The following terms and definitions are those that are used and defined in Finding Financial Freedom:
401(K) – A retirement savings plan that permits an employee of a for-profit organization to set aside a portion of salary into a tax-deferred account before it is taxed, usually offering a variety of investment alternatives. Income and capital gains are sheltered from taxes until the funds are withdrawn. The employee’s contributions to the plan may be matched by the employer up to a certain limitation, or they may not be matched.
403(B) – A retirement savings plan that permits an employee of a not-for-profit organization (religious, charitable, scientific, educational, and other public interest-oriented institutions such as private schools, colleges, universities, research institutions, and teaching hospitals) to set aside a portion of salary into a tax-deferred account before it is taxed, usually offering a variety of investment alternatives. Income and capital gains are sheltered from taxes until the funds are withdrawn. The employee’s contributions to the plan are generally not matched by the employer.
529 COLLEGE SAVINGS PLAN – A tax-advantaged savings plan offered by all states to save funds for college or university tuition, room and board, books, supplies, and other qualified higher education expenses. Income and capital gains grow tax deferred, and withdrawals are federally and sometimes state tax-free when used for qualified education expenses. A wide range of investment alternatives is typically available. Some states may offer a state income tax deduction for residents who invest in their own state’s plan.
AMORTIZATION – The schedule of payments for paying off a loan. While the amount of each payment remains the same, the portion of the payments allocated to interest decreases and the portion allocated to principal increases until the loan is paid in full.
ASSET – Something of monetary value that is owned.
CAPITAL APPRECIATION – An increase in the market value of an asset.
CAPITAL DEPRECIATION – A decrease in the market value of an asset.
CASH FLOW – The amount of net cash generated during a specific period, calculated by subtracting all uses of funds from all sources of funds.
CELL REFERENCE – The letter and number combination, such as B9, that identifies the column and row intersection of an Excel® cell.
COMPOUNDED RATE OF RETURN – The annual rate of return earned on an investment in which dividends, interest or capital gains are reinvested at the same rate of return.
CONSUMER PRICE INDEX – A measure assessed by the government of the cost of living (inflation) for consumers compared with a base period.
CURRENT ASSET – Cash, or an asset that could be converted into cash within a period of one year.
CURRENT LIABILITY – An obligation or debt that is due within one year.
CURRENT RATIO – A measure of ability to meet short-term obligations. It is calculated by dividing current assets by current liabilities.
DEBT TO WORTH RATIO – The relationship between funds provided by creditors and those provided by an individual. It is calculated by dividing total liabilities by net worth.
DISCRETIONARY EXPENSE – Expenses that can largely be controlled or which may be more readily reduced or eliminated if necessary.
EQUITY SECURITIES – Investments in individual common stocks or in mutual funds and Exchange Traded Funds (ETFs) that are comprised of common stocks.
EXCEL® - A database and spreadsheet program developed by Microsoft Corporation that provides great flexibility in managing and manipulating numbers and other data for recordkeeping and development of “what if” scenarios.
EXCHANGE TRADED FUND (ETF) - ETFs represent shares of ownership in portfolios of common stocks which are designed to generally correspond to the price and yield performance of their underlying portfolios of securities, either broad market, industry sectors, regions, investment styles, or international. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks within a single security, as easily as buying or selling a share of stock. They offer a wide range of investment opportunities.
FIXED INCOME SECURITIES – A security such as a bond or preferred stock that pays a constant investment return. The value of the underlying security fluctuates primarily with changes in interest rates.
IRA (TRADITIONAL) – A retirement account into which an individual may set aside earned income for investment, the growth on which is tax-deferred. Contributions, subject to limitations, are tax deductible, and withdrawals are taxable. A broad array of investment alternatives are available.
IRA (ROTH) – A new type of IRA plan, established by the Taxpayer Relief Act of 1997, which allows individuals, subject to certain income limits, to save for retirement while allowing the investments to grow tax-free. Contributions to the plan are not income tax deductible, but withdrawals, subject to certain rules, are not taxed. A broad array of investment alternatives are available.
LIABILITY – An obligation to pay an amount to another party, often with interest.
LONG-TERM – Relates to the gain or loss in a security that has been held for a certain period of time. For example, to qualify as a long-term capital gain under current tax laws, a security must be held for twelve months or more.
LONG-TERM ASSET – An asset owned that is intended to be held for a period of longer than one year.
LONG-TERM LIABILITY – An obligation or debt that is not due for longer than one year.
MUTUAL FUND – An investment company that continually offers new shares and stands ready to redeem existing shares from the owners. Because the shares are purchased from and sold to the investment company, these shares are not traded on stock exchanges like common stocks and Exchange Traded Funds. The assets of an equity mutual fund consist of a portfolio of common stocks.
NET WORTH – A measure calculated by subtracting total liabilities from the total market value of assets for an individual.
NON-DISCRETIONARY EXPENSE – Expenses which are viewed as mandatory and over which one has little or no control.
PRO-FORMA – As related to financial statements, one which is constructed from one or more projected amounts.
SAVINGS RATE – The percentage of total income that an individual is able to save.
SOURCE OF FUNDS – The means from which an individual derives income or other cash flows such as proceeds of loans, gifts and liquidation of assets.
USE OF FUNDS – The ways in which an individual applies funds to liquidate obligations, pay expenses and increase ownership of assets.
WORKBOOK – The basic Excel® document, consisting of one or more worksheets.
WORKSHEET – A page in an Excel® workbook. Also referred to as a "spreadsheet."