Financial planning terms
Learning financial planning terms can help you make better money decisions. Review the 22 terms financially savvy people should know.
By: Thomas Broderick, Edited by: Rebecca Munday, Reviewed by: R.J. Weiss
Published: June 13, 2025
Do you want to make informed decisions with your money? If so, understanding financial planning terms is an important first step. Knowing these terms can help you navigate the financial world, understand important documents, and put your money into the best investment vehicles.
Dive into the 22 top financial planning terms everyone should know.
Glossary of financial planning terms
| Term | Definition |
|---|---|
| Asset | Financial assets are types of wealth. They include your money, home, car, all other property, and investments. Assets are one of the factors that make up your overall net worth. |
| Bond | A bond is a fixed income investment where an investor lends money to an entity such as a corporation or government in exchange for periodic interest payments and the return of the principal amount at maturity. Bonds with a longer maturity date typically offer a higher interest rate than those with a shorter maturity date. |
| Certified public accountant (CPA) | CPAs are licensed accountants who help individuals and organizations make sound financial decisions. CPAs must complete required professional development classes to stay current with the latest financial rules and regulations. |
| Budget | A budget is a financial document comparing your income to your monthly expenses. A typical budget includes categories for different expenses, such as housing, utilities, food, entertainment, and health insurance. Using a budget can help you identify areas where you can reduce spending and save money. |
| Compound interest | Compound interest describes how money grows in some savings accounts. Each interest payment is slightly larger than the previous one because the interest calculation includes all the money in your account and not just the principal amount. On the investment side, compound interest provides better financial outcomes than simple interest, which bases interest payments solely on the original amount. However, compound interest makes debt more expensive over time. |
| Diversification | Diversification is the process of putting your money into different investment classes, such as stocks, bonds, cash, and appreciating assets. Furthermore, diversification can also refer to spreading your risk among each asset class, such as owning many stocks instead of just one. Diversification can protect you if one of your investments loses value unexpectedly. |
| Dividend | If a publicly traded company earns a profit, it may pay its stockholders a dividend, or portion, of the profit. Since dividends are paid on a per-share basis, investors with more stock receive a greater dividend than investors with less stock. One benefit of paying dividends is increasing investor loyalty. |
| Depreciation | Depreciation happens when physical assets lose value over time. Most physical goods are depreciating assets, as eventual wear and tear makes them less valuable to potential buyers. Businesses can reduce their taxable income by writing off depreciating assets. |
| Equity | Equity refers to the value of something after accounting for debt and other liabilities. Owing $5,000 on a $15,000 car results in $10,000 of positive equity. Negative equity means owning an asset wherein the debt you owe exceeds the asset's value. |
| Income statement | Also referred to as a profit and loss statement, an income statement summarizes a business's profits and expenses over a set period of time. Businesses may release an income statement every quarter or year. Unlike balance sheets, income statements do not include information about a business's liabilities or equity. |
| Interest rate | Banks earn money by charging borrowers an interest rate. A higher interest rate means borrowers pay back much more than the loan's principal amount. The term also applies to how much banks pay customers who deposit money into a high-yield savings account or another guaranteed investment vehicle. |
| Liabilities | Liabilities refer to debts, such as your home mortgage, car loan, and credit card debt. Banks may not lend you money if your liabilities exceed the value of all your assets or if the payments on your liabilities take up too much of your income. You can reduce your liabilities through sound financial planning. |
| Net worth | Your net worth is the combined value of your assets minus that of your liabilities. If your liabilities exceed your assets, you have a negative net worth. If this happens to you, focus first on paying off your debt. |
| Net income | Net income refers to the money you receive in a paycheck. It differs from gross income because net income accounts for taxes, Social Security, and other withholdings. Other factors affecting net income include the number of dependents you indicate on a W-4 tax form. |
| Portfolio | This term describes all of your investments as a single unit. A financial advisor can help you start or diversify an investment portfolio. An optimized portfolio for your risk tolerance can help you reach your financial goals, such as purchasing a home or retiring early. |
| Quote | A quote is a stock's price at a specific time. Many investors base their buying and selling decisions based on how quotes change. They want to buy stocks at the lowest quote possible and sell them at the highest quote possible. |
| Return on investment (ROI) | ROI measures an investment's profitability. To calculate ROI, subtract your initial investment from the investment's current value and then divide that figure by the initial investment. Any result greater than zero shows a positive ROI. |
| Risk tolerance | The amount of variation in outcomes or acceptable loss that an investor can tolerate with the given resources and comfort with uncertainty. |
| Stock market | The stock market refers to publicly traded companies offering shares on an exchange. The major exchanges in the United States include the New York Stock Exchange and Nasdaq. You can invest in the stock market in different ways, such as buying single shares of one company or investing in a mutual fund. |
| Treasury bond | The U.S. government sells 20- to 30-year treasury bonds to investors. These bonds offer a fixed interest rate and are considered safe as they're backed by the U.S. government. Consider using treasury bonds to balance out riskier investments in your portfolio. |
| Volatility | Volatility is the degree to which an investment, such as the stock market, moves up or down over a specific period. Investor panic, recession, or other negative pressures on the market can cause volatility. Investing during a volatile market comes with many risks, such as losing money on your investments. |
| Yield | The amount of income an investment generates is its yield. Expressed as a percentage of the principal amount, yield can refer to bond interest payments or stock dividends. Yield differs from ROI because it does not consider losses in its calculations. |
Get started with personal finance on edX.
Now that you know more about financial planning terms, explore edX personal finance courses and certificates that can help you learn how to manage your money better.
Stand out in your field
Use the knowledge and skills you have gained to drive impact at work and grow your career.Learn at your own pace
On your computer, tablet or phone, online courses make learning flexible to fit your busy life.Earn a valuable credential
Showcase your key skills and valuable knowledge.