Balance-Charge or Credit:
accounts may post interest earned,
or credit cards may post charges
based on an established policy.
Five of the most popular account
balance procedures which post
credits or charges are: a previous
balance; an adjusted balance; an
average daily balance; a past due
balance; and a final balance.
beginning balance plus the sum of
all entries on a ledger or in a
checkbook register must equal the
ending balance on an account statement.
Deposits, interest received, and
credits are added to the beginning
balance. From this total amount,
automatic withdrawals, checks outstanding,
checks negotiated, and account charges
are subtracted. When the resulting
balance equals the ending balance
on the account statement, the account
Active Participant: A
person, or his or her spouse, who
participates in any of the following
employer-sponsored retirement plans
for any part of an applicable year:
1) a qualified pension, stock bonus,
or profit sharing plan, 2) a qualified
annuity plan, 3) a tax-sheltered
annuity (TSA) plan, 4) a simplified
employee pension plan (SEP), or
5) a local, state, county, or federally
sponsored retirement plan.
Actuary: Insurance contracts and retirement plans require professional
calculation of payments to be received
and benefits to be paid. An actuary
analyzes all probability and risk
estimates based upon past experiences
to confirm obligations are pragmatic
Additional Voluntary Contributions: Employers frequently establish qualified tax-deferred retirement
plans for eligible employees. Some
employers match employee contributions
to a predetermined maximum percentage
level. Beyond any matching amount,
employees are permitted to deposit
additional voluntary contributions, usually pre-tax, up to a scheduled
Adjustable Rate Mortgage (ARM): Also called a variable rate mortgage. A mortgage in which the
interest rate is adjusted periodically,
usually at intervals of one, three,
or five years, based on a measure
or an index, such as the rate on
US Treasury bills or the average
national mortgage rate. In exchange
for assuming some of the risk of
a rise in interest rates, a borrower
receives a lower rate at the beginning
of an ARM than if he or she had
taken out a fixed-rate mortgage.
Adjusted Gross Income (AGI): On
a federal income tax return, AGI
is calculated by first combining
income from all sources, and then
subtracting certain allowable deductions
and adjustments to income.
Advance: A services company may establish a salary advance to assist new employees with initial cash flow problems,
or to help seasoned employees with
emergency needs. The advance represents
money received before it is actually
earned. In addition, some businesses
will establish an employee cash
advance program to provide for business-related
Aggressive Growth Fund: A mutual fund with the objective of maximizing long-term
capital growth, rather than dividend
income, by investing in narrow market
segments and small company stocks.
Allocation Formula: Employers make contributions
to employee profit sharing accounts
based on an allocation formula.
The formula also governs the reallocation
of funds forfeited by employees
who terminate from the plan.
Alternative Minimum Tax (Corporation): A federal
tax applied to regular business
income with adjustments made for
tax preference items.
American Stock Exchange (AMEX): Stock exchange
located in downtown Manhattan, generally
trading in smaller stocks compared
to the New York Stock Exchange (NYSE).
Amortization: The process of reducing an outstanding
loan balance by making regular payments
of principal and interest until
the debt’s maturity.
Annual Percentage Rate (APR): The cost of credit
or a loan expressed as a simple
annual percentage. The Federal Truth
In Lending Act requires all consumer
credit agreements and loans to disclose
the APR in large, bold type. On
a mortgage, the APR is usually higher
than the stated interest rate, since
it includes points and other charges.
Annual Report:The yearly financial statement issued
by a mutual fund to its shareholders.
It reports on the fund’s assets,
liabilities, and year-end earnings,
as well as certain historical information.
Annuitant: The person to whom an annuity is payable.
Annuity Cash Refund: In an income for life annuity,
the contract may include a death
benefit for the total premiums paid.
When the annuitant dies, the annuity
cash refund will be the net
sum of premiums paid minus the amount
received in annuity payments.
Annuity Certain: An option in an annuity contract
where the annuity owner selects
a future level payment of income
covering a specified number of years,
generally ten years. If the annuitant
predeceases before the expiration
of the annuity payments, the remaining
obligation is transferred to the
designated beneficiary in the annuity
Annuity Joint and Survivor: In contrast to distribution
of income for one annuitant, an
annuity joint and survivor provides for annuitized payments over two
designated lives. Upon the death
of the first annuitant, the surviving
annuitant receives prearranged,
continued payments for life, based
on a percentage received by the
Annuity Joint Life: While two or more individuals
may be named annuitants, payments
cease at the death of the first
annuitant in an annuity joint
Annuity Modified Refund: In a contributory retirement
plan, the annuity beneficiary of
a deceased retiree receives the
accumulated balance of the pension
Annuity Payout Option: An alternative an annuitant
has for how he or she may receive
annuity payments. Annuities may be received in a variety of ways: as a fixed
dollar amount, for a fixed period,
or over the lifetime(s) of one or
Annuity: A life insurance contract guaranteeing the purchaser,
or his or her beneficiary, payment
in the future, usually during retirement.
