Financial Planning Terms To Familiarize Yourself With

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Do you ever feel like financial planning is full of terms and language that is confusing and overwhelming?

At Tencap, we’re all for cutting through the confusion so you can be better educated and coached around your finances. Tencap put together this glossary—a simple guide to decoding “mysterious” financial planning terms.

From asset allocation to investment planning, you can have the education to navigate your financial journey confidently by delving into the details.

Financial Planning Terms Glossary

You may encounter the following terms as you work with a financial advisor when exploring investments and plans.

1-9

  • 401(k) 

An employer-sponsored retirement savings plan where employees contribute a portion of their pre-tax salary. The company often matches these contributions up to a certain dollar amount.

Also read: Retirement Savings in America: A Deep Dive into 401k Statistics

  • 529 Plan

A tax-advantaged savings plan encouraging saving for future education expenses typically used for college tuition. However, there are aspects of these plans that can be used strategically in financial planning for a family.

A

  • Adjusted gross income (AGI)

Total income minus specific deductions, representing an individual’s taxable income before accounting for exemptions and credits.

  • Annual percentage rate (APR)

The total cost of borrowing money through a loan or credit card, including the interest rate and other charges. Lenders charge this rate every year.

  • Asset allocation

The strategic distribution of investments across asset classes to balance risk and return according to an investor’s goals and risk tolerance.

  • Automatic investment plan (AIP)

A system allowing investors to automate regular contributions to their investment accounts by deducting their paycheck or other income streams.

B

  • Bear market

A market condition where asset prices decline, investors become pessimistic, and sustained selling occurs due to economic downturns and reduced confidence.

  • Beneficiary

An individual or entity designated to receive assets or benefits from a will, trust, insurance policy, retirement account, or other financial instrument upon the holder’s death.

  • Bonds

Fixed-income securities that investors lend to a company or government, as an example. In return, the lender receives periodic interest payments and the principal amount upon maturity. Bonds are typically less risky than stocks.

Also read: Navigating Uncertainty: Which Investment Type Typically Carries the Least Risk?

  • Bull market

A market condition where asset prices rise, investors are optimistic, and buying activity is high due to strong economic performance and positive sentiment.

  • Buy-and-hold

An investment strategy that involves purchasing and holding securities for an extended period, regardless of short-term market fluctuations, to benefit from long-term growth.

C

  • Capital gains tax

The tax imposed on the profit earned from selling an asset—a stock, bond, or real estate property.

Also read: How to Avoid Capital Gains Tax When Selling Your Home: A Complete Guide to Section 121 Exclusion 

  • Cash flow

The net amount of cash in a business or personal account calculated by subtracting expenses from income.

  • Certified financial planner (CFP®)

A professional designation given by the CFP® Board to financial advisors who pass a series of qualifying terms and give their word to a number of promises. The CFP® designation is earned by gaining expertise in comprehensive disciplines, including investment, insurance, code of conduct promises and education planning, as an example.

Also read: A Complete Guide to the Designations and Certifications for Financial Advisors

  • Chartered financial consultant (ChFC®)

A professional designation indicating a financial advisor’s advanced knowledge in estate, income tax, and employee benefits planning.

  • Compound interest

The accrued interest on the principal investment amount and interest accumulated from previous periods. It allows investments to grow exponentially over time with the reinvestment of earned interest. 

D

  • Diversification

A strategy that involves spreading investments across asset classes and securities to manage risk and optimize returns.

  • Dividend

A portion of a company’s profits distributed to shareholders as a return on their investment. It’s typically paid out quarterly in cash or reinvested as additional shares of stock.

  • Defined contribution pension plan

A tax-deferred savings plan where employees contribute a portion of their salary to build their retirement fund.

  • Dollar-cost averaging

A strategy of investing a fixed amount of money in an asset at regular intervals, regardless of price and market conditions, to manage and minimize risks.

E

  • Earned income

Wages, salaries, and bonues derived from actively participating in a trade, business, or employment.

  • Emergency fund

Savings set aside to cover unexpected expenses or financial emergencies. Emergency funds provide a financial safety net to avoid high-interest debt or liquidating investments.

  • Estate tax

A tax imposed on transferring a deceased person’s estate before distribution to heirs. It’s based on the estate’s total value and subject to exemptions and deductions.

Also read: 8 Key Questions to Ask Your Estate Planner Before Working with Them 

F

  • Fee-based

A compensation structure in which financial advisors may charge fees for advice. They may also earn commissions from selling financial products to clients.

  • Fee-only

A compensation structure in which financial advisors solely charge fees for their services, avoiding commissions or other forms of compensation from product sales.

  • Fiduciary

A legal and ethical obligation requiring financial advisors to protect the welfare of their clients by disclosing any potential conflicts of interest and providing transparent, impartial advice.

