A–Z Financial Glossary
Money and tax language can feel like a foreign tongue. This glossary explains the most common personal finance, investing, and tax terms used in the United States and Canada in plain English. Where the two countries differ, we note it. Many entries link to free calculators so you can put the concept to work right away.
A B C D E F G H I L M N P R S T W 0–9
A
Amortization
Amortization is the process of paying down a loan through regular scheduled payments that are split between interest and principal. In the early years, most of each payment goes toward interest; over time the balance shifts toward principal. You can see exactly how this works for a home loan with our mortgage calculator or any installment loan with the loan calculator.
Annual Percentage Rate (APR)
APR is the yearly cost of borrowing money, expressed as a percentage that includes the interest rate plus most lender fees. It lets you compare loans and credit cards on an apples-to-apples basis. A lower APR means a cheaper loan, all else being equal.
Annual Percentage Yield (APY)
APY is the real rate of return you earn on savings or investments over one year, including the effect of compounding. Unlike a simple interest rate, APY reflects how often interest is added to your balance. See how compounding builds wealth with the compound interest calculator.
Asset Allocation
Asset allocation is how you divide an investment portfolio among broad categories such as stocks, bonds, and cash. The mix you choose drives most of your long-term risk and return. Younger investors often hold more stocks, shifting toward bonds as they near retirement; model the outcome with our investment calculator.
B
Bear Market
A bear market is a prolonged period of falling asset prices, commonly defined as a decline of 20% or more from a recent peak. Bear markets often coincide with economic slowdowns and pessimism. Staying invested and using dollar-cost averaging can help long-term investors ride them out.
Bond
A bond is a debt security: you lend money to a government or company and, in return, receive periodic interest payments and the return of your principal at maturity. Bonds are generally less volatile than stocks and provide income and stability in a portfolio. U.S. Treasury bonds and Government of Canada bonds are among the safest.
Bull Market
A bull market is a sustained period of rising prices and investor optimism, the opposite of a bear market. Bull markets can last for years and are typically tied to a growing economy. No one can reliably predict when they begin or end, which is why a long-term plan beats market timing.
C
Capital Gain
A capital gain is the profit you make when you sell an asset for more than you paid for it. In the USA, long-term gains (assets held over a year) are taxed at preferential rates; in Canada, only 50% of a capital gain is included in taxable income for most amounts. Estimate what you might owe with the capital gains calculator.
Capital Loss
A capital loss occurs when you sell an asset for less than you paid. In both the USA and Canada, capital losses can offset capital gains to reduce your tax bill, and unused losses can often be carried forward to future years. This is the basis of a strategy called tax-loss harvesting.
Certificate of Deposit (CD)
A CD is a U.S. savings product that locks your money in for a fixed term, such as six months or five years, at a guaranteed interest rate. You typically earn more than a regular savings account but pay a penalty for early withdrawal. The Canadian equivalent is the GIC.
Compound Interest
Compound interest is interest calculated on both your original principal and the interest already earned, so your money grows faster the longer it stays invested. Albert Einstein reportedly called it the eighth wonder of the world. Watch it in action with the compound interest calculator.
Credit Score (FICO)
A credit score is a three-digit number, most commonly a FICO score ranging from 300 to 850 in the USA, that summarizes how reliably you repay debt. Higher scores unlock lower interest rates on mortgages, car loans, and credit cards. Payment history and credit utilization are the biggest factors.
Credit Utilization
Credit utilization is the percentage of your available revolving credit that you are currently using. Keeping it below 30%, and ideally under 10%, helps protect your credit score. For example, a $300 balance on a $1,000 limit is 30% utilization.
D
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is the share of your gross monthly income that goes toward debt payments. Lenders use it to decide how much you can borrow, with most preferring a DTI below 36% to 43% for a mortgage. Lowering your DTI can improve loan approval odds; our debt payoff calculator can help you get there.
Diversification
Diversification means spreading your investments across many holdings and asset types so that no single one can sink your portfolio. The idea is captured by the phrase "don't put all your eggs in one basket." Index funds and ETFs offer instant diversification at low cost.
Dividend
A dividend is a portion of a company's profits paid out to shareholders, usually in cash and often quarterly. Reinvesting dividends can significantly boost long-term returns. Canada offers a dividend tax credit on eligible dividends, while in the USA qualified dividends enjoy lower tax rates.
Dollar-Cost Averaging
Dollar-cost averaging is the practice of investing a fixed dollar amount at regular intervals, regardless of price. This automatically buys more shares when prices are low and fewer when they are high, smoothing out your average cost. It removes the temptation to time the market.
