Decision Center Glossary

A retirement plan into which contributions are made by employees and sometimes employers. Taxes on employee contributions and earnings from a 401(k) are deferred. Withdrawals, however, are taxed.

A retirement plan into which contributions are made by nonprofit and public service employees and sometimes employers. Taxes on employee contributions and earnings from a 403(b) are deferred. Withdrawals, however, are taxed.

The fee a lessor charges for the preparation of a vehicle and paperwork for a lease. Similar to a dealer-preparation charge.

An individual's gross income after a limited group of expenses is subtracted. These expenses include business expenses, capital loss deductions of up to $3,000, expenses from rent or royalty income, IRA contributions and other expenses including alimony.

A special minimum tax that is imposed if you took too many special deductions, such as interest, medical expenses, taxes, miscellaneous deductions and passive activity losses. These "excess" deductions are added back into your income and the result is taxed at a flat rate. You would pay the higher of either your regular tax or this alternative minimum tax.

The process of repaying a loan through periodic payments of principal and interest. An amortization schedule shows the division of principal and interest for each payment and the principal balance left after each payment.

The amount you pay each year for the privilege of using a credit card. Some cards have no annual fees. Others have fees of up to $75 per year.

The simple interest rate plus fees or charges associated with a loan. The annual percentage rate reflects the true cost of a loan.

Your annual profit on an investment as a percentage of the amount invested. For example, a $10 investment that pays $1 in profits over the year has an annual return of 10 percent. This is a tool for comparing the performance of different investments over the same time period. For example, if you want to compare the performance of a six-month CD to a one-year bond, you could calculate, or annualize, what the same CD would have earned if it were held for one year.

A contract in which you make a payment or series of payments now and receive a payment or series of payments later. Money invested in an annuity grows tax-deferred.

Anything you own - such as cash, real estate, stocks, bonds, automobiles and other items - that has measurable value.

Automated teller machine

An Internal Revenue Service audit is an investigation of a taxpayer's tax returns to verify accuracy.

The loan principal you still need to pay after the last regular payment. Balloon payments occur when a loan's regular payments do not fully amortize the loan.

Under federal law, a debtor hands over his assets to the bankruptcy court and is relieved of the future obligation to repay his unsecured debts.

One one-hundredth of 1 percent. When investors talk about expenses on mutual funds or yields on bonds, a percentage point is often too large to be meaningful. So they might say that expenses on a mutual fund are 75 basis points, which is three-fourths of 1 percent.

A person who receives a benefit, such as the income of a trust or proceeds from an insurance policy.

An agreement to borrow money, pay interest and later repay money. Bonds are issued by the government and many businesses.

Typically a salesperson who makes a commission by helping execute purchases and sales of stocks, bonds and other investments.

The rate banks charge brokers for money, which can be attractive compared to other sources of borrowing. The interest paid is tax deductible against dividends, capital gains and any interest you earn on your investments.

Hard-sell telemarketing operations pushing securities or financial services.

The profit you get by selling such things as stocks, bonds, mutual funds or real estate for more than you paid for them.

A mutual fund shareholder's portion of the fund's capital gains. Generally, these are paid once a year.

The loss you incur by selling a stock, bond or mutual fund for less than you paid for it.

A means of determining how much life insurance you need. It includes a review of all your expenses, debt and savings to figure how much life insurance you would need to support your dependents after you're gone.

The negotiated selling price of a vehicle.

More commonly known as a down payment, this can be either cash or a trade-in. This amount is applied to the capitalized cost to reduce monthly payments.

The interest fees you pay when you borrow money on your credit card rather than purchase something with it. They come into play when you use the checks the card issuer provides you. The interest rate for cash advances is typically higher than that for purchasing merchandise. There also may be a separate fee just for the advance. It pays to investigate this before writing out the check.

When property is damaged or destroyed from a sudden and unexpected event.

A time-based deposit at a bank or savings and loan institution. When you buy a CD, you agree to leave your money in the bank for a specific period of time ranging from 30 days to several years. In exchange, the bank guarantees you a specific interest rate that is higher than that paid on a passbook savings account.

