefits given by employ-
Asset classes Investments, such as stocks, bonds, and real ers.
estate, that one makes to reach long-term goals. Compound interest Interest earned on interest added to an
Automatic Teller Machine (ATM) Provides banking customers account.
with access to financial transactions in a public space with- Compounding The process of earning interest on interest pre-
out the need for a bank teller. viously added to an account.
Baby boom A period of very high birthrates that occurred Consumer price index (CPI) The formal measure of prices
between 1946 and 1964. used to calculate inflation that tells us whether things over-
Bank draft Used to authorize someone to withdraw money all are more expensive now than in the past.
from a bank account automatically to satisfy some financial Corporate bonds Bonds issued by a large company—they
obligation. have all degrees of risk depending on the strength of the
Bankruptcy A legal process in which a court takes over some of corporation.
the finances of a person who is unable to pay his or her bills. Cosigner A person, other than the principal borrower, who
Beneficiary A person who receives payment from a life insur- signs for a loan and assumes equal liability for it.
ance provider when the policyholder dies. Coupon payment Regular interest payments on bonds.
Bond A promissory note to repay a certain amount of money Coupon rate A bond’s interest rate, so-called because origi-
at some future point. nally bonds came with booklets of prewritten coupons for
Brokerage A firm that provides access to the stock markets. the interest due.
Budget A list of planned expenses and revenues. Credit Money that a lender makes available to a borrower
Budgeting The process of forecasting future expenses and with the understanding that the borrower will repay the
Business cycle The economic pattern of alternating periods of Credit bureau Organization that collects credit information
shrinking and expanding. about individual consumers.
Capital gain Taxable income that occurs when an asset is sold Credit card Provides individuals with revolving open-end
for more than it originally cost. credit, which they can draw from repeatedly up to some pre-
Cash advance The ability to use a credit card to withdraw set limit.
cash from a bank or ATM (rather than just purchasing a Credit check Performed by potential creditors to access a per-
good or a service). son’s credit report to examine the individual’s credit history
Cash inflow Money received. and the ability to repay.
Cash outflow Money spent. Credit history Record of credit use and payments.
Credit limit A person may borrow up to this amount based on Employer-sponsored retirement plan Set up by an employer
his or her income level, debt level, and overall credit record. and designed to help employees save for retirement. The
Credit management Decision making about getting and using employer generally contributes to the plan.
credit. Equal Credit Opportunity Act Prohibits creditors from deny-
Credit provider An entity, such as a bank, that agrees to make ing credit based on gender, age, race, national origin, reli-
a certain amount of credit available to a cardholder. gion, or marital status.
Credit report Summarizes an individual’s existing and past Equity Ownership in something.
lines of credit. Estate planning The process of determining how wealth will
Credit score Created by credit bureaus to assess an individ- be allocated on or before a person’s death.
ual’s creditworthiness. Expense Anything on which money is spent.
Credit union Functions similarly to a bank, but has nonprofit Face value A bond’s maturity value, which is printed on the
status and is owned by its members. front of the bond.
Creditor Someone who provides credit. Fair Credit Reporting Act A federal law that limits the sharing
Current liability Debt that is due within one year. of an individual’s financial information to firms that have a
Debit card Enables one to withdraw cash from an ATM or to legal purpose to evaluate it.
pay directly for goods or services at stores and restaurants. Fair Isaac Corporation Created a model on which credit
Debt consolidation Combining several small accounts into scores (FICO scores) are calculated.
one larger account that may be able to be financed at a Federal agency bonds Issued by federal agencies whose
lower rate. proceeds are used to buy mortgages to encourage home
Deductible The amount of money that a policyholder must ownership.
pay before an insurance policy will begin to cover a claim. Federal Deposit Insurance Corporation (FDIC) A major
Default When a person stops making payments on a loan. federal insurer that provides deposit insurance on the first
Defined-benefit plan An employer-sponsored retirement plan $250,000 deposited in a bank account.
in which an employer guarantees an employee a specific Federal Perkins loan Similar to a Stafford loan, but for stu-
amount of income at retirement. The benefit is often based dents with “exceptional” financial need. This loan carries a
on factors such as the number of years worked and the aver- lower interest rate and offers a longer grace period before
age salary earned during peak earning years. repayment must begin.
