Glossary
Equity compensation, planning and household money, one page per term: a definition, an example with the numbers worked, and what Taiga Finance shows for it.
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409A valuation409A appraisalA 409A valuation is an independent appraisal of what one share of a private company's common stock is worth. The tax regulations presume an independent appraisal reasonable for up to 12 months, unless later information materially affects the value. A stock option granted with a strike below it falls under Section 409A.50/30/20 rule50-30-20 budgetThe 50/30/20 rule is a rule of thumb that splits take-home pay into three shares: half for needs, such as rent, groceries and utilities; 30% for wants, such as dining out and travel; and 20% for savings and debt payments beyond the minimums. It is a shape some people give a budget before the month.529 planQualified tuition program · QTPA 529 plan is a qualified tuition program under Section 529 of the US tax code: an account for one beneficiary's education costs. Earnings in it owe no federal income tax while they stay in the account, and a withdrawal spent on qualified education expenses owes none either.529-to-Roth rollover529 to Roth IRA rolloverA 529-to-Roth rollover is a transfer from a 529 plan straight into a Roth IRA of the 529's own beneficiary, allowed by Section 529(c)(3)(E) of the US tax code. A transfer that meets its conditions owes no federal income tax, and the total moved this way for one beneficiary is capped at $35,000.
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AmortizationAmortization scheduleAmortization is the paying down of a loan through level payments, each split between the interest owed on the balance that month and a reduction of the principal, until the balance reaches zero. The table that lists the split for every month is the amortization schedule.AMTAlternative minimum taxThe AMT (alternative minimum tax) is a second US federal income tax, computed alongside the regular one on a broader income base with its own exemption and its own two rates. A person owes whichever of the two comes out higher, and the spread on an ISO exercise counts as income under the AMT even though the regular tax ignores it.APRAnnual percentage rateAn APR, or annual percentage rate, is the cost of credit expressed as a yearly rate, the figure a creditor discloses on consumer credit under Regulation Z. On a credit card it is the periodic interest rate multiplied by the number of periods in a year, so a 2% monthly rate is a 24% APR.Asset allocationAllocation · Asset mixAsset allocation is how a portfolio's value is split across asset classes, such as stocks, bonds and cash, stated as a percentage of the whole for each class. The percentages add up to 100, and they change whenever one class's value moves differently from the others.Asset classAsset categoryAn asset class is a group of investments that behave alike in the market and are counted alike in a portfolio, such as stocks, bonds and cash. A holding belongs to one class, or to several by weight when it is a fund that holds more than one, and the classes are the buckets an allocation is measured in.Avalanche vs. snowballDebt avalanche · Debt snowball · Debt payoff strategies · Payment rolloverAvalanche vs. snowball is the choice between two orders for paying down several debts at once. Both pay the minimum on each debt and put the money left over on one debt at a time: the avalanche on the highest APR, the snowball on the smallest balance.
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Balance transferBalance transfer cardA balance transfer moves a balance owed on one credit card onto another card, usually one offering a promotional rate on transferred balances for a set number of months. The new card charges a transfer fee, a percentage of the amount moved, which is added to the balance it now carries.Balance-only sharingBalance-only sharing is a middle setting between sharing an account in full and keeping it private: the other partner sees that the account exists and what its balance is, but not its transactions or holdings.Bargain elementSpread · Compensation elementThe bargain element is the difference between what a share is worth on the day a stock option is exercised and the strike price paid for it. Also called the spread, it is the figure the tax code treats as compensation: ordinary income on an NSO, and an alternative minimum tax adjustment on an ISO.Biweekly mortgage paymentsBiweekly payment plan · Half-payments every two weeksBiweekly mortgage payments are half the monthly payment paid every two weeks instead of the full payment once a month. A year has 52 weeks, so 26 half-payments add up to 13 monthly payments rather than 12, and the extra payment a year goes to principal.Budget rolloverCarryover · Rollover budgetBudget rollover is the carrying of a spending line's unspent or overspent balance into the next month, instead of starting each month from the planned amount alone. A line under by $80 opens the next month with $80 more than its planned amount; a line over by $60 opens with $60 less.
