Financial Glossary: Plain-English Definitions

401(k): Employer retirement plan. 2026 limit: $24,500 ($32,500 at 50+, $35,750 at 60–63). Traditional = pre-tax; Roth = after-tax, tax-free later.
403(b) / 457(b): The 401(k)'s cousins for nonprofits/schools (403b) and government workers (457b). Same 2026 limits.
AGI (Adjusted Gross Income): Your income after "above-the-line" deductions (HSA, student-loan interest, half of SE tax). Many phaseouts key off this number.
Amortization: Paying a loan down in fixed installments — early payments are mostly interest, later ones mostly principal.
Annual gift exclusion: Amount you can gift per person per year ($19,000 in 2026) without filing a gift-tax return.
APR: Annual Percentage Rate — the yearly cost of borrowing, including fees. Compare APRs, not just interest rates.
APY: Annual Percentage Yield — what your savings actually earn including compounding. Higher APY = better savings account.
Asset allocation: Your mix of stocks, bonds, and cash. The single biggest driver of your returns — more important than which funds you pick.
Avalanche method: Paying debts highest-interest-first. Mathematically the cheapest way out of debt.
Backdoor Roth IRA: Contribute non-deductible to a traditional IRA, then convert to Roth — the legal workaround when income exceeds Roth limits.
Beneficiary: The person who inherits an account. Designations on 401(k)s, IRAs, and insurance override your will — keep them current.
Bond: An IOU from a government or company: steady interest, lower returns than stocks, calms a portfolio.
Capital gains: Profit from selling an asset. Long-term (held 1+ year): 0/15/20%. Short-term: taxed as ordinary income.
Catch-up contribution: Extra you're allowed to save at 50+: $8,000 on 401(k)s, $1,100 on IRAs (2026). Ages 60–63: $11,250 "super" catch-up.
Compound interest: Growth on your growth. The reason starting at 25 beats starting at 35 even with smaller contributions.
Copay / Coinsurance / Deductible: Your share of medical costs: flat fee per visit (copay), percentage after deductible (coinsurance), amount you pay first each year (deductible).
Credit score: 300–850 rating of your creditworthiness. 760+ unlocks the best rates; payment history is 35% of it.
Diversification: Not betting on one thing. An index fund holding thousands of companies is diversification in one purchase.
DTI (Debt-to-Income): Monthly debt payments ÷ gross monthly income. Under 36% is healthy; lenders balk above 43%.
Emergency fund: 3–6 months of essential expenses in a high-yield savings account. Insurance you pay to yourself.
Estate tax: 40% federal tax on estates above $15M per person (2026, permanent). ~12 states have their own, lower thresholds.
Executor: The person your will names to carry it out: pay debts, file taxes, distribute assets.
Expense ratio: A fund's annual fee as a % of assets. 0.03% (index) vs 1% (active) = hundreds of thousands lost over a career.
FAFSA: Free Application for Federal Student Aid — required for federal grants, loans, and most college aid.
FDIC insurance: Protects bank deposits up to $250,000 per depositor per bank. If your bank fails, you're covered.
Fiduciary: Someone legally required to act in your best interest. Demand this of any advisor you pay.
HSA (Health Savings Account): Triple-tax-advantaged account paired with an HDHP: deductible in, tax-free growth, tax-free medical withdrawals. 2026: $4,400/$8,750.
HDHP: High-Deductible Health Plan — lower premiums, higher deductible (≥$1,700 single in 2026). Unlocks the HSA.
Index fund: A fund that owns a whole market index (e.g., S&P 500) for ~0.03%/yr. Beats most active managers over time.
IRA: Individual Retirement Arrangement. 2026: $7,500 ($8,600 at 50+). Traditional = deductible; Roth = tax-free later.
Marginal tax rate: The tax on your next dollar — the rate that should drive Roth-vs-traditional and most planning decisions.
Mega backdoor Roth: After-tax 401(k) contributions converted to Roth — lets some savers add tens of thousands beyond normal limits. Plan must allow it.
PMI: Private Mortgage Insurance — required under 20% down on conventional loans (~$100–300/mo). Drops at 20% equity.
Power of attorney: Document letting someone manage your finances if you're incapacitated. "Durable" = survives incapacity.
Probate: Court process validating a will and distributing assets — slow, public, sometimes costly. Beneficiaries and trusts avoid it.
QBI deduction: Up to 20% of pass-through business income deductible (Section 199A). A huge, often-missed break for owners.
Rebalancing: Periodically selling winners and buying losers to restore your target allocation. Annual is plenty.
RMD: Required Minimum Distribution — forced taxable withdrawals from traditional accounts starting at 73 (or 75). Roth IRAs have none.
Roth conversion: Moving traditional IRA/401(k) money to Roth, paying tax now. Powerful in low-income years.
SALT cap: State & local tax deduction limit: $40,000 for 2026–2029 ($20k if married filing separately).
SEP IRA / Solo 401(k): Self-employed retirement accounts allowing up to $72,000/yr (2026). Solo 401(k) usually wins for solopreneurs.
Snowball method: Paying debts smallest-balance-first. Costs slightly more than avalanche but delivers motivating quick wins.
Standard deduction: Flat amount subtracted from income: $16,100 single / $32,200 joint in 2026. Itemize only if you beat it.
Step-up in basis: Heirs inherit appreciated assets at current market value — wiping out capital-gains tax on a lifetime of growth.
Target-date fund: One-fund portfolio that auto-shifts from stocks to bonds as your target year nears. The best "set and forget" option.
Term life insurance: Pure death-benefit coverage for a set period (20–30 yrs). ~$30–50/mo per $1M for a healthy 35-year-old.
Trust (revocable living): Legal entity holding your assets; avoids probate, manages money for minors, keeps things private. You control it while alive.
Umbrella insurance: Extra $1–5M liability coverage above auto/home limits. ~$150–400/yr per $1M — the best value in insurance.
Vesting: Earning ownership of employer contributions over time (e.g., 25%/yr). Leave early and unvested match stays behind.
Wash-sale rule: Can't claim a tax loss if you rebuy the same security within 30 days before/after the sale.
Will: Legal document naming guardians for minor kids, an executor, and who gets your probate assets.

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