Financial Glossary

A guideline suggesting retirees can safely withdraw 4% of their portfolio per year (adjusted for inflation annually) without running out of money over a 30-year retirement.

A tax-advantaged employer-sponsored retirement savings plan in the US where contributions are made pre-tax (traditional) or after-tax (Roth). Many employers match a portion of employee contributions.

The process of paying off a debt over time through regular scheduled payments. Each payment covers both interest and a portion of the principal balance.

The yearly cost of borrowing money, expressed as a percentage. Unlike a simple interest rate, APR includes fees and additional costs, making it a more complete measure of loan cost.

Anything of value you own that can be converted to cash — including savings accounts, investments, real estate, vehicles, and retirement accounts.

The strategy of dividing a portfolio among different asset classes — stocks, bonds, cash, and real assets — to balance risk and return based on your goals and time horizon.

A debt payoff strategy where you pay minimums on all debts but direct every extra dollar to the highest-interest debt first. Minimizes total interest paid.

Moving an existing credit card balance to a new card, typically one offering a 0% introductory APR. Used to pause interest and pay down debt faster during the promotional window.

A period when stock prices fall 20% or more from recent highs, typically over at least two months. Often associated with economic slowdowns or recessions.

Debt instruments where you lend money to a government or corporation in exchange for regular interest payments and return of principal at maturity. Generally lower risk than stocks.

A plan that allocates your income across spending categories, savings, and debt payments. A budget helps ensure you spend intentionally and live within your means.

A period of rising stock prices — typically defined as a 20% or greater increase from a recent low — often associated with economic expansion and investor optimism.

Profit earned from selling an investment (stock, real estate, fund) for more than you paid for it. Short-term gains (held under 1 year) are taxed at ordinary income rates; long-term gains at lower rates.

Interest calculated on both the principal and the accumulated interest from previous periods. Often called the 'eighth wonder of the world' because it allows wealth to grow exponentially over time.

A numerical rating (300–850 in the US) that represents your creditworthiness based on payment history, utilization, credit age, credit mix, and recent inquiries. Higher is better.

The percentage of your available revolving credit currently in use. Calculated as current balance divided by credit limit. Keeping this below 30% (ideally under 10%) helps maximize your credit score.

Combining multiple debts into a single loan, ideally at a lower interest rate and/or with a simpler single monthly payment. Can simplify repayment but doesn't reduce the total amount owed.

The percentage of your gross monthly income that goes toward debt payments. Lenders use DTI to evaluate loan applications — most prefer a DTI below 36-43%.

Spreading investments across different asset classes, sectors, and geographies to reduce risk. The idea: if one investment falls, others may hold steady or rise, smoothing out overall portfolio volatility.

A portion of a company's earnings paid to shareholders, typically quarterly. Dividend-paying stocks provide income in addition to any capital appreciation.

Investing a fixed dollar amount at regular intervals regardless of price. This strategy automatically buys more shares when prices are low and fewer when prices are high, reducing average cost over time.

A dedicated savings reserve of 3-6 months of essential living expenses, kept in a liquid account. Protects against unexpected financial setbacks without resorting to debt.

1. In investing: ownership stake in a company (stock). 2. In real estate: the portion of your home's value you own outright — market value minus remaining mortgage balance.

A basket of securities that trades on a stock exchange like a single stock. ETFs offer instant diversification, low costs, and tax efficiency. Index ETFs track market benchmarks like the S&P 500.

The annual fee charged by a mutual fund or ETF to cover operating costs, expressed as a percentage of assets. Lower is better — index funds often charge 0.03–0.20%, while active funds may charge 0.5–1.5%+.

The most widely used credit scoring model, created by the Fair Isaac Corporation. Scores range from 300-850. About 90% of top US lenders use FICO scores in lending decisions.

The point at which your investment portfolio generates enough passive income to cover all your living expenses indefinitely — making paid work optional.

Recurring costs that remain the same each month, such as rent, mortgage payments, car loans, and insurance premiums. These are the most predictable part of a budget.

Total income before taxes and deductions are removed. Distinct from net (take-home) income, which is what you actually receive in your paycheck.

A credit check initiated when you apply for credit (a loan, mortgage, or credit card). Hard inquiries remain on your credit report for 2 years and may temporarily lower your score by a few points.

A savings account — typically at an online bank — offering significantly higher interest rates than traditional savings accounts. Ideal for emergency funds and sinking funds.

A mutual fund or ETF that tracks a market index (like the S&P 500) by holding the same securities in the same proportions. Offers broad market exposure with minimal costs.

The rate at which the general price level of goods and services rises over time, eroding purchasing power. The US Federal Reserve targets approximately 2% annual inflation.

The cost of borrowing money, expressed as a percentage of the loan amount per year. Also the rate earned on savings or investments.

A financial obligation or debt — anything you owe to others, including mortgages, car loans, credit card balances, student loans, and personal loans.

How quickly and easily an asset can be converted to cash without significant loss of value. Cash is perfectly liquid; real estate is relatively illiquid.

A pooled investment vehicle where many investors contribute money, which is then professionally managed across a diversified portfolio of stocks, bonds, or other assets.

Income after all taxes and deductions have been removed — your actual take-home pay. Also called 'take-home pay'. Used as the basis for most personal budgets.

The total value of everything you own (assets) minus everything you owe (liabilities). A fundamental measure of financial health that grows as you build assets and pay down debt.

The collection of all your financial investments — stocks, bonds, ETFs, real estate, cash, and other assets. A well-diversified portfolio spreads risk across multiple asset types.

The original amount of money borrowed or invested, separate from any interest or fees. When repaying a loan, payments go toward both principal and interest.

The process of realigning a portfolio back to its target asset allocation after market movements have shifted the actual percentages. Typically done annually or when allocations drift significantly.

An individual US retirement account funded with after-tax dollars. Qualified withdrawals in retirement are completely tax-free, including all investment gains.

Registered Retirement Savings Plan — Canada's equivalent of a traditional IRA. Contributions reduce taxable income in the year made and grow tax-sheltered until withdrawal.

The danger that poor investment returns early in retirement will permanently deplete a portfolio, even if long-term average returns are acceptable. Particularly relevant for the first 5-10 years of retirement.

A dedicated savings bucket for a specific known future expense — like a car repair, vacation, or annual insurance premium. Spread the cost monthly to avoid financial shock when the expense arrives.

A debt payoff strategy where you pay minimums on all debts but direct extra payments to the smallest balance first, regardless of interest rate. Creates psychological momentum through quick wins.

Selling investments at a loss to offset capital gains taxes on other investments. The losses reduce your tax bill; you then reinvest in a similar (but not identical) security to maintain market exposure.

Tax-Free Savings Account — a Canadian account where contributions are made with after-tax dollars but all growth and withdrawals are completely tax-free.

An individual US retirement account where contributions may be tax-deductible. Taxes are owed on withdrawals in retirement. Required minimum distributions (RMDs) start at age 73.

Spending that changes from month to month, such as groceries, dining out, entertainment, and clothing. The most flexible part of a budget and the easiest to reduce when cutting costs.

The income earned on an investment, expressed as a percentage of the investment's cost or current market value. A bond with a $1,000 face value paying $50/year has a 5% yield.

A budgeting method where every dollar of income is assigned a specific purpose (spending, saving, or debt payoff) so that income minus all allocations equals zero at the end of planning.