THE LIBRARY · GLOSSARY · 194 TERMS
Money terms, defined
Each term has a short definition, the formula where there is one, the calculator that computes it and the lesson that explains it.
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10% early-withdrawal taxAn additional 10% tax on distributions from retirement accounts taken before age 59½, on top of ordinary income tax, unless an exception applies (for example separation from service in or after the year you turn 55 for a 401(k), or a 72(t) series).4% ruleA finding from US market history: withdrawing about 4% of the starting portfolio, then raising the amount with inflation, lasted through every 30-year period Bengen tested from 1926.401(k) withdrawals after leaving the USA traditional 401(k) or IRA paid to a nonresident alien is withheld at 30% by default unless a treaty lowers it, and the 10% early-withdrawal tax still applies before 59½.50/30/20 ruleA rule of thumb that divides take-home pay into about half for needs, about three tenths for wants, and about a fifth for saving and paying down debt.529 planA state-sponsored education savings account whose growth is free of federal tax and whose withdrawals are tax-free when spent on qualified education costs.60-day grace period (H-1B and similar)After a job ends, H-1B, L-1, E-3, O-1 and some other workers may stay in the US for up to 60 days, or until their authorized stay ends if sooner, to find a new sponsor, change status or leave.72(t) substantially equal periodic payments (SEPP)A way to take money from an IRA before 59½ without the 10% additional tax: a series of payments computed by one of three IRS methods, continued for at least five years or until 59½, whichever is later. Back to topA
ACA premium tax creditA tax credit that lowers the cost of marketplace health insurance, sized by your household income relative to the federal poverty line.Annual gift tax exclusionThe amount a person can give to each recipient every year without filing a gift tax return or using any of the lifetime estate tax exemption.Annual percentage rate (APR)The yearly cost of borrowing expressed as a percentage, which federal law requires lenders to disclose.Annual percentage yield (APY)The yearly return on a deposit with compounding included, which banks must quote under federal Truth in Savings rules.Asset allocationHow a portfolio is divided between broad kinds of investment, mainly stocks, bonds and cash.Asset locationDeciding which kind of account (taxable, tax-deferred or Roth) holds each investment, so the same overall portfolio pays less tax.Automatic renewalA sales arrangement in which a subscription continues and is billed again unless the customer acts to stop it; regulators call it a negative option. Back to topB
Balance transferMoving a credit card balance to another card, usually one offering a low or zero promotional rate for a set number of months in exchange for a one-time fee charged as a percentage of the amount moved.Barista FIRELeaving full-time work while part-time income pays part of your spending, so the portfolio only has to cover the rest.Beneficiary designationThe form on a retirement account, life insurance policy or payable-on-death or transfer-on-death account that names who receives it when you die.Billing error disputeA written notice to a credit card issuer that a charge is wrong, for example unauthorized or for something not delivered as agreed.Budget varianceThe difference between what a budget planned for a category and what was actually spent or earned.Buy-sell agreementA contract among business owners, and often the company, that sets who will buy an owner's interest after death, disability, divorce, departure or deadlock, at what price and on what terms. Back to topC
Capital gains distributionA payment a fund makes to its shareholders from net gains it realised by selling holdings during the year.Capitalization rateA property's yearly net operating income (rent minus operating costs, before any mortgage) divided by its price.Capitalized interestUnpaid interest that is added to a loan's principal, so that interest is then charged on it as well.Cash-on-cash returnA rental property's yearly cash flow after the mortgage and all costs, divided by the cash the owner actually invested (down payment, closing costs and initial repairs).CD ladderSplitting savings across several certificates of deposit that mature at different times, for example every few months, so part of the money becomes available regularly while the rest earns a fixed rate.Charging orderA court order that lets a creditor of an LLC member or partner receive any distributions the entity pays that owner, without gaining any vote or control.Charitable remainder trustAn irrevocable trust that pays income to the donor or other named people for life or a term of up to 20 years, then gives what remains to charity.Coast FIREHaving enough invested today that, with no further contributions, it is expected to grow to your FIRE number by a chosen retirement age.COBRA continuation coverageThe right to keep an employer's group health plan after leaving a job, usually for up to 18 months, by paying the full premium plus up to a 2% administrative charge.CoinsuranceYour share of the cost of a covered health service, stated as a percentage of the plan's negotiated price, which you