Personal finance dictionary

241 money terms explained in plain English, from APR to whole life insurance. Each one has a worked example, how it’s used, and its strengths and weaknesses.

Basics & budgeting 18

50/30/20 rule: A simple budgeting guideline that splits take-home pay into 50% needs, 30% wants and 20% savings and extra debt payments.
Asset: Something you own that has monetary value, such as cash, investments, property or a vehicle.
Budget: A plan for how you will divide your income among spending, saving and debt payments over a set period, usually a month.
Cash flow: The movement of money into and out of your accounts over a period, and whether more comes in than goes out.
Cost of living: The amount of money needed to cover basic expenses such as housing, food, transportation, health care and taxes in a given place.
Discretionary income: Money left after taxes and essential living costs, available for wants, extra saving or faster debt payoff.
Emergency fund: Cash set aside to cover unexpected expenses or a loss of income without borrowing or selling investments.
Gross income: Total earnings before any taxes, retirement contributions, insurance premiums or other deductions are taken out.
Inflation: The general rise in prices across an economy over time, which means each dollar buys a little less than before.
Liability: Money you owe to someone else, such as a mortgage, car loan, student loan or credit card balance.
Liquidity: How quickly and cheaply an asset can be turned into cash without losing value.
Net income (take-home pay): The money you actually receive after taxes, benefit premiums, retirement contributions and other deductions come out of your pay.
Net worth: The total value of everything you own minus everything you owe, giving a snapshot of your overall financial position.
Opportunity cost: The value of the best alternative you give up when you choose to spend money, time or resources one way instead of another.
Pay yourself first: A saving habit of setting aside money for savings and investing as soon as you are paid, before spending on anything else.
Purchasing power: How much a given amount of money can actually buy, which falls when prices rise faster than income or savings grow.
Real vs. nominal value: Nominal values are stated in current dollars; real values are adjusted for inflation to show true buying power.
Sinking fund: Money set aside in small regular amounts for a known future expense, so the cost does not hit all at once.

Interest & time value of money 18

Amortization: Paying off a loan with regular equal payments that cover interest first and gradually reduce principal to zero by the end of the term.
Annual percentage rate (APR): The yearly cost of borrowing expressed as a percentage, which for many loans includes certain fees as well as interest.
Annual percentage yield (APY): The actual yearly return on a deposit once compounding is included, used to compare savings accounts and CDs.
Annuity (payment stream): In finance math, a series of equal payments made at regular intervals for a set number of periods.
Compound interest: Interest earned on both the original principal and on interest already added, so growth speeds up over time.
Discount rate: The rate used to convert future money into today’s value; also the rate the Federal Reserve charges banks for short-term loans.
Federal funds rate: The interest rate banks charge each other for overnight loans of reserves, targeted by the Federal Reserve to steer the economy.
Fixed interest rate: An interest rate that stays the same for the life of a loan or deposit term, regardless of what market rates do.
Future value: What money invested today will grow to at a later date, given a rate of return and compounding.
Interest: The price of using someone else’s money: what borrowers pay lenders, and what savers earn on deposits and bonds.
Present value: What a future amount of money is worth in today’s dollars, given a rate of return or discount rate.
Prime rate: A benchmark interest rate banks use as a base for many consumer and business loans, moving closely with Federal Reserve policy.
Principal: The original amount borrowed or invested, separate from any interest charged or earned on it.
Real interest rate: An interest rate adjusted for inflation, showing how much purchasing power a saver gains or a borrower actually pays.
Rule of 72: A shortcut for estimating how many years it takes money to double: divide 72 by the annual percentage rate of return.
Simple interest: Interest calculated only on the original principal, not on interest that has already built up.
Time value of money (TVM): The principle that a dollar today is worth more than a dollar in the future, because money available now can earn a return.
Variable interest rate: An interest rate that can change over time because it is tied to a benchmark index, so payments may rise or fall.

