401(k) – Also known as a defined contribution plan, a type of retirement plan offered by employers to their employees. Money taken out of your paycheck is typically invested in stock or bond funds, where it grows untaxed until you retire, at which point you pay taxes on it. Typically, your employer will allow you to choose your mix of funds and often will match your contribution up to a certain level.  An excellent deal.

Bond – Essentially an IOU.  When you buy a bond, you are lending money to its issuer – either a company or the government, federal, state, or municipal, which agrees to pay it back with interest on a certain date, called the maturity date. Bonds are less safe than bank accounts or money market funds but generally safer than stocks. 

Brokerage firm – A company that handles your stock trading. When you want to buy or sell shares of a stock, you contact your broker and he or she arranges it. The brokerage firm also provides you with statements that you’ll need at tax time. Brokerage firms focus on individual stocks and bonds. Some brokerage firms offer mutual funds, but you'll generally pay more than you would at a low-cost mutual fund company.

Cash flow – What's left at the end of the month after you've paid all your bills and done all your spending. To find your cash flow, add up all of your expenses for a month and subtract that number from your monthly income. Knowing your cash flow is key to setting a monthly savings goal.

Closing costs – The additional costs typically involved in purchasing a piece of real estate.  Closing costs, which usually amount to about 1% to 4% of the total price, include fees for inspections, appraisals, title insurance, credit checks, land surveys and legal services.

Compounding – Occurs when earnings from an investment are added back into the investment and used to generate further earnings. For example, on bank accounts that pay interest, the interest is typically added to the balance of the account each day, which means that the next day's interest is calculated on a slightly higher amount. Likewise, if you leave your money in a mutual fund, rather than periodically withdrawing earnings on it, it will grow significantly faster. Compounding is the key to the success of long-term investments.

Credit rating – A rating assigned to you by three major credit bureaus that indicates how likely you are to pay back a loan on time.  The rating is based on your credit report, a detailed list of all of your past transactions with creditors, like the credit card payment you missed five years ago.  Information on your credit reports generally remains there for seven years. Bankruptcies remain for ten.

Credit union – A special kind of bank that exists to serve a particular community, such as city employees. Credit unions operate under a different set of rules that allows them to offer better rates than other banks. You are about three times as likely to find free checking with no minimum balance at a credit union than at a regular bank, you'll generally get a better interest rate on your savings or checking accounts, and you'll likely be charged lower fees for things like bounced checks. There are drawbacks, however. Credit unions usually do not have their own ATMs, which means you may end up paying for the use of other banks' machines. You also may not receive your cancelled checks with your statements. But the biggest catch is eligibility. You may be eligible to join a credit union associated with your employer, your profession, your religious group, or even the neighborhood you live in. Or, you may be eligible to join a credit union if you have a close relative who is a member. The Credit Union National Association can help you find a credit union in your state that you may be eligible to join.

Debt – Money you've borrowed from a lender. In addition to paying back the money borrowed, you almost always have to pay interest. The rate of interest being charged on your debt affects how you should approach paying it off. Credit card debts generally carry the highest rates (sometimes over 20%) and should be paid off first. Debts with lower rates, like most student loans (5-10%), can be paid off more slowly, even while saving.

Expense ratio – The annual fee a mutual fund company charges its customers, expressed as a percentage of your investment. The current average expense ratio for stock funds is 1.5%, which means that the fund takes 1.5% of your investment each year. Index funds, on the other hand, can have much lower expense ratios – the Vanguard 500 Index Fund, for example, charges only 0.18%. The difference this makes to your investment is considerable: $10,000 held for 10 years in a fund with a growth rate of 8% and an expense ratio of 1.5% will grow to $18,561, while the same investment in a fund with the same growth rate but an expense ratio of 0.18% will grow to $21,204.

Gross income – The amount of money you earn before it is reduced by federal and state taxes, FICA, and any other automatic payouts.

Growth fund – A mutual fund generally consisting of stocks chosen for their strong growth potential. These are generally mid-sized or large companies whose stock prices appear to be growing rapidly. Gains may be greater than average when the market is doing well, and losses may be similarly great when the market falls. Growth funds make for a relatively aggressive investment, which is to say they are more of a gamble than other funds, but may pay off over the long haul.