usually pay after meeting the deductible.Compound growthGrowth on both what you put in and the growth already earned, so a balance grows faster the longer it is left alone.ContangoA futures market in which contracts for later delivery cost more than contracts for nearer delivery.Cost per useWhat a subscription or membership costs each time it is actually used: the price for a period divided by the number of uses in that period.Cost-sharing reductions (CSR)Extra help for Marketplace buyers with household income from 100% to 250% of the federal poverty line who choose a silver plan.Covered callSelling a call option on shares you own: you collect the premium now and agree to sell the shares at the strike price if the buyer exercises.Covered expatriateA citizen who gives up citizenship, or a long-term resident who ends US residence, and who meets any of three tests: average annual net income tax over the prior five years above an inflation-adjusted threshold, net worth at or above a fixed threshold, or failure to certify five years of tax compliance on Form 8854.Credit freezeA block that stops a credit bureau from releasing your file to new lenders, so applications made in your name are usually declined.Credit scoreA three-digit number, usually from 300 to 850, that summarises the information in a credit report to predict how likely a borrower is to pay late.Credit utilizationThe share of your available revolving credit, mostly credit card limits, that you are using, measured from the balances on your statements. Back to topD
Debt avalancheA payoff order that pays the minimum on every debt and sends all extra money to the debt with the highest interest rate, then rolls that payment to the next-highest rate once the first is cleared.Debt snowballA payoff order that pays the minimum on every debt and sends all extra money to the smallest balance first, regardless of interest rate, then rolls that payment to the next-smallest.Debt validation noticeThe notice a third-party debt collector must send that names the creditor, states the amount owed and explains how to dispute the debt.Debt-to-income ratio (DTI)Your required monthly debt payments divided by your gross monthly income.DeductibleThe part of a covered loss you pay yourself before an insurance policy starts paying.Deposit insurance (FDIC and NCUA)Federal protection for deposits at an insured bank (FDIC) or credit union (NCUA) if the institution fails.Digital asset (estate planning)In the fiduciary access law most states use, an electronic record in which a person has a right or an interest, such as email, files in cloud storage, social media accounts and the records of online accounts.Direct Consolidation LoanA federal loan that combines several federal student loans into one.Discretionary income (student loans)The part of income that Income-Based Repayment uses to set a federal student loan payment: adjusted gross income minus 150% of the federal poverty guideline for the borrower's family size and state.DiversificationSpreading money across many investments, so that a loss in any one has a small effect on the whole.Domestic asset protection trustAn irrevocable trust, allowed in roughly twenty states, that names its own creator as a discretionary beneficiary while blocking most of the creator's future creditors.Domicile (estate tax)Living in a place with the intention of staying there indefinitely, the test that decides whether a person who is not a US citizen is treated as a US resident for estate and gift tax.Donor-advised fundAn account at a sponsoring charity: you contribute cash or investments, take the charitable deduction in the year you contribute, and recommend grants to charities later.Dual-status alienSomeone who is a nonresident alien for part of a tax year and a resident alien for the rest, usually in the year of arrival or departure.Dual-status tax yearA tax year in which you are a US resident for part of the year and a nonresident for the rest, usually the year you arrive or the year you leave.Durable power of attorneyA signed document naming an agent to handle someone's financial and legal affairs, which stays in force if that person loses the capacity to decide.Duration (bonds)A measure, in years, of how sensitive a bond or bond fund's price is to changes in interest rates. Back to topE
Effective tax rateYour total tax divided by your income: the share of everything you earn that goes to tax.Effectively connected income (ECI)Income of a nonresident alien that is connected with a US trade or business, such as wages for work in the US, taxed at the ordinary graduated rates on Form 1040-NR.Emergency fundCash kept for a job loss or a large unexpected bill, usually sized in months of essential spending.Employer matchMoney an employer adds to your workplace retirement plan when you contribute, set by a formula with a match rate and a cap as a share of pay.Envelope budgetingSetting aside a fixed amount for a spending category at the start of each period, in cash envelopes, separate accounts or app categories, and stopping spending in that category when its amount runs out.Estate tax exemptionThe amount each person can transfer during life and at death, combined, before federal gift or estate tax applies.Estimated tax paymentsPayments made during the year on income that has no withholding, such