Gnomenclature

Debt snowball is a debt-reduction strategy for people who want to simplify their debt situation by eliminating individual debts as quickly as possible. The debt snowball approach focuses on directing any extra debt payments toward your smallest debts first. This allows you to reduce the number of different debts you have most quickly. While that may be satisfying, this may not be the most cost-effective approach.

Debt-free date is a target date by which all your current debt obligations are scheduled to be paid off. This may be based on a combination of the amortization schedule for loans and your current or planned repayment rate for variable payments or prepayments. Your debt-free date depends on your pace of repayments and whether you take on any additional debt.

Debt-reduction strategy is a plan for how to reduce the amount of debt you have. It should include both a schedule for repaying your current debts and a budget for reducing or eliminating the need to take on additional debt.

A decision framework can help you recognize the parameters of financial choices so you can see what works best in your situation.

Default is when you fail to make a payment on an amount you owe. If you show no signs of attempting to make a payment that is overdue, the lender may take legal action in an attempt to get the money or refer the matter to a collection agency. In addition to the additional charges that you may ultimately incur by defaulting on a debt, a default can do serious damage to your credit score.

A defined benefit pension is an employer-sponsored retirement plan that pays specified amounts to the employee after retirement. That amount is usually based on the employee’s earnings and time with the employer. The employer is responsible for funding and investing the plan to make sure enough money is available to pay employees their benefits when the time comes.

A defined contribution plan is a type of employer-sponsored retirement plan. Typically, it depends primarily on voluntary contributions by the employee, though an employer may also choose to make contributions. No specified amount of benefits are paid out. Instead, the value of an employee’s share of a defined contribution plan is based on the size of the contributions and investment earnings (or losses) on those contributions over time.

Deflation is a period of falling prices. While lower prices may sound like a good thing, widespread deflation is generally associated with a seriously weak economy.

Delinquency is a term used to describe payments that are overdue. Many creditors allow a 30-day grace period before late payments have consequences. Payments that are delinquent beyond the grace period may incur a late fee. Payments that are over 90 days late are considered seriously delinquent. This may result in referral to a collection agency, cancellation of your account or other serious consequences. Delinquent payments also may be reflected in your credit report and in your credit score.

Depletion rate is the pace at which you draw down money from a retirement plan. A key part of managing your finances in retirement is trying to make your resources last for the remainder of your life at least.

Measuring your depletion rate helps you assess whether you are taking money out too quickly. Caution must be applied in planning your depletion rate because you can’t be sure of how long your resources will need to last.

Depreciation is a general term for the loss of value that occurs after the purchase of an item. For automobiles, the steepest depreciation occurs immediately after a new vehicle is initially purchased.

Discretionary income (DI) is the money that is left over once you have paid all your bills and obligations. It’s the money that you get to decide when and how to spend or invest.

Disinflation describes a declining rate of inflation. Unlike “deflation,” it does not mean prices are falling, but instead it is used for periods when prices are rising at a slower rate, as when inflation slows from 8% to 4%.

Disposable income is the money you have available to spend after payment of all federal, state, and local taxes and any other charges mandated by the government. Disposable income is also often referred to as “net income.”

Donations are gifts of cash or other property for charitable purposes. If the recipient is a qualified non-profit organization, the donor may be able to claim a tax deduction for part or all of the gift. Donations may be made subject to specific instructions or given without restrictions.

Down payment is a portion of the purchase price which you pay up front when you are financing the rest of the purchase with a loan. Making a bigger down payment may help you qualify for a loan, and it may also allow you to get a better interest rate.

DTI ratio stands for “debt-to-income ratio.” It measures the proportion of your monthly debt payments to your monthly income. It is a metric lenders use to evaluate your ability to handle new loan payments. It is also something to keep in mind before you borrow, because it measures how much of your household income will be devoted to repaying debt.

Early distribution penalty is a tax penalty for distributions from a tax-advantaged retirement plan prior to the beneficiary’s reaching age 59½. The penalty is currently 10% in addition to any ordinary income tax charges. Early distribution penalties apply to the portion of the money in the retirement plan that has not previously been subject to income tax.

Emergency funds are savings set aside to cover unexpected expenses. Emergency savings should be only part of your plan for dealing with unexpected costs. You should also consider other resources, such as your discretionary income, available credit, and long-term assets.

An employer match is a contribution to a defined contribution plan made by an employer on an employee’s behalf. It is based on a formula that matches all or part of the employee’s contributions to the plan.

Endowments are charitable gifts designed to fund specific programs over time. Besides describing the purpose of the money, endowment policy statements should also describe how the money is to be invested. To make them last, endowments are often designed to keep the principal of the gift intact while spending no more than the expected investment earnings on the money.

Equity is the amount of a property’s value over and above what you owe on it. Equity contributes to your net worth. It also can give you the flexibility to refinance or borrow against the equity. Use this formula to calculate it:

Equity = Current market value – Remaining balance of any mortgages on the property

Expansion is a term used to describe a period when the economy is growing. This is generally measured by a positive change in the inflation-adjusted Gross Domestic Product (GDP).

FAFSA stands for “Free Application for Federal Student Aid.” It is an online form you can fill out to apply for loans, scholarships, grants, and other forms of educational financial assistance from the federal government. Many colleges and states also use the FAFSA to evaluate eligibility for their own student aid programs.

The Federal Deposit Insurance Corporation is a federal agency that protects investors against losses due to bank failures. Deposits in qualified accounts at FDIC-backed institutions are insured for up to $250,000 (or $500,000 for joint accounts) per depositor at each bank. Qualified accounts include savings, money market and certificate of deposit accounts. Other accounts, such as brokerage accounts, are not covered even if they are offered by an FDIC-participating institution.

The federal funds rate is an interest rate used for short-term lending and borrowing among banks. The Federal Reserve sets targets for the Fed funds rate which it maintains by buying and selling securities. This influences economic activity by affecting the cost of borrowing money.

Federal Reserve Board is the central bank of the United States. It performs many functions to provide stability to the financial system. These include setting interest rates and providing liquidity to financial institutions and markets.

Federal student loans are educational loans subsidized by the U.S. government. They may be serviced by private companies, but their government backing typically makes them easier to get and more affordable than private loans. Federal student loans also have more flexible repayment terms.

The FICO Score is the most widely used credit scoring model. A credit score is a three-digit number which is based on your history of using credit. FICO scores range from 300 to 850, with higher scores being better. Lenders review credit scores as part of their evaluation of how risky it would be to extend credit to you. The higher your credit score, the better chance you have of getting credit and the lower the interest rate you are likely to pay.

Fixed-rate mortgage is a home loan for which the interest rate stays constant throughout the repayment period. As a result, fixed-rate mortgages typically have the same monthly payment from start to finish.