Personal Finance Terms for Beginners

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401(k) Plan

An employer-sponsored retirement savings plan employees can contribute to from their pre-tax income, frequently supplemented by additional funds provided by the employer, that can grow tax-free.

50/30/20 Rule

A popular rule of thumb that guides you on how to spend your income categories responsibly: 50% to “needs,” 30% to “wants,” and 20% to “savings or debt payment.”

529 plan

A state-run, tax-advantaged account earmarked for educational expenses, which you can use for any education expense starting at kindergarten up through graduate school, and student loan paybacks.

A

APR (Annual Percentage Rate)

The yearly cost of borrowing money, expressed as a percentage rate.

Asset

An item regarded as having economic value, such as stock or real estate.

B

Bank

A financial institution that accepts checking and savings deposits and makes loans.

Budget

A budget is an outline that includes income and expenses. Allowing you to track and plan how you will spend your money and ensuring you have enough money to cover monthly payments. 

Bill-Payment Service

A service that lets you create and pay bills online or through a mobile app. Set up for a bank, credit union, prepaid card account, or a business where you owe money.

C

Capital Gain

Capital gain is the increase in the value of an item or currency or the profit from selling an asset. 

Certificate of Deposit (CD)

A savings product from a bank or credit union that earns on a lump sum for a fixed period.

Credit

A customer’s ability to obtain goods or services before payment. A lender grants a borrower money, for example, via a credit card, personal loan, or home mortgage, in exchange for later payment. 

Credit Card Statement

A summary of your credit card use over one billing period.

Credit Limit

The maximum amount set by a financial institution on a credit card.

Credit Report

A summary of your credit activity and current credit standing, such as loan paying history and the status of your credit accounts. Lenders use these reports to decide if they will loan you money and what interest rates, they will offer you. 

Other businesses might use your credit reports to determine whether to offer you insurance; rent a house or apartment; or provide you with cable TV, Internet, utility, or cell phone service. If you agree to let an employer look at your credit report, it may also be used to make employment decisions about you.

Credit Union

A not-for-profit financial institution that accepts checking and savings deposits and makes loans. It is owned by its members/clients and chartered by the National Credit Union Administration (an independent federal agency) or a state government.

Credit Utilization Ratio

The amount of revolving credit you’re using divided by the total credit available to you. Lenders use your credit utilization ratio to help determine how well you manage your current debt.

Credit Score/FICO Score

Your credit score is a number between 280-850. It is meant to show how creditworthy and helps lenders determine how likely you are to repay a loan. The higher the score, the better your credit.

D

Debt

Money that’s owed to another person or business. For example, your mortgage is a debt you owe to the bank.

Direct Deposit

Money is electronically sent to your bank account, credit union account, or prepaid card.

Dividend

A portion of a company’s profit paid to shareholders out of its earnings. 

E

Emergency Fund

A cash reserve that’s set aside for unplanned expenses or financial emergencies. Common examples include car repairs, home repairs, medical bills, or a loss of income.

Expenses

The outflow of cash in return for goods or services. Expenses include everyday household bills, credit card payments, and groceries. 

F

FAFSA – Free Application for Federal Student Aid

The Free Application for Federal Student Aid form determines how much a student and their family can receive in federal financial aid. The FAFSA may also be used to determine a student’s eligibility for state and school-based support and also may influence how much private aid a student receives.

FDIC – Federal Deposit Insurance Corporation 

An independent agency created by the Congress to maintain stability and public confidence in the nations. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection.

Financial Advisor

A professional with skills and knowledge to assist with various financial matters. They can help you make decisions around managing your money for long-term planning, including retirement and your kids’ education, buying a home, or more short-term dreams such as buying a car.

Financial Wellness

The ability to meet all financial needs and manage money for the short- and long-term. Feel secure in the economic future, absorb a financial shock, and have the financial freedom to make choices to enjoy life.

Fixed Expenses

Expenses, like bills, that must be paid each month and generally cost the same amount. Some fixed expenses, like a utility bill, may also be variable because the amount changes monthly depending on usage.

Foreign Transaction Fee

A foreign transaction fee is a fee charged by a credit card issuer/provider or bank for every transaction made in a country outside of the U.S. Fees vary but usually fall between 1% and 5% of the purchase amount. Check your credit card or bank’s terms and conditions,

Form W-4: Employee’s Withholding Allowance Certificate

A form that an employee completes and the employer uses to determine the amount of income tax to withhold.

G

Generational Wealth

Financial assets are passed down from parents or relatives to children or other family members. Assets may include cash, property, or anything else that has monetary value, as well as investments in children’s education, like paying for college or vocational training. They are also referred to as intergenerational wealth.

Gig

A single project or task that is temporary and performed on an informal or on-demand basis. 

Gig Economy

An informal term for a job where people are hired for single projects or tasks, often through a digital marketplace.

Gross Income

Total pay, including your wages, dividends, capital gains, business income, and retirement distributions before taxes and other deductions are taken out.

H

Health Savings Account (HSA)

A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses.

I

Impulse Purchase

Buying things without having planned for them beforehand. It can cause you to spend more money than you can afford.

Income

The money you regularly receive through your job, investments, or other sources. In terms of making a budget, be sure to use your take-home pay, which is your income after taxes, benefits, and other deductions.

