RealityCheckFinancial Glossary
Plain-English definitions for common finance terms. This glossary is designed to explain financial concepts used in our calculators and directory. It is informational only and does not constitute financial advice.
4
401(k)
An employer-sponsored retirement savings plan that allows employees to save and invest a piece of their paycheck before taxes are taken out.
Commonly used for: Building long-term retirement savings with tax advantages.
A
Active Investing
An investment strategy that involves ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.
Commonly used for: Attempting to outperform average market returns.
Adjustable-Rate Mortgage (ARM)
A home loan with an interest rate that can change periodically. This means that the monthly payments can go up or down.
Commonly used for: Financing a home with a lower initial interest rate.
Amortization
The process of spreading out a loan into a series of fixed payments over time. Early payments mostly cover interest, while later payments pay down the principal.
Commonly used for: Mortgages, auto loans, and personal loans.
Amortization Schedule
A complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term.
Commonly used for: Visualizing the exact path of debt repayment over time.
APR (Annual Percentage Rate)
The yearly cost of borrowing money, including both the interest rate and any associated fees. It provides a more comprehensive view of what a loan actually costs.
Commonly used for: Comparing different credit cards, mortgages, or personal loans.
APY (Annual Percentage Yield)
The actual rate of return earned on savings or investments in a year, taking into account the effect of compounding interest.
Commonly used for: Comparing high-yield savings accounts and certificates of deposit (CDs).
Asset
Anything of value or a resource of value that can be converted into cash.
Commonly used for: Determining an individual's total net worth.
Asset Allocation
An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.
Commonly used for: Managing risk within an investment portfolio.
B
Balloon Payment
A large payment due at the end of a balloon loan, such as a mortgage, a commercial loan, or another type of amortized loan.
Commonly used for: Structuring loans with lower initial monthly payments.
Bankruptcy
A legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, or on behalf of creditors.
Commonly used for: Seeking legal relief from overwhelming debt obligations.
Bear Market
A condition in which securities prices fall and widespread pessimism causes the stock market's downward spiral to be self-sustaining.
Commonly used for: Describing prolonged periods of declining market values.
Beneficiary
Any person who gains an advantage and/or profits from something. In the financial world, a beneficiary typically refers to someone eligible to receive distributions from a trust, will, or life insurance policy.
Commonly used for: Designating who receives assets after an individual passes away.
Bonds
Fixed-income instruments that represent a loan made by an investor to a borrower (typically corporate or governmental).
Commonly used for: Providing steady, predictable income within an investment portfolio.
Brokerage Account
An investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETFs.
Commonly used for: Building an investment portfolio outside of a standard retirement plan.
Budget
An estimation of revenue and expenses over a specified future period of time and is utilized by governments, businesses, and individuals.
Commonly used for: Planning and controlling monthly spending and saving habits.
Bull Market
A financial market of a group of securities in which prices are rising or are expected to rise.
Commonly used for: Describing prolonged periods of increasing market values.
C
Capital
Financial assets, such as funds held in deposit accounts and/or funds obtained from special financing sources. It can also refer to the physical assets of a business.
Commonly used for: Describing the money needed to start a business or make an investment.
Capital Gain
An increase in a capital asset's value. It is considered to be realized when the asset is sold.
Commonly used for: Calculating taxable income from sold investments.
Capital Loss
The loss incurred when a capital asset decreases in value. This loss is not realized until the asset is sold for a price that is lower than its original purchase price.
Commonly used for: Offsetting capital gains for tax purposes.
Cash Flow
The net amount of cash and cash-equivalents being transferred in and out of a business or personal budget.
Commonly used for: Analyzing monthly budgeting and living expenses.
Certificate of Deposit (CD)
A product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time.
Commonly used for: Earning a fixed, guaranteed return on savings.
Closing Costs
The expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction.
Commonly used for: Budgeting for the final expenses of purchasing a home.