Banks & institutions 17

Brokerage firm: A company that buys and sells stocks, bonds, funds and other securities for customers and holds them in investment accounts.
Certificate of deposit (CD): A deposit that pays a fixed interest rate for a set term, such as one year, with a penalty if you withdraw before it matures.
Checking account: A bank or credit union account for everyday spending that allows frequent deposits and withdrawals by debit card, check, transfer or bill pay.
Commercial bank: A for-profit company that takes deposits, makes loans and offers everyday accounts such as checking, savings and credit cards to the public.
Credit union: A not-for-profit financial cooperative owned by its members that offers banking services, often with lower fees and better rates than banks.
FDIC insurance: Federal protection that covers deposits at insured banks up to $250,000 per depositor, per insured bank, per ownership category if the bank fails.
Fiduciary: A person or firm legally required to act in someone else’s best interest, putting the client’s needs ahead of their own when giving advice.
Financial advisor: A professional who helps people plan and manage money, such as investing, retirement, taxes and insurance, for a fee or commission.
High-yield savings account: A savings account that pays a much higher interest rate than a typical bank savings account, most often offered by online banks and credit unions.
Money market account: An insured savings account that often pays tiered interest and may allow limited check writing or debit card access.
NCUA insurance: Federal insurance for credit union deposits, covering up to $250,000 per member, per insured credit union, per ownership category.
Online bank: A bank that operates mainly or entirely through websites and apps instead of physical branches, often paying higher rates with fewer fees.
Overdraft: What happens when a transaction takes more money than your account holds, which can lead to a fee, a declined payment or a transfer from savings.
Robo-advisor: An online service that uses algorithms to build, invest and rebalance a diversified portfolio for you, usually at a low annual fee.
Savings account: An interest-bearing deposit account for money you do not plan to spend right away, such as an emergency fund or savings goal.
Savings and loan (thrift): A bank-like institution that historically focused on taking savings deposits and making home mortgage loans.
SIPC protection: Coverage that restores up to $500,000 of missing securities and cash, including a $250,000 cash limit, if a member brokerage fails.

Credit & credit cards 22

Annual fee: A yearly charge some credit cards bill just for keeping the account open, usually in exchange for richer rewards or perks.
Authorized user: Someone added to another person’s credit card account who gets a card and charging privileges but is not legally responsible for the debt.
Balance transfer: Moving debt from one credit card to another, often to a card with a low or 0% introductory APR, usually for a fee.
Cash advance: Borrowing cash against your credit card’s limit, usually with an upfront fee, a higher APR and interest that starts right away.
Charge card: A payment card that usually requires paying the full balance each month and typically has no preset spending limit.
Credit bureau: A company that collects information about how people use credit and sells it as credit reports to lenders and other approved users.
Credit card: A card that lets you borrow up to a set limit for purchases and repay over time, with interest charged on balances not paid in full.
Credit freeze: A free tool that blocks most new lenders from viewing your credit report, making it much harder for someone to open accounts in your name.
Credit limit: The maximum amount a lender lets you borrow on a credit card or line of credit at one time.
Credit report: A detailed record of your credit accounts, balances, payment history and public records, compiled by a credit bureau.
Credit score: A three-digit number that summarizes how likely you are to repay borrowed money, based on the information in your credit reports.
Credit utilization: The share of your available revolving credit you are using, a major factor in credit scores, figured per card and across all cards.
Debit card: A card that pays for purchases and ATM withdrawals directly from your checking account rather than by borrowing money.
FICO score: The most widely used credit score in U.S. lending, with base versions ranging from 300 to 850.
Grace period: The time between the end of a credit card billing cycle and the due date during which paying in full avoids interest on new purchases.
Hard inquiry: A check of your credit by a lender when you apply for new credit, which appears on your report and can lower your score slightly.
Identity theft protection: Paid services that monitor for misuse of personal information, alert the user and help restore their identity after fraud.
Minimum payment: The smallest amount you must pay on a credit card or line of credit by the due date to keep the account in good standing.
Penalty APR: A higher interest rate a credit card can apply after a serious late payment or other violation of the card terms.
Rewards credit card: A credit card that gives cash back, points or miles on purchases, sometimes in exchange for an annual fee or higher APR.
Secured credit card: A credit card backed by a cash deposit that usually sets your limit, designed to help people build or rebuild credit.
Soft inquiry: A credit check that does not affect your credit score, such as checking your own credit or a lender prescreening you for an offer.