Interest

Interest is the price paid to borrow money. Interest costs require additional repayments on top of the original loan. A bank or credit union may also pay you interest if you deposit money in certain accounts. Interest is paid to a client for money deposited in a bank. Interest owed on a credit card or loan balance.

Interest Rate

A percentage of the principle amount that a lender charges. 

Lender

An organization or person that lends money with the expectation that it will be repaid, generally with interest.

M

Minimum Payment

The minimum dollar amount that must be paid each month on a loan, line of credit, or other debt.

Money Market Account

A money market account is an interest-bearing account that you can open at banks and credit unions that may offer higher interest rates on your savings and often include check-writing. The account may have minimum balance requirements and limits on how frequently you can access your money each month.

Mortgage

This loan is granted to purchase a piece of property where the lender charges interest and can take the title to the property if payments are not made. You pay your mortgage regularly over a certain period, generally 15 or 30 years.

N

Net Income

An amount of money received in a paycheck after taxes and other deductions are taken out, also called take-home pay.

P

Pay Period

The time used to determine when employees receive their paychecks— for example, a week or a month.

Paycheck

A check for your salary or wages.

Payroll Card

A type of prepaid card arranged by an employer to pay its employees’ wages or salary. 

Payroll Tax

Taxes taken from your paycheck, including Social Security and Medicare taxes.

Prepaid Card

A debit card where you can load money in advance to spend. Similar to a gift card. A prepaid card is not linked to a checking account or credit union share draft account. You can usually only spend what you have already loaded onto your prepaid card.

Prepayment

Payment of all or part of a debt before the due date.

Prepayment Penalty

A fee lender can charge borrowers if they pay off a loan too early.

Private Student Loans

These loans are from private organizations like banks, credit unions, or organizations. Private loans are generally more expensive than federal loans.

R

Retirement Account

A long-term savings account at a financial institution that allows an individual to save for retirement and the age when the individual can collect full Social Security benefits. These can include employer-sponsored 401(k)s and individual retirement accounts (IRA). 

S

Salary

The compensation received by an employee for services performed. A salary is a fixed sum paid for a specific period worked, such as weekly or monthly.

Sales Tax

A tax on retail products based on a set percentage of the retail price.

Savings

The money you have set aside in a secure place, such as in a bank account, that you can use to make specific purchases.

Savings Goal

The amount of money you plan to put aside for a specific purpose.

Savings Account

An account at a bank or credit union where you can deposit funds and earn some interest.

Scholarships

Financial support awarded to a student, based on academic achievement or other criteria to help pay education expenses. Scholarships generally do not have to be repaid.

Secured Credit Card

A credit card is backed by a security deposit. The larger the security deposit, the higher the credit limit. Secured cards are often used to build credit history.

Short-Term Goals

Goals that you want to achieve in the near future. The near future can mean today, this week, this month, or even this year.

SMART Goals

Goals that are specific, measurable, attainable, relevant, and time-bound.

Social Security

Provides benefits for retired workers and people with disabilities, as well as unmarried children under 18, surviving spouses, or former spouses (in some instances) of both.

Social Security Number

A unique identifier (nine-digit number) issued by the Social Security Administration used to track an individual’s earnings. 

Stock Market

The stock market functions as a place where buyers and sellers converge to exchange money for securities.

T

Tax Credit

A dollar-for-dollar reduction in tax. It can be deducted directly from taxes owed. Tax credits can reduce the amount of tax you owe or increase your tax refund, and some credits may result in a refund even if you don’t owe any tax.

Tax Deduction

An amount (often a personal or business expense) that reduces income subject to tax.

Tax Refund

Money owed to taxpayers when their total tax payments are greater than the total tax. Refunds are received from the government.

Tax-related Identity Theft

When someone steals your Social Security number to file a tax return claiming a fraudulent refund.

Taxes

Contribution to state revenue, required by the government on workers’ income and business profits. They use the funds to provide public goods and services for the benefit of the community as a whole.

Term

A fixed or limited period for which an agreement lasts or is intended to last (for example, a five-year loan, a three-year certificate of deposit, a one-year insurance policy, or a 30-year mortgage).

Tip

An optional or extra payment a customer gives to an employee. Also called a gratuity.

U

Unbanked

Unbanked households do not have a checking or savings account at an institution that is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

Underbanked

A person who has an account at a bank or credit union but also uses an alternative financial service like a payday loan, check cashing, or a pawn shop loan.

V

Variable Expenses

Expenses that change in an amount from month to month.

Virtual Currency

Electronic money. It’s a digital representation of value not issued by a government, such as a central bank or a public authority, but is accepted as a means of payment and can be transferred, stored, or traded electronically.

W

Withholding (“pay-as-you-earn” taxes)

Money that employers withhold from employees’ paychecks. This money is deposited for the government and is credited against the employees’ tax liability when they file their returns. Employers withhold money for federal income taxes, Social Security and Medicare taxes, and state and local income taxes in some states and localities.

Work-Study Program

A federal program that provides part-time jobs for undergraduate and graduate students. Awarded to college students with financial needs allowing them to earn money to help pay for education expenses.

Will

A document that lists the distribution of your assets after death. A will can help ensure your money and assets are left to the heirs you designate.