A type of lease used for automobile leasing. It is a lease in which the vehicle is simply turned in at the end of a lease. At lease inception, the lessor sets a predetermined value for the vehicle at lease-end (residual value) and is responsible for any decline in the vehicle's value at lease-end.

A legal document that changes an earlier will.

A fee charged by brokers for buying or selling investments.

Community property means that one-half of the earnings of each spouse is deemed the property of the other spouse. States that recognize community property are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas and Washington. In other states, the income is considered the distinct property of each spouse.

The risk you take when you put all your money in one stock - or in your home or your business.

There are many measurements of inflation, but for most of us the Consumer Price Index (CPI) is the measure to watch. The CPI measures the cost of buying all the things Americans usually buy in the course of a year. It includes clothing, food, entertainment, housing, medical care, transportation and other goods and services. For example, this year's "market basket" price is compared with last year's and any increase is considered inflation. To be more accurate and to take into account the fact that something might cost more because it is of a better quality, the CPI also factors in improvements in quality (such as advances in computer technology).

The total purchase price you paid for an investment. The difference between what you sell an investment for and its cost basis determines your capital gain or loss.

An account set up with a bank or investment company in your child's name.

The chance that a borrower won't repay what is owed. Bondholders face this risk, too. So do investors in money-market funds, which are short-term loans in the money markets. But the risk is much greater for bondholders because the term of the debt is longer.

Guidelines that estimate the size of the loan you can get when buying a home. When you're ready to pass the muster of loan officers, you may later pre-apply for a loan, locking in the interest rate and other terms pending final loan approval. Also called income guidelines.

A bond sold for less than its par (or face) value. If you buy a $50 savings bond, the face value is $50. However, because savings bonds are sold at a discount, you will pay less than $50 for it. All savings bonds and T-bills are sold at a discount, as these investments do not make interest payments to investors. Investors are compensated by the increased valued of the bonds over time. When redeemed or sold, the profit is treated as interest income.

The fee charged to a lessee for costs associated with preparing a vehicle for resale, for example cleaning, repairs, maintenance, and so on.

The portion of corporate earnings distributed to shareholders. Dividends are taxable and are usually distributed quarterly.

The fee charged to a lessee in the event of an early termination of a lease. Penalties vary from lease to lease and are determined at lease inception.

The market value of your property, less the amount you owe on it and must repay when you sell. It represents the amount of your money that's "tied up" in the property.

Everything you own - house, bank accounts, investment portfolios, life insurance, personal property and retirement plans.

An overall strategy that coordinates the disposition of everything you own - house, bank accounts, investment portfolios, life insurance and retirement plans.

The fee charged for exceeding the predetermined mileage cap on a leased vehicle, usually set at 15,000 miles per year.

Expense ratio is the percentage of a fund's assets that is paid out in expenses, which include management fees and all other fees associated with marketing, distributing and administering the fund.

Properties that the federal government has accepted as collateral for FHA loans and then later repossessed. These properties often sell for 5 to 7 percent below the market value. If you plan to live in one of them, you can often get a low-interest mortgage with a 5 percent down payment. The FHA, and some local brokers, will give you a list of properties. Since these properties were FHA financed and foreclosed, they're typically not the larger, more luxurious homes but rather starter homes.

A person holding a position of confidence, such as a trustee, guardian or executor.

An assumption that investments are sold in the same order in which they're purchased.

Homes that are "for sale by owner." The sellers will not be paying a brokerage commission, lowering the costs by anywhere from 5 percent to 10 percent, which is the range most brokerages charge on their commissions.

The redemption value of a bond at maturity.

A legal procedure in which a lender repossesses property and then sells it to satisfy a debt.

A partial portion of an individual share of a stock, bond or mutual fund.

The nickname for the Government National Mortgage Association, a federal agency that borrows money from investors and then lends it to homeowners for mortgages.

The time between the closing date of a billing cycle and the due date when you can avoid interest charges if you pay in full. If, for example, a credit card has no grace period, you can never avoid finance charges, no matter how quickly you pay. Even if you do have a grace period, you will be charged finance charges unless you pay off the entire balance.

