Financial Glossary

A tax strategy that allows real estate investors to defer capital gains taxes by reinvesting proceeds from a property sale into a like-kind property.

A tax-advantaged retirement savings plan sponsored by employers that allows employees to save and invest a portion of their paycheck before taxes are taken out.

Example: Contributing $10,000 to your 401(k) reduces your taxable income by $10,000, potentially saving you $2,400 in taxes if you're in the 24% bracket.

A retirement plan similar to a 401(k) but designed for employees of public schools, certain non-profit organizations, and some ministers.

A budgeting guideline suggesting you allocate 50% of income to needs, 30% to wants, and 20% to savings and debt repayment.

An investment strategy that balances risk and reward by dividing a portfolio among different asset categories, such as stocks, bonds, and cash.

Your gross income minus specific deductions (like retirement contributions and student loan interest). Used to determine eligibility for many tax benefits.

A parallel tax system that ensures high-income taxpayers pay a minimum amount of tax by limiting certain deductions and exemptions.

The process of paying off a debt over time through regular payments. A portion of each payment goes toward the interest cost and the remaining amount is applied to the principal balance.

The yearly cost of a loan expressed as a percentage, including interest and other charges. APR provides a more complete picture of loan costs than interest rate alone.

A mortgage with an interest rate that changes periodically based on market conditions, typically starting with a lower rate that adjusts after an initial fixed period.

Items of value that you own, including cash, investments, real estate, vehicles, and personal property.

A measure of a stock's volatility relative to the overall market. A beta of 1 means the stock moves with the market; above 1 means more volatile; below 1 means less volatile.

A financial plan that estimates income and expenses over a specified period, helping you manage money and reach financial goals.

The point at which total revenue equals total costs, meaning a business is neither making a profit nor incurring a loss.

The rate at which a company spends its cash reserves, typically expressed as monthly cash expenditure.

The maximum amount you can contribute to a retirement account annually, set by the IRS and adjusted periodically for inflation.

Additional retirement contributions allowed for individuals age 50 and older, enabling them to save more as they approach retirement.

Interest calculated on both the initial principal and the accumulated interest from previous periods. This creates exponential growth over time.

Example: $10,000 growing at 8% annually becomes $46,610 in 20 years thanks to compounding.

The profit from the sale of an asset such as stocks, bonds, or real estate. Capital gains can be short-term (held less than one year) or long-term (held more than one year), with different tax treatments.

A loss incurred when an asset is sold for less than its purchase price. Can offset capital gains and up to $3,000 of ordinary income annually.

The original value of an asset for tax purposes, used to calculate capital gains or losses when the asset is sold.

Fees and expenses beyond the down payment that buyers and sellers incur to complete a real estate transaction, typically 2-5% of the loan amount.

A real estate valuation measure calculated as Net Operating Income divided by property value, used to estimate an investor's potential return.

The net amount of money being transferred in and out of a business or investment. Positive cash flow means you receive more than you pay out.

A rate of return that calculates annual cash flow divided by total cash invested, showing the actual return on money invested.

A numerical representation (300-850) of your creditworthiness based on your credit history, used by lenders to evaluate loan applications.

The percentage of your available credit that you're using, calculated as total balances divided by total credit limits. Lower is better for credit scores.

Example: If you have $10,000 in credit limits and $2,000 in balances, your utilization is 20%.

The direct costs attributable to producing goods sold by a company, including materials and direct labor.

A risk management strategy that mixes a variety of investments within a portfolio to reduce exposure to any single asset or risk.

Example: Instead of buying only tech stocks, diversify across sectors, geographies, and asset classes to reduce risk.

A portion of a company's earnings distributed to shareholders, typically paid quarterly in cash or additional shares.

Annual dividends per share divided by the stock price, expressed as a percentage. Shows how much income you receive relative to the stock price.

Example: A stock trading at $100 paying $3 annual dividends has a 3% dividend yield.

An investment strategy of investing a fixed dollar amount at regular intervals, regardless of market conditions, to reduce the impact of volatility.

The portion of a home's purchase price that you pay upfront in cash, typically 3-20% of the purchase price.

Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders use this to assess your ability to repay loans.

Example: $2,000 monthly debt payments and $6,000 monthly income equals a 33% DTI ratio.

The decrease in value of an asset over time, often used for tax purposes to account for wear and tear on business property.

Money your employer contributes to your 401(k) based on your contributions, typically matching 50-100% of your contributions up to a certain percentage of your salary.

Example: If your employer matches 100% up to 6% of salary and you earn $50,000, contributing $3,000 gets you $3,000 free.

The annual fee that mutual funds and ETFs charge investors, expressed as a percentage of assets. A 0.50% expense ratio means $50 per year per $10,000 invested.

An investment fund that trades on stock exchanges like individual stocks, typically tracking an index, commodity, or basket of assets.

Your total tax divided by your total income, representing your average tax rate across all income.

A financial arrangement where a third party holds funds on behalf of two parties in a transaction. In mortgages, often refers to the account for property taxes and insurance.

