Financial Planning Vocab

401(k)

A special savings plan set up by an employer that allows you to avoid paying taxes on your savings until after retirement Typically, a portion of your untaxed earnings is automatically deducted each pay period and invested in the plan. Some companies try to encourage participation by offering to match some or all of your contributions with contributions of their own. Money in the this plan typically can be invested in some combination of stocks, bonds and mutual funds.

529 plan

An education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1998.

Accumulation

These are the financial vehicles that make up the top portion of a financial pyramid. Accumulation products help you grow your money over time. These investment products include stocks, bonds and mutual funds.

APR (Annual Percentage Rate)

represents the annual cost of borrowing money, expressed as a percentage of the loan amount. It includes interest payments and fees.

APY (Annual Percentage Yield)

represents the annual rate of return you earn on an investment, expressed as a percentage of the amount you invested. It takes into the account the effect of compounded interest.

Assets

Anything you own that has monetary value, such as money you have in bank accounts, stocks, bonds, mutual funds, real estate, the value of your life insurance policy, and any personal property that you could sell for money (a car, jewelry, artwork, etc).

Bank Account

Money deposited in a banking institution. It may be a checking account or a savings account, or a combination

Bond

A long-term loan an investor makes to a government (Treasury or municipal bond) or a company (corporate bond). The investor earns interest on the loan.

Certificate of deposit

Time deposits that earn a set amount of interest (usually compound interest) over a set period of time, usually between 3 months and 5 years. Up to $250,000 is insured by the Federal Deposit Insurance Corporation (FDIC). There is generally a penalty for early withdrawal.

Checking account

A transaction account that allows you to transfer your money to another person or company by writing a check or making an electronic funds transfer. Money is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor,

Compound interest

A method of calculating interest that adds accumulated interest back to the principal amount, resulting in a larger principal amount. Compounded interest allows you to earn interest on a progressively larger amount of money. Simple interest grows more slowly because you earn interest only on the original amount of money.

Dividend

A portion of a company's profits that is distributed to its owners. Many corporations are owned by stockholders, and many stocks pay dividends.

Inflation

A rise in the price of the things you buy. Over long periods of time, inflation averages about 2% to 3% a year. When investing, you should take inflation into account. An investment that pays a low rate of return, such as a bank savings account, will not amount to very much over time after inflation is taken into account.

Interest

The cost of borrowing money. It is the amount earned from investing in a bond, savings account or CD. (By investing in these instruments, you are loaning money to a bank or other institution. It is also the amount paid to obtain a loan or use a credit card. It is expressed as a percent of the principal. It can be simple or compound (See compound interest definition).

Investment

Any use of your assets to create additional assets. You can invest in stocks, mutual funds, CDs, interest-bearing bank accounts, bonds, or real estate. All of these investments offer an opportunity to earn money through interest or dividend payments or a rise in the value of the asset.

IRA

An Individual Retirement Account is a savings account that allows you to save for retirement without paying taxes until you withdraw the money anytime after age 59 12. Like a 401(k) account, it holds money that has not yet been taxed. But it is maintained by an individual rather than an employer.

Liability

Any amount you owe to someone else. Liabilities can include credit card debt, student loans, mortgages and car loans.

Money market account

A savings account that usually offers check-writing privileges and interest rates that are higher than ordinary savings accounts. Money market accounts usually require a minimum balance of around $500.

Mutual fund

An investment that allows you to own shares in a group of stocks or bonds with a single purchase.

Net worth

Add the value of all the assets you own, subtract your liabilities (what you owe) and that is your net worth.

Principal

This is the original amount of money that you invest or borrow, before interest payments or earnings are calculated.

Roth IRA

A special type of Individual Retirement Account for saving money that has already been taxed. After five years, any amount that you invested in a Roth IRA can be withdrawn tax-free if you are 59 72 or older.

Savings account

A deposit account in a bank or credit union that pays interest on your balance. It is insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.

Stock

A share of ownership in a company. Blue chips are shares of the biggest, most consistently profitable companies. Some stocks pay dividends.