as self-employment profit, usually in four installments.Estimated tax safe harborThe rule that protects you from the underpayment penalty if withholding and timely estimated payments reach the smaller of 90% of this year's tax or 100% of last year's tax (110% when last year's adjusted gross income was above a set level).Exchange-traded fund (ETF)A fund whose shares trade on a stock exchange during the day at a market price, rather than being bought from and sold back to the fund company once a day.Exempt individual (substantial presence test)A person whose days in the US do not count toward the substantial presence test, such as an F, J, M or Q student, a J or Q teacher or trainee, and their F-2 or J-2 family.Expense ratioThe share of a fund's assets taken each year to pay for running it, stated as a yearly percentage in the prospectus fee table. Back to topF
FBAR (FinCEN Form 114)A yearly report of foreign financial accounts, filed with FinCEN (not with the tax return) by any US person, residents for tax included, whose foreign accounts together exceeded $10,000 at any time in the year.FICA exemption for F-1 and J-1 studentsStudents on F-1 or J-1 visas who are nonresident aliens for tax, including on OPT, do not owe Social Security and Medicare tax on qualifying employment.FICA taxThe Social Security and Medicare taxes on wages, named after the Federal Insurance Contributions Act.Filing statusThe category a federal return is filed under: single, married filing jointly, married filing separately, head of household or qualifying surviving spouse.FIRE (financial independence, retire early)Reaching the point where invested savings can pay for your spending, so work becomes optional, and often stopping work well before the usual retirement age.FIRE numberThe portfolio at which withdrawing your chosen percentage each year covers your annual spending.First-year choiceAn election that lets someone who misses the substantial presence test in their arrival year, but meets it the next year, be treated as a resident from part-way through the arrival year.Fixed expenseA cost that stays the same from month to month unless you take a deliberate step to change it, such as rent, a loan payment or an insurance premium.Flood insurance (NFIP)Separate cover for damage from rising water, which standard homeowners and renters policies exclude.Foreign tax creditA dollar-for-dollar reduction of US income tax for qualifying income tax paid to another country on the same income.Form 3520 foreign gift reportingThe duty of a US person, including a resident alien, to report large gifts or bequests received from foreign individuals, estates, corporations or partnerships on Form 3520.Form 8843The IRS statement an exempt individual files to explain why their days in the US should not count toward the substantial presence test.Form 8938 (FATCA)A form attached to the tax return listing specified foreign financial assets once their value passes a threshold that depends on filing status and whether you live in the US or abroad.Fraud alertA note on your credit file telling lenders to take reasonable steps to verify your identity before opening credit.Full retirement ageThe age at which Social Security pays your full benefit: 67 for anyone born in 1960 or later. Back to topG
Geographic arbitrageEarning or saving in a high-cost place and spending in a lower-cost one, which lowers the spending your portfolio must cover and therefore your FIRE number.Grantor retained annuity trustAn irrevocable trust that pays its creator a fixed annuity for a set number of years and passes whatever is left to heirs. Back to topH
Health flexible spending account (FSA)An employer account that lets you set aside part of your pay before tax for medical, dental and vision costs during a plan year.Health Savings Account (HSA)A tax-advantaged account for people covered by a high-deductible health plan.Hedonic adaptationThe tendency for people to return to a fairly stable level of happiness after good or bad changes, so that the pleasure of a new purchase or a higher standard of living fades as it becomes normal.High-deductible health plan (HDHP)A health plan whose deductible is at least an IRS minimum and whose out-of-pocket maximum is at most an IRS ceiling, both set each year.High-yield savings accountA savings account, usually at an online bank or credit union, that pays a rate well above the national average for savings.Hobby or businessThe tax distinction between an activity carried on to make a profit and one done mainly for pleasure.Home biasThe tendency to hold far more of your own country's stocks than that country's share of world markets would suggest.Home office deductionA deduction for self-employed people who use part of their home regularly and exclusively as their principal place of business, or to meet clients.Homestead exemptionA state law that protects some or all of the equity in a primary residence from most creditors.House hackingLiving in a home while renting part of it, such as a room, a basement unit or the other side of a duplex, so the rent offsets your own housing cost.Human capitalThe economic value of your ability to earn income over the rest of your working life. Back to topI
