Glossary

This glossary consists of frequently used personal finance terms and those cited in the McGill Personal Finance Essentials core modules. It is meant as a reference and supplementary learning resource for personal knowledge. The definitions were assembled using a variety of financial sources. While the information presented is believed to be factual and current, it should not be regarded as a complete analysis of the terms discussed. The information is not intended as legal, financial or other professional advice and is subject to change.

80/20 Rule

Also known as the Pareto Principle, this rule suggests that 20% of your activities will account for 80% of your results.

Active Mutual Fund

A mutual fund in which a manager or a management team makes decisions about how to invest the fund's money in order to generate superior performance.

After-Tax Return

Any profit made on an investment after subtracting the amount due for taxes.

Annual Fee

A fee that is automatically charged once a year to your credit card account for the benefits that come with that credit card.

Annual Interest Rate

An interest rate is the rate of return a lender receives for allowing you to use money for a specified term. An annual interest rate is the rate over the period of one year.

Annual Percentage Rate (APR)

A way of measuring the full cost a lender charges per year for borrowing funds. Typically associated with mortgages, loans and credit cards, APR combines the total amount of interest payable and the cost of other fees and charges, averaged over the term of the loan and expressed as a percentage.

Asset

Something that you own that has monetary value - such as a house, car, or money in an investment.

Balance Transfer

A process that lets you move debt, or a “balance,” from one credit card or loan to another credit card.

Bankruptcy

A legal term for when you cannot repay your outstanding debts. As part of the process, you will demonstrate how you will pay off your creditors, or how you will sell your assets in order to make the payments.

Basic Personal Amount

A non-refundable tax credit that every Canadian resident is entitled to claim on their income tax return. The amount changes year to year, in order to keep up with inflation and is applied to your return to reduce the amount of income you’re required to pay tax on.

Bear Market

When stock prices are falling, and investor confidence is low.

Behavioural Bias

A human tendency that affects your behavior and perspective, based on predetermined beliefs. Often, behavioral biases can bring about negative outcomes.

Behavioural Finance

The study of how investor psychology affects investors' decisions, and how they in turn affect financial markets. In particular, Behaviour Finance focuses on behaviour that could be considered irrational or non-standard.

Biased Self-Attribution

An investor's tendency to attribute successes to their personal skills, and failures to factors beyond their control.

Bond

A way for governments and companies to borrow money. In return, the issuer promises to pay the holder a specific amount of interest for a specified length of time and to repay the loan on its maturity.

Brokerage Account

An investment account you open with a brokerage firm that you use to buy investments. A brokerage firm is a financial institution that helps you buy and sell securities, acting as the middle man between buyer and seller.

Bubble

When there is a surge in prices (i.e. on investments or real estate) driven by excitement that's not grounded in reality. Bubbles occur when investors begin to buy assets without considering their real economic value, and end in a sharp price decline.

Budget

A document you create that lists all your fixed expenses (such as rent/mortgage, utilities, food), as well as discretionary spending, usually on a monthly basis.

Bull Market

When stock prices are rising or expected to rise, and investor confidence is high.

Capital Appreciation

Also called a capital gain, capital appreciation is an increase in the value of an investment. It is the difference between the purchase price and the sale price of an asset.

Cash In

Money earned or received - such as income, monetary gifts and scholarship funds.

Cash Out

Money paid out as an expense/ expenditure - such as rent or bill payments, or daily costs such as food, transportation, coffee, groceries.

Collection Agency

A company used by lenders to recover funds that are past due.

Compounding

The ability to earn interest on your savings, then earn more interest on top of that original interest. This "interest on interest" increases your rate of growth over time.

Compounding Frequency

Compounding frequency is the number of times per year the accumulated interest is paid out. The frequency could be yearly, half-yearly, quarterly, monthly, weekly, daily, or continuously (or not at all, until maturity).

Conservatism Bias

A bias where investors rely too heavily on their prior beliefs - such as their view on the value of a company - and don't update those beliefs sufficiently when faced with relevant new information.
Conservatism leads investors to under-react.

Cost of Borrowing

The total charge for taking on debt. The cost of borrowing is made up of interest payments and other financing fees.

Credit History

A list of facts, gathered from financial institutions, retailers and other lenders, about how you have handled credit in the past. Most of this information stays in your file for seven years. This information forms a profile of your credit-worthiness, called your credit rating. Your credit rating is used to help banks and other lenders determine whether they will allow you to borrow money, and how much.

Credit Limit

The amount of credit a financial institution will give you. Can also be the maximum amount a credit card company allows you to borrow on one credit card.

Credit Report

Your credit history is compiled by Canada’s central credit bureaus. When a bank or utility considers an application for credit or an account, it will request the applicant’s credit report.

Credit Score

A statistical number that is based on your credit history and identifies your credit worthiness. A person's credit score can range from 300 to 900 – the higher the score, the more financially trustworthy you're considered to be.