Collateral
An asset that a lender accepts as security for a loan. If the borrower defaults on the loan payments, the lender can seize the collateral and resell it to recoup the losses.
Commonly used for: Securing auto loans and mortgages.
Compound Interest
Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It's essentially "interest on interest."
Commonly used for: Estimating long-term savings growth and investment returns.
Cost of Living
The amount of money needed to sustain a certain standard of living by affording basic expenses such as housing, food, taxes, and healthcare.
Commonly used for: Comparing the financial requirements of living in different geographical locations.
Credit Report
A detailed breakdown of an individual's credit history prepared by a credit bureau.
Commonly used for: Providing lenders with a comprehensive view of an individual's borrowing behavior.
Credit Score
A statistical number that evaluates a consumer's creditworthiness and is based on credit history. Lenders use credit scores to evaluate the probability that an individual will repay debts.
Commonly used for: Qualifying for loans, credit cards, and favorable interest rates.
Credit Utilization Ratio
The amount of revolving credit you're currently using divided by the total amount of revolving credit you have available. It's often expressed as a percentage.
Commonly used for: Understanding factors that impact a credit score.
D
Deductible
The amount you pay for covered health care or insurance services before your insurance plan starts to pay.
Commonly used for: Understanding out-of-pocket costs for insurance policies.
Default
The failure to repay a debt including interest or principal on a loan or security.
Commonly used for: Describing the consequences of missing required loan payments.
Depreciation
An accounting method of allocating the cost of a tangible or physical asset over its useful life or expectancy.
Commonly used for: Estimating the declining value of assets like vehicles over time.
Disposable Income
The amount of money that an individual or household has to spend or save after income taxes have been deducted.
Commonly used for: Calculating savings rates and budgeting for discretionary spending.
Diversification
A risk management strategy that mixes a wide variety of investments within a portfolio.
Commonly used for: Reducing the impact of volatility on a portfolio.
Dividend
A distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders.
Commonly used for: Generating passive income from stock investments.
Down Payment
An initial up-front partial payment for the purchase of expensive items/services such as a car or a house.
Commonly used for: Securing a mortgage or auto loan.
DTI (Debt-to-Income Ratio)
The percentage of your gross monthly income that goes toward paying debts. Lenders use it to measure your ability to manage monthly payments to repay the money you plan to borrow.
Commonly used for: Evaluating mortgage or loan eligibility.
E
Emergency Fund
A bank account with money set aside to pay for large, unexpected expenses.
Commonly used for: Creating a financial buffer against job loss or medical emergencies.
Equity
The difference between the value of the assets and the value of the liabilities of something owned.
Commonly used for: Measuring the portion of a home's value that is actually owned outright.
Escrow
A financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction. In real estate, it often holds funds for property taxes and homeowners insurance.
Commonly used for: Managing recurring homeownership costs alongside a mortgage payment.
Exchange-Traded Fund (ETF)
A type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other asset.
Commonly used for: Building a diversified investment portfolio with low fees.
Expense Ratio
The annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses.
Commonly used for: Comparing the ongoing costs of different investment funds.
F
FICA Tax
The Federal Insurance Contributions Act (FICA) tax is a United States federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare.
Commonly used for: Estimating take-home pay from gross salary.
FICO Score
A specific type of credit score created by the Fair Isaac Corporation. It is the most widely used credit score by lenders to evaluate credit risk.
Commonly used for: Determining eligibility for mortgages and other loans.
Fiduciary
A person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust.
Commonly used for: Selecting a financial advisor or planner.
Fiduciary Duty
The legal obligation of one party to act in the best interest of another. The obligated party is typically a fiduciary, that is, someone entrusted with the care of money or property.
Commonly used for: Ensuring financial advisors provide recommendations that benefit the client above themselves.
FIRE (Financial Independence, Retire Early)
A movement of people devoted to a program of extreme savings and investment that aims to allow them to retire far earlier than traditional budgets and retirement plans would permit.