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Capital gainsCapital gains taxA capital gain is the profit on the sale of an asset: the price received minus its cost basis. US tax law sorts each gain by how long the asset was held, short-term at one year or less and long-term at more than a year, and taxes the two kinds at different rates, in the year of the sale.Cash flowNet cash flowCash flow is the money that came in over a period, usually a month, minus the money that went out; it is positive when more arrived than left and negative when more left than arrived. It measures movement over a stretch of time, where net worth measures what is owned and owed on one date.College-cost inflationTuition inflation · College inflationCollege-cost inflation is the yearly rate at which the price of a year of college rises. A college savings projection uses it to grow today's cost to the years a child will be enrolled, so the bill it compares the savings against depends on the rate chosen.Combined loan-to-value (CLTV)CLTV · CLTV ratioA combined loan-to-value ratio, or CLTV, is the total of every loan secured by a property divided by the property's value, as a percent. Lenders cap it when sizing a HELOC or a second mortgage, and the room under the cap is what they may lend.Compound interestCompoundingCompound interest is interest worked out on the principal plus the interest already accrued, so each period's interest is charged, or earned, on a larger amount than the period before. Simple interest is worked out on the principal alone, so every period's interest is the same.Concentration riskConcentrated position · Single-stock riskConcentration risk is the exposure a portfolio carries when a large share of its value sits in one holding, one sector or one company, so that a move in that one thing moves the whole. It is common with equity compensation, where vested RSUs and ESPP shares are all the same employer's stock.Cost basisTax basis · BasisCost basis is what an asset cost for tax purposes: the amount paid for it, plus any part of its value that has already been taxed as income. A sale is taxed on the difference between the price received and the basis, so the basis decides how much of a sale counts as gain.Credit limitCredit lineA credit limit is the most a revolving account, such as a credit card or a home equity line, is allowed to carry at one time, set by the lender. The limit minus the balance is the available credit, and the balance divided by the limit is its credit utilization.Credit scoreFICO scoreA credit score is a number a scoring model derives from a credit report: a prediction, in the CFPB's words, of how likely a person is to pay a loan back on time. A FICO score runs from 300 to 850 and is built from five weighted categories of what the report holds.Credit utilizationUtilization ratio · Credit utilization ratioCredit utilization is the share of a credit limit in use: the balance on a credit card divided by the card's limit, as a percent. Across several cards, it is the total of the balances divided by the total of the limits.
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Debt-to-income ratioDTIA debt-to-income ratio, or DTI, is a household's monthly debt payments divided by its gross monthly income, the figure a lender works out when it underwrites a loan. It compares payments, not balances, and the income is before tax, so a $2,400 month of payments against $7,500 of gross income is a 32% DTI.Discretionary spendingWantsDiscretionary spending is the spending a household chooses month by month, such as dining out, travel and shopping, as opposed to the fixed costs it is committed to. The discretionary pool is what take-home pay leaves after the fixed costs and the savings and investment lines are taken out.Disqualifying dispositionA disqualifying disposition is a sale of ESPP or ISO shares before both holding periods have run: two years from the grant date and one year from the purchase or exercise date. It makes the discount or spread the shares carried on the day they were bought ordinary income in the year of the sale.Dividend yieldYieldDividend yield is a year of dividends per share divided by the share price, stated as a percentage. It says what a share pays out in cash for each dollar of its price, and it moves whenever the price does, even when the dividend has not changed.Dollar-cost averagingDCADollar-cost averaging is investing a fixed dollar amount on a fixed schedule, whatever the price is on each date. Because the amount is constant, more shares are bought when the price is low and fewer when it is high, so the average cost per share comes out below the average of the prices paid.
