401(k) PLAN – An employer-sponsored investment vehicle that allows a worker to save for retirement and defer current income taxes on the saved money and earnings until withdrawal. Employees elect to have portions of their wages contributed directly into their 401(k) accounts. Employers may match some or all of the workers' contributions.
ASSET ALLOCATION – A strategy to match your choice of investments — such as savings in stocks, bonds, and cash — to your personal goals.
BOND – A loan that consumers make to a company, city, state or federal agency in exchange for a predetermined interest rate. The consumer lends to the issuer in exchange for regular interest payments and the return of the original investment amount, or principal, at maturity. Bonds can also be called fixed-income investments.
CERTIFICATE OF DEPOSIT (CD) – A basic savings instrument that earns interest on a fixed term of deposit, generally one month to five years. The longer the term, the higher the rate the CD pays. Customers can withdraw money from a CD before the maturity date, but they have to pay penalties to do so. Many CDs require minimum deposits of $1,000 or more. CDs purchased at banks are insured by the FDIC.
DISABILITY INSURANCE – Replaces a portion of the beneficiary's earned income against the risk that an injury or illness will make working — and therefore earning — impossible. Disability generally covers expenses such as food and the mortgage, which are typically covered by salary, and does not pay for the extra care and services needed while disabled.
DIVERSIFICATION – A strategy for spreading money among a variety of investments to reduce risks and improve returns. By dividing assets into stocks, bonds and cash, you decrease the impact if any one investment loses value.
DURABLE POWER OF ATTORNEY FOR FINANCES (DPA FOR FINANCES) – A legal document that identifies the person you want to be responsible for handling your financial matters should you become unable to do so.
EARNED INCOME TAX CREDIT (EITC OR EIC) – A refundable tax credit that helps offset a portion of the U.S. payroll taxes for workers with low incomes.
INDEX FUND – An investment that tracks the performance of a particular stock market or bond index by holding all — or a representative sample — of the securities in the index being tracked. Generally, the costs needed to operate an index fund are less than those required for an actively managed mutual fund. In theory, index funds pass on a higher percentage of their investment returns to shareholders.
INDIVIDUAL RETIREMENT ARRANGEMENT (IRA) – Savings vehicles that provide tax-advantaged ways to save for retirement. When you contribute to a traditional IRA, you receive an immediate deduction on that year's taxes, but you will be taxed when you begin withdrawals. With a Roth IRA, contributions are taxed, but withdrawals are tax-free.
LONG-TERM CARE INSURANCE – A kind of policy designed specifically to cover some of the costs of long-term care. Depending on the policy, long-term care insurance can cover care at home, in an assisted-living facility or in a nursing home.
MONEY MARKET – Similar to savings accounts offered by commercial banks. Some banks reduce the interest or impose fees if the balance falls below a specific amount. Accounts usually offer check writing and are insured by the FDIC.
MUTUAL FUND – A type of investment that offers ways for many people to pool their money and have it professionally managed toward a common investment goal. The fund manages investments, handles account record keeping and spreads contributions over different investments — such as stocks, bonds, cash or a combination — based on the fund’s stated objectives.
PENSION – A traditional retirement plan in which an employer makes contributions, and the employee receives a stream of income upon retirement.
REBALANCING – A method of readjustment that helps you stick to your investment strategy when investments are thrown off by significant market fluctuations.