Annuities may be structured in different
ways with different payout options.
Funds invested in an annuity grow
on a tax-deferred basis.
Application Fee: A fee lenders may charge to process a loan
application. Paying this fee does
not guarantee loan approval. Some
lenders apply the cost of the application
fee toward certain closing costs.
Appraisal: An assessment of a property’s value based on information
from recent sales of similar properties.
Asset Allocation: The process of determining how investment
funds will be apportioned among
different classes of financial assets,
such as stocks and bonds. Many financial
advisers believe that the investment
mix has a greater impact on long-term
portfolio performance than does
any individual investment.
Asset Class: Securities with similar features. The three main
asset classes are stocks, bonds,
and cash reserves.
Asset: Property with a cash value, such as real estate, equipment,
savings, and investments.
Assignment: The legal transfer of the entire or
partial ownership of an asset, such
as an insurance policy, to another
person or entity.
Automatic Reinvestment: A prearranged investment plan that automatically
deposits mutual fund dividends or
capital gains back into the fund
to purchase additional shares.
Backup Withholding: Unless a Social Security or
Tax Identification number is filed
with a financial institution, the
Internal Revenue Service requires
20% of all interest or dividend
income be withheld. Backup withholding
may be avoided by filing a W-9 form
when opening an account with a financial
Balance: The amount of money in a bank account
after deposits, withdrawals, interest,
and bank charges.
Balloon Mortgage: A mortgage with a final payment
considerably larger than the preceding
payments. Balloon mortgages are
typically used when borrowers anticipate
receiving a large sum of extra cash
to pay the balance, or when they
expect to refinance before the balloon
payment comes due.
Bankruptcy: An inability to pay outstanding debt, in full or
in part, or declaring insolvency
may lead to bankruptcy. There are three parties to any bankruptcy proceeding: debits,
creditors, and a trustee. Bankruptcy
is an expensive process and may
adversely affect future credit opportunities.
Some more recognizable bankruptcy
Chapter 7: A debtor (individual) is declared bankrupt and
a court appointed trustee initiates
a liquidation process and a discharge of all eligible debts. The debtor has no financial sources
to attempt a reorganization. A
separate taxable entity is created.
Chapter 11: A debtor (business, individual, or
partnership) is declared bankrupt,
but is allowed reorganization to attempt debt repayment. Creditor approval is required.
A separate taxable entity is created.
Chapter 13: A debtor (individual or sole proprietor)
is declared bankrupt, but is allowed
to retain estate-related assets
and to restructure debt obligations
for eventual payment. No creditor
approval is required.
Basis Point: One one-hundredth of one percent. For example,
40 basis points equal 0.40%.
Basis: The original cost and any additional outlays
represent the cost basis in equity
investments or property. The Internal
Revenue Service computes the taxable
gain, profit, or appreciation on
the difference between the basis
and the actual amount of sale.
Therefore, defining basis as original
price, and not as total cost, may
incorrectly result in an inflated
Bear Market: An extended period of declining security
Beneficiary: A person or entity named in a life
insurance policy, a qualified retirement
plan, or an annuity, or one who
is eligible by the terms of such
a policy or plan, to receive benefits
upon the death of the insured or
the plan participant.
Beta: A measure of a security’s price fluctuations (volatility)
relative to an appropriate market
index. For example, the Standard
& Poor’s 500 Stock Index (S&P 500)
has a beta of 1. Stocks with betas
greater than 1 are subject to more
rapid and extreme price fluctuations
than the market. Conversely, price
fluctuations for stocks with betas
less than 1 are less frequent and
smaller than the market. Conservative
investors generally seek lower-beta
securities, while aggressive investors
Blue Chip Stock: The common stock of a company with a reputation
for quality products, services,
and management, and a long history
of earnings growth and dividend
payments. Examples of blue chip
companies include General Electric,
International Business Machines,
Bond: A debt security issued by a corporation,
government, or government agency
obligating the issuer to pay interest
periodically and repay the principal
Broker: A financial professional who sells insurance
or securities, and oversees a client’s
insurance or investment portfolio.
Budget: Projected income and expenses for a given
Bull Market: An extended period of rising security
Business Succession: A prearranged process that addresses
the future orderly transfer
of a business entity and plans for
every alternative contingency that
would affect any transfer. Business
succession broadly involves legal,
financial, tax, and family concerns.
Buy-and-Hold: An investment strategy that advocates
holding securities for the long-term,
while ignoring short-term price
Buy-Sell Agreement: A written, legal buy-sell agreement provides for the purchase of all outstanding shares
of an owner who wishes to sell,
terminate involvement, is permanently
disabled, or dies. Such an agreement allows for different future ownership structure. The agreement is
usually funded with life and disability
insurance, and contains specific
Cafeteria Employee Benefit Plan: An employee benefit
plan offering a variety of benefit
options from which individual employees
may select. Depending on personal
needs and finances, employees may
voluntarily elect benefits (e.g.,
life, health, disability, health
Canceled Check: A cashed check. The bank returns
canceled checks, or a copy of them,
in a monthly statement for the check
Capital Gains Distribution: Payments to mutual fund shareholders
of profits from the sale of securities
in the fund’s portfolio, usually
made on an annual basis.