Mortgages & home buying 26

15-year mortgage: A home loan repaid over 15 years, with higher monthly payments than a 30-year loan but far less total interest.
30-year mortgage: A home loan repaid over 30 years, the most common U.S. term, offering the lowest required payment at the cost of more total interest.
Adjustable-rate mortgage (ARM): A home loan with a fixed introductory rate for a set period, after which the rate resets periodically based on a market index.
Balloon mortgage: A home loan with relatively small payments for a few years followed by one large lump-sum payment of the remaining balance.
Cash-out refinance: A refinance in which the new mortgage is larger than the old balance and the borrower receives the difference in cash.
Closing costs: The fees and prepaid expenses due when a home purchase or refinance is finalized, separate from the down payment.
Conventional loan: A mortgage not insured or guaranteed by a government agency such as the FHA, VA or USDA.
Discount points: Upfront fees paid to a lender at closing to lower a mortgage’s interest rate, with one point equal to 1% of the loan amount.
Down payment: The portion of a home’s purchase price paid up front in cash rather than borrowed, usually expressed as a percentage of the price.
Escrow: An account a neutral party or mortgage servicer holds to pay property taxes and insurance, or to hold funds until a home sale closes.
FHA loan: A mortgage insured by the Federal Housing Administration that allows smaller down payments and lower credit scores than many conventional loans.
Fixed-rate mortgage: A home loan whose interest rate stays the same for the entire term, so the principal and interest payment never changes.
Home equity: The part of a home’s value the owner truly owns: its current market value minus every loan secured by it.
Home equity line of credit (HELOC): A revolving credit line secured by a home, letting the owner borrow against equity as needed up to a set limit.
Home equity loan: A lump-sum loan secured by home equity, usually with a fixed rate and fixed payments, taken alongside the existing mortgage.
Interest-only mortgage: A home loan that lets the borrower pay only interest for an initial period, after which payments jump to cover principal too.
Jumbo loan: A mortgage larger than the conforming loan limit, so it cannot be sold to Fannie Mae or Freddie Mac and usually has stricter rules.
Loan-to-value ratio (LTV): The loan amount divided by the property’s appraised value or price, showing how much of the home is financed.
Mortgage: A loan used to buy real estate, in which the property itself serves as collateral the lender can claim if the borrower stops paying.
Mortgage pre-approval: A lender’s conditional offer to lend up to a stated amount, based on a review of the buyer’s credit, income, assets and debts.
Private mortgage insurance (PMI): Insurance that protects the lender, not the borrower, typically required on conventional loans with less than 20% down.
Refinancing: Replacing an existing loan with a new one, usually to get a lower rate, change the term or switch between fixed and adjustable.
Rental property and house hacking: Real estate owned to earn rent, including house hacking, where an owner lives in one unit of a multi-unit property and rents the others.
Reverse mortgage: A loan for older homeowners that turns home equity into cash, with no monthly payments until the borrower moves out, sells or dies.
USDA loan: A government-backed mortgage for low- and moderate-income buyers in eligible rural and some suburban areas, usually with no down payment.
VA loan: A mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible service members, veterans and some surviving spouses.

Loans & debt 15

Auto loan: A loan for buying a vehicle, secured by the vehicle itself, which the lender can repossess if payments stop.
Bankruptcy: A federal court process that lets people who cannot repay their debts eliminate some of them or repay them under court protection.
Buy now, pay later (BNPL): A point-of-sale loan that splits a purchase into a few installments, often interest-free if every payment is made on time.
Collateral: An asset a borrower pledges to secure a loan, which the lender can take and sell if the borrower fails to repay.
Cosigner: A person who signs a loan alongside the main borrower and becomes legally responsible for the full debt if the borrower does not pay.
Debt avalanche: A payoff strategy that makes minimum payments on every debt and puts all extra money toward the highest-interest balance first.
Debt consolidation: Combining several debts into a single new loan or account, ideally with a lower interest rate or simpler payment.
Debt snowball: A payoff strategy that makes minimum payments on every debt and puts all extra money toward the smallest balance first.
Debt-to-income ratio (DTI): The share of gross monthly income that goes to required debt payments, used by lenders to judge whether a borrower can take on more.
Default: Failure to repay a debt as the loan agreement requires, typically after a period of missed payments, triggering serious consequences.
Federal student loan: A loan for college or career school funded by the U.S. Department of Education, with fixed rates set by law and federal borrower protections.
Payday loan: A small, short-term, high-cost loan due on the borrower’s next payday, usually repaid in one lump sum including a flat fee.
Personal loan: An installment loan, usually unsecured, that provides a lump sum repaid in fixed monthly payments over a set term.
Private student loan: An education loan from a bank, credit union or other private lender, priced on credit and lacking most federal loan protections.
Secured vs. unsecured debt: The difference between debt backed by an asset the lender can claim, such as a home or car, and debt backed only by a promise to repay.

