CFP Module 4 key terms

The principle that a sum of money today is worth more than the same amount in the future because it can be invested and earn a return over time.

The value of the next best alternative given up when a resource, such as money or time, is committed to one particular use.

The current worth of a future sum or stream of cash flows, calculated by discounting those amounts at an appropriate rate of return.

The amount a current sum or stream of cash flows will grow to over time when compounded at a stated rate of return.

The rate used to convert future cash flows into today's dollars, reflecting the required return or cost of capital for the analysis.

The process by which investment earnings are reinvested so that future returns are earned on both principal and previously accumulated earnings.

The return on an investment after removing the effect of inflation, showing the change in actual purchasing power over a period.

A planning document that lists a household's inflows and outflows over a period to show surplus or deficit and support budgeting decisions.

A snapshot listing assets at fair market value minus liabilities owed, producing the household's equity position at a point in time.

Liquid reserves set aside to cover unexpected expenses or income loss, typically several months of essential living costs held in accessible accounts.

The ease and speed with which an asset can be converted to cash without a significant loss of value in the market.

An investor's emotional and psychological willingness to accept investment volatility and the possibility of losing money.

An investor's financial ability to absorb losses without jeopardizing goals, driven by time horizon, income stability, and obligations.

The length of time an investor expects to hold assets before the money is needed, which shapes suitable risk and allocation choices.

Dividing a portfolio among asset classes such as equities, fixed income, and cash to balance expected return against volatility.

Spreading investments across assets, sectors, and issuers so that any single loss has a limited effect on the overall portfolio.

A statistical measure ranging from -1 to +1 describing how closely two investments move together, used to assess diversification benefits.

A measure of how widely an investment's returns vary around their average, commonly used as a gauge of total volatility.

A measure of an investment's sensitivity to movements in the broad market, where a value above one indicates greater volatility than the market.

Market-wide risk that affects all securities, such as interest rate or recession risk, and cannot be eliminated through diversification.

The annual percentage of fund assets deducted to cover management, administration, and operating costs of a pooled investment vehicle.

The per-share value of a mutual fund or similar pool, calculated by subtracting liabilities from total assets and dividing by shares outstanding.

The constant yearly rate at which an investment would have grown from its starting value to its ending value over a given period.

A retirement plan where the contribution amount is set but the eventual benefit depends on investment performance, shifting market risk to the employee.

A pension arrangement promising a specified retirement benefit, usually based on salary and years of service, with the employer bearing investment risk.

The schedule under which an employee gains non-forfeitable ownership of employer contributions or benefits after meeting service requirements.

The minimum amount that must be withdrawn annually from certain tax-advantaged retirement accounts once the account owner reaches the required age.

Investment earnings that accumulate without current taxation, with taxes paid later when funds are withdrawn from the account.

A retirement account funded with after-tax dollars that allows qualified withdrawals of earnings free of federal income tax in retirement.

The percentage of pre-retirement income a retiree needs to maintain a comparable standard of living after leaving the workforce.

The danger that rising prices will erode the purchasing power of savings and fixed income, reducing real retirement income over time.

The risk that a retiree outlives their assets because lifespan or spending exceeds what the retirement plan assumed.

A contract, usually with an insurer, that converts a lump sum into a stream of payments, often for life, to hedge longevity risk.

The amount an insured person must pay out of pocket for a covered loss before the insurer begins to pay benefits.

A cost-sharing arrangement in which the insured pays a stated percentage of covered expenses and the insurer pays the remainder.

Liability coverage that sits above auto and homeowners policies, paying excess damages once underlying limits are exhausted.

Coverage that replaces a portion of earned income when illness or injury prevents the insured from working, often defined by an own-occupation or any-occupation test.

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

The court-supervised process of validating a will, settling debts, and distributing assets to heirs, which trusts are often used to avoid.

The condition of dying without a valid will, causing assets to be distributed according to state law rather than the deceased's wishes.

A written authorization letting a named agent act on another person's financial or legal affairs, often used if that person becomes incapacitated.