Terms & Definitions
- 401(k) Plan - A retirement savings plan established by an employer in which employees set aside a percentage of pay in an account that earns interest. 403(b) Plan: A retirement savings plan similar to a 401(k), but exclusively for employees of public schools and certain tax-exempt organizations.
- 529 College Savings Plan - An education savings plan operated by a state or educational institution. It is designed to help families set aside funds to pay for future college costs.
- Annual percentage rate (APR) - APR allows you to evaluate the cost of the loan in terms of a percentage. If your loan has a 10% rate, you'll pay $10 per $100 you borrow annually.
- Annual percentage yield (APY)
- The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.01^12).
- Confused about APR vs. APY? View this article from Investopedia to help further explain these two concepts.
- Annual Fee - The amount that credit card companies charge for the use of a credit card.
- Asset - Any possession that has value in an exchange. For example, cash, stocks, bonds, real estate and personal possessions.
- Bank - A for-profit company that is owned by its stockholders and provides saving and checking accounts and other financial services to its customers.
- Bonds - Loans to corporations or to the government for a certain period of time, called a term. You earn interest on your loan investment, and at the end of the term, your bond matures and can be repaid to you by the company.
- Budget - A plan for managing money, dividing up expected income and expenses among spending and saving options based on personal financial goals during a given time period.
- Capitalization - When interest is capitalized, the outstanding (unpaid) interest on your student loan account is added to the principal balance. When this happens, you are essentially paying interest on top of interest.
- Certificate of Deposit (CD) - An account in which you deposit funds for a set term (e.g., six months or one, two, or five years), with a financial institution, with the promise of a set interest rate. For most CDs you cannot make deposits or withdrawals to the account during this term.
- Corporate bonds - Loans to corporations for a certain period of time, called a term.
- Credit - Amount of money a creditor is willing to loan another to purchase goods and services, based the expectation that the money will be repaid as promised with interest.
- Credit Card - Amount of money a creditor is willing to loan another to purchase goods and services, based the expectation that the money will be repaid as promised with interest.
- Credit Limit - The maximum amount of credit a lender will extend to a customer.
- Creditworthiness - A measure of one's ability and willingness to repay a loan.
- Credit rating/score
- A measure of creditworthiness based on an analysis of the consumer's financial history, often computed as a numerical score, using the FICO or other scoring systems to analyze the consumer's credit. A creditor's evaluation of a person's willingness and ability to pay debts as judged by character, capacity, and capital; a mathematical model used by lenders to predict the likelihood that bills will be paid as promised.
- Worried about your credit score? Learn more about the effects of credit inquiries on your credit score
- Credit Union - A financial institution owned by its members that provides savings and checking accounts and other services to its membership at low fees.
- Debit Card - A card used to pay for goods and services directly from a checking account by transferring funds electronically from one's checking account to the store's account to pay for a purchase; also called check cards.
- Debt - The entire amount of money owed to lenders.
- Deferment - A temporary postponement on federal student loan payment, deferments are granted if you meet the specific criteria. (For example, Unemployment or Economic Hardship).
- Diversification - When you spread the risk of loss over a variety of savings and investment options.
- Earned Interest - The payment you receive for allowing a financial institution or corporation to use your money.
- EE Bond - EE is a type of bond that is normally purchased at half its face value and must be held for at least one year before being cashed.
- Employee benefits - Additional benefits, beyond a paycheck, offered by employers (e.g., health insurance or pension plan).
- Electronic Transfer Account (ETA) - A low-cost savings account that provides federal payment recipients with the opportunity to receive their federal payments through direct deposit.
- Equity - The difference between how much your house is worth and how much you owe on your mortgage.
- Federal Student Loans - Loans that are guaranteed by the federal government, includes Stafford, Direct, Parent PLUS, and Grad PLUS loans. These loans have a fixed interest rate, as well as deferment and forbearance options.
- Fixed Expenses - Expenses that cost the same amount every time.
- Grace Period - The length of time you have before you start accumulating interest on an unpaid balance.
