Personal Finance Terms: Your Ultimate Glossary

Here is a glossary of useful personal finance terms that can help you navigate through your personal finance journey.

I will be regularly updating this list of personal finance terms as time goes on, so be sure to bookmark it for easy reference!

Table of Contents

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401(k) Plan: A tax-advantaged retirement plan offered by many employers in the US.

403(b) Plan: A retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Also called a tax-sheltered annuity or TSA plan.

457(b) plan: A retirement plan offered to state and local government employees such as police officers, firefighters, or other civil servants. Some highly paid executives at certain nonprofits like hospitals, charities, and unions are also able to use 457(b) plans. It is also known as a deferred compensation plan.

A

Accrued Interest: Interest that has been earned but not yet paid out.

Alternative Investment: An investment that is not a typical one like stocks and bonds. Examples include commodities or cryptocurrency.

Amortization: Spreading of payments over multiple periods.

Amortization Schedule: A table detailing each periodic payment on an amortizing loan/mortgage.

Annual Percentage Rate (APR): Interest rate for a year, as applied on a loan, mortgage loan, credit card, etc.

Annuity: A contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.

Appreciation: The increase in the value of an investment or asset.

Arrears: A legal term for the part of a debt that is overdue after missing one or more required payments.

Assets: Property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

Asset Allocation: The implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame. 

B

Balance: The amount available in an asset account, or the amount owed on outstanding debt.

Balance Transfer: The transfer of the balance in an account to another account, often held at another institution. It is most commonly used when describing a credit card balance transfer.

Balanced Fund: A mutual fund that typically contains a component of stocks and bonds.

Balance Sheet: a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Bankruptcy: A legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. 

Barter: Exchange (goods or services) for other goods or services without using money.

Basis Points: One hundredth of one percent (0.01%), used chiefly in expressing differences of interest rates.

Bear Market: The condition of a financial market in which prices are falling or are expected to fall.

Beneficiary: A person who derives advantage from something, especially a trust, will, or life insurance policy.

Billing cycle: The interval of time from the end of one billing, or invoice, statement date to the next billing statement date.

Blue Chip: A nationally recognized, well-established, and financially sound company.

Blue-Chip Stock: Stocks sold by blue-chip companies. They are seen as relatively safer investments, with a proven track record of success and stable growth.

Bonds: Units of corporate debt issued by companies and securitized as tradeable assets.

Bond Fund: A mutual fund that invests solely in bonds.

Bond Rating: A way to measure the creditworthiness of a bond, which corresponds to the cost of borrowing for an issuer.

Broker: A person who buys and sells goods or assets for others.

Budget: A budget is a financial plan for a defined period, often one year. It includes planned income, expenses, savings, and investments.

Bull Market: The condition of a financial market in which prices are rising or are expected to rise.

C

Callable Bond: A bond that the issuer may redeem before it reaches the stated maturity date. A callable bond allows the issuing company to pay off their debt early. Also known as a redeemable bond.

Capital Gain (Loss): Refers to an increase (decrease) in a capital asset’s value and is considered to be realized when the asset is sold. 

Cash flow: The movements of money into and out of a business, an entity, or a person’s wallet.

Certificate of Deposit (CD): A financial product commonly sold by banks, thrift institutions, and credit unions. CDs differ from savings accounts in that the CD has a specific, fixed term and usually, a fixed interest rate.

CD Ladder: A strategy in which an investor divides a sum of money into equal amounts and invests them in certificates of deposit (CDs) with different maturity dates. This strategy decreases both interest rate and reinvestment risks.

Class Action: A type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. Also known as a class-action lawsuit, class suit, or representative action.

Compounding: The process whereby interest is given to an existing principal amount as well as to interest already paid. Compounding can thus be construed as interest on interest—the effect of which is to magnify returns to interest over time, the so-called “miracle of compounding.”

Collateral: Something pledged as security for repayment of a loan, to be forfeited in the event of a default.

Commission: Money paid to a broker for gains on the funds they manage.

Credit Rating: a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.

Credit Report: A detailed summary of an individual’s credit history, prepared by a credit bureau.

Credit Score: A number assigned to a person that indicates to lenders their capacity to repay a loan. It is usually a number between 300 and 850.

Creditor: A person or company that has loaned out money to a borrower.

D

Debt: Money that is owed and must be paid back.

Deductible: A specified amount of money that the insured must pay before an insurance company will pay a claim.

Deduction: Expenses that are eligible to decrease taxable income. Check out my post to learn more about the most common tax deductions available to small business owners.

Default: The failure to repay a debt, including interest or principal, on a loan or security.

Defined Benefits Pension Plan: A type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum or combination thereof on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns.

Defined Contribution Plan: A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Future benefits fluctuate on the basis of investment earnings.

Deflation: A decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%.

Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear. If you are a small business owner (including a blogger, a vlogger, etc.) who has to purchase equipment such as laptop, you may claim depreciation expenses (see tax tips for bloggers for more detail).