Capital Gains Tax: Tax on profits from the sale
of securities, or fixed assets,
such as land, buildings, equipment,
Capital Loss: A decrease in a security’s selling
price from its purchase price.
Cash Advance: An instant loan obtained from a credit
card account. Issuers charge interest
from the date of the advance until
it is repaid. They may also charge
a transaction fee based on the amount
of the advance.
Cash Basis: An accountancy reporting method that recognizes
cash inflows or outflows when actually
expended or received.
Cash Budget: A budget used to quantify an
immediate, short-term cash flow.
Reviewing daily, weekly, and monthly
expenditures is essential for a
resolution to establish credit lines
or contemplate investing short-term
Cash Flow: Cash income less cash payments for a
given period. Individuals whose
assets exceed their liabilities
(claims against the assets) may
still get into financial difficulty
if they don’t have enough cash to
meet their current obligations.
Cash Management: Channeling available cash into expenditures
that enhance productivity, directly
Cash Surrender Value: The amount the policyowner receives when
terminating a cash value insurance
contract. Computation of the cash
surrender value is stated, by law,
in the contract.
Cash Value: The accumulated cash build-up in a
whole life policy that a policyholder
receives if the policy is redeemed
before its maturity or the policyholder’s
Casualty Loss: Sudden and unexpected losses due to damage, destruction,
fire, or theft. that are
usually reimbursed either in full
or in part by insurance contracts.
Amounts of compensation are listed
for losses are not usually tax-deductible
if full restitution is made by the
insurance carrier. However, claims
denied or not covered are potentially
Certificate of Deposit (CD): An insured, interest-bearing
debt instrument issued by a bank.
Individual CDs start as low as $100
and have maturities ranging from
a few weeks to several years.
Check: A written transfer of money from a bank account, used
in place of cash.
Claim: A request for payment under the terms of an insurance
Claims-Paying-Ability Rating: An assessment of
an insurance company’s ability to
pay claims, relative to other insurance
Closing Costs: Also called settlement costs. The expenses involved
in transferring real estate from
a seller to a buyer. Typically includes
fees or charges for loan origination,
discount points, appraisal, property
survey, title search, title insurance,
deed filing, credit reports, taxes,
and legal services. Does not include
points and the cost of private mortgage
Closing: The process of transferring real estate from a seller
to a buyer.
Cloud on Title: An apparent or potential claim, lien, or right
on real estate. The title
is not clean and a quitclaim deed
must be filed to resolve the potential
hindrance. For instance, a paid
loan with property secured may not
have been recorded or a deceased
owner was never removed from the
deed to a house or title of a car.
Combined Financial Statement: An individual or corporation may
own more than one affiliated business
enterprise. Each has a complete
set of financial documents. To provide
a financial overview of all affiliates,
a combined financial statement
will present side-by-side accountings
of balance and net worth statements.
Commercial Loan: Short-term credit lines and commercial loans represent two important sources of short-term
financing. Businesses, for example,
in need of additional inventory
to complete existing orders will
frequently bolster immediate cash
flow with a commercial loan. The
loan will be based on the credit
worthiness of the business and/or
owner and the prime lending rate.
Commercial Paper: A short-term debt obligation frequently used
as investments by money market accounts
with a life cycle of less than six
months, but more than one day. Commercial
paper is rated as a safe investment,
backed by major institutions.
Commission: A broker’s fee for executing a trade,
based either on the dollar amount
of the trade or the number of shares
Commitment: A written agreement specifying the terms and conditions
under which a lender will loan and
a borrower will borrow funds to
finance a home.
Common Stock: A security representing partial ownership, also
called equity, in a corporation,
and which entitles shareholders
to participate in stockholder meetings
and to vote for the board of directors.
Compounding: The process of applying investment
growth not only to the original
investment, but also to income and
gains reinvested in prior periods.
Construction Loan: Short-term financing to fund the cost of
real estate construction. The lender
disburses funds as work progresses
or according to a prearranged schedule.
The loan is repaid at project completion.
Contingent Beneficiary: Also called secondary beneficiary.
The beneficiary who receives the
proceeds of a life insurance policy
if the primary beneficiary predeceases
the insured. For instance, a child
might be the contingent beneficiary
of a policy where the child’s mother
or father is the primary beneficiary.
Contingent Liabilities: An unplanned and unforeseen potential
financial judgment. In practice,
many individuals and corporations
face contingent liabilities. Therefore, contracts for sale and transfer
of ownership should address all
latent contingent liabilities.
