Glossary
Financial planning terms, plainly defined
No jargon. No textbook definitions. Just clear explanations of the terms that come up most in financial planning conversations.
A
- Asset allocation
- How your investment portfolio is divided across different asset types — typically stocks, bonds, and cash. Your allocation should reflect your time horizon and risk tolerance. A 30-year-old and a 60-year-old should hold very different allocations even if both are "saving for retirement."Asset allocation by age →
B
- Beneficiary designation
- The person or entity you name to receive an account or policy when you die. Beneficiary designations on retirement accounts and life insurance policies override your will — so keeping them current is essential, especially after major life events.Beneficiary designations guide →
- Bond
- A loan you make to a government or company in exchange for regular interest payments and the return of your principal at maturity. Bonds are generally less volatile than stocks and serve as a stabiliser in a diversified portfolio.
C
- Capital gains
- Profit from selling an asset for more than you paid. Short-term gains (assets held under a year) are taxed as ordinary income. Long-term gains (assets held over a year) qualify for lower tax rates — currently 0%, 15%, or 20% depending on your income.
- Compound interest
- Earning returns on your returns. If you invest $10,000 and earn 7% per year, after year one you have $10,700. In year two you earn 7% on $10,700, not just the original $10,000. Over decades, this compounding effect is the primary driver of investment growth.
D
- Disability insurance
- Insurance that replaces a portion of your income if you become too sick or injured to work. Most people underestimate this risk — the odds of a lengthy disability before retirement are higher than the odds of dying during your working years.Disability insurance explained →
- Diversification
- Spreading investments across different asset classes, sectors, and geographies to reduce the impact of any single bad outcome. A diversified portfolio is not designed to maximise returns — it is designed to avoid catastrophic losses.
- Dollar-cost averaging
- Investing a fixed dollar amount at regular intervals regardless of market conditions. When prices are low, your fixed amount buys more shares. When prices are high, it buys fewer. Over time this smooths out the effect of market volatility.Dollar-cost averaging explained →
E
- Emergency fund
- Cash set aside specifically for unexpected expenses — a medical bill, a car repair, a job loss. The standard target is three to six months of essential expenses, kept in a high-yield savings account, separate from your regular checking.How to build an emergency fund →
- Estate planning
- The process of deciding what happens to your assets and dependants when you die or become incapacitated. At minimum it includes a will, beneficiary designations, and powers of attorney. More complex situations involve trusts and other structures.Estate planning checklist →
- ETF (Exchange-Traded Fund)
- A fund that holds a collection of securities and trades on a stock exchange like an individual stock. Most ETFs track an index, making them a low-cost way to own a broad slice of the market. Similar to mutual funds but with intraday trading and typically lower fees.ETF vs. mutual fund →
F
- Fee-only financial advisor
- An advisor who is paid directly by clients — through flat fees, hourly rates, or a percentage of assets — and receives no commissions for recommending products. This eliminates the conflict of interest created when advisors earn more by steering clients toward certain products.What is a fee-only financial advisor? →
- Fiduciary
- A legal standard requiring an advisor to act in your best interest at all times. Not all financial advisors are fiduciaries. Fee-only advisors registered as investment advisers (RIAs) are held to the fiduciary standard.What is a fiduciary advisor? →
H
- HSA (Health Savings Account)
- A tax-advantaged account available to people with a high-deductible health plan. Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free — a triple tax benefit. After age 65, withdrawals for any purpose are taxed like traditional IRA withdrawals.
I
- Index fund
- A fund designed to track the performance of a market index, like the S&P 500, rather than picking individual stocks. Because they require minimal management, they carry very low fees. Over long periods, most actively managed funds underperform their index benchmark.Index funds for beginners →
- Inflation
- The gradual increase in the price of goods and services over time, which erodes the purchasing power of cash. Historically around 2–3% per year in the US. One of the primary reasons to invest rather than hold all savings in cash.
