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Key Terms

As you plan and invest, here are some important financial terms you should know.

We’ll Help You Learn the Lingo

Our financial glossary provides quick overviews of common financial planning, investing, and life insurance terms.

Financial Planning Terms

A personal or household budget is a spending plan that defines how much you can spend in a given time period (often monthly), based on your income. Expenses are typically divided into categories. Effective budgeting helps you live within your means, reduce debt, and save more, making it a valuable practice at any stage of life.

Your estate refers to all your assets, such as cash, investments, real estate, and other property, as well as any liabilities you have (such as your mortgage). Estate planning is the process of deciding how your assets will be distributed after you die and creating strategies to carry out those decisions.

An individual retirement account is a type of retirement savings account that can provide tax advantages, such as tax-deferred growth. An IRA is not an investment itself but rather an account that holds assets such as cash and stocks. The two main types are Traditional and Roth IRAs. Unlike workplace retirement plans such as 401(k)s and pensions, you can get an IRA directly from a financial institution, which may provide more flexibility.

This is the value of all your assets (such as savings, investments, and real estate) minus your liabilities (such as a mortgage, student debt, and credit cards). Understanding your net worth can help you get a sense of your overall financial health and help with financial planning.

A trust is a legal arrangement that is commonly used as a tool for protecting assets and estate planning. In essence, a trust lets you give a person or firm (the trustee) the authority to hold and manage your assets for the benefit of a third party, such as another person or an entity such as a charity.

Investing Terms

In a diversified investment portfolio, asset allocation refers to the percentage of your money assigned to each asset class (such as stocks, bonds, and cash). Because investments come with different levels of risk and potential return, your asset allocation should reflect your personal goals, tolerance for risk, and how much time you have to invest.

With this type of investment, an investor loans money to a company or government entity that must repay the money with interest.

A mutual fund is a popular investment strategy in which many shareholders pool their money in a professionally managed fund. Because these funds invest in many different stocks, they provide greater diversification than buying individual shares of a company, which may help reduce investors’ exposure to stock market risk.

A prospectus is a document that discloses information about an investment such as a stock, bond, or mutual fund. When researching a potential investment, it is important to review the prospectus.

Rebalancing is the process of bringing the asset allocation in your investment portfolio back to its desired balance. Let’s say your target allocation is 70% stocks and 30% bonds. If the stock market performs particularly well, growth in the value of your stocks could cause them to make up a disproportionate amount of your portfolio. To rebalance, you would sell some of your stocks and increase your bond holdings to return the portfolio to your desired asset allocation.

Buying stock lets you invest in an ownership stake in a company. Investing in stocks is traditionally used to support long-term portfolio growth. Keep in mind that buying stocks comes with the risk of losing money if stock values go down.

Life Insurance Terms

The beneficiary or beneficiaries of your life insurance policy are people, such as your spouse or kids, who will receive the policy’s death benefit if you die. To ensure that this benefit will be distributed as you intend, make sure to review your policy’s beneficiary information regularly, particularly after a major life change such as the birth of a child or a divorce.

This is a feature of permanent life insurance policies such as whole life insurance. A portion of your insurance premium payments are used to build up a “cash value” in addition to the policy’s death benefit. Policyholders may take advantage of this savings component of the policy while they are alive by borrowing against it or withdrawing funds.

Your life insurance policy’s death benefit is the sum of money that the insurance company will pay to your beneficiaries if you pass away.

Unlike whole life insurance policies, which don’t have an expiration date, term life policies are in force for a specific period, usually up to 30 years. Unlike whole life policies, term life policies do not have a cash value. However, they are typically less expensive than whole life policies. Younger parents often choose term life policies to provide financial protection for their family until their children are old enough to support themselves.

Whole life insurance is a basic type of permanent life insurance, which means it doesn’t have a fixed term like term life insurance. This type of policy includes a cash value component that can grow over time.