This is a living glossary of finance terms kids need to understand. Most of these are simple concepts that kids can grasp easily, they just need the information. If you have any suggestions for additional finance terms kids could benefit from, please let us know.
An announcement of a product’s or service’s benefits that is intended to encourage its purchase. This is typically paid for by a company wanting their product promoted.
An item with economic value that an individual or organization owns, such as stocks, real estate, personal property, and business equipment.
Annual Percentage Rate (APR)
The percentage cost of credit on an annual basis, which must be disclosed by law.
Annual Percentage Yield (APY)
The annual rate of return on an investment, which must be disclosed by law and which varies by the frequency of compounding.
Automated Teller Machine (ATM)
A computer terminal used to conduct business with a financial institution or purchase items such as postage stamps or transportation tickets; also known as a cash machine.
A state of being legally released from the obligation to repay some or all debt in exchange for the forced loss of certain assets. A court’s determination of personal bankruptcy remains in a consumer’s credit record for 10 years.
Bankruptcy Abuse Prevention and Consumer Protection Act
A revision of bankruptcy law intended to make the system fairer for creditors and debtors and make affordable credit available to more people.
A state or federally chartered for-profit financial institution that offers commercial and consumer loans and other financial services.
Exchange (goods or services) for other goods or services without using money.
A person or organization named to receive assets after an individual’s death.
A certificate representing the purchaser’s agreement to lend a business or government money on the promise that the debt will be paid— with interest — at a specific time.
An account to keep cash, liquid money in to be used for investing in stocks, bonds, mutual funds, and other investments.
A spending plan or a record of projected and actual income and expenses over a period.
A description of a company’s organizational structure, staff, activities, and marketing and financial plans, including expected sources of income and expenses.
Income that results when the selling price of an asset is greater than the original purchase price.
Monetary loss that occurs when the selling price of an asset is less than the original amount invested.
An economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state. This is the current model of the United States.
A profession or field of employment for which one studies or trains, such as financial services or medicine. The term “career” usually applies to a long-term employment, whereas the term “job” typically applies to a temporary employment.
Cash flow statement
A summary of receipts and payments for a given period, helpful when preparing a budget; also known as an income and expense statement.
Aid to those in need.
A written order directing a bank to pay money as instructed.
An account with funds typically used for the money you’re using for bill payments and living expenses. This type of account typically pays little to no interest.
A specific-purpose loan requiring repayment with interest and any other finance charges by a specific date. Examples include most mortgages or auto loans.
Property that a borrower promises to give up to a lender in case of default.
Physical objects—such as fine art, stamps, and antiques—that an investor buys in the hope that they will grow in value.
A business that specializes in obtaining payments from debtors who have defaulted on their loans.
An economy in which production, investment, prices, and incomes are determined centrally by a government. North Korea is currently a command economy.
The process of seeking information about products and services to find the best quality or utility at the best price.
Payment and benefits for work performed; also payment to injured or unemployed workers or their dependents.
An expression of dissatisfaction with a product or service, often in the form of a letter to the seller or manufacturer documenting the problem and stating the desired solution.
Compound Interest (Compounding)
Calculating interest on both principal and previously earned interest.
A legally binding agreement between two or more parties.
To imitate or feign especially with intent to deceive. This typically happens with money, such as a counterfeit $20 bill.
An agreement to provide goods, services, or money in exchange for future payments with interest by a specific date or according to a specific schedule. The use of someone else’s money for a fee.
A plastic or metal card that authorizes the delivery of goods and services in exchange for future payment with interest, according to a specific schedule.
Credit counseling service
An organization that provides debt and money management advice and assistance to people with debt problems. Often, most of the services can be done without the aid of this service, but it can make it more convenient.
An official record of a borrower’s credit history, including such information as the amount and type of credit used, outstanding balances, and any delinquencies, bankruptcies, or tax liens.
A statistical measure of a loan applicant’s creditworthiness, which is the likelihood of repayment.