Index – An index is a group of stocks that are bunched together and watched closely as an indicator of the performance of the market. For example, Standard & Poor's 500 is a collection of stocks in large, established companies.

Index fund – An index fund is a mutual fund that buys only the stocks in a particular index, unlike most funds, whose stocks are chosen by a highly-paid fund manager. Because you are not paying a manager, index funds are less expensive. In fact, index funds, on average, have actually out-performed other funds over the past twenty years. 

Insurance – The cost of a wrecked car, stolen possessions, or medical treatment is often too much for anyone to bear alone. When you buy insurance, you agree to pay a company a small amount each year, called a premium, in return for coverage of the costs of certain future calamities, or "perils." Insurance comes in different varieties, depending on the type of peril it covers. Everyone should have health insurance, which covers most types of medical treatment and care. Car owners need auto insurance, homeowners need home insurance, and anyone with children should have life insurance and disability insurance. (see also term life insurance)

Interest – The fee a lender charges in exchange for lending you money. This fee is calculated as an agreed-upon percentage of the amount of the loan per year (the "interest rate"). Interest rates vary between 0% and 20% or more, depending on the type of loan, the particular lender, and, often, on your credit rating. Interest can also be paid to you, as in the case of bonds and certain bank accounts.

Investment – An investment is something of value which has been bought in anticipation of a positive rate of return (i.e., you’ll make money), but which could also have a negative rate of return (you’ll lose money). Examples of investments include mutual funds, stocks, and bonds. If you invest responsibly and let your investment grow untouched, the results can be astounding: if $1,000 a year is invested for ten years in a tax-favored retirement account, and it grows at 8% per year for thirty more, the account will be worth $168,627.

IRA (Individual Retirement Account) – This tax-favored investment comes in two types: traditional and Roth. In a traditional IRA, you contribute money tax-deferred, which means it is taxed only when you withdraw it upon retirement. In a Roth IRA, you pay taxes up-front on the money you contribute, after which it is never taxed again. For a number of reasons, Roth IRAs are often better for younger people. To find out why, go to The IRA Decision.

Large-cap fund – A mutual fund consisting of stocks in large companies whose total stock is worth roughly $8 billion or more, though each fund has its own policy about where to draw the line. Large-cap funds are generally considered the safest stock investments and are often among the best performing as well.

Load – Some mutual fund companies charge you an additional commission above standard expenses. This charge, called a load, is a one-time fee taken off the top of your investment and given directly to the broker. Load funds do not generally do any better than no-load funds, so steer clear of loads.

Market capitalization – The total dollar value of all the stock that exists for a particular company, obtained by multiplying the total number of shares by the current share price.

Mid-cap fund – A mutual fund consisting of stocks in mid-sized companies whose total stock is worth roughly between $1 billion and $8 billion, though each fund has its own policy about where to draw the lines.

Money market fund – Nearly as safe as bank accounts but with higher returns, these funds consist of an ever-changing collection of very short term loans to large, stable companies or governments. Also called "money funds."

Mortgage– A loan taken out to buy real estate. The loan is guaranteed by the real estate, which means that until you pay off your mortgage, your bank owns your house.

Municipal fund – A mutual fund consisting of bonds issued by city, town, and state governments.

Mutual fund – Mutual funds are investments that pool together the money of many investors and invest it in a variety of stocks, bonds, and money market securities. By owning a stake in a wide variety of investments, individual investors are protected from the possible ill fate of any particular investment. Unless you have enough money – and time – to invest in many different stocks, all of your stock investment should be in mutual funds.

Net income – The amount of money you've earned after paying federal and state taxes, FICA, and any other automatic payouts. Your "take-home" pay.

No-load fund – A mutual fund which charges you only the annual expense fee and no additional commission on your investment. There are plenty of quality no-load mutual funds out there.