Commonly used for: Planning for aggressive early retirement scenarios.
Fixed Expense
An expense whose total amount does not change from month to month, such as rent or a car payment.
Commonly used for: Creating baseline budgets and emergency funds.
Fixed-Rate Mortgage
A home loan that has a fixed interest rate for the entire term of the loan.
Commonly used for: Securing predictable monthly payments for a home purchase.
Foreclosure
A legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
Commonly used for: Understanding the risks of defaulting on a mortgage.
G
Grace Period
A set length of time after the due date during which payment may be made without penalty.
Commonly used for: Managing credit card payments and avoiding late fees.
Gross Income
The total amount of money earned before taxes and other deductions are taken out.
Commonly used for: Calculating tax brackets and loan qualification limits.
H
Health Savings Account (HSA)
A tax-advantaged savings account designed to help people with high-deductible health plans save for medical expenses.
Commonly used for: Saving for medical costs while receiving multiple tax benefits.
High-Yield Savings Account (HYSA)
A type of savings account that typically pays a much higher interest rate than a standard savings account.
Commonly used for: Storing emergency funds or saving for short-term goals.
Home Equity
The value of a homeowner's interest in their home. It is the property's current market value minus any liens that are attached to that property.
Commonly used for: Measuring the actual accumulated wealth within a real estate asset.
Home Equity Loan
A type of loan in which the borrower uses the equity of his or her home as collateral.
Commonly used for: Accessing cash for major expenses by borrowing against a property's value.
I
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).
Commonly used for: Achieving broad market exposure with low operating expenses.
Individual Retirement Account (IRA)
A tax-advantaged investing tool that individuals use to earmark funds for retirement savings.
Commonly used for: Supplementing employer-sponsored retirement plans.
Inflation
The general increase in prices of goods and services over time, which reduces the purchasing power of money.
Commonly used for: Estimating future living costs and retirement needs.
Interest
The charge for the privilege of borrowing money, typically expressed as annual percentage rate (APR).
Commonly used for: Calculating the total cost of debt or return on savings.
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.
Commonly used for: Calculating base monthly loan payments or savings yields.
L
Liability
Something a person or company owes, usually a sum of money.
Commonly used for: Calculating net worth and assessing financial health.
Liquid Asset
An asset that can be quickly and easily converted into cash without a significant loss of value.
Commonly used for: Funding emergency expenses without delay.
Liquidity
The ease with which an asset, or security, can be converted into ready cash without affecting its market price.
Commonly used for: Evaluating the accessibility of emergency funds.
M
Minimum Payment
The lowest amount a customer can pay on their revolving credit account per month to remain in good standing with the credit card company.
Commonly used for: Planning debt payoff strategies.
Mortgage
A type of loan used to purchase or maintain a home, land, or other types of real estate.
Commonly used for: Financing real estate purchases over an extended period.
Mutual Fund
A type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
Commonly used for: Gaining access to professionally managed portfolios of equities.
N
Net Income (Take-Home Pay)
The amount of money you receive after taxes and deductions have been subtracted from your gross income.
Commonly used for: Creating personal budgets and calculating savings rates.
Net Worth
The value of the assets a person or corporation owns, minus the liabilities they owe.
Commonly used for: Tracking overall financial progress over time.
O
Opportunity Cost
The potential benefit that is lost when you choose one alternative over another.
Commonly used for: Evaluating the trade-offs of major financial decisions.
P
Passive Investing
An investment strategy to maximize returns by minimizing buying and selling. Index investing is one common passive investing strategy.
Commonly used for: Building long-term wealth with lower fees and less hands-on management.
Payday Loan
A type of short-term borrowing where a lender will extend high-interest credit based on a borrower's income and credit profile.
Commonly used for: Securing immediate, high-cost funds before a scheduled paycheck.
PITI
An acronym for Principal, Interest, Taxes, and Insurance. It represents the total monthly mortgage payment for a homebuyer.