I bond (Series I savings bond)A U.S.Income bufferA holding account for people with irregular pay: all income goes in, and a fixed amount moves out to the spending account on a set day each month, like a salary.Income-driven repaymentFederal student loan repayment plans that set the monthly payment as a share of income rather than by the balance, recalculated each year, and forgive any balance left after a set number of years.Index fundA mutual fund or ETF that holds the securities in a published market index, in roughly the index's proportions, instead of picking which ones to own.Individual Taxpayer Identification Number (ITIN)A nine-digit tax number the IRS issues, on Form W-7, to people who need a US taxpayer number but are not eligible for a Social Security number, such as a spouse without work authorization named on a joint return.IRMAA (income-related monthly adjustment amount)An extra amount added to Medicare Part B and Part D premiums for people whose modified adjusted gross income from two years earlier is above a set line. Back to topL
Lean FIREFinancial independence sized to a pared-down budget, usually your essential spending rather than your current lifestyle.Legacy contactA person you name inside an online service to manage or receive your account's data after your death or long inactivity, such as a Facebook legacy contact, an Apple Legacy Contact or the contacts in Google's Inactive Account Manager.Letter of instructionAn informal document, kept with your will, that tells your executor and family what you own, where accounts and documents are, where credentials are stored and what you want done with each account.Lifestyle creepSpending that rises as income rises, so raises go into a bigger lifestyle instead of savings.Long-term capital gains rateThe lower federal rates of 0%, 15% and 20% that apply to gains on assets held for more than one year and to qualified dividends.Long-term disability insuranceInsurance that replaces part of your earnings if illness or injury keeps you from working for a long time.Long-term resident (expatriation rules)A green card holder who was a lawful permanent resident in at least 8 of the 15 tax years ending with the year their US residence ends. Back to topM
Margin loanA loan from a broker secured by the investments in your account.Marginal tax rateThe rate of tax on your next dollar of income, set by the bracket your taxable income reaches.Mark-to-market election (PFIC)An election for a PFIC whose shares are marketable stock: each year's rise in value is taxed as ordinary income, without the interest charge of the default PFIC rules, and declines are deductible up to earlier inclusions.Medigap (Medicare Supplement Insurance)Private insurance sold in standardized lettered plans that pays some of the costs Original Medicare leaves to you, such as the Part B coinsurance and the Part A deductible.Mental accountingThe tendency to sort money into separate mental accounts by its source or intended use, and to treat money differently depending on the account, even though money is interchangeable.Money market fundA mutual fund that holds very short-term debt such as Treasury bills and aims to keep a stable share price, so it behaves much like cash.Monte Carlo simulationTesting a retirement plan against thousands of randomly generated market paths instead of one average return, and reporting the share of paths in which the money lasts.Multi-signature walletA cryptocurrency wallet that needs more than one key to approve a transaction, for example any two of three keys held by different people or in different places. Back to topN
Nonresident spouse election (§6013(g))An election that lets a citizen or resident treat a nonresident spouse as a US resident so the couple can file jointly.NRE and NRO accountsBank accounts in India for people resident outside India. Back to topO
Opportunity costThe value of the best alternative given up when money or time is used one way rather than another.Ordinary and necessary business expenseThe federal test for whether a cost of running a trade or business is deductible: ordinary means common and accepted in that line of work, and necessary means helpful and appropriate for it.Out-of-pocket maximumThe most a health plan can make you pay in a plan year for covered, in-network care through deductibles, copays and coinsurance. Back to topP
Pay yourself firstA budgeting order in which a set amount moves to savings or investments as soon as pay arrives, before any discretionary spending, so that spending adjusts to what remains rather than saving depending on what is left over.PFIC (passive foreign investment company)A non-US company or fund whose income or assets are mostly passive.PhishingA message or call that impersonates a trusted organisation to get you to reveal a password or one-time code, install software, or send money.PortabilityThe election that lets a surviving spouse add the part of the deceased spouse's estate tax exemption that went unused.Prepay debt or investComparing the guaranteed return of paying down a loan, its interest rate after any tax effect, with the uncertain after-tax return of investing the same money.Present biasThe tendency to give much more weight to costs and rewards today than to those in the future, even when the future ones are larger.Price-to-earnings ratio (P/E)A company's share price divided by its earnings per share over a year, or the whole company's market value divided by its profit.Private mortgage insurance (PMI)Insurance that protects the lender, not the borrower, on a conventional mortgage with a down payment under 20% of the price.ProbateThe court-supervised process that validates a will, appoints an executor, pays the dead person's debts and taxes, and distributes what remains.Protective putBuying a put option on shares you already own, which gives the right to sell them at a set strike price until expiration.Public Service Loan Forgiveness (PSLF)A federal program that forgives the remaining balance on Direct Loans after 120 qualifying monthly payments made while working full time for a government or qualifying nonprofit employer. Back to topQ