A life insurance policy "illustration" is a set of projections prepared by the actuarial department of the insurance company. It shows how your policy will perform over your lifetime. It includes financial projections for each year. If it's a term policy, the projections extend to when the policy ends. Or if you chose permanent life insurance, the projections show data that stretches well beyond your 100th birthday.

Guidelines that estimate the size of the loan you can get when buying a home. When you're ready to approach loan officers, you may later pre-apply for a loan, locking in the interest rate and other terms pending final loan approval. Also called debt guidelines.

Replicates a market index such as the Standard & Poor's 500 Stock Index, which is often used as a proxy for the stock market. The manager does not decide which stocks to buy. Instead, the manager must efficiently buy the securities in that index as money comes in and sell them when investors want to redeem shares. For that reason, professionals refer to index funds as "passive management" as opposed to "actively managed" funds where a manager selects, buys and sells securities according to a system.

A tax-deferred retirement plan for anyone with employment income. IRAs offer great flexibility on how an individual can invest them. Maximum contribution is $2,000 per year. If you have no income but receive alimony, you still qualify for an IRA contribution.

An increase in the price of good and services.

The risk that our money will not be worth as much in the future. That's because the cost of the things we need to buy like housing, clothing and medical care all increase. Guaranteed investments like bank accounts do not keep pace with inflation.

The cost of borrowed money. Interest payments do not reduce principal of a loan.

The cost of money, expressed as an annual percentage.

The chance that interest rates will change the value of their investment. All investors are affected by interest rate risk, but interest rates have the greatest impact on bonds. When rates rise, the value of bonds fall. And the longer the term of the bond, the more it falls. So an increase in interest rates will have a much greater impact on a 30-year bond than on a five-year bond.

Intestate means having no valid will, so the assets are governed by individual state laws for "intestacy."

An institutional investor manages large amounts of money for a big organization. Managers of mutual funds, pension funds and insurance companies are institutional investors.

An asset that produces money.

A retirement plan for the self-employed. Money invested in a Keogh is tax deductible and earnings from the plan are tax deferred. Withdrawals from the plan are taxed.

The length of time a lease lasts. Most terms are 24 to 48 months long.

The customer who leases, for example, an apartment or a vehicle.

The financial or leasing institution that owns, for example, an apartment or a vehicle.

Borrowing for investment or speculation. Leverage gives you the opportunity to buy more than you could have without borrowing.

Debts you owe, such as a mortgage or home equity loan, credit card balance, car loan, student loan, or any other personal loan or obligation.

A document that allows a person to explain in writing which medical treatment he or she wants or doesn't want during a terminal illness. A living will takes effect only when the patient is incapacitated and can no longer express his or her wishes. The will states which medical treatments may be used and which may not be used in order to die naturally, without the patient's life being artificially prolonged by various medical procedures.

A sales commission charged when buying or selling shares in a mutual fund. Some mutual funds don't charge a sales commission. These are referred to as no-load mutual funds.

Money borrowed or lent, usually in exchange for interest.

A block of stock or mutual fund shares purchased at the same time. For example, if you purchase 100 shares of Litware, Inc. on Jan. 10 and 50 shares of Litware, Inc. on Jan. 11, you would own two lots of Litware, Inc.

A request from a brokerage to a client to bring margin deposits up to a required minimum level.

The highest percentage rate at which any of your income is taxed. You can find the top bracket in last year's income tax calculations, or look it up in the Internal Revenue Service's tax tables. "Marginal" usually refers to the increase you see in one category of anything from an increase in another. In this case, it's the highest tax rate that applies to any of your income exceeding a level set by tax law.

The price a buyer is willing to pay for an asset. Market prices are readily available for most stocks, bonds and mutual funds.

The chance that there will be no ready market for your investment if you want to sell it in a hurry. That's certainly a big risk if you buy a piece of land, or if you buy a stock that is very thinly traded. But it is not a risk when you buy a mutual fund, which you can sell back on any business day.

The date at which a bond, note, CD or loan principal must be repaid.

A type of mutual fund that invests in short-term securities, such as Treasury bills, and earns interest.

How many people died vs. how many people the company projected would die for each age.

State or local government-issued debt. Municipal bonds are generally exempt from federal income taxes and most state and local taxes, particularly in the state of issue.