Defined-contribution plan An employer-sponsored retirement Federal Reserve System The central bank of the United
plan in which an employer contributes to an employee’s States.
retirement account but does not guarantee a specific retire- Federal Stafford loan The most common type of federal
ment benefit. education loan; it is available in two forms: subsidized and
Demand deposit Money put into a checkable account that can unsubsidized.
be withdrawn at any time. Fiat money The money currently used in the United States. It
Demographics The study of human populations. has value because the government orders that it must be
Depository institution A financial institution, such as a sav- accepted as payment.
ings bank, that is legally allowed to accept monetary Finance To pay a portion of the cost of a major purchase such
deposits from consumers. as a house or a car by taking a loan.
Depression A severe recession. Fixed annuity A type of financial product that guarantees
Disability insurance Insures the beneficiary’s earned income annual payments to the owner for a fixed period of time or
against the risk that sickness or injury will make working for a person’s lifetime. The return and ultimate payment is a
(and therefore earning) impossible. guaranteed amount.
Discount brokerage Offers a reduced level of service, lower Fixed expense An expense that remains the same from period
costs, and often the ability to trade online. to period.
Discount rate The interest rate the Fed charges to banks when Fixed rate mortgage A mortgage in which the interest rate
it loans them money. remains the same for the life of the loan.
Diversification The process of investing in multiple invest- Forecast A projection about future cash flows.
ments. Forecast error The difference between the actual value and
Dividend The distribution of cash to shareholders. the predicted value for the corresponding period.
Down payment The initial upfront portion of the total Fraud Occurs when someone submits false information to get
amount due on a purchase. a financial benefit.
Economics The production, distribution, and consumption of Full-service brokerage Provides advice and executes trades
goods and services. Economists seek to understand ways for a price; for example, Merrill Lynch and Edward Jones.
that individuals and businesses make decisions, the factors Future value What money is “worth” at a specified time in the
that influence their choices, and the impact these decisions future assuming a certain interest rate.
have on others. Global economy The world in which economies of all coun-
Economy The system related to the production, distribution, tries interact and depend on each other.
exchange, and consumption of goods and services in which Grace period Time in which credit card companies do not
individuals, businesses, governments, and the world charge interest on purchases. Typical grace periods are 20
interact. days from the time the statement is “closed,” or the bill is
Electronic funds transfer Authorization for someone to calculated and mailed.
access a bank account for payment or deposit.
Gross domestic product (GDP) The total dollar amount of Life insurance Provides payment to a specific person or per-
all final goods and services purchased domestically in a sons when the policyholder dies.
given year. Line of credit An agreement to allow borrowing as needed up
Gross income The total amount of a person’s income. to a certain amount of money.
Gross pay Hourly wage multiplied by hours worked. Liquid asset Something owned that can be rapidly converted
Group plan Insurance plans that cover a large group of indi- to cash without a risk of significant loss.
viduals, such as employees of a particular company or local Liquidity Available cash on hand for meeting immediate wants
government. Within a group plan, an individual’s high risk and needs.
or loss is spread across the entire pool of group members. Long-term goal A goal that will take more than five years to
Health insurance Provides payment to people who suffer a accomplish.
financial loss as a result of illness or injury. Long-term liability Liabilities that will take more than one
HIPAA The Health Insurance Portability and Accounting Act year to pay off.
ensures that workers can continue their health insurance Macroeconomics The study of broad economic issues that
coverage if they switch jobs. The act prohibits insurance impact the economy as a whole.
companies from denying new employees access to coverage Market value The current quoted price at which investors buy
based on their health or preexisting conditions. or sell a share of common stock or a bond at a given time.
Home equity loan Allows a homeowner to borrow against the Maturity date The date at which a loan will be completely
equity in his or her home—that is, the difference between repaid.
the home’s value and the amount owed to a lender. Medicaid A government-sponsored program that provides
Household asset Tangible possessions owned by a household. health insurance for low-income individuals.
Furniture is one example. Medicare Funded by payroll taxes. Provides health care cover-
Identity theft When someone uses an individual’s personal age to older Americans and some younger disabled people.
information without permission for personal gain. Microeconomics The study of individual choices or decisions
Income Money coming in through wages earned, allowance, made by small units.
or other sources. Middle-term goal A goal an individual aims to meet within
Individual retirement account (IRA) A type of savings account the next one to five years.
created by the government to encourage people to save for Monetary policy The raising or lowering of the money supply
retirement. to achieve some goal.
