Financial Terms Quick Reference Guide

Financial Terms Quick Reference Guide

As we continue to deliver information related to improving your financial wellness, we may introduce new terms to you. We created this quick reference cheat sheet to define some of these terms. The link in parentheses directs you to the articles where we first introduced the term.

Credit and Debt:

  • Annual fee: This is a fee that some credit cards charge simply for having the card. It is not dependent on your balance or interest rate. Some saving and investment accounts also charge an annual fee. (Understanding Debt Part 1)
  • Annual percentage rate (APR): This is the annual rate charged for funds borrowed. This rate includes required fees but does not include compounding, so the actual rate paid on borrowed funds could be higher. (Understanding Debt Part 1)
  • Average daily balance: This is a method some credit card issuers use in calculating interest charges. The account balance at the end of each day is divided by the number of days in the billing period, to calculate an average. This figure is then multiplied by the monthly interest rate to calculate the finance charge for the period. (Understanding Debt Part 1)
  • Good debt: In general, good debt is the money owed when borrowing to purchase goods or services that have the potential of either increasing in value over time, such as a home, or increasing an individual’s potential to earn more money, such as educational debt.
  • Bad debt: In general, bad debt is the money owed when borrowing to purchase goods or services, e.g. a washer or dryer, that decrease in value over time, thus making the total cost significantly higher than the actual value.
  • Credit report: Prepared by one of three credit reporting agencies, a credit report details an individual’s credit history, including closed and open accounts, current balances, payment history and total credit available. Credit reports also include credit inquiries from potential lenders. (Your Credit Report)
  • Credit score: Related to a credit report, a credit score is calculated using a proprietary scoring system that assigns a value to an individual’s credit worthiness, based on the information in a credit report. A higher credit score typically means more favorable credit terms, such as lower interest rates for borrowing. (Your Credit Report)
  • Secured debt: This is debt that is issued for the purchase of something that has real value and which may be reclaimed by the lender if the loan is in default. Loans for cars and homes are examples of secured debt.
  • Unsecured debt: This is general debt, such as credit card debt, that is issued where the lender has no specific claim on the items purchased.


  • Income stream: An income stream is a consistent source of income generally that provides for regular living expenses. During working years, this would be a salary, and in retirement might include payments from Social Security, an annuity or an employee pension. (Investing for Life – Creating Income)
  • Gross Income: Gross income is the total amount of income an individual receives from all sources, such as salary, interest, and dividends.
  • Adjusted Gross Income (AGI): This number, which is the bottom number of page one of an individual’s 1040 form, is an individual’s gross income, less certain deductions that are allowed before standard or itemized deductions are subtracted and taxes are calculated.
  • Ordinary income: Ordinary income is income not eligible for treatment as long-term capital gains and is generally taxed as regular income. (Wages and salaries, as well as bonuses, tips, commissions, and interest are considered ordinary income)

Saving & Investing:

  • Bonds: Bonds are debt instruments where an investor is making a loan to a company or government in exchange for repayment with an agreed upon interest rate over a set period, as opposed to stocks, where the purchase confers an ownership interest. Bonds may be issued by companies, governments and some other types of institutions. (Investing for Life – Creating Assets)
  • Mutual funds: An investment vehicle that pools the funds of many depositors for investing. The actual investments in the fund can be stocks, bonds or almost any financial instrument.
  • Money market: An investment or savings vehicle with high liquidity and short duration; examples would be CDs and T-Bills. More commonly this is shorthand for a Money Market Fund or Account that uses one or more of these financial instruments as the underlying investment.
  • 401 (k): An employer provided plan for pre-tax contributions to an employee’s retirement account. It is designed for employee contributions through payroll deduction and can have an employer paid portion as well. (Investing for Life – Creating Income)
  • 403 (b): A non-profit employer provided plan for pre-tax contributions to a retirement account for the employee. Like a 401(k), it is designed for employee contributions through payroll deduction and can have an employer paid portion as well. (Investing for Life – Creating Income)
  • Tax Deferred: Tax deferred means that one can delay paying taxes on money that is invested and the corresponding earnings on investments until the funds are taken out of the account later. This is the foundation for retirement investing.
  • Time Value of Money (TVM): A concept that means that funds received now are worth more than funds in the future because the current funds can earn interest in the intervening time. (Investing for Life – Creating Assets)
  • Present Value (PV): The present value is a term in finance that calculates the current value of an amount of money that is to be received in the future. The formula uses an expected interest rate.
  • Dollar Cost Averaging: Dollar Cost Averaging is a method of investing, where an individual invests a fixed amount of money to a retirement or investment account on a regular basis over a period of time. Using stocks as an example, since the price of the investment fluctuates, one will buy some shares when the price is lower and other shares when the price is higher. Over the long term, the price paid will even out and will often be less than the average price.
  • The rule of 72: This is a way to estimate the number of years that it will take for your earnings to double at a specific rate of return. For example, at 6% interest your earnings will take 12 years to double (72/6 = 12).
  • Risk Tolerance: Risk tolerance is an investing term that refers to the amount of market volatility (ups and downs) that a person can withstand. If a person worries when their investments go down a little, their risk tolerance is low, for example. (Investing for Life – Creating Assets)

Account Management Terms:

  • Active Management: This style of management of a fund’s portfolio relies on analytical research, forecasts, and judgements and experience of the manager in making investment decisions about what securities to buy, hold, and sell. (Did you Know – Active v. Passive)
  • Passive Management: This style of management, often associated with a mutual or exchange-traded fund, has the manager mirroring a specific market index. This is also referred to as a passive strategy or index investing. The fees associated with this type of management are usually much less than with an actively managed account. (Did you Know – Active v. Passive)
  • Diversification: This is a risk management technique of including a variety of types of investments in an account, such as stocks and bonds. A diversified portfolio provides for a smoother ride in the ups and downs in investing, as some investments go up when others go down. Finding the right mix depends upon one’s age, risk tolerance, and the types of assets available.
  • Total return: Total return refers to the actual amount, expressed as a percentage, that an investment earned over a specific period, usually years.