Financial Terms

Accumulation – Building a stockpile of wealth for the distant future, including bequest.

Amortization – The process by which the amount due on a loan is reduced over time.

Annuity – A financial instrument offered through an insurance company that guarantees certain payouts, either in a lump sum or in increments.

APR – Annual Percentage Rate- The total annual amount it will cost you to borrow money.

Arrival Syndrome – The complacency of someone who confidently believes he “has arrived”.

Austrian School of Economics – The school of economic thought derived from the 19th century Austrian, Carl Menger. It relies on a logical, verbal exposition, as opposed to formal mathematical models. The Austrians tend to be very free—market oriented, viewing prices as a communication network. Some famous Austrians from the 20th century were Ludwig von Mises and Nobel laureate Friedrich Hayek.

Beneficiary – The recipient of an item or asset, generally after its original owner has died.

Capitalization – In the Maximum Wealth concept, building up the cash value in a whole policy by deferring expenditures for several years initially, such that the growth of the policy will be able to accommodate the desired financing purposes.

Cash Flow – The movement of a person’s money-coming in as income and going out as expenses.

Central Bank – A government-sanctioned bank that has regulatory power over other banks. It often has a monopoly on the issue of bank notes which in turn are made legal tender.

Certificate of Deposit (CD) – A savings instrument issued by a bank or other institution that offers a specified term and (usually) a low fixed interest rate.

Collateral – A borrower’s item, property, or asset that a lender accepts as a guarantee of a loan.

Compounding (on interest) – The process by which a sum of money grows exponentially, because of interest earning interest.

Deposit Banking – The practice by which bankers would lend out a portion of demand deposits to other bank customers.

Direct Recognition – An insurer’s practice of reducing dividends to those participating policies which have outstanding policy loans.

Economic Value Added (EVA) – The true financial return generated by an operation or decision, accounting for the full opportunity cost of the resources used.

Equity – Your ownership of an asset after you have accounted for the debt you owe on it.

Excess Reserves – The amount of reserves (either cash in the vault or deposits with the central bank) that commercial banks hold, over and above their legally required minimum to “back up” customer deposits. Excess reserves are legally available to be lent out.

Fannie Mae – The Federal National Mortgage Association (FNMA), a government—sponsored enterprise (GSE) that bought mortgages in the secondary market to induce more liberal lending decisions.

Freddie Mac – The Federal Home Loan Mortgage Corporation (FHLMC), a government–sponsored enterprise (GSE) that bought mortgages in the secondary market to induce more liberal lending decisions.

Federal Funds Rate – The interest rate that commercial banks charge each other on unsecured, overnight loans of reserves. The Federal Reserve “targets” (but doesn’t directly set) the federal funds rate by adjusting the total amount of bank reserves in the system.

Federal Reserve – The central bank in the United States (founded in 1913) that controls every aspect of the dollar which includes printing, setting of interest rate, money supply, borrowing, spending and every other aspect of our currency.

Fiat Money – Money that is not valuable as a commodity, but only in its use as a medium of exchange. Modern paper currencies (not tied to precious metals) issued by governments are example of fiat money.

Fiduciary – A person or organization who is legally bound to be honest with you and act in your best interest.

Golden Rule – One of the Nelson Nash’s “human problems,” meaning that he who has the gold makes the rules. It refers to the opportunities available to those with liquid wealth.

Inflation – The amount by which the volume of currency increases and the value of the currency decreases which requires one to need more of the currency to purchase goods and services.

Keynesian School of Economics – The school of thought derived from John Maynard Keynes and his classic 1936 text The General Theory. The typical Keynesian believes that the free-market economy can fall into a sustained unemployment equilibrium, requiring government intervention to restore aggregate demand (and hence full employment).

Law of Large Numbers – A principle from probability theory stating that with a sufficiently large sample size, the average outcome in the sample should approach the mathematically expected outcome. In life insurance, it is the principle by which insurance companies are not “gambling” so long as they issue policies covering many similar individuals.

Liquidity – A term describing how quickly and easily you can pull cash out of an asset.

Malinvestment – An Austrian economics concept referring to the investment of resources in improper projects, a mistake that is fostered when the central bank sets artificially low interest rates.

Modified Endowment Contract (MEC) – A life insurance policy that has been so heavily funded that the IRS strips it of certain tax advantages.

Monetary Inflation – The expansion of the quantity of money, such as by the central bank when it buys assets.

Mutual Insurance Company – A life insurance company where the policyholders are the owners, who have come together to solve a common problem.

Net Worth – The total value of all of your assets minus the total amount of your debt.

Non-Direct Recognition – An insurer’s practice of paying the same dividends to participating policies, regardless of whether they have outstanding policy loans.

Opportunity Cost – In economics, the value placed on the best alternative that cannot be accomplished, because of an action.

Parkinson’s Law – The tendency of people to multiply their “needs” as their income rises, and other related habits. Parkinson’s Law underscores the importance Nash places on changing the way one thinks.

Permanent Life Insurance – Life insurance that (if kept in force) will last throughout the person’s whole life (as opposed to term insurance).

Price Inflation – An increase in the general level of prices.

Principal – The dollar amount of money you deposited into an account or borrowed, not including interest.

Quantitative Easing – An unconventional monetary policy that focuses on the amount or type of assets purchased by the central bank, as opposed to the movement in interest rates that these purchases typically cause.

Return on Investment – A measurement of how much an asset has grown in value since you bought it relative to how much you paid for it.

Tax-Deferred – A status implying that tax consequences may accrue in the future.

Tax-Free – A status implying that the activity will never have tax consequences.

Term Life Insurance – Life insurance that only offers coverage for a specified term of time, after which it must be renewed (usually at higher rates) or lost. If the insured doesn’t die during the term period, he gets nothing in exchange for his stream of premium payments.

Time Value of Money – The recognition that a dollar today is more valuable than a dollar expected in the future, because today’s dollar can be lent out at interest or can earn income in some other way.

Universal Life Insurance (UL) – A life insurance policy that offers transparency in its component parts, with explicit interest credits, as well as explicit mortality and overhead expenses. It is “universal” because it gives great flexibility to the life insurance company to raise rates or reduce benefits and the policyholder in choosing premium payments(within limits) and adjusting (within limits) the death benefit.

Variable Life Insurance (VL) – A life insurance policy where the cash value and death benefits “vary” according to the performance of stock and bond funds chosen by the policyholder.

Variable Universal Life Insurance (VUL) – A life insurance policy that blends the payment  flexibility of ordinary Universal Life (UL) with the investment exposure of a Variable Life (VL) policy.

Whole Life Insurance – The only classic form of permanent insurance, in which the policyholder pays a level premium for a specified number of years. In exchange, the insurance company pays a specified benefit either upon death or the attainment of a high age (such as 100 or 121).

Volume of Interest – The actual dollars paid in interest over the term of a loan.

Willie Sutton’s Law – The tendency of government officials to tap into large pools of wealth. The point is that citizens should not fall into the trap of assuming current tax laws governing investments are set in stone.

Yield – The earnings an investment returns to its owner expressed as a percentage.


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