Investing & investment vehicles 36

Accredited investor: A person or entity that meets SEC tests of income, net worth or professional knowledge and may invest in certain private, less-regulated offerings.
Active vs. passive investing: Two approaches to investing: trying to beat the market by selecting investments, or simply owning the whole market through low-cost index funds.
Alternative investments: Investments outside ordinary stocks, bonds and cash, such as private equity, hedge funds, private credit, commodities and collectibles.
Annuity (insurance product): A contract with an insurance company in which a person pays money up front or over time in exchange for payments later, often for life.
Asset allocation: How a portfolio is divided among broad investment types such as stocks, bonds and cash, chosen to balance growth potential against risk.
Bond: A loan an investor makes to a government or company, which promises to pay interest and return the face value on a set maturity date.
Bond duration: A measure, in years, of how sensitive a bond or bond fund’s price is to changes in interest rates.
Bond yield and yield to maturity: The return a bond provides relative to its price, measured either as income alone (current yield) or as the total return if held to maturity (YTM).
Bull and bear markets: Names for sustained periods of rising prices (bull) and falling prices (bear) in a market, most often the stock market.
Capital gain: The profit from selling an investment or other asset for more than its cost basis; selling for less produces a capital loss.
Compound annual growth rate (CAGR): The steady yearly growth rate that would take an investment from its starting value to its ending value over a given number of years.
Corporate bond: A bond issued by a company to borrow money from investors, usually paying a higher interest rate than government bonds to reflect greater risk.
Credit rating (bonds): A letter grade from a rating agency that estimates how likely a bond issuer is to make its interest and principal payments on time.
Cryptocurrency: A digital asset recorded on a blockchain, a shared electronic ledger, that is not issued by a government and whose price is often highly volatile.
Diversification: Spreading money across many different investments so that a loss in any single one has a smaller effect on the whole portfolio.
Dividend: A payment a company or fund makes to its shareholders, usually in cash, out of its profits or income.
Dollar-cost averaging: Investing a fixed dollar amount on a regular schedule regardless of price, so more shares are bought when prices are low and fewer when high.
Exchange-traded fund (ETF): A pooled fund holding stocks, bonds or other assets whose shares trade on an exchange throughout the day like an individual stock.
Expense ratio: The yearly fee a mutual fund or ETF charges, shown as a percentage of the money invested and taken out of the fund’s returns.
Index fund: A mutual fund or ETF that aims to match the performance of a market index by holding the same investments rather than picking winners.
Margin account: A brokerage account that lets an investor borrow from the broker to buy securities, using the account’s holdings as collateral.
Market capitalization: The total market value of a company’s outstanding shares, found by multiplying the share price by the number of shares.
Money market fund: A mutual fund that invests in short-term, high-quality debt and aims to keep a stable $1 share price while paying interest-like income.
Municipal bond: A bond issued by a state, city or other local government entity whose interest is generally exempt from federal income tax.
Mutual fund: A pooled investment that collects money from many investors to buy a portfolio of stocks, bonds or other assets run by a professional manager.
Options (calls and puts): Contracts giving the buyer the right, but not the obligation, to buy or sell an asset at a set price by a set date.
Price-to-earnings ratio (P/E): A valuation measure that compares a stock’s price to the company’s profit per share, showing how much investors pay for each dollar of earnings.
Real estate investment trust (REIT): A company that owns or finances income-producing real estate and passes most of its taxable income to shareholders as dividends.
Rebalancing: Buying and selling investments to bring a portfolio back to its target mix after market movements have pushed it off course.
Risk tolerance: How much decline in investment value a person is willing and able to withstand in pursuit of potentially higher returns.
Series I savings bonds (I bonds): U.S. savings bonds whose interest rate combines a fixed rate with an inflation rate that resets every six months, protecting savings from inflation.
Stock: A share of ownership in a company that can rise or fall in value and may pay part of the company’s profits as dividends.
Target-date fund: A fund that holds a mix of stocks and bonds and gradually shifts toward bonds and cash as a chosen target year, usually retirement, approaches.
Treasury Inflation-Protected Securities (TIPS): Treasury securities whose principal rises and falls with the Consumer Price Index, so their interest and final payout keep pace with inflation.
Treasury securities: Debt issued by the U.S. Treasury to fund the federal government, backed by the full faith and credit of the United States.
Volatility: How much and how quickly an investment’s price moves up and down over time, often measured by the standard deviation of returns.