Convertible Term Insurance: Term insurance that a policyholder
may exchange for another type of
coverage without providing evidence
Corporate Bond: A debt security issued by a corporation obligating
the issuer to pay interest periodically
and repay the principal at maturity.
Correction: A short-term reversal, usually downward,
in the prices of stocks, bonds,
or commodities, bringing them more
in line with their underlying fundamental
Co-Signer: An individual who adds his or her signature to a
loan or a credit card agreement
along with the principal applicant,
and who thereby assumes responsibility
for paying the outstanding balance
if the applicant defaults.
Cost of Insurance: The total premium outlay paid
for a potential death benefit from
a life insurance policy. On an annual
basis, the policyowner may consult
a government publication, P.S. 58
tables, or, if available, the annual
renewable term rates from the carrier
for the “pure” insurance cost at
each attained age.
Covenant not to Compete: A contractual promise to refrain from
performing professional or similar
business activities. The legal enforcement
of a covenant not to compete depends on the wording, compensation,
duration, and situation.
Credit History: The record of how an individual has paid his
or her debts. A credit report discloses
an individual’s credit history.
Credit Line: A revolving credit agreement allowing a person
to borrow any amount up to a preapproved
limit for purchases or cash advances.
As the outstanding balance is paid
off, the credit again becomes available
to fund new purchases or cash advances.
Credit Rating: Formal evaluation of a company’s ability to pay interest and repay principal on borrowed money, as published
by a credit rating agency or service.
For example, Standard and Poor’s
and Moody’s Investor Service rate
Death Benefits: Payments from an insurance policy or an individual
retirement account (IRA) to a beneficiary.
Debit Card: A card that allows an individual to
pay for purchases with funds that
are immediately deducted from his
or her checking or savings account.
Debt: A legal obligation, written or oral,
to deliver a product, service, or
Debt-to-Equity Ratio: The ratio of total debt to total shareholder
equity indicates the level of capability
for repayment of outstanding creditors.
In addition, long-term debt as a
function of shareholder equity indicates
the degree of leveraged money to
improve shareholder rates of return.
Decreasing Term Insurance: A term insurance policy with a death
benefit that decreases over time.
Decreasing term insurance is often
used in conjunction with a mortgage
or other amortized debt. For example,
a holder of a 30-year mortgage may
also hold a 30-year decreasing term
insurance policy to cover the mortgage
if he or she dies before it is paid
Deed: A document identifying legal ownership of real estate,
and used to transfer it from a seller
to a buyer.
Deferred Annuity: An annuity that pays an income
or lump sum at a future date.
Deferred Compensation: The deferral of constructive receipt
of current earned income or compensation
to a later date, usually retirement,
so future receipt might experience
a potentially lower marginal tax
Defined Benefit Plan: An employer-funded retirement plan designed
to pay a predetermined benefit based
on an employee’s salary and service.
Defined Contribution Plan: Employee-funded retirement
plans, such as 401(k)s and 403(b)s,
that pay benefits based on the amount
the employee has accumulated over
his or her working life.
Deflation: Reduction in the price of goods and
services. Deflation occurs when there is an outright decline in the consumer
price index (CPI) or producer price
index (PPI). Raw materials, oil,
base materials, copper, and the
Commodity Research Bureau’s nonfinancial
futures price index will evidence
Dependent Student: An unmarried student under age 24 with no
dependents, who still has access
to parental support.
Deposit Slip: A form the bank provides to use when making a
Deposit: The money put into a bank account.
Depreciation: The decreasing value of a fixed asset during its
projected life expectancy. The Internal
Revenue Service permits several
processes to calculate annual depreciation
amounts over asset life expectancy.
Derivative: A security whose value is based on a traditional
security, an asset, or a market
Direct Rollover: A tax-free transfer of funds from one retirement
plan to another. Distributions from
a qualified retirement plan may
be transferred to another retirement
plan or an individual retirement
account (IRA), while funds from
an IRA may be rolled over to another
Disability Benefit: Benefits received from an insurance
policy that are payable if
the insured becomes totally (and
sometimes partially) disabled.
Disability Insurance: A policy that pays a portion of the insured’s
income in the event of temporary
or permanent total disability.
Discount Broker: A brokerage firm that buys and
sells securities at lower rates
than a full service broker. Discount
brokers generally do not offer all
the services of full service brokers.
Diversification: Strategy for reducing the risk of investing
in a single industry/market sector
or a small number of companies,
by spreading the risk over several
industries/market sectors or a larger
number of companies.
Dividend: Distribution of earnings to shareholders
of corporations and mutual funds,
or life insurance policyowners,
generally paid in the form of money
Dollar-Cost Averaging: A method of investing a
fixed dollar amount in securities
at set intervals, regardless of
market prices. With this approach,
an investor buys more shares when
prices are low, and fewer shares
when prices are high. This generally
results in a lower average cost
per share than if the investor had
purchased a constant number of shares
at the same periodic intervals.