Derivatives: A financial security with a value that is reliant upon or derived from, an underlying asset or group of assets. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset.

DINKs: “Dual Income No Kids”.

Discretionary Income: Income remaining after deduction of taxes, other mandatory charges, and expenditure on necessary items. It is your fun money, though you should spend it wisely!

Diversification: The process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets.

Dividends: The distribution of some of a company’s earnings to its shareholders.

Dividend Aristocrat: A listed company that has paid and increased its base dividend every year for at least 25 consecutive years. Here are some Canadian dividend aristocrats worth considering for your portfolio.

Dividend Reinvestment Plan (DRIP): A program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.

Down Payment: An initial payment made when something is bought on credit (e.g., a house bought with a mortgage).

E

Emergency Fund: A sum of easily-accessible money that’s set aside only to be used in the case of absolute emergencies. Also known as a rainy-day fund.

Employee Benefits: A form of employee compensation not in the form of wages, salaries, commissions, or other cash payments. Can include vision care, dental insurance, life insurance, and so on.

Employee Stock Options: A type of equity compensation granted by companies to their employees and executives. They give the employee the right to buy the company’s stock at a specified price for a finite period of time. 

Equity: Ownership of assets that may have debts or other liabilities attached to them. 

Exchange-Traded Fund: A type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same as a regular stock. 

F

Federal Deposit Insurance Corporation (FDIC): A government entity that provides deposit insurance up to $100,000 per account, to depositors in U.S. commercial banks and savings institutions.

Financial Advisor: A person who is employed to provide financial services or guidance to clients.

Financial distress: A condition in which an entity is unable to meet its current cash obligations — that is, it does not have enough cash on hand or inflow to pay its suppliers, employees, and debt payments on time.

Financial leverage: Refers to the proportion of debt in relation to the proportion of equity that has been used to finance a company. 

Financial Plan: A financial plan is a comprehensive evaluation of an individual’s current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans.

Foreclosure: The action of taking possession of a mortgaged property when the mortgagor fails to keep up their mortgage payments.

Fraud: Wrongful or criminal deception intended to result in financial or personal gain.

Futures: Derivative financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and set price. 

G

Gamification: Applying game-like features to any non-game activity (i.e., saving or investing money, or paying down debt).

Grace Period: A period immediately after the deadline for an obligation during which a late fee, or other action that would have been taken as a result of failing to meet the deadline, is waived provided that the obligation is satisfied during the grace period.

Gross Income: The total income from all sources, including returns, discounts, and allowances, before deducting any expenses or taxes.

H

Health Savings Account (HSA): A tax-advantaged savings account for medical expenses in the US. It allows you to save for health care expenses while reducing your taxable income.

Home Equity: The difference between the home’s fair market value and the outstanding balance of all liens on the property.

Home Equity Line of Credit (HELOC): A secured form of credit. The lender uses your home as a guarantee that you’ll pay back the money you borrow.

Hyperinflation: Very high and typically accelerating inflation.

I

Identify Theft: The fraudulent acquisition and use of a person’s private identifying information, usually for financial gain.

Index Fund: A type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500)

Inflation: A general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Therefore, inflation reflects a reduction in the purchasing power per unit of money.

Interest Rate: The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Investment: The action or process of investing money for profit or material result.

Investment Grade: A rating that signifies that a municipal or corporate bond presents a relatively low risk of default.

J

Joint Account: A bank account held by more than one person, each individual having the right to deposit and withdraw funds.

Junk Bond: A high-yield, high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover.

L

Lease: A contract by which one party conveys land, property, services, etc. to another for a specified time, usually in return for a periodic payment.

Leverage: An investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. 

Liability: The future sacrifice of economic benefits that an entity is obliged to make to other entities as a result of past transactions or other past events.

Line of Credit: A flexible loan from a bank or a financial institution. It is a defined amount of money that you can access as needed and then repay immediately or over a prespecified period of time. 

Liquidity: The ease with which an asset, or security, can be converted into ready cash without affecting its market price.

Long Position: The purchase of an asset with the expectation it will increase in value—a bullish attitude.

M

Marginal Tax Rate: The tax rate you pay on the next additional dollar of income.

Market Economy: An economic system in which production and prices are determined by unrestricted competition between privately owned businesses.

Maturity date: When a debt comes due and all principal and/or interest must be repaid to creditors.

Medicaid: A federal and state program in the United States that helps with healthcare costs for some people with limited income and resources.

Money: Any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context.

Mortgage: A legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.

Mortgage-Backed Security (MBS): An investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them.

Mutual fund: An open-end professionally managed investment fund that pools money from many investors to purchase securities

N

Nasdaq Composite: A widely used stock market index that includes almost all stocks listed on the Nasdaq stock exchange. 

Net Income: The profit that remains after all expenses and costs have been subtracted from revenue.

Net Worth: The value of everything you own (assets) minus the value of everything you owe (liabilities).

No-Load Fund: A mutual fund whose shares are sold without fees or commission charges.