Credit Worthiness

The extent to which you are considered suitable to receive financial credit. Your credit worthiness is often based on how reliable you have been in paying money back in the past.

Creditor

A creditor could be a bank, supplier or person that has provided you with money with the expectation of being repaid at a later date.

Debt

Money owed by one party to another. You may take on debt as a way to make large purchases you could not otherwise afford. There is typically a contract or agreement in place where you agree to pay back the money borrowed within a certain time frame, usually with interest.

Deferred Tax

Tax that has not been paid or will be paid at a later date.

Deficit

When your expenditures are higher than your cash in.

Discounting

The process of determining the present value of a payment or a stream of payments that is to be received in the future.

Disposition Effect

A tendency for investors to sell stocks in their portfolio that have performed well, and hold on to stocks that have performed poorly.

Diversification

Holding different stocks in different industries and different investment vehicles such as stocks, bonds, money market accounts.

Down Payment

A portion of the total sales price of your home, which you give to the seller. The rest of the payment to the seller comes from your mortgage lender.

Earning Capacity

The potential for generating income from money you have deposited or invested.

Economic Sector

An area of the economy in which businesses share the same or a related product or service. It can also be thought of as an industry.

Expenditures

Everyday living costs, such as rent/mortgage, food, heating, electricity, transportation, clothing and debt repayment.

Expense Ratios

The expense ratio (ER), sometimes referred to as the management expense ratio (MER), measures how much of a fund's assets are used for administrative and other operating expenses.

Fixed Interest Rate

A loan whose interest rate is the same throughout the term of the loan.

Fixed-rate Mortgage

The interest rate for a fixed-rate mortgage is locked in for the full term of the mortgage. Payments are set in advance for the term, providing you with the security of knowing precisely how much your payments will be throughout the entire term. Fixed-rate mortgages can be open (may be paid off at any time without breakage costs) or closed (breakage costs apply if paid off prior to maturity).

Future Value

The amount of money an investment with a fixed rate of return will be worth on a particular date in the future.

Guaranteed Investment Certificate (GIC)

A type of deposit investment that guarantees the investment principal and usually pays a predetermined rate of interest for a specified amount of time (the term).

Housing Affordability

The relationship of housing expenses with your household income.

Income

The money you receive from all sources, including employment, interest and investments, social assistance or pensions.

Inflation

When the general level of prices is going up and more money is needed to pay for goods and services.

Insolvency

A state of financial distress in which you are no longer able to pay your bills or meet your other financial obligations.

Interest

The money earned from a bank or investment on the money you deposit.

Interest Rate

The rate of return a lender receives for allowing a borrower to use money for a specified term. The interest rate is usually expressed as an annual rate. The compounding frequency (for example, semi-annual compounding) will depend on the type of loan or mortgage you select.

Investment Expenses

These are the costs to invest. Different investments come with different types of costs - common investment expenses include expense ratios, annual fees, purchase fees and redemption fees.

Investments

Investments can be stocks, bonds, mutual funds, interest-bearing accounts, real estate, artwork – anything you believe will either provide income (i.e. in the form of interest) or be worth more in the future.

Key Performance Indicator

A measurable value that demonstrates how effectively you are achieving your objectives. KPIs let you track your progress at reaching your goals and targets.

Leverage

When you borrow money to finance the purchase of a personal asset. When you use leverage to buy a home, this is called a mortgage.

Line of Credit

A type of credit that offers you immediate access to part or all of a pre-determined amount of money. You can borrow money from a line of credit, pay it back and then borrow it again up to your credit limit. A line of credit can either be unsecured or secured with personal assets, such as your home. A secured line of credit usually comes with a lower interest rate.

Liquidity

The degree to which an asset or security can be quickly bought or sold at a price that reflects its intrinsic value. Cash is the most liquid asset, whereas real estate is considered illiquid.

Macroeconomic Factor

An event or situation that affects the economy on a broad level. Examples of macroeconomic factors include unemployment rates and inflation.

Marginal Tax Rate

Marginal tax is the amount of tax paid on an additional dollar of income. As your income rises, so does your tax rate. This is different than a flat tax rate where you pay the same rate of tax no matter what your income level is.

Market Index

A market index is a metric that tracks the performance of a group of stocks.

Measurable Target

A goal with a defined success factor and due date.

Microeconomic Factor

A factor that affects individuals and businesses. When buying a home, a microeconomic factor might be location and property type.

Mortgage

A loan secured by real property, typically a home.

Mortgage Default

A mortgage default means you have not done everything you're required to do under your mortgage agreement. The most common type of default is not making payments.

Mortgage Loan Insurance

Also known as mortgage default insurance and commonly referred to as Canada Mortgage and Housing Corporation (CMHC) insurance, mortgage loan insurance is mandatory in Canada for down payments between 5% (the minimum in Canada) and 19.99%. Mortgage loan/ default insurance protects lenders in the event they stop making payments and default on their mortgage loan.