Retirement & tax-advantaged accounts 25

401(k): An employer-sponsored retirement plan that lets workers save part of each paycheck, usually before income tax, with investments growing tax-deferred.
403(b): A retirement plan, similar to a 401(k), for employees of public schools, many tax-exempt nonprofits and certain ministers.
457(b): A deferred compensation retirement plan for state and local government workers and some nonprofit employees, with its own separate contribution limit.
529 plan: A state-sponsored savings plan for education where investment earnings grow tax-free when used for qualified education expenses.
72(t) substantially equal periodic payments: A series of fixed, IRS-calculated withdrawals that lets people take money from retirement accounts before 59½ without the 10% penalty.
Backdoor Roth IRA: A two-step workaround for high earners: contribute after-tax money to a traditional IRA, then convert it to a Roth IRA.
Early withdrawal penalty: The 10% additional federal tax usually charged on money taken from a retirement account before age 59½, on top of regular income tax.
Employer match: Money an employer adds to a worker’s retirement account based on how much the worker contributes, up to a set limit.
Health savings account (HSA): A tax-advantaged account paired with a high-deductible health plan, used to pay medical costs now or save for health expenses later.
Medicare: The federal health insurance program for people 65 and older and some younger people with disabilities, made up of Parts A, B, C and D.
Mega backdoor Roth: Making after-tax 401(k) contributions above the normal deferral limit and moving them into Roth accounts, if the plan allows.
Net unrealized appreciation (NUA): The growth in value of employer stock inside a 401(k), which can be taxed at capital gains rates if the shares are taken out in a lump-sum distribution.
Pension (defined-benefit plan): An employer retirement plan that promises a set monthly income for life, usually based on salary and years of service.
Required minimum distribution (RMD): The minimum amount that must be withdrawn each year from most tax-deferred retirement accounts once the owner reaches an age set by federal law.
Rollover: Moving money from one retirement account to another, such as from an old 401(k) to an IRA, without triggering taxes or penalties if done correctly.
Roth 401(k): The after-tax version of a 401(k): contributions are taxed now, but qualified withdrawals of both contributions and earnings are tax-free in retirement.
Roth conversion: Moving money from a pre-tax retirement account to a Roth account, paying income tax now in exchange for tax-free qualified withdrawals later.
Roth IRA: An individual retirement account funded with after-tax money, where qualified withdrawals of earnings are tax-free and contributions can be taken out any time.
Rule of 55: An IRS exception that allows penalty-free withdrawals from a current employer’s 401(k) or 403(b) after leaving the job in or after the year you turn 55.
SEP IRA: A simplified retirement plan for self-employed people and small businesses, funded by employer contributions set as a percentage of each worker’s pay.
SIMPLE IRA: A low-cost retirement plan for small employers where workers defer part of their pay and the employer must match or contribute a set percentage.
Social Security: The federal program that pays retirement, disability and survivor benefits, funded by payroll taxes on workers’ earnings.
Solo 401(k): A 401(k) for self-employed people with no employees other than a spouse, allowing contributions both as employee and as employer.
Traditional IRA: An individual retirement account, opened on one’s own, where contributions may be tax-deductible and investments grow tax-deferred until withdrawal.
Vesting: The process of earning full ownership of employer-provided money or benefits, such as matching contributions, over time.

