Financial Literacy Part 2: Glossary

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Glossary of Financial Literacy

Financial Literacy Part 2: Terms and Definitions, Expanding Your Money Vocabulary

Understanding essential financial terms is crucial for enhancing financial literacy and making informed decisions about personal finance and investments. As part 2 of the Learn Financial Literacy article series, this piece delves into the language of personal budgeting, taxes, entrepreneurship, and investing, demystifying key concepts and providing a solid foundation for navigating the financial landscape.

Personal Budget

Cash flow statement: A financial statement that summarizes an individual’s or household’s income and expenses over a specific period, providing a snapshot of their financial situation.

Debt avalanche method: A debt repayment strategy that involves paying off debts in order of highest to lowest interest rate, while making minimum payments on all other debts.

Debt repayment plan: A strategy for paying off outstanding debts, such as credit cards or student loans, by prioritizing payments based on factors like interest rates, balances, or repayment terms.

Debt snowball method: A debt repayment strategy that involves paying off debts in order of smallest to largest balance, while making minimum payments on all other debts.

Debt-to-income ratio: A financial metric that compares an individual’s total monthly debt payments to their gross monthly income, often used by lenders to assess creditworthiness.

Deficit: The amount by which expenses exceed income in a budget, indicating that an individual is spending more money than they are earning.

Discretionary spending: Non-essential expenses, such as entertainment, dining out, or travel.

Envelope system: A budgeting method where an individual allocates cash for specific expense categories by placing the designated amount in physical envelopes, helping to control spending and track expenses.

Expenses: The costs that an individual incurs, such as rent, utilities, food, and transportation.

Financial goals: Specific monetary objectives that an individual aims to achieve over a defined period, such as saving for a down payment on a house, reducing debt, or building an emergency fund.

Fixed expenses: Costs that remain constant over time, such as mortgage or rent payments.

Income: The money an individual earns from a job, investments, or other sources.

Net income: The amount of money an individual has left after deductions, such as taxes and other withholdings, have been subtracted from their gross income.

Savings: The portion of income set aside for future use, including emergency funds, retirement, or other financial goals.

Sinking fund: A savings strategy where an individual sets aside a specific amount of money each month to cover an expected future expense, such as car repairs, vacations, or holiday spending.

Surplus: The amount of money remaining after all expenses have been accounted for in a budget. A surplus indicates that an individual’s income is greater than their expenses.

Variable expenses: Costs that fluctuate based on consumption, such as groceries or utilities.

Zero-based budget: A budgeting method where every dollar of income is allocated to a specific expense or savings category, ensuring that the total income minus total expenses equals zero.


Alternative Minimum Tax (AMT): A parallel tax system designed to prevent high-income taxpayers from using certain deductions and exemptions to avoid paying their fair share of taxes.

Capital gains tax: A tax levied on the profit earned from the sale of an investment or property, with rates depending on the holding period and the taxpayer’s income level.

Estate tax: A tax imposed on the transfer of a deceased person’s estate, which includes property, investments, and other assets, before being distributed to beneficiaries.

Gift tax: A tax levied on the transfer of money or property from one person to another without receiving anything of equal value in return.

Income tax: A tax levied on an individual’s or business’s income, which may be progressive or flat-rate.

Payroll taxes: Taxes withheld from an employee’s paycheck and paid by the employer, typically including Social Security and Medicare taxes.

Property tax: A tax assessed on the value of real estate or personal property, such as land, buildings, or vehicles.

Sales tax: A tax imposed on the sale of goods and services, typically calculated as a percentage of the purchase price.

Tax audit: A formal examination of an individual’s or business’s tax return by a government tax authority to verify its accuracy and compliance with tax laws.

Tax avoidance: The use of legal methods to minimize an individual’s or business’s tax liability, often through tax planning strategies and financial decisions.

Tax brackets: A range of income levels subject to a specific tax rate, which progressively increase as income rises.

Tax credits: A direct reduction of an individual’s tax liability, often provided as an incentive for specific actions, such as investing in renewable energy.

Tax deductions: Expenses that can be subtracted from an individual’s taxable income, reducing the amount of tax owed.

Tax evasion: The illegal act of deliberately underreporting or concealing taxable income, resulting in the non-payment of taxes owed.

Tax exempt: A status granted to certain types of income or organizations, which are not subject to taxation under specific circumstances or conditions.