- IRA (Individual Retirement Account)
- A personal retirement savings account with tax advantages. Traditional IRAs offer a potential tax deduction now; withdrawals in retirement are taxed as income. Roth IRAs offer no deduction now; qualified withdrawals in retirement are tax-free.Roth IRA vs. Traditional IRA →
L
- Life insurance
- Insurance that pays a death benefit to your beneficiaries when you die. The primary purpose is to replace your income for people who depend on it. Term life (coverage for a fixed period) is the most cost-effective option for most working adults with dependants.How much life insurance do I need? →
- Liquidity
- How quickly and easily you can convert an asset to cash without significant loss of value. A savings account is highly liquid. Real estate is illiquid — it takes time and cost to sell. Emergency funds should be kept in liquid assets.
M
- Mutual fund
- A pooled investment vehicle that collects money from many investors to buy a diversified portfolio of securities. Priced once per day at net asset value (NAV). Can be actively managed or index-tracking. Similar to ETFs but without intraday trading.
N
- Net worth
- Your total assets minus your total liabilities. A snapshot of your financial position at a given moment. Tracking net worth over time is more useful than focusing on income alone — it shows whether you are actually building wealth.
P
- Portfolio rebalancing
- Periodically adjusting your investment portfolio back to your target allocation. If stocks have a good year, they will represent a larger portion of your portfolio than intended. Rebalancing means selling some stocks and buying bonds to restore the target split.
R
- Required Minimum Distribution (RMD)
- The minimum amount the IRS requires you to withdraw from tax-deferred retirement accounts each year, starting at age 73. Withdrawals are taxed as ordinary income. Failing to take RMDs results in a significant penalty.
- Risk tolerance
- Your ability and willingness to accept investment losses in exchange for the potential for higher returns. It has two components: financial capacity to absorb losses, and emotional comfort with portfolio volatility. A financial plan should be built around your actual risk tolerance, not an idealised version.
- Roth IRA
- An individual retirement account funded with after-tax dollars. Contributions can be withdrawn at any time without penalty. Qualified withdrawals in retirement — including all investment growth — are completely tax-free. Income limits apply to direct contributions.Roth IRA vs. Traditional IRA →
- Roth conversion
- Moving money from a traditional (pre-tax) retirement account to a Roth account. You pay income tax on the converted amount in the year of conversion, but future growth and qualified withdrawals are tax-free. Often makes sense in low-income years or before RMDs begin.
S
- Sequence of returns risk
- The risk that poor investment returns early in retirement — when you are drawing down the portfolio — can permanently damage your financial plan, even if long-term average returns are fine. It is why retirement income planning is more complex than accumulation planning.
- Social Security
- A federal program providing retirement, disability, and survivor benefits funded through payroll taxes. Retirement benefits can be claimed from age 62 to 70; delaying increases your monthly benefit significantly. Claiming strategy is one of the most impactful retirement planning decisions.Social Security claiming strategy →
T
- Target-date fund
- An all-in-one mutual fund that automatically shifts from growth-oriented to more conservative investments as the target retirement date approaches. A reasonable default for 401(k) investors who do not want to manage their allocation manually.Target-date funds explained →
- Tax-loss harvesting
- Selling investments that have declined in value to realise a loss, which can offset capital gains and reduce your tax bill. The proceeds are typically reinvested in a similar (but not identical) asset to maintain market exposure. Most beneficial in taxable brokerage accounts.
- Term life insurance
- Life insurance that provides coverage for a specific period — typically 10, 20, or 30 years. Premiums are fixed for the term. If you die during the term, your beneficiaries receive the death benefit. If you outlive the term, coverage ends. The most cost-effective type for most families.Term vs. whole life insurance →
W
- Will
- A legal document specifying how your assets should be distributed after death and, if you have children, who should be their guardian. Without a will, your state's intestacy laws determine these decisions. A basic will is a minimum estate planning requirement for any adult.How to write a will →
- Whole life insurance
- Permanent life insurance that covers you for your entire life (as long as premiums are paid) and builds a cash value component. Significantly more expensive than term life for the same death benefit. Appropriate for a narrow set of situations; often over-sold.Term vs. whole life insurance →
Knowing the terms is step one
Building a plan that actually works for your life is step two. We start with a free conversation — no sales pitch, no obligation.