This will be an ever-growing list of financial terms, phrases, proverbs, etc. that you may run across in my posts.  I’ll try and simplify them as much as I can!

401(k) and 403(b) – Employer-sponsored retirement accounts for employees.  Basically, it’s your employer helping you save for retirement.  Sometimes comes with a match.

Budgeting – One of the Three Keys of Smart Personal Finance.  Budgeting is keeping track of where money is coming in and where money is going out.  Keeping track of where your money is going is key to gaining control over your finances.

Deductible – The amount a person has to pay out-of-pocket for an expense before insurance kicks in.
Example: If you have a $500 deductible plan, you have to pay the first $500, then insurance pays for the rest.

Financial Health – The current state of your finances, based on the Financial Independence Flowchart.  Step 0 (Budgeting) is the most important, so get started on that right now!  You’ll thank me later 🙂

Financial Independence – Not having to trade your money for time in order to live.  The amount of money you spend is less than the cash flow generated by your investments, businesses, etc., so you don’t need to work 40 hours a week to keep the lights on or put food on the table.

The Free Money Rule – One of the Three Keys of Smart Personal Finance.  The rule is: “Don’t give away free money”.
Example: If your employer offers a “match” on a retirement account, and you don’t maximize that match, you’re essentially giving away free money.  You’re breaking The Free Money Rule.

Health Savings Account (HSA) – An account sometimes offered to folks who have high-deductible health insurance.  It allows them to put money into an account tax-free for potential medical expenses.

Index Fund – A fund that you can invest in that mirrors an entire market index, which is basically a big group of companies.  You’re investing in an entire section of the stock market, not just one specific company, so it’s less risky (with less chance for explosive reward).

Interest Treadmill – When the minimum payments on a debt barely (or don’t) cover the interest that’s accrued, that’s an Interest Treadmill.  You’re never touching the debt itself, just the interest, so even though you’re paying, the size of the debt never goes down, or goes down unacceptably slowly.

IRA – Individual Retirement Account.  This is a way for an individual to save for retirement whether or not they’re employed.  Comes in Traditional and Roth flavors.

  • Traditional IRA – A “pre-tax” account.  Money goes into the IRA without being taxed, but is taxed when you go to withdraw it.
  • Roth IRA – The opposite of a Traditional IRA, a “post-tax” account.  The money is taxed before it’s added to the account, but is tax-free to withdraw.

Match/Employer Match – Sometimes, employers will “match” your contributions to your retirement account.
Example: If your employer offers a 5% match on your 401(k), then your first 5% you contribute to the fund are basically doubled.  If you contribute 3%, then the total contributions are 6%.  Not maxing out your match violates The Free Money Rule.

Money Market Account (MMA) – Like a checking or savings account, banks offer Money Market Accounts.  These accounts have higher interest rates than checking or savings accounts, so you can earn more money.  However, they are more restrictive: they normally require higher “Running Balances”, and you can usually only make a limited amount of transfers per month into and out of the account.

“Pay Yourself First” – The concept that, before spending your money on anyone or anything else, you should give yourself a little.  Works best when it’s automated.
Example: If your paychecks are directly deposited into your bank account, maybe you set up Direct Deposit to put $50 from every paycheck into a separate account (Emergency Fund, Vacation Fund, etc.).  That’s “paying yourself first”.

Principal – The original size of a debt.  This is where interest is accrued.
Example: 5% interest on a $10,000 principal is $500.

Running Balance – The required balance that a bank account needs to stay at or above in order to not be penalized.
Example: If your savings account has a $500 minimum balance, and you have less than $500 in there, they could penalize you (by taking more of your already-low funds.  Messed up, I know).  This violates The Free Money Rule.

Tax-Advantaged Account – an account or investment that’s exempt from taxes, pays lower taxes, or has other tax benefits.  An IRA is an example of a tax-advantaged account.