The difference between the market value of a property and the amount still owed on the mortgage. In investing, it refers to ownership interest in a company through stocks.

Money set aside in a readily accessible account to cover unexpected expenses or financial emergencies, typically 3-6 months of living expenses.

Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of operating performance that excludes financing and accounting decisions.

Payroll taxes that fund Social Security (6.2%) and Medicare (1.45%), totaling 7.65% for employees (employers match for total 15.3%).

A mortgage where the interest rate remains constant throughout the life of the loan, providing predictable monthly payments.

A quick valuation tool calculated as property price divided by gross annual rental income. Lower GRM typically indicates better value.

Revenue minus cost of goods sold (COGS). It represents profit before accounting for operating expenses, taxes, and interest.

The portion of your home that you actually own, calculated as the home's market value minus any outstanding mortgage balance.

A revolving line of credit secured by your home equity, allowing you to borrow funds as needed up to a predetermined limit.

A tax-advantaged retirement account that individuals can establish to save for retirement. Common types include Traditional IRA and Roth IRA.

A mutual fund or ETF designed to track a specific market index (like the S&P 500), offering broad diversification at low cost.

Specific expenses that can be deducted from your income (mortgage interest, state taxes, charitable contributions, medical expenses) instead of taking the standard deduction.

The percentage charged on the principal by a lender, or earned on an investment. Can be fixed (stays the same) or variable (changes over time).

The rate at which the general level of prices for goods and services rises, eroding purchasing power over time.

The ratio of your loan amount to the appraised value of the property, expressed as a percentage. Lower LTV means more equity and less risk.

Example: Borrowing $200,000 to buy a $250,000 home results in an 80% LTV ratio.

Financial obligations or debts that you owe, including mortgages, loans, credit card balances, and other debts.

The ease with which an asset can be converted into cash without significantly affecting its value. Cash is the most liquid asset.

An investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.

The total value of a company's outstanding shares, calculated by multiplying share price by number of shares outstanding.

Example: A company with 100 million shares trading at $50 has a $5 billion market cap.

The tax rate applied to your last dollar of income. This is the rate at which your next dollar of income will be taxed.

Example: If you're in the 24% tax bracket, each additional $1,000 you earn costs you $240 in federal taxes (plus state/FICA).

AGI with certain deductions added back, used to determine eligibility for Roth IRA contributions, premium tax credits, and other benefits.

A property's gross income minus operating expenses (excluding mortgage payments), used to evaluate real estate investment profitability.

The total value of your assets minus your total liabilities. It represents your overall financial position at a given point in time.

Total revenue minus all expenses, taxes, and costs. Also called 'bottom line' or net income.

The costs required to run a business's day-to-day operations, excluding COGS. Includes rent, utilities, salaries, and marketing.

The original amount of money borrowed in a loan or invested, excluding interest or earnings.

Insurance that protects the lender if you default on your loan, typically required when your down payment is less than 20% of the home's value.

A lender's conditional commitment to lend you a specific amount based on verification of your income, assets, and credit. Stronger than pre-qualification.

A profitability ratio calculated as net income divided by revenue, showing what percentage of revenue becomes profit.

An individual retirement account where contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.

Example: Contributing $7,500 to a Roth IRA at age 25 could grow to over $160,000 tax-free by age 65.

The minimum amount you must withdraw from traditional retirement accounts starting at age 73. Failure to take RMDs results in a 25% penalty.

A performance measure used to evaluate the efficiency of an investment, calculated by dividing net profit by the initial cost of investment.

The process of periodically buying or selling assets in a portfolio to maintain your desired asset allocation.

Example: If stocks outperform and grow from 60% to 70% of your portfolio, rebalancing means selling some stocks and buying bonds to return to 60/40.

Replacing an existing loan with a new loan, typically to get a better interest rate, change loan terms, or tap into home equity.

The amount of time a business can continue operating before running out of money, calculated by dividing cash balance by monthly burn rate.

A flat dollar amount that reduces the income you're taxed on. Taxpayers can choose between the standard deduction and itemizing deductions.

A retirement account where contributions may be tax-deductible and investments grow tax-deferred until withdrawal in retirement.

A range of income taxed at a particular rate in a progressive tax system. The U.S. uses marginal tax brackets where different portions of income are taxed at different rates.

A dollar-for-dollar reduction in your tax bill. More valuable than deductions, which only reduce taxable income.

Example: A $2,000 tax credit reduces your tax bill by exactly $2,000, regardless of your tax bracket.

An expense that can be subtracted from your income before calculating taxes owed, reducing your taxable income.

Selling investments at a loss to offset capital gains and reduce taxable income, then potentially buying similar investments.

The process by which you earn the right to keep employer contributions to your retirement account. Typically occurs over 3-6 years of service.

The degree of variation in the price of a financial instrument over time. Higher volatility means greater price swings and higher risk.

An IRS rule that disallows claiming a loss on a security if you buy a substantially identical security within 30 days before or after the sale.

The income return on an investment, such as interest or dividends received, expressed as a percentage of the investment's cost or current value.