Down Payment
A down payment is the upfront cash you pay toward a purchase, most often a home, with the remainder financed by a loan. A larger down payment means a smaller mortgage and can help you avoid PMI in the USA. See how it affects your costs with the mortgage calculator or compare options using rent vs. buy.
E
Effective Tax Rate
Your effective tax rate is the average percentage of your total income that you actually pay in tax. Because both the USA and Canada use progressive brackets, your effective rate is always lower than your top marginal rate. Estimate yours with the income tax calculator.
Emergency Fund
An emergency fund is cash you set aside to cover unexpected costs such as a job loss, car repair, or medical bill. Most experts suggest three to six months of essential expenses kept in an accessible account. Figure out your target with the emergency fund calculator.
Equity
Equity is the value of your ownership in an asset after subtracting any debt against it. Home equity, for example, is your property's market value minus the mortgage balance. In investing, equity also refers to stocks, which represent ownership shares in a company.
Escrow
Escrow is a neutral third-party arrangement that holds money or documents until conditions are met. With a U.S. mortgage, lenders often collect property taxes and homeowners insurance in an escrow account and pay those bills on your behalf. Escrow also protects buyers and sellers during a home sale.
Exchange-Traded Fund (ETF)
An ETF is a basket of securities, such as stocks or bonds, that trades on an exchange just like an individual stock. ETFs typically have very low fees and offer instant diversification, making them popular for long-term investors in both the USA and Canada. Many index funds are now offered in ETF form.
F
First Home Savings Account (FHSA)
The FHSA is a registered Canadian account that helps first-time buyers save for a home. It combines the best of two worlds: contributions are tax-deductible like an RRSP, and qualifying withdrawals are tax-free like a TFSA. Annual and lifetime contribution limits apply.
FICA
FICA stands for the Federal Insurance Contributions Act, the U.S. payroll taxes that fund Social Security and Medicare. Employees and employers each pay half, while the self-employed pay both halves as self-employment tax. FICA is withheld automatically from W-2 paychecks.
G
Guaranteed Investment Certificate (GIC)
A GIC is a Canadian deposit product that guarantees your principal and pays a fixed interest rate over a set term. It is the Canadian counterpart to a U.S. CD and is considered one of the safest places to park cash. GICs held within a TFSA or RRSP grow tax-sheltered.
H
Health Savings Account (HSA)
An HSA is a U.S. account that offers a rare triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. You must be enrolled in a high-deductible health plan to contribute. Project its long-term value with the HSA calculator.
High-Yield Savings Account
A high-yield savings account pays an interest rate well above the national average, typically because it is offered by an online bank with lower overhead. It is an ideal home for an emergency fund because the money stays liquid and federally insured. Rates move up and down with central bank policy.
I
Index Fund
An index fund is a mutual fund or ETF designed to track a market index, such as the S&P 500 or the S&P/TSX Composite. Because it simply mirrors the market rather than trying to beat it, fees are very low. Decades of evidence show low-cost index funds outperform most actively managed funds.
Inflation
Inflation is the general rise in prices over time, which steadily reduces the purchasing power of your money. If inflation is 3%, something that costs $100 today will cost $103 next year. Investing for returns above the inflation rate is how you preserve and grow real wealth.
L
Liquidity
Liquidity describes how quickly an asset can be turned into cash without losing value. Cash and savings are the most liquid; real estate and collectibles are among the least. A good financial plan keeps enough liquid assets on hand for emergencies and short-term needs.
M
Marginal Tax Rate
Your marginal tax rate is the rate applied to your next dollar of income, equal to your highest tax bracket. It matters when deciding whether to make a deductible contribution, such as to an RRSP or 401(k), because the deduction saves tax at that top rate. It is higher than your effective tax rate.
Mortgage
A mortgage is a loan used to buy real estate, secured by the property itself, and repaid over many years with interest. If you stop paying, the lender can foreclose. Compare payments, terms, and total interest with the mortgage calculator.
Mutual Fund
A mutual fund pools money from many investors and is managed by professionals who buy a mix of stocks, bonds, or other assets. Funds can be actively managed or passively track an index. Watch out for management expense ratios, which can quietly erode returns over time.
N
Net Worth
Net worth is the total value of everything you own minus everything you owe. It is the single best snapshot of your overall financial health and a useful number to track over time. Growing net worth, not income alone, is the real measure of building wealth.