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Earmarked / free to allocateAllocated and unallocatedEarmarked money is the part of an account's balance assigned to a purpose, such as a savings goal, without being moved anywhere. Free to allocate is the rest: money in the account that no purpose has claimed yet.Emergency fundCash reserve · Rainy-day fundAn emergency fund is money held in cash for expenses that were not planned, such as a job loss, a medical bill or a car repair; the CFPB defines it as “a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies.” Its size is usually stated in months of essential expenses.Envelope budgetingEnvelope system · Cash envelopesEnvelope budgeting is a method that divides a paycheck, when it arrives, among a set of envelopes, one per kind of spending, and pays for each kind only from its envelope. In the cash form the envelopes hold bills; in the digital form the money stays in the bank and each envelope is a record of how much of the balance is set aside for it.ESPPEmployee stock purchase plan · Section 423 planAn ESPP (employee stock purchase plan) is a payroll plan that lets employees buy their company's stock below its market price, by up to 15% under a US tax-qualified plan. Money is held back from each paycheck over an offering period and spent on shares at set purchase dates.ESPP lookback & discountLookback provision · Lookback pricingAn ESPP lookback is a plan term that sets the purchase price from the lower of the stock's price at the start of the offering period and its price on the purchase date. The discount, at most 15% under a US Section 423 plan, then comes off that lower price, so the employee pays 85% of whichever is lower.ExerciseOption exercise · Exercising stock optionsAn exercise is the act of using a stock option to buy the shares it covers, paying the strike price for each one. Exercising turns vested options into owned shares, and it is the moment the spread between the strike and the fair market value is measured for tax.Exercise windowPost-termination exercise window · PTE window · PTEPAn exercise window is the period in which a stock option can be exercised before it expires. After an employee leaves, the post-termination exercise window is the time left to exercise vested options, set by the plan; an option not exercised by the last day of the window is gone.Expense ratioFund fee · Total annual fund operating expensesAn expense ratio is a fund's annual cost stated as a percentage of the assets in it, so a fund with a 0.20% expense ratio takes $2 a year from every $1,000 invested. It is deducted from the fund's assets a little each day, which lowers the return rather than arriving as a bill.Extra principal paymentPrepayment · Paying extra on a loanAn extra principal payment is an amount paid on a loan above the scheduled payment and applied to the balance rather than to interest. The next month's interest is charged on the smaller balance, so the schedule ends sooner and the total interest is lower, while the scheduled payment itself stays where it was.
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Fair market valueFMVFair market value is the price a share would sell for between a willing buyer and a willing seller who both know the facts. For a public company it is the market price; for a private company, whose shares don't trade, it is the figure an independent 409A valuation puts on one share of common stock.Fixed vs variable expensesFixed and variable costsFixed expenses are the costs that arrive at a set amount on a schedule, whatever the month's choices: rent or a mortgage payment, insurance premiums, a loan payment, a subscription. Variable expenses are the costs whose amount depends on the month's choices: groceries, dining out, fuel, shopping.Future valueFV · Future value of an annuityFuture value is what an amount of money, or a series of deposits, grows to by a later date at an assumed rate of return. The starting amount, the deposits, the rate and the number of periods fix it, and a change in any one of them moves it.
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HELOCHome equity line of creditA HELOC, a home equity line of credit, is a revolving loan secured by a home: a credit limit the borrower can draw on, repay and draw on again, with the house as collateral. The limit is sized from the equity in the home, its value minus what is already owed against it.HELOC capacityBorrowing capacity · Available equityHELOC capacity is the amount a homeowner could still borrow against a property through a home equity line of credit. Lenders cap the total debt secured by a home at a share of its value, the combined loan-to-value (CLTV) limit.Holding periodLTCG clock · Long-term holding periodA holding period is the time between acquiring a share and selling it. US tax law uses it twice: a share held more than one year sells at the long-term capital gains rates, and ESPP or ISO shares also need more than two years from the option's grant date for the sale to be a qualifying disposition.Home equityEquity in a homeHome equity is the part of a home's value that belongs to the owner rather than to a lender: the property's current value minus every loan secured against it, the mortgage and any HELOC. It grows as the loans are paid down and as the value rises, and shrinks when either moves the other way.Household net worthHousehold net worth is the net worth of a couple or family counted as one unit: everything either person owns, alone or jointly, minus everything either owes, with what they hold jointly counted once.
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Interest capitalizationCapitalized interestInterest capitalization is the adding of unpaid interest to a loan's principal, so that from then on interest accrues on the larger figure. It is common on student loans at the end of a deferment, when the interest that accrued while payments were paused is folded into the balance.Irregular incomeVariable incomeIrregular income is pay that changes from month to month, such as freelance, commission, tips or seasonal work, with no set amount to plan a month from. A plan for it is built from a baseline: one figure drawn from recent months, usually the lowest of them.ISOIncentive stock optionAn ISO is an incentive stock option, a US employee stock option that meets the conditions of Section 422 of the tax code. Exercising one creates no regular taxable income; the spread counts toward the alternative minimum tax instead, and a sale after the required holding periods is taxed as a capital gain.