A state or federally chartered not-for-profit financial cooperative that provides financial services to its member-owners, who have met specific employment, residence, or other eligibility requirements.
The presumption that a specific borrower has sufficient assets, income, and/or inclination to repay a loan.
A system of money in general use in a particular country.
A plastic card that provides access to electronic funds transfer (EFT) from an automated teller machine (ATM) or a point-of-sale (POS) terminal.
Something owed, usually measured in dollars.
The dollar amount or percentage of a loss that is not insured, as specified in an insurance policy.
The failure to meet a financial obligation or agreement.
A person who relies on another individual for support.
The act of putting money into an account.
A long period during which the economy is poor and many people are without jobs. During an economic depression, spending by consumers, businesses, and the government goes down significantly. The most serious depression in U.S. history was the Great Depression.
Gross pay minus deductions for taxes.
A strategy for reducing some types of risk by selecting a wide variety of investments.
Earnings from corporate stock or credit union share accounts.
A method of investing a fixed amount in the same type of investment at regular intervals, regardless of price.
Dow Jones Industrial Average
An indicator of how the stock market is performing. It is based on the stocks of 30 well-known companies, including General Motors, McDonalds, Microsoft, and Disney. When the value of these stocks goes up, the “Dow” goes up, too. The Dow Jones Industrial Average goes up or down every day.
Earnings from employment, including commissions and tips.
Short-term loans granted regardless of credit history, often for very short periods and at high interest rates.
The way a country manages its money and resources (such as workers and land) to produce, buy, and sell goods and services. Goods are products like cars, computers, or even corn. Services are duties performed by one person for another, such as teaching and transportation. The United States has a free-market economy. That means people can freely buy and trade goods and services. The price of each good or service is determined not by the government but by demand. Demand is a measure of how many people want to buy a particular good or service.
Electronic Funds Transfer (EFT)
The shifting of money from one financial institution account to another without the physical movement of cash.
Money set aside for unexpected expenses or for living costs in case of job loss.
Compensation that an employee receives in addition to a wage or salary. Examples include health insurance, life insurance, childcare, and subsidized meals.
Employer-sponsored retirement savings plan
Tax-deferred investment programs, such as 401(k) plans for corporate employees and Section 457 plans for state and local government employees, which provide, in some cases, employer matching funds. The military and other federal careers have access to a TSP.
An individual who creates, establishes, operates, and assumes the risks of a business.
Equal Credit Opportunity Act
A federal law that forbids lenders from discriminating against loan applicants on the basis of gender, race, marital status, religion, national origin, age, or receipt of public assistance.
Stock ownership in a corporation (shareholder’s equity). Also refers to the amount of an asset owned (i.e. if you have a $100,000 home, and you only owe $50,000 on the mortgage, you have 50% equity in the home).
The assets and debts that a person leaves at death.
Moral principles that govern a person’s behavior or the conducting of an activity. Businesses also often operate by a specific, published set of ethics.
The cost of goods and services, including those that are fixed (such as rent and auto loan payments) and those that are variable (such as food, clothing, and entertainment).
Fair and Accurate Credit Transactions Act (FACT Act)
A federal law that gives consumers more ways to recover their credit reputations after they have been victims of identity theft, and allows consumers to request one free copy of their credit reports from the major credit reporting agencies each year.
Fair Credit and Charge Card Disclosure Act
A part of the Truth in Lending Act that mandates a description of key features and costs—such as APR, grace period, balance calculation, annual fees, and penalty fees—on credit card applications.
Fair Credit Billing Act
A federal law that addresses billing problems with open-end credit accounts by requiring, for example, that consumers send a written error notice within 60 days of receiving the first bill containing the error, and preventing creditors from damaging a consumer’s credit rating during a pending dispute.
Fair Credit Reporting Act
A federal law that covers the reporting of debt repayment information, requiring, for example, the removal of certain information after seven or ten years, and giving consumers the right to know what is in their credit reports, to dispute inaccurate information, and to add a brief statement explaining accurate negative information.
