Personal Finance Terminology and Concepts

Flashcards covering personal finance terminology and concepts.

Saving

Safe because your money is guaranteed, but the interest rates are lower (<4%) and so it’s hard to grow wealth.

Investing

Riskier because you could lose money, but the rate of return is higher and you can grow wealth (>5%)

Stocks

A security that represents the ownership of a fraction of the issuing corporation.

Bonds

A promise by a borrower to pay a lender their principal and usually interest on a loan; typically the government sells bonds to individuals or businesses.

401K

An employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary, often on a pre-tax basis, to an individual retirement account.

Diversification

A risk management strategy that involves spreading investments across a variety of assets, asset classes, and geographies to reduce the overall risk of a portfolio.

Mutual Fund

a pooled investment vehicle that collects money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. This allows individual investors to participate in a larger investment strategy managed by professionals.

Index Fund

an index that tracks the combined average performance of stocks from 500 of the largest public US companies.

Income Tax

A tax imposed on individuals or entities in respect of the income or profits earned by them.

Tax Brackets

The divisions at which tax rates change in a progressive tax system.

Federal Insurance Contribution Act (FICA)

A federal payroll tax directed towards both employees and employers to fund Social Security and Medicare.

Property Tax

A tax on property based on the value of that property (usually issued at the local or town/city level)

Sales Tax

A tax applied to sales of commercial goods paid by the purchaser at point of purchase.

Capital Gains Tax

A tax levied on profit from the sale of property or an investment.

Estate Tax

A tax levied on the net value of the estate of a deceased person before distribution to the heirs.

Insurance

A practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a monthly premium or fee.

Cost of Living

The cost of maintaining a certain standard of living.