P
Private Mortgage Insurance (PMI)
PMI is insurance that U.S. lenders require when a borrower puts down less than 20% on a conventional mortgage. It protects the lender, not you, and adds to your monthly payment. Once you build 20% equity you can usually request to cancel it; the mortgage calculator can show the impact.
Principal
Principal is the original amount of money you borrow or invest, separate from any interest. On a loan, each payment reduces the principal balance; on an investment, returns are earned on top of the principal. Paying extra toward loan principal can save significant interest, as shown in the loan calculator.
R
Refinance
Refinancing means replacing an existing loan with a new one, usually to obtain a lower interest rate, change the term, or tap home equity. The savings must outweigh closing costs to be worthwhile. Many homeowners refinance a mortgage when rates fall; estimate the new payment with the mortgage calculator.
Registered Retirement Savings Plan (RRSP)
An RRSP is a Canadian retirement account where contributions are tax-deductible and investments grow tax-deferred until you withdraw them, typically in retirement when your income is lower. It is broadly comparable to a U.S. Traditional IRA or 401(k). Plan your savings with the retirement calculator.
Roth IRA
A Roth IRA is a U.S. retirement account funded with after-tax dollars, so qualified withdrawals in retirement are completely tax-free. It is ideal if you expect to be in a higher tax bracket later. Income limits cap who can contribute directly; the retirement calculator can model your balance.
S
Self-Employment Tax
Self-employment tax is the U.S. Social Security and Medicare tax paid by freelancers, contractors, and business owners, covering both the employee and employer halves of FICA. It is roughly 15.3% on net earnings, on top of income tax. Estimate it with the freelancer tax calculator or compare working arrangements using 1099 vs. W-2.
Standard Deduction
The standard deduction is a fixed dollar amount U.S. taxpayers can subtract from income instead of itemizing individual deductions. Most filers take the standard deduction because it is larger and simpler. See how deductions affect your bill with the income tax calculator.
T
Tax Bracket
A tax bracket is a range of income taxed at a specific rate within a progressive system used by both the USA and Canada. Moving into a higher bracket only taxes the income above the threshold at the higher rate, not all your income. Find your bracket impact with the tax calculator.
Tax-Free Savings Account (TFSA)
A TFSA is a flexible Canadian account where you contribute after-tax money, and all growth and withdrawals are completely tax-free. Unused contribution room carries forward, and withdrawn amounts can be re-contributed the following year. It can be used for any goal, from an emergency fund to retirement.
Traditional IRA
A Traditional IRA is a U.S. retirement account where contributions may be tax-deductible and investments grow tax-deferred until withdrawal, when they are taxed as ordinary income. It is the U.S. counterpart to a Canadian RRSP. Required minimum distributions begin at a set age.
W
W-2
A W-2 is the U.S. tax form an employer issues each year to report an employee's wages and the taxes withheld from their paychecks. You use it to file your federal and state income tax returns. If you receive a 1099 instead, you are treated as a contractor, not an employee.
Withholding
Withholding is the money an employer deducts from each paycheck and remits to tax authorities toward your annual tax bill. Adjusting your withholding (via Form W-4 in the USA) controls whether you owe or receive a refund at tax time. Too little withholding can trigger penalties.
0–9
1099
A 1099 is a family of U.S. IRS forms used to report income paid to people who are not employees, such as freelancers, contractors, and gig workers. Unlike a W-2, no taxes are withheld, so recipients must set money aside themselves. Estimate that tax with the freelancer tax calculator.
401(k)
A 401(k) is an employer-sponsored U.S. retirement plan that lets you contribute pre-tax (Traditional) or after-tax (Roth) dollars directly from your paycheck, often with a matching contribution from your employer. The employer match is essentially free money. Project your nest egg with the retirement calculator.
Frequently Asked Questions
What is the difference between APR and APY?
APR is the annual cost of borrowing including fees, while APY is the annual return on savings including the effect of compounding. APR is used for loans and credit cards; APY is used for savings accounts and CDs.
Is a TFSA the same as a Roth IRA?
They are similar but not identical. Both use after-tax money and grow tax-free, but a TFSA is a flexible Canadian account for any goal, while a Roth IRA is a U.S. retirement account with income limits and specific withdrawal rules.
What is the difference between marginal and effective tax rate?
Your marginal tax rate is the rate on your last dollar of income, equal to your top bracket. Your effective tax rate is the average rate across all of your income and is always lower in a progressive system like those in the USA and Canada.
How much should I keep in an emergency fund?
A common rule is three to six months of essential living expenses kept in an accessible account such as a high-yield savings account. People with variable or self-employment income may aim for more.