Fair Debt Collection Practices Act
A federal law that prohibits debt collectors from engaging in unfair, deceptive, or abusive practices, such as calling consumers at work after being told not to.
FDIC (Federal Deposit Insurance Corporation)
The government agency that insures bank deposits. Let’s say a bank has 100 customers who each deposit $3,000. The bank is allowed to use a percentage of those deposits to make loans and conduct everyday business. But if all 100 customers want to withdraw all of their money at once, the bank must be able to produce the cash. What happens if the bank does not have enough money on hand to do that? If the bank is insured by the FDIC, the FDIC will step in and make sure the customers get their money. In order to be insured by the FDIC, a bank must show that it is operating fairly and obeying all banking laws. Right now, the FDIC insures every bank depositor for up to $250,000.
Often called “The Fed” for short, the Federal Reserve is America’s central bank. But everyday people can’t open an account there. The Fed is a bank used only by other banks and by the federal government. The Fed controls the amount of money in the economy and helps to determine how high or low interest rates will be. It creates rules for the banking industry to make sure that banks are safe places for people to keep their money.
Federal Reserve Notes
The official name of United States paper money.
FICA (Federal Insurance Contributions Act)
A United States federal payroll (or employment) contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.
The total dollar amount paid for credit. Example: A $100 loan repaid with $9 interest plus a $1 service fee has a finance charge of $10.
A person who provides financial information and advice. Examples include employee benefits staff, bank and credit union employees, credit counselors, brokers, financial planners, accountants, insurance agents, and attorneys. Many of these come with certifications, such as a CFP (Certified Financial Planner ™).
Desired results from one’s efforts to achieve personal economic satisfaction.
The ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security.
A report that identifies a person’s financial goals, needs, and expected future earning, saving, investing, insurance, and debt management activities; it typically includes a statement of net worth.
A process in which homeowners lose their property because they have failed to make mortgage payments. Homeowners often borrow money from a bank to pay for their new home. They are expected to repay part of that money each month. If they fail to make the monthly payment, they might first receive a warning from the bank. When they miss many payments and have not worked out an agreement with the bank, the house might go into foreclosure. That means it becomes the property of the bank.
Intentional and illegal deception, misrepresentation, or concealment of information for monetary gain.
Free market economy
An economic system with little or no government intervention where pricing is based on supply and demand.
A personal year (can be shorter or longer) taken after high school and before college or entering the force force. This time is meant to either travel, figure out a career, or a number of other things.
A court-sanctioned procedure that sets aside a portion of an employee’s wages to pay a financial obligation.
A time during which a borrower can pay the full balance of credit due and not incur finance charges or pay an insurance premium without penalty.
The most serious economic depression in U.S. history. It began in October 1929 when the American stock market dropped suddenly, or “crashed.” Most stocks became worthless, causing investors to lose huge sums of money. Immediately after the crash, business slowed and many banks, stores, and factories shut down. Millions of people lost their jobs, homes, and savings. Many of them depended on charity and government aid to put food on their tables. The Great Depression was so severe, it impacted the economies of nations around the globe. It lasted about a decade, ending when the U.S. prepared to enter World War II. (Our involvement in the war created many defense-related jobs.)
Wages or salary before deductions for taxes and other purposes.
The crime of using another person’s name, credit or debit card number, Social Security number, or another piece of personal information to commit fraud.
Purchasing goods or services without considering needs, goals, or consequences (i.e. the checkout aisles in grocery stores are designed to instigate impulse buys).
Money earned from investments and employment.
A type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500).
Individual Retirement Account (IRA)
An investment with specific tax advantages. A traditional IRA defers taxes on earnings until withdrawal and, under certain circumstances, allows the deduction of some contributions from current taxable income. A Roth IRA requires after-tax contributions only, but allows tax-free withdrawals under certain rules. An IRA is also known as an Individual Retirement Arrangement.
An overall rise in the price of goods and services; the opposite of the less common deflation.
Money or property that is passed from one person to another upon the owner’s death.