A collection of stocks, bonds and other securities managed by an investment professional but owned by the mutual fund's shareholders. When you buy shares in a mutual fund, your money is combined with other investors' money.

The market value of an asset minus liabilities.

Investment income minus investment expenses.

What you own minus what you owe.

The price at which a security is offered to buyers.

Services provided by your bank or financial institution that allow you to do common banking tasks from your computer.

A type of lease that holds a lessee responsible for any difference between a residual value and its market value at the end of a lease. In the case of an automobile, if the vehicle is worth less than the lease's residual value, the lessee must pay the difference. An open-end lease also gives a lessee the option of purchasing the vehicle at lease-end.

The amount you could have earned on an alternative investment. For example, if you could earn 8 percent on a CD, the opportunity cost of investing in stock or something else other than that CD is 8 percent.

The chance you take when you tie up your money in a conservative investment like a bank certificate of deposit and lose the chance to put it into something with real growth potential.

The right to purchase or sell something, such as a stock, at a predetermined price at some time in the future.

The value of a bond at maturity. Bonds are usually issued with a $1,000 par value.

Deductions from trades or businesses in which the taxpayer is only "passively" involved, such as income from portfolios and tax refunds. The "loss" deductions come into play when the amount of "passive deductions" exceed "passive activity gross income" for the taxable year.

The potential profit or loss on an investment at a point in time stated as a percentage.

What you pay in your monthly mortgage payment. It includes principal, interest, taxes and insurance or PITI.

A sum equal to 1 percent of a loan amount. It is charged to the borrower by the lender.

A portfolio simply means a collection of investments like stocks, artwork, bonds, gold and real estate.

A document authorized by a person, called the principal, that grants legal authority to another person, the agent, to act on behalf of the principal. A power of attorney could authorize the agent to write checks, sell property, file tax returns, and so on. Under a "durable" power of attorney, the principal authorizes the agent to make decisions (including health care decisions) on his or her behalf in the event the principal is incapacitated.

Preferred stock receives dividends prior to common stock and has preference over common stock in case of bankruptcy.

What you still owe or are owed on a loan.

The court process in which a deceased person's estate is administered, whether the person died with a will or not. The process includes the appointment of a representative, notice to creditors, making an inventory, and distributing the estate according to the deceased person's will or according to the law if there is no will.

A prospectus is a formal, written offer to sell a security, which must disclose certain important information about the security. A mutual fund prospectus discusses the fund's history, investment objectives, performance and management. Every mutual fund is required to publish a prospectus, which is offered free to anyone who requests it.

Statement that announces the annual meeting and agenda of a mutual fund. A mutual fund is not required to hold an annual meeting each year, but it must do so if it wants to make changes in investment policy or in the investment advisory contract or if it needs to elect new directors. If the fund plans to do any of these things, it must issue a proxy statement. If you receive a proxy statement in the mail, look carefully for changes in investment policy and changes in investment management fees. You can vote against them.

A predetermined purchase price. For example, for a vehicle, the purchase option price may be at the end of a lease.

Property that is "real estate owned" by a bank that foreclosed on that property.

A Canadian retirement plan that allows you to save on a tax-deferred basis. Amounts contributed to an RRSP are tax deductible and income earned is tax exempt as long as the funds remain in place. Capital and income from the plan are fully taxable once funds are withdrawn.

The actual profit or loss on an investment you sell. (The value of the investments can go up or down, but the gain or loss is unrealized until the investment is sold.)

Using interest or dividend payments from an investment to purchase more shares of that investment. Retirement plans such as 401(k) plans are frequently set up to automatically reinvest dividends and interest.

Agencies that are often hired by large companies to sell the homes of executives who have recently relocated. If you move into an area with large corporate employers, chances are the corporations are using a relocation service to sell the homes of their relocated employees.

Also known as the projected market value. In the case of an automobile, for example, the residual value would be at the end of a lease. Sometimes referred to as the lease-end value, it is established at the time of lease inception and is used to determine the cost of a lease. The higher the residual value, the lower the monthly payment. A high residual is most advantageous in a closed-end lease.