Wealth management & planning 17

Assets under management (AUM) fee: An annual fee a financial advisor charges as a percentage of the investments they manage for a client.
Bunching deductions: A tax strategy that concentrates deductible expenses into alternating years so itemizing beats the standard deduction in those years.
Donor-advised fund (DAF): A charitable giving account that gives an immediate tax deduction for contributions, then lets the donor recommend grants to charities over time.
Employee stock purchase plan (ESPP): A workplace program that lets employees buy company stock through payroll deductions, often at a discount to the market price.
Fee-only, fee-based and commission advisors: Three ways financial advisors are paid: only by clients, by a mix of client fees and product commissions, or mainly by commissions on products sold.
Financial independence (FIRE): Having enough savings and other income to cover living costs without needing to work; FIRE adds the goal of retiring early.
Fund loads and 12b-1 fees: Sales charges some mutual funds collect when shares are bought or sold, plus ongoing 12b-1 fees for marketing and distribution.
Incentive vs. non-qualified stock options: Employer grants giving the right to buy company shares at a fixed price; incentive and non-qualified options differ mainly in how they are taxed.
Lifestyle creep: The tendency for spending to rise along with income, so raises and bonuses bring little or no increase in savings.
Longevity risk: The risk of living longer than expected and outlasting retirement savings or income.
Pension lump sum vs. annuity: The choice some pension plans offer between a guaranteed monthly payment for life and a single one-time payout of the pension’s value.
Qualified charitable distribution (QCD): A transfer from an IRA directly to a charity, available from age 70½, that is excluded from taxable income and can count toward an RMD.
Restricted stock units (RSUs): A promise from an employer to give an employee company shares once vesting conditions are met, typically after staying a set length of time.
Safe withdrawal rate (4% rule): The share of a retirement portfolio that can be withdrawn in the first year, then raised with inflation, with a low chance of running out of money.
Sequence-of-returns risk: The danger that poor investment returns early in retirement, while withdrawals are being taken, permanently shrink how long savings last.
Social Security claiming age: The age at which a person starts Social Security retirement benefits, anywhere from 62 to 70, which permanently sets the size of the monthly check.
Vesting cliff: A waiting period before any equity or employer contributions vest, after which a large portion vests at once.

Taxes 22

1031 exchange: A swap of one investment or business real estate property for another that lets the owner defer capital gains tax on the sale.
Adjusted gross income (AGI): Total income minus certain specific adjustments, such as deductible IRA and HSA contributions; it is the starting point for many tax calculations.
Alternative minimum tax (AMT): A parallel federal income tax calculation with fewer deductions; taxpayers owe the higher of the regular tax or this minimum tax.
Asset location: Placing each investment in the account type, taxable, tax-deferred or tax-free, where it is likely to be taxed least over time.
Capital gains tax: Tax on the profit from selling an investment or other asset for more than its cost, with lower rates for assets held more than one year.
Cost basis: The original value of an asset for tax purposes, usually what was paid plus certain costs, used to figure the gain or loss when it is sold.
Effective tax rate: The share of income actually paid in tax, found by dividing total tax by income; usually lower than the marginal rate.
Estimated taxes: Income tax paid directly to the IRS during the year, usually quarterly, on income that has little or no withholding.
Form 1099: A family of IRS information returns reporting income other than wages, such as freelance pay, interest, dividends and retirement withdrawals.
Form W-2: The annual form employers give employees and the IRS showing wages paid and taxes withheld for the year.
Itemized deductions: Specific eligible expenses, such as mortgage interest and charitable gifts, listed on a tax return instead of taking the standard deduction.
Kiddie tax: A rule that taxes a child’s investment income above a yearly threshold at the parents’ tax rate instead of the child’s lower rate.
Marginal tax rate: The tax rate applied to the next dollar of income, equal to the rate of the highest bracket a person’s taxable income reaches.
Qualified vs. ordinary dividends: Two tax categories of dividends: qualified ones get lower long-term capital gains rates, while ordinary ones are taxed like wages.
Standard deduction: A fixed dollar amount, set by law and adjusted each year, that taxpayers can subtract from income instead of itemizing deductions.
Tax bracket: A range of taxable income taxed at a particular rate; in the U.S. federal system, each slice of income is taxed at its own bracket’s rate.
Tax credit: A dollar-for-dollar reduction of the tax owed, which makes it more valuable than a deduction of the same size.
Tax deduction: An amount subtracted from income before tax is calculated; its value equals the deduction times the taxpayer’s marginal tax rate.
Tax-loss harvesting: Selling investments at a loss to offset taxable gains or some ordinary income, often reinvesting in a similar but not identical holding.
Taxable, tax-deferred and tax-exempt accounts: How an account is taxed: on money going in, on growth each year, or on withdrawals, usually grouped as taxable, tax-deferred and tax-free.
Wash sale rule: An IRS rule that disallows a loss on a sale if the same or a substantially identical security is bought within 30 days before or after it.
Withholding: Income tax an employer takes out of each paycheck and sends to the government in advance, based on the employee’s Form W-4.