A risk management tool that protects an individual from specific financial losses under specific terms and premium payments, as described in a written policy document. Major types include:
- Auto – Provides liability and property damage coverage under specific circumstances.
- Disability – Replaces a portion of income lost when a person cannot work because of illness or injury.
- Health – Covers specific medical costs associated with illness, injury, and disability.
- Homeowners – Provides property damage and liability coverage under specific circumstances.
- Liability – Protects the insured party from others’ claims of loss due to the insured’s alleged or actual negligence or improper actions.
- Life – Protects dependents from loss of income, debt-repayment, and other expenses after the death of the insured party.
- Long-term care – Covers specific costs of custodial care in a nursing facility or at home.
- Renters – Protects from losses due to damage to the contents of a dwelling rather than the dwelling itself.
The cost of borrowing money and/or the earnings from lending money. It works against you with debt, and for you with investing.
Money that financial institutions, governments, or corporations pay for the use of investors’ money.
The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
Purchasing securities such as stocks, bonds, and mutual funds with the goal of increasing wealth over time, but with the risk of loss.
A position of employment with specific duties and compensation. Typically not meant to be as long-term as a career.
The loss of a job when a company cuts costs. For example, one car maker had to lay off hundreds of employees last spring. Why? The car maker had not been doing very well. Because of high fuel prices, customers were not buying SUVs and other big cars. To survive in this economy, the car maker had to lay off some of its employees. The company will save money because it no longer has to pay those workers.
A written contract specifying the terms for the use of an asset and the legal responsibilities of both parties to the agreement, such as a landlord and tenant.
Money that must be accepted in a country when offered for payment for a good or service.
An actual or potential financial obligation.
The quality of an asset that permits it to be converted quickly into cash without loss of value. For example, a mutual fund is more liquid than real estate.
A document that contains the signer’s desires for specific medical treatment in case the person is unable to make medical decisions; also known as a health care directive.
A thing that is borrowed, especially a sum of money that is expected to be paid back with interest.
A person who lends money at an exorbitant rate of interest.
A program, financed by state and federal government tax revenues, to pay specified health care costs care for those who cannot afford them.
A federal government program, financed by deductions from wages, that pays for certain health care expenses for older citizens. The Social Security Administration manages the program.
The action or business of promoting and selling products or services, including market research and advertising.
When one company gains exclusive control of the production of a product or service. A company becomes a monopoly when it eliminates all its competition for a product.
A long-term loan to buy real estate, that is, land and the structures on it.
An investment tool that pools the money of many shareholders and invests it in a diversified portfolio of securities, such as stocks, bonds, and money market assets.
Nasdaq is a global electronic marketplace for buying and selling securities, as well as the benchmark index for U.S. technology stocks. Nasdaq was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971. The term, “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, and Intel.
The amount of money a country owes. The U.S. national debt is well over $20 trillion! It is the highest national debt in the world. The U.S. owes about half of that money to individuals, companies, and foreign governments who have bought bonds and other investments from the U.S. Treasury. (If you have a savings bond, then some of that debt is owed to you!) It owes the rest to itself. That’s because the government sometimes spends money that it does not actually have. You can see real-time numbers of all the debt in the U.S. on the National Debt Clock website.
A measure of a person’s financial condition at a given time, equal to what that person owns (assets) minus what that person owes (liabilities).
New York Stock Exchange
The New York Stock Exchange (NYSE) is a stock exchange located in New York City that is considered the largest equities-based exchange in the world, based on the total market capitalization of its listed securities.
An agreement with a financial institution that gives a borrower the use of money up to a specified limit for an indefinite time as long as repayment of the outstanding balance and finance charge proceeds on schedule; also known as revolving credit or a revolving line of credit. A credit card is an example.
The value of possible alternatives that a person gives up when making one choice instead of another; also known as a trade-off.
An easy-access credit business that makes high-interest loans secured by personal property collateral, such as jewelry.