Also read: Here Are 3 Ways to Find the Right Fiduciary Advisor Near You

  • Financial advisor

A professional who provides financial guidance and assistance to clients through investment management, retirement planning, estate planning, etc.

G

  • Gross income

Total income earned before taxes, contributions, expenses, and other deductions.

  • Growth investing

An investment strategy focusing on securities with potential for capital appreciation. It usually involves investing in new and small companies with strong growth prospects.

H

  • Hedge fund

A type of investment fund that pools money from accredited investors and institutions to generate high returns. It involves using leverage, derivatives, and alternative investments.

  • Health savings account (HSA)

A tax-advantaged savings account for qualified medical expenses that standard health plans don’t typically cover.

I

  • Individual retirement account (IRA)

A tax-advantaged retirement account allowing individuals to save for retirement with either tax-free or tax-deferred growth, depending on the type of IRA.

  • Inflation

An increase in the general prices of goods and services. It erodes purchasing power and impacts the value of money.

Also read: Inflation and Retirement Planning: How to Protect Your Savings From Being Eroded Away

  • Intestate

A legal term referring to the situation where a person dies without a valid will, resulting in the distribution of assets according to state intestacy laws.

The process of assessing risks and determining appropriate insurance coverage to mitigate potential financial losses from unforeseen events, like accidents, illness, or death.

The practice of setting financial goals, assessing risk tolerance, and creating a diversified portfolio of investments aligned with individual objectives and time horizons.

J

  • Joint account

A bank or investment account that two or more individuals own, allowing them to deposit, withdraw, and manage funds jointly.

K

  • Keogh plan

A tax-deferred retirement savings plan for self-employed individuals and small businesses, offering potential tax benefits and flexibility in contributions.

L

  • Laddering

An investment strategy involving staggered purchases or maturities of financial instruments, such as bonds or certificates of deposit, to manage interest rate risk and maintain liquidity.

  • Life insurance

A contract between an individual and an insurance company providing a death benefit to beneficiaries upon the insured’s death. It’s often used for financial protection and estate planning.

  • Liquidity

The ease with which an individual can convert an asset into cash without significantly impacting its value. It’s crucial for financial flexibility and emergency access to funds.

M

  • Medicare

A federal health insurance program primarily for individuals aged 65 and older, as well as younger people with certain disabilities or medical conditions.

Also read: A Quick Guide to Medicare in Utah (and How to Incorporate It into Your Financial Plan)

  • Mutual fund

An investment vehicle that pools together funds from multiple investors. Professional portfolio managers handle and invest these funds in a diversified portfolio of stocks, bonds, or other securities.

  • Mortgage

A loan for purchasing real estate that uses property as collateral. It’s typically repaid over a specified term with interest.

N

  • Net asset value (NAV)

The per-share value of a mutual fund or exchange-traded fund (ETF). It’s calculated by subtracting the fund’s total liabilities from its assets.

  • Net worth

The difference between an individual’s assets and liabilities. It represents their overall financial position or wealth.

  • Non-qualified investment

An investment that doesn’t offer any special tax advantages. Examples include annuities, precious metals, jewelry, and collectibles.

O

  • Options (Financial derivative)

Financial contracts giving someone the right – but not the obligation – to buy or sell an underlying asset at a predetermined price within a particular timeframe.

  • Overdraft

Occurs when a bank account balance falls below zero, leading to a negative balance. Banks typically charge extra fees or interest to process transactions with an empty account.

P

  • Pension

A retirement plan that provides regular income payments to retirees based on their years of service and salary.

  • Portfolio

A collection of investments a person or an entity holds and manages to achieve specific financial goals and risk tolerance. It may mix stocks, bonds, mutual funds, and other assets.

  • Premium

Monthly, quarterly, or annual payment to an insurance company for policy coverage.

  • Principal

The initial amount of money invested or borrowed, excluding any interest or earnings.

  • Probate

The legal process of validating a will and distributing the deceased person’s assets to heirs. Wills are subject to court supervision and potential fees.

Q

  • Qualified retirement plan

An employer-sponsored retirement plan – such as 401(k) and IRA – that meets the IRC’s (Internal Revenue Code) and ERISA’s (Employee Retirement Income Security Act) requirements for tax benefits.

R

  • Return on investment (ROI)

A measure of an investment’s profitability. It’s calculated by dividing the net profit (gain minus cost) by the initial investment cost and multiplying by 100.

  • Rollover

The transfer of funds from one retirement account to another, typically from an employer-sponsored plan to an IRA, without incurring taxes or penalties.

  • Roth IRA

An individual retirement account that permits after-tax contributions to grow tax-free, with qualified withdrawals in retirement being tax-free as well.