Inflation A sustained increase in the general level of prices. Money management Making decisions about how much cash
During a time of inflation, most things become more or liquid assets to keep in reserve and how much to invest.
expensive and the purchasing power of money decreases. Money market deposit account Has some features of a check-
Initial public offering (IPO) The first sale of stock issued by a ing account or a savings account. These accounts require an
company to raise money for business operations, expansion, individual to maintain a minimum balance, have no matu-
and other needs. rity date, pay interest, and offer limited check-writing privi-
Installment credit Used for specific purchases; allows the bor- leges.
rower more time to repay. Money order Functions similarly to a cashier’s check. It is pur-
Institutional investor One who trades large volumes of stocks chased for cash so that the recipient can trust its worth.
on behalf of large institutions; for example, for a huge pen- Mortgage The common term for the type of loan people take
sion fund. to purchase a home.
Insurance A financial product that when purchased provides Municipal bond Issued by state and local governments to
reimbursement paid to a person in the event of certain types finance large public projects such as water and sewer systems.
of financial loss. Mutual fund Sells shares to investors in order to collect a pool
Interest Fee charged by a lender on money borrowed. of money that is then used to buy various investments.
Internal Revenue Service A branch of the United States National Association of Security Dealers Automated
Treasury Department that carries out the federal tax Quotation (NASDAQ) An organized stock exchange in the
system. secondary market in which stock sales occur.
Internship A temporary, short-term position designed to pro- National Credit Union Savings Insurance Fund (NCUSIF) A
vide exposure to and training for a particular job. major federal insurer that provides deposit insurance on the
Intestate When an individual dies without having a will. first $250,000 deposited in a credit union account.
Investment Something acquired with the goal of making Negotiable order of withdrawal (NOW) Functions like a
money. checking account but pays a small amount of interest on
Itemized deduction A specific expense that, under tax law, money in the account. NOW accounts require the user to
can be deducted from income to reduce the amount of maintain a minimum balance in order to earn interest.
income subject to income tax. Net pay Wages that remain after taxes are withheld (take-
Junk bonds Corporate bonds issued by companies with the home pay).
highest risk. Net worth Assets minus liabilities.
Lease A long-term rental agreement. New York Stock Exchange (NYSE) An organized stock
Liability What is owed (debt). exchange in the secondary market in which stock sales
Liability coverage Auto insurance that covers damage to an occur.
individual’s car or damage caused to other people or their Nondepository institutions Insurance companies, finance
property. companies, and securities firms and investment companies
that provide certain financial services but do not accept tra- Primary market The initial sale of financial assets in which a
ditional deposits. company receives money during an IPO.
Noninstallment credit The simplest form of consumer credit. Principal The total amount of money outstanding on a loan.
It is usually for a very short term, such as 30 days. Publicly traded When a company begins trading on one of the
Opportunity cost The opportunity lost to do something with organized stock exchanges.
money when an individual uses that money to do some- Real estate Buildings and land.
thing else. Recession A period of time in which the economy is shrinking.
Overdraft protection A feature that allows a person to “over- Résumé A snapshot of an individual’s qualifications including
draw,” or exceed the credit limit. (Overdraft protection is background, education, and previous work history.
also a feature of checking accounts, where it protects some- Revolving open-end credit Allows consumers to borrow up to
one in the event that a check is written for more money some preset maximum amount.
than is in the account.) Risk The possibility of a financial loss.
Pawnbroker Holds items in exchange for loans that run for 30 Roth IRA Similar to a traditional IRA, but contributions are
days to as much as three months. not tax deductible. Earnings from an eligible account are
Payday lending A lender provides cash advances at a high cost never taxed, even after withdrawal.
to customers who provide a check dated for some time in Rule of 72 Shows how long it would take to double an
the future. amount of money for a given interest rate.