An investor should consider his
or her financial ability to continue
through all types of market conditions.
Dollar cost averaging will not assure
a profit or protect against loss
in a down market.
Double Taxation: Business profits and income of
sole proprietors, partnerships,
and S corporations receive taxation
only at the individual taxpayer
level. However, C corporations experience
taxation at the corporate level
and the individual taxpayers pay
taxes on dividends.
Dow Jones Industrial Average (DJIA): The price-weighted
average of 30 actively traded blue
chip stocks on the New York Stock
Exchange (NYSE). The DJIA represents
approximately 15% to 20% of the
market value of NYSE stocks.
Early Distribution: A distribution from an individual retirement
account (IRA) taken before age 59
1/2. Early withdrawals are usually
subject to a 10% penalty.
Education IRA: A savings vehicle that allows parents to receive
tax-free savings on money earmarked
for a child’s college education.
There are limits on income eligibility
and on how much may be set aside
per year in an education IRA.
Electronic Banking: Many banking institutions provide
computerized network services that
provide account holders access to
their accounts by personal computer.
Customers may make payments directly
to stores, credit card accounts,
mortgage companies, utility companies,
and other creditors. Individuals
having two or more bank accounts
may also transfer cash between accounts.
Electronic Check: The use of a computerized network
to draft checks for the payment
of bills and the purchase of goods
Electronic Commerce: Buying and selling of capital goods and
services on a computerized
network, such as the World Wide
Electronic Funds Transfer System (EFTS): Funds
may be electronically transferred
between accounts of buyers, sellers,
and other individuals. This service
allows for direct deposits or withdrawals
without processing written checks.
Employee Benefit Plan: The total compensatory package of employee
benefits offered by an employer
beyond the salary or wage scale.
Employee Pension Benefit Plan: An employer sponsored benefit
plan for eligible employees to provide additional retirement accumulations
through pre-tax and tax-deferred
Employee Retirement Income Security Act (ERISA): Most
pension and retirement plans became
subject to government overview and
the establishment of several federal
and practices under ERISA in 1974.
Employee Stock Ownership Plan (ESOP): A popular
employee plan that encourages employee
ownership and allows employees to become actually involved in their company’s success.
Employee Welfare Benefit Plan: In contrast to pension plans, employees are offered fringe-benefit, or employee
welfare benefit plans, which
may include health, disability,
paid vacations, paid state and national
holidays, or compensation to beneficiaries
at death. In some plans, the health
portion of coverage may describe
dollar or percentage coverages for
medical, surgical, or hospital based
on an itemized schedule.
Endorse: To sign the back of a check to receive
Endowment: A life insurance policy paid to the
policyholder on the maturity date,
or to a beneficiary if the policyholder
dies before that date.
Equity Loan: A loan a homeowner takes against the accumulated
equity in his or her home using
the property to secure the debt.
Also, a variation on a second mortgage.
An equity loan may be structured
as a line of credit the homeowner
can access with a check or credit
Equity: The difference between a property’s current market value
and the sum of all claims against
Escrow: Property, such as money or securities, held by a third
party until a contract’s conditions
Estate Planning: The process of planning for the orderly administration
and disposition of assets after
the owner dies.
Estate Tax: Federal and/or state taxes levied on assets of a
decedent (person who dies). Estate
taxes are paid by the decedent’s
estate rather than his or her heirs.
Excess Compensation: In a benefit pension plan
that is integrated with federal
old-age, survivors, and disability
insurance (OADSI), excess compensation
is above that specified amount upon
which calculations for future benefits
Excess Contribution: The amount of an individual retirement account (IRA) contribution above the allowable
limits. If not corrected, a 6% Internal
Revenue Service penalty applies.
Executor: A person named under a will to administer the distribution
of the deceased’s assets as directed
by the will. An executor is often
a family member, a trusted friend,
or a bank trust officer.
Family Limited Partnership (FLP): A partnership
of family members to arrange for
generational transfers, maintain
control in the general partners,
and reduce potential liability to
the transferor and transferee. Family
limited partnerships utilize
the benefits in wealth preservation,
taxation, credit protection, and
Federal Reserve System (The Fed): The central banking system
that regulates the national money
supply. The Fed Board establishes
Federal Reserve System policies
and sets interest rates.
Fiduciary: An individual, commonly a trustee of a trust, who
assumes legal responsibility to
perform duties or manage affairs
for the benefit of another person
or beneficiary. An attorney assumes
a fiduciary role when representing clients.
Financial Aid: The financial support a student
receives from federally and privately
funded sources to attend college.
Financial aid includes loans, grants,
scholarships, and work-study programs.
Financial Statement: Written records concerning the financial
circumstances of a business organization.
Such a statement generally includes
balance sheets, changes in retained
earnings, profit and loss statements,
cash flows, and other forms of financial
analysis that are beneficial to
First-to-Die Life Insurance: A life insurance policy
covering two or more people that
pays the death benefit when the
first person dies. First-to-die
life insurance is often used to
cover mortgage payments, or to fund
Fixed Annuity: An annuity that guarantees
a fixed payment, either for life
or for a specific period.