Commonly used for: Estimating the full monthly cost of a home loan.
PMI (Private Mortgage Insurance)
A type of mortgage insurance you might be required to pay if you have a conventional loan and make a down payment of less than 20% of the home's purchase price.
Commonly used for: Factoring into overall monthly housing costs when buying a home.
Portfolio
A grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts.
Commonly used for: Evaluating overall investment holdings and asset allocation.
Principal
The original sum of money borrowed in a loan or put into an investment, separate from the interest.
Commonly used for: Calculating loan balances and investment baselines.
R
Return on Investment (ROI)
A performance measure used to evaluate the efficiency or profitability of an investment. It measures the return of an investment relative to its cost.
Commonly used for: Comparing the profitability of various investments or side hustles.
Revolving Credit
A type of credit that does not have a fixed number of payments, such as a credit card. It allows you to borrow money repeatedly up to a set limit.
Commonly used for: Managing short-term cash flow needs.
Robo-Advisor
Digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision.
Commonly used for: Automating investment portfolio management at a lower cost than traditional advisors.
Roth IRA
An individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. Contributions are made with after-tax dollars.
Commonly used for: Building tax-free income for retirement.
S
Savings Account
An interest-bearing deposit account held at a bank or other financial institution.
Commonly used for: Stashing cash for short-term goals or emergencies safely.
Savings Rate
The percentage of a person's income that is saved, rather than spent on consumption.
Commonly used for: Measuring the efficiency of a household budget in building wealth.
Secured Loan
A loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan.
Commonly used for: Financing major purchases like a home or a vehicle.
Sinking Fund
A strategic way to save money by setting aside a little bit each month for a specific, upcoming expense.
Commonly used for: Preparing for known future expenses like property taxes, holidays, or a new car.
Stock
A type of security that signifies proportionate ownership in the issuing corporation.
Commonly used for: Investing in company equity for long-term growth.
T
Tax Bracket
A range of incomes subject to a certain income tax rate. Tax brackets result in a progressive tax system, in which taxation increases as an individual's income grows.
Commonly used for: Estimating federal income tax liabilities.
Tax Deduction
A reduction of income that is able to be taxed and is commonly a result of expenses, particularly those incurred to produce additional income.
Commonly used for: Lowering overall taxable income.
Tax Return
A form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information.
Commonly used for: Calculating and reporting an individual's or entity's tax liability.
Term
The amount of time a loan or other contract lasts.
Commonly used for: Determining the length of time needed to repay debt.
Time Value of Money (TVM)
The concept that a sum of money is worth more now than the same sum will be at a future date due to its earning potential in the interim.
Commonly used for: Understanding the impact of inflation and compound interest over decades.
Traditional IRA
A type of individual retirement account (IRA) in which contributions may be tax-deductible and earnings grow tax-deferred until withdrawals begin during retirement.
Commonly used for: Reducing current taxable income while saving for retirement.
U
Unsecured Loan
A loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral.
Commonly used for: Funding personal expenses through personal loans or credit cards.
V
Variable Expense
An expense that changes from month to month, such as groceries or entertainment.
Commonly used for: Identifying areas to reduce spending in a budget.
Volatility
A statistical measure of the dispersion of returns for a given security or market index. Higher volatility means a riskier investment.
Commonly used for: Assessing the risk level of an investment portfolio.
W
Withdrawal Rate
The percentage of an investment portfolio that is removed each year to cover living expenses, often used in retirement planning to estimate how long funds will last.
Commonly used for: Determining a sustainable income stream during retirement.
Withholding
The portion of an employee's wages that is not included in their paycheck but is instead remitted directly to the federal, state, or local tax authorities.
Commonly used for: Estimating actual take-home pay from a gross salary.
Y
Yield
The income returned on an investment, such as the interest received from holding a security.
Commonly used for: Comparing returns across different investments or savings accounts.