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Minimum paymentMinimum dueA minimum payment is the smallest amount a lender accepts on a debt each period without treating it as missed: on a credit card a percentage of the balance or a stated floor, whichever is larger, and on an installment loan the scheduled payment. Part of it covers the month's interest, and only the rest reaches the balance.Monte Carlo simulationA Monte Carlo simulation, in retirement planning, runs the same plan many times over randomly generated sequences of market returns, and reports how the results spread out. A retirement Monte Carlo reports a success rate: the share of runs in which the money did not run out before the plan's end.Mortgage recastRe-amortization · Loan recastA mortgage recast is a lender's re-amortization of a loan after a large lump-sum principal payment: the lower balance is spread over the remaining term at the same rate, so the monthly payment drops while the rate and the payoff date stay where they were.
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Negative amortizationNegAmNegative amortization is a rise in a loan's balance while payments are being made, because the payment is smaller than the month's interest and the part it does not cover is added to what is owed. The next month's interest is then charged on the larger balance.Net worthNet worth is what a person or household owns minus what it owes: the total of its assets, such as cash, investments and a home, less the total of its debts, such as a mortgage, a car loan and a credit card balance. It is a figure on one date, and it can be negative.Nominal vs real returnReal rate of return · Inflation-adjusted return · Nominal returnA nominal return is the change in an investment's value counted in dollars as they stand at the time; a real return is the same change with inflation taken out, the change in what the money can buy. 6% nominal in a year when prices rise 3% is a real return of about 2.9%.NSONon-qualified stock option · NQSO · Nonstatutory stock optionAn NSO is a non-qualified stock option: a right to buy company shares at a fixed strike price that does not meet the conditions for an incentive stock option. When it is exercised, the spread between the strike and the fair market value is ordinary income, taxed like wages in that year.
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Pay periodPay schedule · Pay frequencyA pay period is the stretch of work one paycheck covers, and the pay schedule is how often those paychecks land: weekly, biweekly, semi-monthly or monthly. On a biweekly schedule, two months of the year hold three paychecks instead of two.Payoff dateDebt-free date · Projected payoffA payoff date is the month a debt's balance reaches zero at a given payment and rate. It is a projection: the balance, the rate and the amount paid each month fix it, and a change in the payment or the rate moves it.PITIPrincipal, interest, taxes and insurance · Mortgage payment with escrowPITI is a mortgage payment counted in full: principal, interest, property taxes and homeowners insurance. The principal and interest repay the loan; the taxes and insurance are usually collected by the servicer with the monthly payment into an escrow account, which pays those bills when they come due.PlanBudgetA plan, the word Taiga Finance uses for a budget, sets amounts from a month's take-home pay for investments, savings and each kind of spending, ahead of the month. Through the month, what actually came in and went out is compared with it.Portfolio driftAllocation drift · DriftPortfolio drift is the gap between a portfolio's actual mix of asset classes and the mix it was set to hold, measured in percentage points per class. It comes from prices: when one class earns more than another, its share of the whole grows without a single trade.Principal vs interestPrincipal and interest · P+IPrincipal vs interest is the split inside a loan payment: the interest is the lender's charge for the month, worked from the balance still owed and the rate, and the principal is the rest of the payment, the part that reduces the balance. A payment quoted as principal and interest, or P+I, is the two together, without escrow.Promotional APR0% APR offer · Intro APRA promotional APR is a temporary rate on a credit card or loan, often 0%, that applies until a set date, after which the standard APR takes over on whatever balance is left. The offer's terms name the rate, what it covers and the month it ends.
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Rate of returnReturn · Time-weighted return · Money-weighted returnA rate of return is the change in an investment's value over a period, as a percentage of what was invested. When money is added or taken out during the period, the plain change in balance mixes those flows with the growth, so a return figure strips the flows out before dividing.RebalancingPortfolio rebalancingRebalancing is bringing a portfolio's mix of asset classes back to its target after market movement has pulled it away. It is done either with trades, selling some of the class that has grown past its share and buying the classes that have fallen below theirs, or with new money directed to the classes below target until the shares match again.Recurring cash flowBills and subscriptions · Recurring expensesRecurring cash flow is the money that moves on a repeating schedule: paychecks coming in, and bills and subscriptions going out, each at a set interval such as weekly, monthly or yearly. Put on a monthly basis, it shows how much income is expected each month and how much spending is committed before the month starts.RefinanceRefinancing · RefiA refinance replaces an existing mortgage with a new loan that pays it off, at a new rate, a new term or both. The new loan has its own closing costs, and its payment is set by amortizing the balance at the new rate over the new term.Revolving vs. installment creditRevolving credit · Installment loanRevolving vs. installment credit is the difference between a line with a limit, such as a credit card, that can be drawn and repaid over and over, and a loan with a fixed amount, a fixed term and a set payment, such as a car loan. A revolving balance and its minimum payment move with what is charged; an installment balance only falls, on a schedule set the day the loan is made.RSURestricted stock unitAn RSU (restricted stock unit) is an employer's promise to hand over one share of its stock once a vesting condition is met, such as continued employment through a schedule. Nothing is bought: the shares arrive on the vest date, and their value that day is taxed as wages.