Payment terms Specific information about the interest rate Safety deposit boxes Small containers located inside a bank
and the time period for paying back a loan. vault used to store valuable documents such as wills and
Payroll tax Tax withheld from paychecks and sent to the gov- small objects such as jewelry, rare coins, and legal documents.
ernment by employers. Sales tax Tax collected by a merchant when a purchase is
Pension plan A defined-benefit plan under which an employer made and then sent to the government.
makes contributions to the plan on the employee’s behalf. Savings account Bank account that generally pays a low rate
Personal balance sheet Lists current assets such as cash in of interest on deposits.
checking accounts and savings accounts, long-term assets Secondary market Transactions that take place after an IPO.
such as common stock and real estate, current liabilities Secured loan Has an asset pledged against the loan. The
such as loan debt and mortgage debt due or overdue, and lender is assured of ending up with some valuable asset if
long-term liabilities such as mortgage and other loan debt. the borrower fails to pay off the loan.
Personal finance Financial issues that can affect an Securities and Exchange Commission (SEC) A government
individual. agency that regulates and monitors the stock market.
Personal financial plan Specifies financial goals and describes Security Investment issued by a corporation or government in
in detail the spending, financing, and investing plans which the investor receives proof of ownership.
needed to reach those goals. SEP-IRA An IRA for self-employed people.
Personal financial planning The process of planning every Shareholders People who own stock in a company.
aspect of personal finances. Short-term goal A goal to be accomplished within the next
Personal identification number (PIN) Typically a four-digit year.
number needed to access a bank account or debit card. Shoulder surfing An identity theft technique that involves
Personal income tax A tax levied on the financial income of someone in a public place accessing personal information
individuals. by listening to a conversation or viewing personal informa-
Personal loan A loan that is not backed by collateral. Also tion.
known as an unsecured loan, it is based solely upon the Simple interest Interest earned only on the original amount
borrower’s credit rating. or principal.
Pharming Identity theft technique that uses e-mail viruses to Skimming Identity theft technique that involves copying credit
redirect someone from a legitimate Web site to an official card or debit card numbers from credit or debit cards.
looking Web site designed to obtain personal information. Social Security Funded by payroll taxes. It provides payments
Phishing Pretexting that occurs online. to eligible retirees and disabled people.
Policy rider Additional insurance coverage to cover things Standard deduction A fixed amount individuals are allowed
such as jewelry or valuable heirlooms that are often not to deduct from their adjusted gross income to reduce their
fully covered by a typical insurance policy. tax liability.
Policyholder A person who buys a health insurance policy or Stock A fractional share of ownership in a company.
subscribes to it through an employer. Subprime mortgage High interest rate mortgage loan made to
Portfolio An individual’s investments. people with poor credit scores.
Preexisting condition A health condition that existed before Take-home pay Wages that remain after taxes are withheld
an individual’s policy was granted. (net pay).
Premium Regular payments paid to an insurance company in Tax Money collected by a government from its citizens and
return for coverage. businesses in order to operate the government.
Present value The value of a cost or benefit computed in Tax deductible A feature that allows people to reduce their
terms of cash today. income taxes by reducing taxable income for the year in
Pretexting Occurs when someone improperly accesses an which they make a contribution (for example, to an IRA).
individual’s personal information by posing as someone Tax deferred When account earnings, such as from interest,
seeking data. are not taxed until they are withdrawn after retirement.
Price level stability A goal of the Fed to ensure that inflation Tax return A report submitted to the IRS that includes all the
or deflation does not occur. information relative to an individual’s income taxes.
Teaser rate An extremely low interest rate for a short period Unsecured loan A loan in which there is no collateral
of time that is used to entice a borrower into a deal. pledged.
Term insurance Life insurance provided over a specific period Variable annuity A type of financial product that guarantees
of time. annual payments to the owner for a fixed time or for a life-
Time value of money Refers to the fact that money received time. The return and ultimate payment depend on the per-
today is worth more than money received next year or the formance of the investments.
year after. Variable expense An expense that changes from one period to
Traditional IRA An account in which people can make tax the next.
deductible contributions and all earnings are tax deferred. Vesting The process of earning eligibility for an employer ben-
Travelers checks Checks paid for in advance and written by a efit.
large financial institution with no payee specified. Whole life insurance Provides coverage for as long as the poli-
Treasury bond Issued by the United States Treasury to finance cyholder continues to pay the premium.
the debt of the government. Will A legal request for how an individual’s estate (everything
Trust Legal mechanism that helps to reduce tax liability when accumulated during a lifetime) should be distributed upon
assets are transferred from one person to another. death.
Universal life insurance Provides coverage for a specified term
and builds savings for the policyholder.