Qualified business income (QBI) deductionA deduction of up to 20% of the profit from a sole proprietorship, partnership or S corporation, limited to 20% of taxable income before it.Qualified charitable distributionA transfer made directly from a traditional IRA to a qualified charity by an owner aged 70½ or older.Qualified domestic trust (QDOT)A trust meeting the requirements of section 2056A, with at least one US trustee, that lets property left to a surviving spouse who is not a US citizen qualify for the estate tax marital deduction. Back to topR
Real estate investment trust (REIT)A company that owns, operates or finances income-producing real estate and pays no corporate income tax on what it distributes, in exchange for meeting tax-code tests: chiefly, distributing at least 90% of its taxable income and keeping most of its assets and income in real estate.Real returnThe growth of your money after inflation, so it measures what your savings can buy rather than the number on the statement.RebalancingBringing a portfolio back to its target mix after market moves have pushed it away, by selling some of what has grown and buying what has lagged, or by steering new money and withdrawals.Refinance break-even pointThe number of months until the lower payment from a new loan has repaid the closing costs of getting it.Refundable tax creditA tax credit reduces the tax you owe dollar for dollar, unlike a deduction, which only reduces the income tax is figured on.Remittance transfer costThe full cost of sending money abroad: the stated fee plus the gap between the exchange rate a provider uses and the market rate, plus any tax collected.Rent versus buy break-evenThe number of years you need to stay before owning costs less than renting, once buying and selling costs, mortgage interest, upkeep and the return the down payment could have earned are counted.Repayment Assistance Plan (RAP)The federal income-driven plan created by the 2025 budget law and opened on July 1, 2026.Replacement cost vs actual cash valueTwo ways a property policy can value a loss.Resident and nonresident alien (for tax)The tax status of a non-citizen, separate from immigration status.Restricted stock units (RSUs)A promise by an employer to give you company shares once a vesting condition, usually continued employment, is met.Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA)A model law, approved by the Uniform Law Commission in 2015 and enacted in some form by most states, that decides when an executor, trustee, agent or guardian may access a person's digital assets.Revocable living trustA trust created and funded during life that the creator can change or cancel at any time, usually acting as their own trustee.Risk toleranceHow much loss in an investment's value someone can accept, combining risk capacity (the financial ability to absorb a fall without changing plans) and risk willingness (the emotional ability to hold on during one).Roth conversion ladderMoving money from a traditional IRA or 401(k) to a Roth IRA a slice at a time, paying income tax on each conversion.Roth versus traditional contributionsTraditional contributions cut tax now and are taxed when withdrawn; Roth contributions are taxed now and come out tax-free if the rules are met. Back to topS
Sailing permit (certificate of compliance)A certificate that most departing aliens must obtain from the IRS before leaving the US, showing they have met their income tax obligations so far.Savings rateThe share of your income you save.Secured credit cardA credit card backed by a deposit you place with the issuer, which usually sets the credit line at about the deposit.Seed phrase (recovery phrase)The list of words, usually 12 or 24, from which a self-custody cryptocurrency wallet's private keys are generated.Self-employment taxThe Social Security and Medicare tax that self-employed people pay on their net earnings, covering both the employee and the employer share.SEP IRAA retirement plan funded only by employer contributions, simple to open and run, and often used by the self-employed.Sequence of returns riskThe risk that poor returns arrive early in retirement, while you are withdrawing, so you sell more of the portfolio at low prices and it never fully recovers.Sinking fundMoney set aside in regular amounts for a cost you know is coming but that does not arrive every month, such as an annual insurance premium, car repairs or holiday gifts.Social Security break-even ageThe age at which waiting to claim Social Security catches up with claiming earlier, in total benefits received.Solo 401(k)A 401(k) plan for a business owner