- Gross Income - The total amount of income from wages before any payroll deductions.
- I Bond - A type of bond purchased at face value, which is the amount printed on the bond and must be held for at least one year before being cashed.
- Individual Development Account (IDA) - A matched savings account in which another organization (e.g., a foundation, corporation, or government entity) agrees to add money to your account to match the money you save in it.
- Identity Theft - When someone uses your name, Social Security number, credit card number, and other personal information without your permission.
- Income - Any money an individual receives.
- Interest - Interest is the additional amount you will pay to a lending institution to borrow money. In terms of savings, interest is the additional amount you will earn for having your money in a bank account or other savings vehicle.
- Simple Interest
- Simple interest is interest paid only on the "principal" or the amount originally borrowed, and not on the interest owed on the loan.
- Compound Interest
- Interest credited daily, monthly, quarterly, semi-annually, or annually on both principal and preciously credited interest.
- Investment - Setting aside money for future income, benefit, or profit to meet long-term goal; using savings to earn a financial return.
- Late Fee - A penalty on all types of credit for making a payment after its due date.
- Loan Term - The length of time you have to pay off a loan.
- Money Market Account - An account that usually pays a higher rate of interest, and it usually requires a higher minimum balance to earn interest than a regular savings account does. You can make deposits and withdrawals.
- Mutual Fund - A professionally managed collection of money from a group of investors. A mutual fund manager invests your money in some combination of various stocks, bonds, and other products.
- Needs - Essentials or basics necessary for maintaining physical life, including food, clothing, water, and shelter, sometimes called material well-being
- Net Income - Also called "take-home pay"; it's the amount of income left after payroll deductions
- Origination Fee - A charge for setting up a loan that is typically associated with home and student loans.
- Payroll deductions - Amounts subtracted from gross income that are withheld by an employer for items such as taxes and employee benefits.
- Promissory Note - A legally binding document signed when you take out a student or parent loan. The promissory note (sometimes referred to as a "prom note") lists the conditions under which you're borrowing and the terms under which you agree to pay back the loan. It will include information on how interest is calculated and what deferment and cancellation provisions are available to the borrower.
- Retirement Investments - Money you invest over a long period of time so that you will have money to live on when you are no longer working.
- Roth Individual Retirement Arrangements (IRAs) - Contributions to a Roth IRA are not tax deductible while contributions to a traditional IRA may be deductible. The distributions (including earnings) from a Roth IRA are not included in income.
- Statement Savings Account - An account that earns interest. You will usually receive a quarterly statement that lists all your transactions–withdrawals, deposits, fees, and interest earned.
- Stocks - Parts of a company, called shares. If the company does well, you might receive periodic dividends based on the number of shares you own. Dividends are part of a company’s profits that it gives back to you, the shareholder.
- Subsidized - The federal government pays the interest that accrues on the subsidized portion of federal loans during the in school period, grace period, and periods of deferment.
- Saving - The process of setting income aside for future spending. Saving provides ready cash for emergencies and short-term goals, and funds for investing.
- Traditional Individual Retirement Arrangements (IRAs) - Contributions to a traditional IRA may be tax deductible, based on the amount of your contribution and your income. The earnings on the amounts in your IRA are not taxed until they are distributed.
- Treasury Inflation-Protected Securities (TIPS) - Provides protection against inflation, and the interest rate is tied to the Consumer Price Index.
- Unsubsidized - A loan in which the borrower is responsible for interest that accrues on any unsubsidized loan.
- U.S. Savings Bonds - A long-term investment option backed by the full faith and credit of the U.S. Government. Savings bonds can be purchased at a financial institution for as little as $25 or through payroll deductions.
- U.S. Treasury Securities - Loans to the U.S. Government for a certain period of time, called a term. Treasury securities are backed by the full faith and credit of the U.S. Government and include Treasury bills (T-bills), notes (T-notes), and bonds (T-bonds).
- Variable Annuity - An insurance contract that invests your premium in various mutual fund-like investments.