Tax lien: A legal claim by the government on a taxpayer’s property, used as security for the payment of taxes owed.

Tax refund: The amount of money returned to a taxpayer when their tax payments exceed their total tax liability for a given year.

Tax shelter: A legal strategy used to reduce an individual’s or business’s taxable income, often through investments, deductions, or credits.

Taxable income: The portion of an individual’s or business’s income subject to taxation after deductions and exemptions are accounted for.

Withholding tax: The amount of an employee’s pay withheld by the employer and sent directly to the government as a prepayment of income tax.


Angel investor: An individual or group that provides capital to early-stage companies in exchange for ownership equity or convertible debt.

Bootstrapping: The process of starting and growing a business with limited resources, often relying on personal savings, low-cost strategies, and reinvesting profits back into the business.

Break-even point: The point at which a business’s total revenue equals its total costs, meaning the business is neither making a profit nor incurring a loss.

Business model: The underlying structure and plan that a business uses to generate revenue, deliver value to customers, and create a sustainable competitive advantage.

Business plan: A written document outlining a business’s goals, strategies, target market, and financial projections.

Capital: The financial resources necessary to start and grow a business, including investments, loans, or personal savings.

Cash flow: The movement of money in and out of a business, including income from sales and expenses for operations.

Corporation: A legal entity separate from its owners, providing limited liability protection and allowing for easier access to funding through the sale of shares.

Crowdfunding: A method of raising capital for a business or project by soliciting small contributions from a large number of people, typically via online platforms.

Franchise: A business model in which an individual (franchisee) pays a fee to use an established company’s (franchisor) brand, products, and support services, in exchange for operating their own business.

Intellectual property: Creations of the mind, such as inventions, artistic works, designs, and symbols, that can be legally protected through patents, copyrights, and trademarks.

Limited Liability Company (LLC): A hybrid business structure that combines the limited liability of a corporation with the tax and operational flexibility of a partnership or sole proprietorship.

Market research: The process of gathering, analyzing, and interpreting information about a market, industry, or target audience to make informed business decisions.

Partnership: A business structure in which two or more individuals share ownership, decision-making, and responsibilities, as well as the profits and losses of the business.

Profit margin: The difference between a business’s revenue and its costs, expressed as a percentage of revenue.

Return on investment (ROI): A financial metric used to evaluate the efficiency of an investment, calculated by dividing the net profit of an investment by its initial cost.

Sole proprietorship: A type of business structure where the owner is the sole decision-maker and assumes all responsibilities, liabilities, and profits of the business.

Startup: A new business in its early stages, often focused on developing a unique product or service.

Venture capital: A form of private equity financing provided by investors to startups and early-stage companies with high growth potential, in exchange for ownership equity.


Active investing: An investment strategy that involves selecting individual stocks, bonds, or other securities in an attempt to outperform the market, often involving more frequent trading and higher management fees.

Bonds: Debt securities issued by governments, corporations, or other entities, which pay periodic interest and return the principal at maturity.

Exchange-traded funds (ETFs): Investment funds that hold assets like stocks or bonds, and trade on a stock exchange, offering the benefits of diversification and easy trading.

Market capitalization: The total value of all outstanding shares of a publicly traded company’s stock, calculated by multiplying the stock’s current market price by the number of outstanding shares.

Mutual funds: Investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other assets.

Passive investing: An investment strategy that seeks to match the performance of a market index, typically through low-cost index funds or ETFs, with minimal trading and portfolio management.

Price-to-earnings ratio (P/E ratio): A financial metric used to determine the relative valuation of a company’s stock, calculated by dividing the stock’s market price by its earnings per share.

Portfolio: A collection of investments held by an individual or institution, which may include stocks, bonds, real estate, and other assets.

Rebalancing: The process of periodically adjusting an investment portfolio to maintain the desired asset allocation, often involving selling assets that have performed well and buying underperforming assets.

Risk tolerance: An individual’s ability and willingness to accept losses in their investments, often influenced by factors such as age, investment goals, and financial situation.

Short selling: An investment strategy that involves borrowing shares of a stock, selling them in the market, and later repurchasing the shares at a lower price to return to the lender, profiting from the decline in the stock’s price.

Stocks: Shares of ownership in a publicly-traded company, which may generate returns through dividends or capital appreciation.

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