Fixed-Rate Mortgage: A mortgage with a set interest rate that
will not vary for the life of the
Floating Debt: Using government Treasury bills
or short-term corporate bonds which,
when continually renewed, pay off
current liabilities or finance cash
Flood Insurance: Insurance that covers against losses that are
a direct result of flood damage.
Flood insurance is required by lenders
if a property is located in a flood
For Sale By Owner (FSBO): The sale of a home directly
by the owner, where the owner assumes
all fiduciary responsibilities involved
with the execution of all legal
contracts, documents, and transactions.
Foreclosure: The legal procedure by which a mortgage
holder, whether a bank, savings
and loan, or private individual,
can seize the property of a borrower
who has not made timely payments
on a mortgage. The lender must obtain
a court order to seize the property,
which it may then sell to satisfy
Forfeitures: Employees who terminate from an employer’s
pension plan are forced to forfeit
nonvested employer contributions.
These forfeitures may be
applied as credits to remaining
employee accounts or used to offset
future employer contributions, depending
on the pension plan.
401(k) Loan: Loan taken from a 401(k) plan
account. Loans must follow Internal
Revenue Service (IRS) guidelines,
as well as the rules set forth by
401(k): A defined contribution plan allowing employees
to make pretax contributions up
to a predefined annual limit. Many
plans offer a variety of investment
choices, including mutual funds,
stocks, bonds, short-term reserves,
and company stock.
403(b): A tax-sheltered annuity for employees of
government and nonprofit organizations,
allowing them to make pretax contributions
up to a predefined annual limit.
Franchise: A license granted by a business or company
allowing a designee to operate a
franchise and market products
or services in a fixed geographic
area. Usually consummated with an
initial cash requirement, the agreement
may offer consultation, financing,
promotional, or other stated benefits
on an arranged percentage of sales
Fringe Benefits: Opportunities and services offered
beyond wages or salary. They are
not generally taxable to the employee,
but may have tax benefits to the
employer. The employer contribution
may be full payment, partial, or
merely providing the opportunity
for employee involvement. Some common
fringe benefits may include paid
holidays, sick days, paid vacation
days, insurance coverage, retirement
plans. Other less common benefits
are company car, expense account,
or stock options. Fringe benefits
are important in attracting and
retaining key employees.
Front-End Load: A sales fee (load) investors pay
up-front at the time they purchase
Futures: Agreements to buy or sell a specific amount
of a commodity or financial instrument
at a set price on a specific future
General Ledger: Lists all financial accounts, including
debits, credits, and balances.
General Partner: The managing partner of a limited
partnership who possesses
Gift Tax: A tax levied by the federal government,
and some states, on assets transferred
from one person to another. The
tax rate increases with the value
of the gift. The donor pays the
tax, not the recipient.
Gift: A voluntary transfer of property when no
compensation involves either the
transferor or the transferee. The
transferor can not retain any incidence
of ownership (e.g., control, possession,
enjoyment, right to income, or power
to designate persons who will receive
benefits of ownership) after relinquishing
control in the transferred gift.
Golden Boot: Offering lucrative financial incentives
or extension of benefits usually
to persuade an older employee to
exercise the option for “early retirement.”
This voluntary election by an employee
help avoid any conflict with age
Golden Handcuff: Providing additional benefits
to a valued and productive employee
to induce him or her to remain with
Golden Parachute: A benefits package secured by
top executives if a layoff occurs
due to a corporate buyout or takeover.
The benefits may include out-placement,
six months to
years of severance pay, stock options,
or a substantial bonus.
Government Bond: A bond issued by the US government.
Grace Period: A period of time after the due date
of an insurance premium or loan
payment during which the overdue
payment may be made without penalty,
and the policy or loan remains in
Grant: A financial aid award that does not require
repayment. Federal grants include
the Federal Supplemental Educational
Opportunity Grant (FSEOG) and the
Gross Estate: The total value of a person’s assets
before taxes and other debts.
Gross Monthly Income: The total monthly income
from all sources, before taxes and
Group Life Insurance: A life insurance policy that
insures a group of people. Group
life insurance is often provided
by employers as an employee benefit,
or by a professional association
for its members.
Group Permanent Insurance: Some pension benefit
plans seek to provide greater death
benefits as well as a retirement
income. The employer contracts with
an insurance carrier to provide
group permanent insurance to participating employees. At retirement, an employee’s
retirement accumulations may be
augmented by the cash surrender
value of the policy. On the other
hand, some insurance carriers offer
employees a payroll-deducted permanent
insurance plan not connected with
the company’s employee pension benefit
plan and usually offered with simplified
Group Renewable Term Insurance: Many employee welfare
benefit plans offer employees group renewable term life insurance based on increments of salary or
a minimum flat amount for all participating
Guardian: The legal representative of a minor child,
as appointed by a will, or of a
legally incapacitated adult.