Insurance 13

Auto insurance: A policy covering liability for injuries and damage a driver causes, plus optional coverage for the driver’s own vehicle and medical costs.
Coinsurance: The percentage of covered costs a policyholder pays after meeting the deductible, with the insurer paying the remaining share.
Copay: A fixed dollar amount paid for a specific covered service, such as a doctor visit or prescription, with the insurer covering the rest.
Deductible: The amount the policyholder pays toward covered costs before the insurer starts paying its share.
Disability insurance: Insurance that replaces part of a person’s income if illness or injury prevents them from working.
Homeowners insurance: A policy that covers damage to a home and belongings and protects owners against liability for injuries or damage to others.
Long-term care insurance: Insurance that helps pay for extended personal care, at home or in a facility, when someone can no longer handle basic daily activities on their own.
Out-of-pocket maximum: The most a person pays for covered in-network health care in a plan year, after which the plan pays 100% of covered costs.
Premium: The regular amount paid to an insurance company to keep a policy in force, whether or not any claims are filed.
Renters insurance: An inexpensive policy that covers a tenant’s belongings, liability and temporary living costs; the landlord’s policy covers only the building.
Term life insurance: Life insurance that pays a set death benefit if the insured person dies within a fixed period, such as 10, 20 or 30 years, with no cash value.
Umbrella insurance: Extra liability coverage that pays after home and auto liability limits are used up, typically sold in million-dollar amounts.
Whole life insurance: Permanent life insurance with fixed premiums, a guaranteed death benefit for life and a cash value that grows over time.

Estate planning 12

Beneficiary designation: A form naming who receives an account or policy at the owner’s death, which generally overrides a will and lets the asset skip probate.
Durable power of attorney: A legal document that lets a chosen agent handle someone’s finances and legal matters, and stays in effect if that person becomes incapacitated.
Estate tax: A federal tax on the value of a deceased person’s estate above a high exemption amount, which most estates fall below.
Executor: The person or institution named in a will, and approved by the probate court, to settle a deceased person’s estate.
Gift tax and the annual exclusion: A federal tax on large gifts made during life, owed by the giver, with an annual per-recipient exclusion and a lifetime exemption shared with the estate tax.
Healthcare directive: Documents stating a person’s medical treatment wishes and naming someone to make health decisions if they cannot speak for themselves.
Irrevocable trust: A trust that generally cannot be changed or canceled once created, used to remove assets from an estate, protect them or control how heirs receive them.
Probate: The court process that validates a will, appoints someone to settle the estate, pays debts and transfers remaining assets to heirs.
Revocable living trust: A trust created during life that the owner controls and can change or cancel, used mainly to pass assets privately without probate.
Step-up in basis: A tax rule that resets the cost basis of inherited assets to their value at the owner’s death, erasing capital gains built up during the owner’s life.
Transfer-on-death and payable-on-death accounts: Registrations that pass a bank account, investment account or, in some states, real estate directly to a named person at the owner’s death, skipping probate.
Will: A legal document that says who receives a person’s property after death, who handles the estate and, often, who would raise minor children.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.