Non-Recourse Debt: A type of loan secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. This is one instance where the borrower does not have personal liability for the loan.

O

Open-end fund: A collective investment scheme that can issue and redeem shares at any time. 

Operating leverage: It is determined by the proportion of fixed costs in the organization’s cost structure. The higher the proportion of fixed costs, the higher the operating leverage.

Opportunity Cost: The loss of potential gain from other alternatives when one alternative is chosen.

Options: A form of derivative financial instrument in which two parties contractually agree to transact an asset at a specified price before a future date. 

Overdraft: Occurs when money is withdrawn in excess of what is on the current account.

P

Payday loan: A payday loan allows a person to get cash for a short time period against his next pay cheque(s). It is one of the options to get cash fast if you need money now.

Pension: A regular payment made during a person’s retirement.

Personal Loan: Describes any situation in which an individual borrows money for personal need, including making investments in a company. Also known as a consumer loan.

Portfolio: Typically refers to your investment portfolio, which is the combination of all your investment assets – stocks, bonds, precious metals, real estate, cash, etc.

Prime rate: The interest rate that commercial banks charge their most creditworthy customers, generally large corporations.

Q

Qualifying Life Event (QLE): a change in your life/situation that makes you eligible to make changes to certain benefits. Changes can include getting married, having a baby, or losing health coverage.

Qualified Small Business Corporation Shares (QSBCS): Shares of a small business corporation that meets the definition of the CRA here. If you have a capital gain when you sell qualified small business corporation shares, you may be eligible for the capital gains deduction.

R

Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-generating real estate. 

Recession: A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Refinance: The replacement of an existing debt obligation with another debt obligation under different terms. 

Reinvest: Put (the profit on a previous investment) back into the same place.

Registered Pension Plan: An RPP is a plan your employer or plan sponsor sets up to provide you with retirement income. They’re required to contribute to it, and you may be able to contribute to it as well.

Registered Retirement Savings Plan (RRSP):  A type of financial account in Canada for holding savings and investment assets. Contributions to RRSPs are deductible from total income, reducing income tax payable for the year in which the contributions are claimed. No income earned in the account is taxed until withdrawal.

Reverse Mortgage: A financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income.

Risk Tolerance: An investor’s ability to psychologically endure the potential of losing money on an investment.

S

Secured Debt: A debt that is backed by collateral to reduce the risk associated with lending.

Settlement: A business process whereby securities or interests in securities are delivered, usually against (in simultaneous exchange for) payment of money, to fulfill contractual obligations.

Shares: Units of stocks.

Short Position: A trading technique in which an investor sells a security with plans to buy it later. It is a strategy used when an investor anticipates the price of a security will fall in the short term.

SINK: “Single Income No Kids”.

Stocks: A security that represents the ownership of a fraction of a corporation. 

Stock Market: The collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. 

Sunk Cost: Money that has already been spent and which cannot be recovered.

S&P 500 Index: A market-​capitalization-weighted index of the 500 largest U.S. publicly traded companies. Its full name is the Standard & Poor’s 500 Index.

T

Tax-Advantaged Account: A type of savings plan or financial account that provides a tax benefit such as tax-deferral or tax exemption.

Tax-Free Savings Account (TFSA): An account available in Canada that provides tax benefits for saving. Investment income, including capital gains and dividends, earned in a TFSA is not taxed in most cases, even when withdrawn. Contributions to a TFSA are not deductible for income tax purposes.

Tax Credit: An amount of money that people are permitted to subtract, dollar for dollar, from the income taxes that they owe.

Tax Deduction: A deduction that lowers a person’s or an organization’s tax liability by lowering their taxable income.

Tax Return: A form on which a taxpayer makes an annual statement of income and personal circumstances, used by the tax authorities to assess liability for tax.

Taxable Income: The portion of a person’s gross income that the government deems subject to taxes.

Trust: A fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes. 

Trust Fund: A fund consisting of assets belonging to a trust, held by the trustees for the beneficiaries.

U

Unearned income: Income from investments and other sources unrelated to employment. Examples of unearned income include interest from savings accounts, bond interest, alimony, and dividends from stock. It is a passive source of income.

Unsecured Debt: Any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment.

V

Variable Expenses: Expenses that change depending on how much you use a product or service.

Variable rate: A rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index, such as the prime rate.

Vesting Period: The time an employee must work for an employer in order to own outright employee stock options, shares of company stock or employer contributions to a tax-advantaged retirement pla

Volatility: The degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns. Assets with high volatility have prices that fluctuate widely, and are considered higher risk because of price unpredictability.

W

Wage Gap: The difference between wages earned by a group of individual and another group of individual.

Wealth: The abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions.

Will: A legal declaration of a person’s wishes regarding the disposal of his or her property or estate after death

Withdrawal: Removing money from an asset account.

Y

Yield: Refers to the earnings generated and realized on an investment over a particular period of time. It’s often expressed as a percentage based on the invested amount, current market value, or face value of the security.


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