S

  • Securities

Company- or government-issued tradable financial assets, such as stocks, bonds, and derivatives, representing ownership or debt obligations.

  • Simplified employee pension (SEP)

A tax-advantaged retirement plan allowing self-employed individuals and small businesses to make tax-deductible contributions for themselves and their employees.

  • Social security

A federal program that provides retirement, disability, and survivor benefits to eligible individuals and their families. It’s funded through payroll taxes.

  • Stocks

Ownership shares in a corporation that represent a claim on the company’s assets and earnings. They’re typically bought and sold on stock exchanges.

T

  • Taxable income

The portion of income that’s subject to taxation after deductions and exemptions.

  • Tax credits

Dollar-for-dollar reductions in tax liability granted directly against what taxpayers owe. The government enacts this incentive to reward specific behaviors or support certain demographics.

Also read: A Complete List of Utah Rebates, Incentives, and Tax Credits

  • Tax-deferred investment

An investment vehicle with tax advantages on contributions and earnings. It’s typically used in retirement accounts such as 401(k)s and IRAs.

  • Trust fund 

A legal arrangement where a trustee holds and manages assets for the benefit of one or more beneficiaries. It’s often used for estate planning and asset protection.

U

  • Umbrella liability coverage

An insurance policy with additional liability coverage beyond the limits of standard insurance policies as protection against large claims or lawsuits.

  • Underwriting

The process where an institution, like a bank or insurance company, assesses the risk involved in approving a loan or insurance policy. They analyze borrowers’ financial history, creditworthiness, or health to determine their likelihood of repaying loans or filing a claim.

V

  • Vesting

The process of granting an individual full ownership rights or entitlements to employer-contributed retirement funds or benefits over a specified period.

  • Volatility

The measure of the degree of variation in the price of a financial instrument or market index over time indicating risk or instability.

W

  • Will

A legal document outlining an individual’s wishes regarding the distribution of their assets and the guardianship of dependents after their death.

  • Wealth management

Comprehensive financial services providing advice and assistance to high-net-worth individuals and families. It often encompasses investment management, financial planning, and estate planning.

Also read: Financial Advisor vs. Wealth Manager: Making the Right Choice

  • Withholding taxes

Income or payroll taxes that employers withhold from their employees’ paychecks and remit to the government.

Y

  • Yield

The return on an investment typically expressed in percentage. It represents the income generated from dividends, interest, or other distributions relative to the investment’s cost.

Z

  • Zero-coupon bond

A bond that does not pay interest but issued at a discount to its future or face value. The bond is redeemable at face value upon maturity, resulting in capital appreciation.

Tencap is Here to Help

Knowing financial planning terms is crucial for making intelligent and informed financial decisions. Whether it’s about saving or investing, understanding them helps you manage your money better.

Remember, each of us are making decisions about money and our retirement planning each day. It’s just that some of us are making better choices than others. Our goal at Tencap Wealth Coaching is to help you make informed and intelligent decisions that will lift you to financial independence – that will allow you to retire responsibly one day.

Each advisor on our team is committed to helping you see solutions and possibilities and to get in-action. Often, people are so confronted and aware of all of the reasons “they can’t save, or can’t invest, or can’t pay down debt” that they spend years or decades making little to no progress in building their financial plan. 

Allow me to be clear about an assertion I have. I am confident and settled that our clients, those willing to come in and sit down with a financial advisor and receive coaching, those that are willing to be accountable – are willing to look for solutions and confront problems; those are absolutely the type of people we believe are more likely to create an intelligent and successful financial plan. The cohort of people found “playing the game” described above, how much more likely are they to experience success than those attempting to create a solvent financial plan, themselves, without coaching – without someone to help co-author a plan, without someone to help hold you accountable? 

At Tencap, we are clear on that question. If you wish to explore what the journey around financial planning is like with an advisor – with a coach, call us! We would love to introduce our financial advisors and answer any question you may have over the phone or in a complimentary no-cost meeting.  

Explore our page to learn more and get started. Let us help you start building and securing your wealth, today!

Photo of Joe Griffin
Joe Griffin
CEO Tencap Wealth Coaching

Joe has been building and managing financial planning firms for the past 13 years. He loves the financial planning space and is very proud of the success and growth that has come from his proprietary marketing and leadership. Joe spent years being involved with the bright minds of the investment committee at Utah’s 529 college savings plan – a plan managing over 20 billion. Joe only works with firms that are stated fiduciaries on a client relationship. Joe is committed to leading a financial planning firm with ethics and integrity.  The money management philosophy that Tencap subscribes to is built on strong academics and is supported by a highly impressive academic board. We can't wait to coach you on the excellence that Tencap stands for.

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