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Safe withdrawal rateA safe withdrawal rate is the largest first-year withdrawal, as a percentage of a retirement portfolio, that did not exhaust the portfolio within a set number of years in a given record of market returns. The 4% figure comes from William Bengen's 1994 study built on US market returns from 1926.Savings fundSavings goalA savings fund is money set aside inside a real account for a purpose, such as a trip, a roof or a reserve, tracked apart from the rest of the balance. A fund can carry a target amount, a date to reach it and a monthly contribution toward it.Savings rateA savings rate is the share of income set aside rather than spent: what goes to investments and savings, divided by income. Over take-home pay it is one figure; the same household's contributions over gross pay are a smaller one, because taxes and payroll deductions sit in the denominator.Secured vs. unsecured debtSecured debt · Unsecured debtSecured vs. unsecured debt is the split between a loan backed by collateral, an asset the lender can take if the payments stop, and a loan backed by nothing but the borrower's promise to pay. A mortgage, an auto loan and a HELOC are secured; a credit card, most personal loans and student loans are unsecured.Sequence-of-returns riskSequence-of-returns risk is the effect of the order of investment returns on a portfolio that fixed-dollar (or inflation-adjusted dollar) withdrawals are taken from. With such withdrawals coming out, the ending balance depends on the order in which the returns arrive: the same returns, with the losses coming later, leave more.Sinking fundA sinking fund is money set aside a little each month for a cost that is known in advance, such as an annual insurance premium or a property tax bill, so the full amount is on hand when it comes due. The monthly amount is the cost divided by the months until the bill.Spending paceBurn rateSpending pace is how much of a month's spending has happened by a given day, set against how much of the month has gone by. Spent so far is compared with the same share of the planned amount, or with what earlier months had reached by the same day, and the difference reads as ahead of or behind pace.Sticker price vs net pricePublished price vs net price · Cost of attendance vs net priceSticker price vs net price is the gap between what a college publishes as a year's cost and what a student pays after grant and scholarship aid. The sticker price is the published cost of attendance; the net price is that cost minus the grants and scholarships the student receives.Strike priceExercise price · Grant priceA strike price is the fixed per-share price at which a stock option can be exercised, set on the day the option is granted. It is what the holder pays for each share, whatever the shares are worth on the day of the exercise.
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Take-home payNet payTake-home pay is the amount of a paycheck that reaches the bank account: gross pay minus the taxes withheld and the pre-tax deductions taken out before the deposit. It is the figure a monthly plan's investments, savings and spending are measured against.Tax lotLot · Share lotA tax lot is a batch of shares bought at one time and one price, tracked on its own for cost basis and holding period. A holding is the sum of its lots, and a sale is taxed lot by lot: the gain or loss and its term come from the lot the shares are sold from.Tax-loss harvestingLoss harvestingTax-loss harvesting is selling a lot that stands below its cost basis so that the loss becomes realized and can be netted against realized gains in the same tax year. A loss is only a tax figure once the lot is sold; while the lot is held, the loss is unrealized and offsets nothing.Transaction categorizationTransaction categories · Categorizing transactionsTransaction categorization is assigning each transaction to a category, such as groceries or gas, so a spending line in a budget can count it. A transaction with no category is still spending, and still in the month's total, but no line counts it.
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Vesting cliffCliff vesting · One-year cliffA vesting cliff is the opening stretch of a vesting schedule in which nothing vests at all. On the cliff date the whole of that stretch vests in one tranche, and the schedule carries on in smaller steps: on a four-year schedule with a one-year cliff, a quarter of the grant vests on the first anniversary.VolatilityStandard deviation of returnsVolatility is how widely an investment's returns swing from year to year, usually measured as the standard deviation of its yearly returns around their average. Two portfolios can have the same average return and different volatility.