An easy-access credit business that makes high interest loans for the period of the borrower’s pay cycle. This practice is illegal in some states due to its destructive nature (i.e., its ability to put the borrower deeper into financial trouble).
The means of settling a financial obligation, such as by cash, check, credit card, debit card, smart card, or stored value card.
An amount an employer withholds from a paycheck. Mandatory deductions include various taxes. Voluntary deductions include loan payments, charitable contributions, and direct deposits into financial institution accounts.
The influence that a social group has on an individual, based on the individual’s desire for the group’s approval.
Pension Protection Act
A federal law that attempts to strengthen employees’ retirement security by, among other things, allowing employers to automatically enroll employees in retirement savings plans.
The principles and methods that individuals use to acquire and manage income and assets.
The act of voluntarily contributing to others’ welfare.
Point of sale (POS)
The location where a transaction occurs. POS software can track sales, inventory, and customer information.
A collection of securities—such as stocks, bonds, mutual funds, and real estate—that an individual investor owns.
1. An amount of money originally invested, excluding any interest or dividends.
2. An amount borrowed, or an outstanding loan balance.
Freedom from unauthorized release of personal information.
The government institution with jurisdiction over a deceased person’s will and estate.
The positive difference between total revenue and total expenses of a business or investment.
A legal document that provides detailed information about mutual funds, stocks, bonds, and other investments offered for sale, as required by the Securities and Exchange Commission.
Rate of return
Annual earnings on an investment expressed as a percentage of the amount invested; also known as yield. Example: A $3 annual dividend divided by $34 share cost = 0.088, an 8.8% rate of return.
A drop in economic growth that lasts at least six months. During a recession, businesses sell fewer goods and services. Once a recession becomes severe (with total sales of goods and services down by more than 10% for a long period of time), a recession can be described as a depression.
The process of keeping an orderly account of a person’s financial affairs, including income earned, taxes paid, household expenditures, loans, insurance policies, and legal documents.
A periodic fee for the use of property.
A plan to buy a product with little or no down payment by renting it until the final payment is made, at which point the total paid far exceeds the product’s purchase price.
Confiscation of collateral, often without notice, if a borrower defaults on a loan.
A measure of the likelihood of loss or the uncertainty of an investment’s rate of return.
The process of calculating risk and devising methods to minimize or manage loss, for example, by buying insurance or diversifying investments.
Rule of 72
A rough calculation of the time or interest rate needed to double the value of an investment. Example: To figure how many years it will take to double a lump sum invested at an annual rate of 8%, divide 72 by 8, for a result of 9 years.
Compensation for work, expressed as an annual sum and paid in prorated portions regularly—usually weekly, bi-weekly, or monthly.
The process of setting income aside for future spending. Saving provides ready cash for emergencies and short-term goals, and funds for investing.
A financial institution deposit account that pays interest and allows withdrawals.
A document representing a loan of more than one year to the U.S. government, to be repaid, with interest on a specified date.
Savings and loan association (S&L)
A state or federally chartered for-profit financial institution that pays dividends on deposits and makes mortgage loans.
A fraudulent or deceptive act.
1. A legal agreement that records a debt or equity obligation from a corporation, government, or other organization. Examples include stocks and bonds.
2. Collateral for a loan.
Interest calculated periodically on loan principal or investment principal only, not on previously earned interest.
A federal government program that provides retirement, survivor’s, and disability benefits, funded by a tax on income, which appears on workers’ pay stubs as a deduction labeled FICA (for Federal Insurance Contributions Act, the enabling legislation).
Another name for a budget.
Standard & Poor’s 500 Index (S&P 500)
Standard & Poor’s (S&P) is a leading index provider and data source of independent credit ratings. It is also the provider of the popular S&P 500 Index. S&P was founded in 1860, offering financial market intelligence. S&P Global divisions include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices, and S&P Global Platts.
Standard of living
The overall degree of comfort of an individual, household, or population, as measured by the amount of goods and services its members consume.
An investment that represents shares of ownership of the assets and earnings of a corporation.
