I wanted to (finally) give you a money dictionary that doesn’t require a dictionary to understand the word’s definition. That doesn’t exist . . . so I made my own. You know how you explain a term to a friend who doesn’t “get” it? That’s the way it’s written here. Let this glossary be your go-to guide for definitions with a practical perspective whenever you need a little cheat-sheet. Some stuff changes over the years, but these basics never go out of style.
AAA: Refers to a credit rating (not roadside assistance), and it tells you if a company, a state or local government, or even a country is likely to repay its debts. The grades help you decide if you want to take your hard-earned cash and invest in those places. The AAA is the best grade there is and it goes down from there, AAA-, AA+, AA, AA-, A . . . you get the point. Anything with a BB+ grade and below is so risky that it’s actually called “junk.” But this can sometimes be a good thing—“the higher the risk, the greater the reward.” In finance it might be good to have a little junk in the trunk. These grades help you make the choice to play it safe or take a gamble.
Accounts Receivable -
Money that’s owed to you for a good or service that’s already been used by your customer, but for which you have not yet been paid.
What happens when you buy a company that’s for sale (as opposed to taking over a company that isn’t for sale, as in the case of a hostile takeover).
AGI (Adjusted Gross Income) -
AGI (Adjusted Gross Income): AGI is literally the bottom line on the first page of your tax return (if you file your taxes yourself). It’s your gross income, or money you’ve made from all sources during the year, minus big deductions like educational expenses or losses from selling your home. Lenders care a lot about this number because it’s viewed as the most accurate report of your income.
Amortization: This is spreading a loss out over a fixed period. It has two meanings: 1. The breakdown of your payment between interest and principal when you pay off debt on a specific schedule. This applies mostly to home or car loans. In the beginning, you’ll mostly be paying off the interest. Then, as the payments near the end, they will eat mostly into the principal until (ideally) you’re all done repaying. 2. When you talk about depreciating something intangible (copyrights, patents, intellectual property, franchise rights) on your taxes evenly over the time you expected to use it for but didn’t (because it wasn’t as valuable as you thought). For example, “In order to pay off the enormous debt she incurred securing a patent for making milkshakes out of chicken (for which she realized there was zero market), Nicole will amortize her loss over the next few years.”
This is spreading a loss out over a fixed period. It has two meanings: 1) the breakdown of your payment between interest and the amount
you owe when you have a mortgage 2) For Boss Bitches, this comes into play when you talk about depreciating something in your business that’s intangible (copyrights, patents, intellectual property, franchise rights) on your taxes evenly over the time you expected to use it for but didn’t (because it wasn’t as valuable as you thought). For example, “In order to pay off the enormous debt she incurred securing a patent for making dresses for alpacas (for which she realized there was zero market), Nicole will amortize her loss over the next few years.” This means she’ll pay off those losses piece by piece, a little bit each month, instead of covering the loss all at once— way less painful to her bottom line. You will hear it used as part of (it’s the “A”) the acronym EBITDA. (See also: EBITDA)
Angel Investor -
An individual who invests in a start- up, often a friend or family member of the founder(s). Angel investors are so named because they’re typically more interested in helping an entrepreneur get her business off the ground than in earning a big payout for themselves, like most investors would be. (See also: VC)
Annuity: A steady stream of payments. It’s anything that pays you something at regular intervals, whether monthly, yearly, etc. An annuity can be a “life annuity,” which is like an alternative retirement program for yourself. Or, you buy an annuity as an investment, like you would buy stocks or bonds. Either way, annuity plans (there are millions) work like this: you put money in, you can let it grow tax deferred (so you pay tax only when you get the payments) then get a series of checks back. (See also: Variable Annuity)
Appreciation: The amount something increases in value over time. The opposite is depreciation, or the amount something decreases in value over time. Obviously, you can appreciate anything (I appreciate you for visiting my site), but in finance it mostly refers to “capital” like stocks, bonds, homes or other property like fine art. (See also: Depreciation)
APR (Annual Percentage Rate) or APY (Annual Percentage Yield) -
APR (Annual Percentage Rate) or APY (Annual Percentage Yield): The interest you will pay or receive for the entire year. APR is a simple calculation for the year, whereas APY (synonym: EAR) takes into account compounding interest, which makes it a more intricate (and, typically, more accurate) calculation. That’s the only difference. As you know, companies sneakily market interest rates all the time. If APR is 10% and APY is 10.5%, it would make sense that a bank that wants you to use its credit card will use APR (it appears lower) and then use APY (it appears higher) for savings accounts. Both essentially refer to the same thing. They are just different ways to present it.
ARM (Adjustable Rate Mortgage) -
ARM (Adjustable Rate Mortgage): A loan for a home that has an interest rate that will bounce around. Unlike traditional fixed mortgages, ARMs will reset to “market conditions” (they’ll get better or worse) after a stated period of time, usually three, five, seven or ten years. Think twice about signing up for an ARM just because the initial monthly payments look good. All that can change. A 3/27 mortgage is an ARM that stays fixed for three years, then bounces for the next twenty-seven years. (See also: Mortgage)
Asset: Anything you own that has cash value. Assets aren’t limited to what’s in your bank account. Your home, your car, your stamp collection: all assets. Assets that are cash or can be turned into cash quickly (like cash or stocks) are called “liquid assets,” whereas the ones that are difficult to turn into cash quickly (like a home or a boat) are called “illiquid.” (See also: Liquidity, Liability)
Asset Allocation -
Asset Allocation: The breakdown of where you’re putting your money. The three main asset classes—equities (stocks), fixed- income (bonds), and cash—have different levels of risk and reward, so depending on what your goals are for investing you want to balance the risk/reward by investing in varying amounts of each. For example, an aggressive investor may have an 80-20 asset allocation, putting 80% in stocks, which have greater potential for earnings but also greater risk, and 20% in bonds or cash, which have less earning power but are safer investments. The older you are, the less aggressive you’re likely to be since you’ll have less time over the long term to recoup any losses should any of your investments tank. (See also: Diversification)