Guardianship: The legal responsibility for the
care of a minor child.
Highly Compensated Employee (HCE): The Internal
Revenue Code has determined that
a highly compensated employee
of an employee benefit plan is one
who receives compensation in the
top 20% of all employees, is a 5%
owner of the business, and exceeds
certain annual compensation levels.
Home Equity: The difference between a property’s
current market value and the sum
of all claims against it. For example,
a homeowner with a house currently
valued at $200,000, and carrying
a $150,000 mortgage, has $50,000
in equity. Home equity is included
in the calculation of financial
Hope Credit: A federal tax credit that gives families
a maximum tuition credit of $1,500
per student per year for the first
two years of post-secondary education.
This is calculated as 100% of the
first $1,000 of tuition and 50%
of the second $1,000.
Household Income: The combined income of all household
members from all sources, including
wages, commissions, bonuses, Social
Security and other retirement benefits,
unemployment compensation, disability,
interest, and dividends.
Housing Ratio: Also called the front-end ratio
or payment-to-income ratio. The
ratio of the monthly housing payment
to total monthly income.
Income: The amount received from all sources, including
wages, commissions, bonuses, Social
Security and other retirement benefits,
unemployment compensation, disability,
interest, and dividends.
Index: An indicator of the market prices of securities
issued by companies included in
the index. An index is used to measure
the movements of securities of similar
companies. Some well-known indexes
are the New York Stock Exchange
Index (NYSE), the American Stock
Exchange Index (AMEX), the Standard
& Poor’s 500 Index (S&P 500), the
Russell 2000 Index, and the Value
Individual Retirement Account (IRA): A tax-deferred
retirement savings account allowing
individuals to contribute up to
$3,000 annually, and single-income
married couples up to $6,000 annually.
The amount deductible for income
tax purposes depends on income level.
Individual Retirement Accounts and
Individual Retirement Annuities
are types of Individual Retirement
Inflation: A general rise in the price level of
goods and services. Occurs when
demand increases relative to supply.
In other words, too much money chasing
too few goods.
Initial Public Offering (IPO): A corporation’s
first stock issue offered to the
Insufficient Funds: When a bank account does not
contain enough money to cover a
Insurability: The ability of an insurance applicant
to be accepted by an insurer, based
on health, occupation, lifestyle,
Insurable Interest: A potential beneficiary who
has a vested financial interest
in the life of another person and
who might suffer loss upon their
disability or death. Side Note:
Current laws have substantiated
that charitable organizations have
an insurable interest in
their donors and, therefore, qualify
as beneficiaries of donor life insurance
Insured: The individual whose life is covered by
an insurance policy.
Intangible Asset: Nonphysical resources that provide
gainful advantages in the marketplace.
Copyrights, software, logos, patents,
goodwill, and other intangible factors
afford name recognition for products
and services. They are all examples
of intangible assets and may provide significant value to a business operation.
Integrated Plan: An employee pension benefit plan
may be included for benefit calculations
with Federal Insurance Contribution
Act (FICA) benefits, also known
as Social Security, or with Old-Age,
Survivorship, and Disability Insurance
Intellectual Capital: Representation of the financial
value that human innovations, inventions,
and intelligence bring to a business
Inter Vivos Trust (living trust): A trust created
during a grantor’s lifetime in which
the grantor has the authority to
revoke or change the trust until
death. At the death of the grantor
the trust becomes irrevocable. In
contrast, a will may contain a testamentary
trust which comes into existence
only when the probate court authenticates
a deceased grantor’s will and the
provisions become irrevocable.
Interest Rate: The cost of borrowed money, expressed
as a percentage for a given period
Interest: The cost of borrowed money.
Internal Rate of Return (IRR): The theorem of internal rate of return is, in effect, compounding interest in reverse,
or discounting. In contemplating
a current investment with a proposed
investment, IRR is a most efficient
evaluation. The rate of return on
a proposed investment should be
equal to the present value of all
future benefits, including revenues,
as well as the gross costs associated
with the (current) property investment.
IRR is important in planning capital
outlays, as well as evaluating rental
real estate investments.
Investment Objective: An individual’s investment
goal based on his or her time horizon
and risk tolerance.
IRA Rollover: A tax-free transfer of funds from
one individual retirement account
(IRA) to another.
Irrevocable Trust: A trust that cannot be altered,
stopped, or canceled. During circumstances
where the trustee cannot interpret
or carry out their specific duties,
the court is then asked to make
Joint Tenancy: Also called joint tenancy with right
of survivorship. A form of property
ownership in which two or more people
own an undivided interest in a property.
Upon the death of one joint owner,
ownership automatically passes to
the surviving joint owner(s) without
a court proceeding. Joint tenancy
applies to property with a title
or other certificate of ownership,
such as mortgages, securities, and
bank and brokerage accounts.