A reverse mortgage is a loan agreement with a lending institution in which a senior citizen gets a monthly income based on a percentage of the equity in his home, prevailing mortgage rates and actuarial life expectancy. Once the senior dies or enters a nursing home, the lending institution gets the deed to the house if the deceased's family can't pay back the loan, so you may eventually be signing your home over to the bank.

RULE 12 (b) 1 was introduced in 1980 by the Securities and Exchange Commission to allow mutual funds to add an annual charge for marketing and distribution. The fee, which is referred to as a 12 (b) 1 fee, is subtracted from the fund's assets and used for such things as advertising or paying additional commissions to the brokers who sell the funds.

U.S. government bonds issued at a discount with face value denominations which ranged from $50 to $10,000. When savings bonds are redeemed, the difference between purchase price and redemption value is considered interest income. Interest from savings bonds is exempt from state and local taxation, and generally no federal tax is due until the bonds are sold.

The SEC requires the company to show what you would pay on a $1,000 investment assuming that it returned 5 percent a year and you redeemed the money at the end of that period. To give you a standard for comparison, consider that a fund charging a total of 1 percent in expenses would cost $10 in one year, $32 in three years, $56 in five years and $124 in 10 years.

Any investment that has a unit value that can change. Typical securities include stocks, bonds and mutual funds.

A pension plan for owners of small business and the self-employed. Money invested in an SEP is tax deductible and earnings from the plan are tax deferred.

Shares of ownership in a corporation's earnings, assets and liabilities. Stockholders may receive dividends and can generally sell their shares at any time.

A dividend paid with shares of the issuing company's stock rather than cash. Stock dividends are generally not taxable.

A transaction where a corporation gives existing shareholders new shares resulting in stockholders owning more shares at a lower price. For example, if a company initiates a two-for-one split, it doubles the number of shares each shareholder owns and drops the price by half.

The abbreviation for a corporation's stock that is used by brokers when trading. You must have a stock symbol entered for each stock you want to use with Online Quotes.

An instruction to your broker to close out your short position and buy stock to replace the shares you borrowed if your losses reach a certain percentage of your investment.

A lease subsidized by a manufacturer, which may offer a better interest rate, residual value and a lower capitalized cost than independent leasing institutions.

Tax advantaged is a term that can be used to describe practically any kind of investment that provides a tax break. It could be used to describe some types of life insurance as well as an investment in your home or a retirement account.

Tax-deferred investments accumulate with no tax liability until withdrawal. Be careful not to confuse this with investments that are tax exempt.

Investment income that isn't taxed. Be careful not to confuse this with accounts that are tax deferred.

Tax-free means that no taxes are ever due on an investment. That is the case for some types of bonds issued by federal and state governments. Municipal bonds, which are issued by state, city or other local governments to pay for projects, are free from federal taxes. Sometimes called "munis," many are also free of state and local taxes.

Companies that prepare reports in advance of any involuntary transfers of property ownership, such as mortgage or tax foreclosures.

Money the U.S. government borrows and pays back within one year. T-bills sell at a discount because they do not make interest payments. They can be bought at a discount and later redeemed for their face values.

Money the U.S government borrows for more than 10 years. Bonds pay interest on a semiannual basis.

Money the U.S. government borrows for two to 10 years. Notes pay interest on a semiannual basis.

A legally recognized arrangement where one or more persons (trustees) take title to property to hold it for the benefit of another person (beneficiary).

A legal document that specifies among other things the collateral for a loan. It also gives a lender the right to seize and sell the collateral if the borrower fails to repay. For a home loan, the collateral is the home itself.

Income that includes dividends, interest, royalties, rental fees, capital gains and any other income that does not come from the sweat of your brow.

The profit or loss on an investment if it were to be sold at its current price.

Damage or depreciation due to normal use of a vehicle. A lease will specify that a lessee is not responsible for normal wear and tear, and will usually define what "normal" means.

Wrap accounts, also referred to as fee-based or managed-money accounts, are a way to get some personal financial advice even if you don't have enormous sums to invest. The problem is that annual fees may go up to 3 percent of the sum under management. Investigate carefully to make sure a wrap account is worth the cost compared to other investment alternatives, including load and no-load mutual funds.