AFP Entrance key terms

The principle that a dollar available today is worth more than a dollar received later, because today's dollar can be invested to earn a return. It underlies nearly every long-term planning calculation.

The amount that a future sum of money is worth today after applying a discount rate over the intervening period. Used to compare cash flows occurring at different times on a common basis.

The amount a current sum will grow to after earning a stated rate of return for a stated number of periods, assuming compounding. Used to project savings and investment balances forward.

The rate used to reduce a future cash flow to its present value. It reflects the opportunity cost of money and the risk of the cash flow being received as expected.

The process by which earned interest is added to principal so that later interest is earned on interest as well. Frequency of compounding affects the effective growth rate of an investment.

The degree of diligence, skill, and prudence a professional is expected to exercise when serving a client. It is the benchmark against which the quality of advice and service is judged.

A legal obligation to act solely in the best interest of another party, placing the client's interests ahead of the professional's own. It typically includes duties of loyalty, care, disclosure, and confidentiality.

A requirement that a recommendation be reasonably appropriate for a client given that client's objectives, financial situation, and risk tolerance. It is generally less stringent than a fiduciary best-interest standard.

A situation in which a professional's personal, financial, or other interests could compromise, or appear to compromise, the objectivity of advice given to a client. Such conflicts generally must be disclosed and managed.

A client's agreement to a course of action made after receiving a clear explanation of the relevant facts, risks, alternatives, and costs. It supports the client's authority over decisions affecting their finances.

The difference between what a person owns (assets) and what a person owes (liabilities) at a point in time. It is a snapshot measure of overall financial position.

A summary of money coming in and going out over a period, usually organized by income sources and expense categories. It reveals whether a household is saving or overspending.

A measure of how many months of expenses could be covered by readily accessible cash and cash equivalents. It indicates a household's ability to absorb a sudden loss of income or an unexpected expense.

Money set aside in readily accessible accounts to cover unexpected expenses or income interruption without incurring debt or selling long-term investments. Typically measured in months of living expenses.

A forward-looking plan that allocates expected income among spending, saving, and debt repayment categories over a period. It converts financial goals into specific periodic targets.

A person's willingness and emotional capacity to accept investment losses or uncertainty in pursuit of a goal. It is distinct from risk capacity, which is the financial ability to absorb losses.

The financial ability of an individual or household to withstand investment losses without jeopardizing goals or lifestyle. It depends on time horizon, income stability, and the size of other resources.

The division of an investment portfolio among asset classes such as stocks, bonds, and cash. It is a primary determinant of a portfolio's expected return and volatility.

Spreading investments across different assets, sectors, or regions so that any single loss has a limited effect on the whole portfolio. It reduces unsystematic risk without necessarily reducing expected return.

Risk that affects the entire market or economy and cannot be eliminated through diversification, such as interest rate changes or recessions. Also called market risk.

A measure of how sensitive an investment's returns are to movements in the overall market. A beta above one suggests greater volatility than the market; below one suggests less.

The periodic adjustment of a portfolio back to its target asset allocation after market movements have shifted the weights. It helps maintain the intended level of risk.

The length of time over which money is invested before it is needed for a goal. Longer horizons generally permit greater exposure to volatile assets.

The amount an insured person must pay out of pocket before an insurance policy begins to pay covered costs. Higher deductibles usually lower the premium.

A cost-sharing arrangement in which the insured pays a specified percentage of covered costs after the deductible is met, and the insurer pays the remainder. It differs from a copayment, which is a fixed dollar amount.

The maximum amount an insurer will pay for a covered loss under a policy, either per occurrence or over the policy term. Losses above the limit are the insured's responsibility.

The amount paid, typically periodically, to an insurer in exchange for coverage. It reflects the insurer's expected claims, expenses, and risk assessment of the insured.

The process by which an insurer evaluates an applicant's risk characteristics to decide whether to offer coverage and at what price. It may involve health, financial, or property information.

Coverage that pays a death benefit only if the insured dies during a specified period, with no cash value accumulation. It generally provides the most death benefit per dollar of premium.