Mortgage Rate

The rate of interest charged by a mortgage lender.

Mutual Fund

A portfolio of investments managed by professionals on behalf of a number of investors, who own “units” in the fund.

Passive Mutual Fund

A mutual fund that simply follows a market index. It does not have a management team making investment decisions.

Portfolio

A group of investment products held by one individual.

Present Value

The value today of an amount of money that you expect to receive or have to pay in the future, considering the fact that a future payment is worth less than one received now.

Price-To-Rent Ratio

The ratio of the purchase price of a property divided by the annual rent of a similar home. If you live in a location where the price-to-rent ratio is over 20, it is generally financially wiser to rent a property than buy the home.

Prime Rate

The annual interest rate Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages. The prime rate is primarily influenced by the policy interest rate set by the Bank of Canada (BoC).

Progressive Tax System

A system where low income earners are taxed at a lower percentage than high-income earners.

Property Tax

Calculated by the local government, property tax is paid by the owner of a property. It is based on the value of the property owned, including the land.

Quick Win

An easy thing to accomplish that can be achieved quickly.

Real Estate Bubble

When housing prices increase due to demand, speculation and high levels of investment, causing home prices to become unsustainable. It leads to limited supply versus an increase in demand.

Real Estate Investment Trust (REIT)

A publicly traded organization that invests predominantly in income-producing real estate assets. You can invest in REIT securities like you would with any other stock.

Registered Retirement Savings Plan (RRSP)

A special investment account registered with the government in which contributions are tax-deductible and investment earnings are tax-deferred.

Representativeness

A kind of stereotyping that can lead to errors in judgment. In the context of financial markets, representativeness can lead investors to overreact to trends.

Reserves

Extra funds or savings that you have set aside in case of unexpected expenses or cash flow needs.

Return

The money made or lost on investment. A higher return represents more money earned.

Risk Aversion

The tendency of investors to avoid risky investments.

Risk Tolerance

The amount of risk – such as volatility, or ups and downs of the market – you can tolerate when investing.

S&P 500 Index

A stock market index that tracks the stocks of 500 large U.S. companies. By reporting the risks and returns of the biggest companies, it represents the stock market's performance, and investors use it as the benchmark of the overall market.

Security

An investment that allows you to own an asset without taking physical possession of it. Stocks and bonds are examples of securities.

Stakeholders

Individuals, groups and/or organizations who have an interest – or “stake” – in whether or not you are successful in accomplishing your goals. Your stakeholders could be family, friends, a financial advisor or accountant.

Stock

A stock is an investment that represents an ownership share in a company. Stocks are also known as equity.

Stock Picker

Someone who selects individual stocks to purchase.

Stretch Goal

An ambitious or challenging objective that requires extra effort, a change in behaviour, or innovative thinking to achieve.

Student Line of Credit

A line of credit designed specifically for students that helps them pay for expenses related to post-secondary education. Generally, repayment terms are more flexible and interest rates are lower than traditional lines of credit.

Student Loan

A type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. Student loans differ from traditional loans in that they tend to offer flexible repayment options, lower interest rates and/or lower set up fees.

Surplus

The amount of money you have left when your income – or cash in – is higher than your expenditures.

Tax Free Savings Account (TFSA)

A registered account with the Canada Revenue Agency (CRA) introduced in 2009. You can use a Tax-Free Savings Account (TFSA) to save for any short- or long-term goal. Investment earnings and withdrawals are tax-free, so your money grows faster.

Tax-Deferred Investment

An investment holding within a registered plan that is not subject to tax until withdrawn.

Time Value of Money

The concept that money available today is worth more than the same sum in the future, due to its potential earning capacity.

Variable Interest Rate

A loan whose interest rate moves up or down with changes in market interest rates.

Variable-rate Mortgage

Variable-rate mortgages can be designed two ways, either with fixed payments or fluctuating payments. In the first instance, mortgage payments are set for the term, even though interest rates may fluctuate during that time. In this case, if interest rates go down, more of the payment is applied to reduce the principal; if rates go up, more of the payment is applied to payment of interest. In the second instance, your monthly payment will fluctuate as the interest rates change, while the ratio of interest to principal payment remains the same (this type of mortgage is also commonly referred to as an “adjustable rate mortgage”). Variable-rate mortgages may be open (where you can pay off the principal at any time) or closed (which do not allow for pre-payments without a penalty).

Vision Statement

A declaration of your objectives. Your vision statement should inspire and motivate you, and guide your decision-making.

Warren Buffett

Warren Buffett is one of the most successful investors of all time. He runs Berkshire Hathaway, which owns more than 60 companies. Known as the Oracle of Omaha, he first bought stock at age 11.