Pension (defined benefit plan) – The old-fashioned retirement plan, increasingly replaced by defined contribution plans like 401(k) plans. Under this type of plan, an employee would stay with a company for decades, and upon retirement begin to receive a steady retirement paycheck based on their length of service.

Prospectus – An informational document available for free from any mutual fund company. Includes basic information about a fund, such as its investment strategy, its past performance, and its expenses. Read it before you invest in the fund. 

Retirement – The point in life at which you stop working. This is also the point at which you are entitled to withdraw money from your 401(k) or IRA. Generally, you must be at least 59.5 years old before you can declare yourself retired and withdraw your money without penalty; however, the rules are different for each type of retirement investment.

S&P 500 – An index of 500 leading stocks traded on the US stock market, chosen by the Standard & Poor's Index Committee to give a balanced representation of the market as a whole. These 500 stocks make up around 80% of the value of the entire US stock market. Over the last 75 years, the S&P 500 has gained an average of 10.3% each year, and over the last 10 years it has outperformed around 70% of general equity funds. These factors have made the index a standard benchmark for mutual fund performance – funds that beat it are thought to have done well. It is also the basis for many index funds, most notably the Vanguard 500 Index Fund, which give people an inexpensive way to invest in the companies that make up the S&P 500. (see also index, index fund)

Securities – A broad term that refers generally to stocks, bonds, and money market instruments. ("Instrument" is just a fancy word for any form of investment, like a stock or a bond.)

Small-cap fund – A mutual fund consisting of stocks in smaller, younger companies whose total stock is worth roughly $1 billion or less, though each fund has its own policy about where to draw the line. Small-cap funds are generally considered riskier investments than other funds, but many advisors recommend keeping them as a small portion of your stock investment.

Stock – Stock is ownership of a company. It is sold in "shares," because its owner owns a share of the company. The price of a company's stock fluctuates according to its supply and demand on the open market and generally reflects the company's current prospects. It is advisable to invest in a wide array of stocks so as not to have too many eggs in too few baskets (see mutual fund).

Tax-favored – A tax-favored investment is one which shelters your money from taxes, minimizing the tax you pay. Typically this is done in one of two ways: either by deferring taxation until you withdraw the money (as in a 401(k) or  traditional IRA) or by letting money which has already been taxed grow without ever being taxed again (Roth IRA).

Term life insurance – The simplest and least expensive type of life insurance, term life insurance covers you for a specific period of time, usually 10, 15, or 20 years. If you die within that time, the insurance company gives a set amount of money to your beneficiaries, usually your spouse or children. Because this type of insurance is so inexpensive, insurance agents are often reluctant to sell it. They may try to persuade you to buy a more expensive policy that includes a tax-deferred savings component, an attractive-sounding perk. Don't be fooled. Unless you are already contributing the maximum to your 401(k) and IRA and need more tax-deferred savings, these expensive policies aren't worth the dough.
(see also insurance)

Value fund – A mutual fund consisting of “value stocks,” stocks that have fallen out of favor with the stock market and are considered under-priced when you look at the company’s past and potential earnings. Basically, a value fund manager is looking for what are considered “good buys.” Sort of like a bargain hunter combing designer outlets.

Withholding – Remember when you got your first paycheck from your first job ever? You knew how many hours you'd worked that week, and you knew how much you made an hour, but you didn't know why your check was so small. The reason, of course, is that your employer takes a portion of your pay from every check and sends it right to the IRS – and, depending where you live, to state and local tax authorities – as partial payment of your taxes for the year. That way, the government gets its money sooner, and you don't end up with a big bill on tax day. The money that is taken out of your check is called withholding. The amount is determined by the size of your check – an indication of your likely yearly income – and by the number of exemptions you claimed on your W-4 form, a form you fill out when you start any job. If you end up owing money at the end of the year, or if you receive a large refund, then your withholding amount is incorrect; visit your human resources department and ask to change it.

If you can't find the word you're looking for here, check these financial glossaries:

InvestorWords.com - This is one of the most complete financial glossaries anywhere, with thousands of terms concisely defined.

The Quicken.com glossary - Thorough and easy-to-understand. An elegant navigation system makes this glossary very easy to use.