The collection of markets and exchanges where regular activities of buying, selling, and issuance of stock shares of publicly-held companies take place. The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE), Nasdaq, and the Chicago Board Options Exchange (CBOE). These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the U.S.
Prepaid plastic card that allows purchases up to a set limit, at which point the card is discarded or, if “rechargeable,” replenished from an account.
Supply and Demand
The idea that pricing will be set by the demand consumers have for the product together with the supply provided by manufacturers.
Gross wage or salary, plus bonuses, minus deductions such as for taxes, health care premiums, and retirement savings.
A government fee on business and individual income, activities, or products.
An amount that a taxpayer who meets certain criteria can subtract from tax owed. Examples include a credit for earned income below a certain limit and for qualified post-secondary school expenses.
An expense that a taxpayer can subtract from taxable income. Examples include deductions for home mortgage interest and for charitable gifts.
The feature of an investment in which taxes due on principal and/or earnings are postponed until funds are withdrawn, often at retirement.
Earnings, such as interest from municipal bonds, that are free of certain taxes.
Time value of money
The potential of an investment to increase in value through periodically compounded earnings.
An amount paid for a service beyond what’s required, usually to express satisfaction; also known as a gratuity. While this is a common practice in the United States, it’s not practiced in all countries, and some cultures find it to be offensive.
A high-cost, short-term loan that uses the borrower’s automobile as collateral.
A technical or vocational school people can attend after [and sometimes during] high school, often instead of going to a university. These schools teach important trades, and the incomes of these trades often rival jobs that require a college degree.
Money that a government provides to citizens for reasons other than current employment or the delivery of goods or services in exchange. Examples include Social Security, veteran’s benefits, and welfare.
The part of the federal government that manages the nation’s money. Once the President and Congress agree on a budget for the nation, it is up to the Treasury to raise enough money for the items on the budget and then oversee the spending. One way the Treasury raises money is by collecting taxes from people and businesses. Another way is by selling savings bonds and notes to investors. (Have you ever received a U.S. Savings bond? Those are sold by the U.S. Treasury.). The Treasury Department is very large. It has 12 sections, or “bureaus.” One is the U.S. Mint, which prints all U.S. money. Another is the Internal Revenue Service, which collects taxes.
A legal arrangement through which a truster manages a trustee’s assets for the good of one or more beneficiaries.
Truth in Lending Act
A federal law that requires financial institutions to disclose specific information about the terms and cost of credit, including the finance charge and the annual percentage rate (APR).
Truth in Savings Act
A federal law that requires financial institutions to disclose specific information about the terms and costs of interest-earning accounts—such as annual percentage yield (APY)—and certain other financial services.
Earnings from sources other than employment, including investment returns and royalties.
The unemployment rate is the percentage of Americans who are out of work and looking for jobs. High unemployment rates are a sign of a weak economy. In January 2009, the unemployment rate was 7.6%. That means more than 7 out of every 100 workers needed jobs. During the Great Depression, the unemployment rate reached almost 25%.
If a person is out of work and has lived in his or her state for at least a year, he or she can collect some money from the state government. This money is meant to help the person get by until he or she finds a job. Unemployment benefits are based on how much money the person used to earn. Usually, it is about 1/3 of the person’s previous pay. The funding for unemployment compensation comes from tax money.
The regard that something is held to deserve; the importance, worth, or usefulness of something.
An individual’s beliefs about what is important, desirable, and worthwhile, which often influence decisions.
Compensation for work, usually calculated on an hourly, daily, or piecework basis and paid on schedule—usually weekly, biweekly, or monthly.
A written guarantee from the manufacturer or distributor that specifies the conditions under which the product can be returned, replaced, or repaired.
In the financial sense, this is accumulated assets; positive net worth. True wealth means different things to different people, and it’s often based on personal values.
Aid in the form of money or necessities for those in need; often from a government program.
A legal declaration of a person’s wishes for the disposition of his or her estate after death.
Note: Special thanks to NEFE (National Endowment for Financial Education), who provided many of these definitions.