with no employees other than a spouse.Standard deductionA flat amount, set by filing status and adjusted for inflation each year, that you subtract from income without receipts.Standby powerElectricity that devices draw while switched off or idle, to power clocks, remote-control receivers, network connections and chargers.Step-up in basisProperty inherited at death takes a new cost basis equal to its market value on the date of death, so the gain built up during the owner's life is never taxed as a capital gain.Student loan refinancingReplacing one or more student loans with a new private loan, usually to get a lower rate or a different term.Subscription creepThe slow build-up of recurring charges, through free trials that convert, introductory prices that end and services kept after they stop being used.Substantial presence testThe IRS day count that decides whether a non-citizen is a US resident for tax: at least 31 days this year, and at least 183 days counting all of this year's days, one-third of last year's and one-sixth of the year before.Sunk cost fallacyThe tendency to keep spending on something because of what has already been spent on it, even though that money cannot be recovered whatever you decide next. Back to topT
Take-home payThe part of your gross pay that reaches your bank account after taxes and payroll deductions.Tax creditAn amount subtracted directly from the tax you owe, dollar for dollar, unlike a deduction, which only lowers taxable income and saves tax at your marginal rate.Tax dragThe part of an investment's return lost each year to tax on interest, dividends and capital gain distributions while it is held in a taxable account.Tax on student loan forgivenessForgiven debt generally counts as taxable income in the year it is forgiven.Tax treatyAn agreement between the US and another country that sets which country taxes certain income and can lower US withholding for residents of the other country, for example on pensions.Tax withholdingIncome tax your employer holds back from each paycheck and sends to the IRS on your behalf, based on the Form W-4 you file.Tax-equivalent yieldThe taxable yield you would need to earn to match a tax-free yield after tax, used to compare municipal or Treasury income with fully taxable interest.Tax-loss harvestingSelling an investment in a taxable account for less than you paid, to realise a capital loss that offsets gains and, up to a yearly limit, ordinary income, then buying a similar but not substantially identical investment to stay invested.Tenancy by the entiretyA form of joint ownership available only to married couples in about half the states, under which the couple is treated as a single owner.Term life insuranceLife insurance that pays a death benefit if the insured person dies within a set term, commonly 10, 20 or 30 years, and ends with no value otherwise.Time horizonHow long until you expect to spend a sum of money.Total compensationEverything an employer pays for your work in a year, not just base salary: bonuses and commissions, equity such as stock units or options, retirement contributions, health and other benefits, and paid time off.Totalization agreementA Social Security agreement between the US and another country that avoids paying into both systems for the same work and can combine work credits from both to qualify for benefits.Treasury billShort-term debt of the U.S. Back to topU
Umbrella insuranceA personal liability policy that pays after the liability limits of your car and home policies are used up, and often covers some claims those policies exclude.US-situated assets (estate tax)The assets on which US estate tax can fall when the person who died was neither a US citizen nor domiciled in the US. Back to topV
Values-based spendingA way of planning spending that starts from what a person values most, spends generously on those few things, and cuts hard on spending that serves none of them.Variable expenseA cost that changes with how you live, such as groceries, fuel, eating out and entertainment.VestingThe process by which employer-provided money or stock becomes fully yours over time.Voidable transferA gift or sale of property that a court can undo because it was made to hinder, delay or defraud a creditor, or because it was made for less than fair value while the owner was insolvent. Back to topW
Wash sale ruleA rule that disallows a capital loss if you, or your spouse, buy a substantially identical security within 30 days before or after the sale, in any account.Withdrawal orderThe order in which you draw from taxable, tax-deferred and Roth accounts in retirement.Withdrawal rateThe share of the portfolio you take out in the first year of retirement; in the usual method the dollar amount then rises with inflation each year regardless of markets.Worldwide incomeThe rule that US citizens and resident aliens are taxed on income from every country, not only income earned in the United States. Back to topY
Yield to maturityThe yearly return a bond pays if it is bought at today's price, every interest payment is received, and it is held until the face value is repaid. Back to topZ
Zero-based budgetA budget in which every dollar of expected income is assigned a purpose, including saving and extra debt payments, until income minus all assignments equals zero. Back to top