Keogh Plan: A tax-deferred qualified retirement
account for employees of unincorporated
businesses or for self-employed
individuals. Section 415 of the
Internal Revenue Code limits annual
contributions to 25% of earned income
up to a limit of $30,000. Withdrawals
commence at age 59½, while contributions
must cease at 70½.
Key Employee: An employee who possesses valued
skills, craft knowledge, intellectual
or organization abilities, and is
crucial to the ongoing operation
of the business or company and is
difficult to replace.
Key Person Insurance: Small companies often have
employees who possess craft or scientific
knowledge, leadership, and valued
skills. Hiring a replacement might
alter business planning, profit,
stability, and management. To address
the financial aspect of replacing
a key employee, the corporation
becomes owner and beneficiary on
an insurance policy that reimburses the company for untimely loss of a
key person employee.
Lapsed Policy: A policy canceled for nonpayment
of premiums. Also refers to a policy
canceled before it has cash or surrender
Layoff: For other than performance or wrongdoing,
an employee is no longer on the
payroll of a business. A layoff is usually the result of a downturn in the economy, lower profit
margins, or a paring down of business
Lease: A contract granting the use of real estate
or a fixed asset, such as a vehicle
or equipment, for a specific period
in exchange for periodic payments.
Leaseback (sale and leaseback): Example: A business
owner sells all or part of the property
from which the business operates
to raise cash for business operations.
The business owner agrees to lease
the sold property for a term of
years from the new owner. The leaseback offers security to the new owner because the seller becomes
the tenant with business operations
remaining at its present location
on a potentially long-term basis.
Lease-Purchase Agreement: An agreement that states:
1) a portion of each lease payment
applies to a future purchase of
the leased property, or 2) the leaseholder
possesses a right to buy the property
during or at the conclusion of the
Lender: One who parts with something of value for
specific compensation and for a
stated or open duration of time.
Letters of Credit by a Bank: The bank, as issuer,
substitutes its creditworthiness
for a recipient customer and buyer
in a single or series of sales transactions.
The seller has little risk in default
of payment by the buyer because
of the letter of credit. A significant variation on a letter of credit is
a letter guaranteeing performance
for completion of a contract.
Level Premium Term Insurance: A life insurance
policy for which premiums remain
the same from year to year for a
Liability: Debt obligations are liabilities and creditors, in most cases, have a claim on the assets
of the debtor. A balance
sheet will usually list the creditor,
amount of outstanding liability,
and dates of maturity.
Life Annuity: An annuity that provides income for
Life Cycle: A time period measure from beginning
to conclusion of an individual,
product, or business. A corporate
business entity, however, frequently
has a life cycle beyond its founder
or current owners. Therefore, small
family businesses may compute life
cycles in generational terms to
plan an eventual transfer or liquidation.
Life Expectancy: The average number of years people
of a given age are expected to live,
according to a mortality table based
on factors such as gender, age,
heredity, and health characteristics.
Life Insurance: A type of insurance that pays a
benefit upon the death of an insured
Lifetime Learning Credit: A 20% federal credit
toward the first $5,000 ($10,000
after 2002) of qualified education
expenses, including tuition and/or
other educational expenses incurred
to learn or improve job skills.
This credit is available to college
juniors and seniors, graduate students,
and working Americans.
Limited Liability Corporation (LLC): In contrast
to the unlimited liability inherent
in proprietorships as a form of
business ownership, a limited liability corporation provides limited liability to each shareholder
to the extent of invested capital.
Limited Partnership: An organization managed by
a general partner and financially
backed by limited partners, offering
limited liability to the extent
of the amount invested by each individual
limited partner. A limited partner
does not supervise the daily operations
or directly manage the partnership.
Liquid Assets: Cash, or assets easily converted
into cash, such as bank deposits,
money market fund shares, or US
Liquidity Ratio: Ratios (cash asset ratio, current
ratio, quick ratio) that quantify
a company’s ability to discharge
debt obligations maturing within
Liquidity: The ability to quickly and easily convert
assets into cash without incurring
a significant loss.
Living Trust: Also called an inter vivos trust.
A trust established by a living
person that allows that person to
control the assets he or she contributes
to the trust.
Living Will: Also called a health care proxy. A
written document that allows you
to designate a representative to
make your medical decisions if you
become incapacitated due to accident
or illness. Often, a living will
identifies specific medical treatments
Locking-In: Assuring an interest rate, such as
on a mortgage, CD (certificate of
deposit), or fixed-rate bond, has
Long-Term Care Insurance: Insurance covering the
cost of long-term nursing home care
or in-home assistance.
Long-Term Debt: Liabilities that are due in a year
or more and payable as the debt
matures. In most instances, the
debtor makes regular interest and
principal payments during the interim.
In contrast, investors purchase
long-term debt, such as Treasury
bonds, which mature in excess of
ten years, usually for income and