Coverage that remains in force for the insured's lifetime, provided premiums are paid and policy terms are met, and that accumulates cash value. Common forms include whole life and universal life.

The savings component inside a permanent life insurance policy that grows over time and may be borrowed against or withdrawn under policy terms. It is distinct from the death benefit.

The amount a policyholder would receive upon voluntarily terminating a permanent life insurance policy before death or maturity. It may be less than the accumulated cash value because of surrender charges.

A person or entity named to receive the proceeds of an insurance policy or retirement account upon the owner's death. Beneficiary designations generally override instructions in a will.

The process by which an employee gains nonforfeitable ownership of employer-provided retirement contributions or benefits after meeting specified service or age requirements. Unvested amounts are forfeited upon leaving.

An employer contribution to a retirement plan that is made only when the employee also contributes, usually up to a stated percentage of pay. It is effectively part of total compensation.

A retirement plan in which the contribution amount is specified and the eventual benefit depends on contributions plus investment performance. The employee generally bears the investment risk.

A retirement plan that promises a specified benefit, often based on salary and years of service, with the employer bearing the investment risk. Benefits are commonly paid as a lifetime annuity.

The minimum amount that must be withdrawn annually from certain tax-advantaged retirement accounts once the owner reaches the required age. Failure to withdraw the required amount can trigger a tax penalty.

The accumulation of investment earnings without current taxation, with taxes postponed until funds are withdrawn. It allows compounding on amounts that would otherwise have been paid in tax.

The rate applied to the next dollar of taxable income, reflecting the highest bracket the taxpayer's income reaches. It differs from the effective rate, which is total tax divided by total income.

Total income tax paid divided by total taxable or gross income, expressed as a percentage. It shows the average burden across all income rather than the rate on the last dollar.

The profit realized when an asset is sold for more than its adjusted cost basis. Holding period generally determines whether the gain is taxed at short-term or long-term rates.

The amount originally invested in an asset, adjusted for items such as commissions, reinvested dividends, or improvements, used to calculate gain or loss on sale.

The loss realized when an asset is sold for less than its adjusted cost basis. Capital losses may generally offset capital gains and, within limits, ordinary income.

The court-supervised process of validating a will and administering a deceased person's estate, including paying debts and distributing assets. It is generally public and can be time-consuming.

The condition of dying without a valid will, in which case state law determines how assets are distributed. The outcome may differ from what the deceased would have chosen.

A legal arrangement in which a trustee holds and manages assets for the benefit of named beneficiaries according to the grantor's instructions. Trusts can help manage assets and avoid probate.

The person or institution responsible for administering a trust according to its terms, including managing assets and distributing them to beneficiaries. Trustees owe fiduciary duties to beneficiaries.

A written authorization letting one person act on another's behalf in financial or legal matters. A durable version remains effective if the principal becomes incapacitated.

The percentage of available revolving credit that a borrower is currently using, calculated by dividing balances by total credit limits. Lower ratios generally support stronger credit scores.

A numerical summary of a borrower's credit history used by lenders to estimate repayment risk. It is influenced by payment history, amounts owed, length of history, and new credit activity.

Total monthly debt payments divided by gross monthly income, expressed as a percentage. Lenders use it to assess a borrower's capacity to take on additional debt.

The gradual repayment of a loan through scheduled payments that cover both interest and principal. Early payments are weighted toward interest, while later payments reduce principal faster.

Replacing an existing loan with a new one, often to obtain a lower interest rate or different term. The decision should account for closing costs and the break-even period.

A tax-advantaged savings account designed for education expenses, offering tax-deferred growth and generally tax-free qualified withdrawals. Contributions may also receive state tax benefits.

A tax-advantaged education savings account with annual contribution limits and income restrictions on contributors. Qualified withdrawals for eligible education expenses are generally tax-free.

Money provided to students to help pay for education, including grants, scholarships, work-study, and loans. Eligibility often depends on the family's assessed ability to pay.

A calculated measure of how much a family is judged able to contribute toward a student's education costs in a given year. It is used by aid offices to determine need-based aid eligibility.