Kathy Cuevas
Financial Coach
Financial Terms
This glossary provides a solid foundation for understanding key terms related to budgeting, investing, and real estate, which can help in making more informed financial decisions.
Budgeting Terms
Budget: A financial plan that estimates income and expenses over a specific period, typically monthly or annually.
Income: The total money earned, including salary, wages, rental income, or investment returns.
Expense: The costs incurred in daily living, such as housing, utilities, food, transportation, and entertainment.
Fixed Expenses: Regular, unchanging costs such as mortgage payments, rent, insurance premiums, and subscriptions.
Variable Expenses: Costs that fluctuate from month to month, such as groceries, gas, and entertainment.
Surplus: The amount left over after all expenses have been paid when income exceeds expenses.
Deficit: When expenses exceed income, leading to a shortfall in available funds.
Emergency Fund: A savings reserve used for unexpected expenses or emergencies (typically three to six months of living expenses).
Debt-to-Income Ratio (DTI): A ratio that compares monthly debt payments to gross monthly income. It helps assess an individual's ability to manage monthly payments.
Savings Rate: The percentage of income saved rather than spent.
Investing Terms
Investment: The act of allocating money or capital to an asset (stocks, bonds, real estate, etc.) with the expectation of generating a return.
Asset: Any resource or property owned with the expectation that it will provide value or income in the future.
Return on Investment (ROI): A measure of the profitability of an investment, calculated as the gain or loss divided by the initial investment amount.
Stock: A share in the ownership of a company, representing a claim on part of the company’s assets and earnings.
Bond: A debt security where an investor loans money to an entity (corporate, government) in exchange for periodic interest payments and the return of the principal amount at maturity.
Mutual Fund: A pool of funds collected from many investors to invest in a diversified portfolio of stocks, bonds, or other securities.
Exchange-Traded Fund (ETF): A type of investment fund traded on stock exchanges, similar to a mutual fund but typically with lower fees and better liquidity.
Dividend: A payment made by a company to its shareholders from its profits, typically in the form of cash or additional shares.
Capital Gain: The profit from selling an asset for more than the purchase price.
Risk Tolerance: The level of risk an investor is willing to take in exchange for potential returns.
Diversification: The practice of spreading investments across various assets to reduce risk.
Index Fund: A type of mutual fund or ETF that aims to replicate the performance of a specific market index, like the S&P 500.
Bear Market: A market characterized by declining prices, typically by 20% or more.
Bull Market: A market in which prices are rising or expected to rise.
Real Estate Terms
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Mortgage: A loan used to purchase real estate, where the property itself serves as collateral for the loan.
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Down Payment: The initial payment made toward the purchase price of a home, usually expressed as a percentage of the total cost (e.g., 20%).
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Equity: The value of a property minus any remaining mortgage debt; it represents the homeowner’s stake in the property.
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Appraisal: The professional assessment of a property’s value, typically done before a sale or refinancing.
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Amortization: The process of gradually paying off a loan over time with fixed payments that cover both principal and interest.
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Fixed-Rate Mortgage: A mortgage with an interest rate that remains constant for the entire term of the loan.
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Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that changes periodically based on a benchmark rate.
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Closing Costs: The fees associated with finalizing a real estate transaction, including attorney fees, title insurance, inspection fees, and transfer taxes.
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Homeowner’s Insurance: Insurance coverage that protects a homeowner against damage to the property or liability in case of accidents.
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Property Tax: Taxes assessed by local governments on real estate based on the property’s value.
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Rental Income: The money earned from renting out a property to tenants.
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Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-producing real estate. REITs allow investors to buy shares in real estate portfolios.
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Foreclosure: A legal process where a lender takes control of a property due to the borrower’s failure to make mortgage payments.
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Appreciation: The increase in the value of a property over time due to market conditions, improvements, or other factors.
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Depreciation: The decrease in the value of a property over time, often due to wear and tear or other factors.
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Cap Rate (Capitalization Rate): A metric used to assess the profitability of a real estate investment, calculated as the annual net income divided by the property's value.