Glossary · Topic 7

L01 Reading a paycheck. Open Lesson 1 →

Gross pay: The top-line number. The hourly rate times the hours worked, plus any overtime, tips, or bonuses, before anything is withheld. This is the number stated in a job offer (e.g., "$50,000 a year" = about $961.50 per weekly pay period).
FICA: Federal Insurance Contributions Act tax. Two components: Social Security at 6.2% of gross (up to an annual cap) and Medicare at 1.45% of gross (no cap). Combined rate for employees: 7.65%. Employers pay a matching 7.65%, doubling the total amount going to those programs.
Federal income tax withholding: An estimate of the federal income tax you will owe for the year, deducted from each paycheck so you don't owe a giant lump sum in April. The estimate is based on Form W-4 (filing status, allowances, extra withholding) and the IRS withholding tables. Lesson 3 reconciles this estimate with the actual tax owed.
State income tax: Same idea as federal withholding, but going to the state. Most states have an income tax; a handful (Texas, Florida, Nevada, Washington, others) do not. Rates and brackets vary by state.
Net pay (take-home): Gross pay minus all deductions. The amount that actually shows up in your bank account on payday.

L02 Tax brackets and marginal rate. Open Lesson 2 →

Progressive tax: A tax in which higher slices of income are taxed at higher rates. The opposite is a flat tax, where every dollar is taxed at the same rate. Most developed economies use progressive income tax systems.
Tax bracket: An income range with a single tax rate applied to it. The 22% bracket for a single 2024 filer runs from $47,150 to $100,525; income inside that range is taxed at 22%.
Taxable income: Gross income minus the standard deduction (or itemized deductions) and any other adjustments. The brackets are applied to taxable income, not to gross. Lesson 3 develops this distinction in detail.
Marginal rate: The rate of the top bracket your taxable income reaches. Determines how much tax you'd owe on the next dollar earned (or save, by deferring it into a 401(k)).
Effective rate: Total tax owed divided by total taxable income, expressed as a percent. Always lower than the marginal rate in a progressive system. The effective rate is the "true" rate at which you're paying tax.

L03 Filing, refunds, and effective rate. Open Lesson 3 →

Standard deduction: A flat amount the IRS allows you to subtract from gross income before applying the brackets. 2024 amounts: $14,600 single, $29,200 married-filing-jointly, $21,900 head-of-household. Almost 90% of filers take the standard deduction rather than itemizing.
Itemized deduction: An alternative to the standard deduction: sum specific allowed expenses (mortgage interest, state/local taxes, charitable donations, large medical bills) instead of taking the flat amount. Worth doing only when the itemized total exceeds the standard deduction.
Gross income vs taxable income: Gross income is all earnings before any adjustments. Taxable income is gross income minus the standard deduction (or itemized deductions). The brackets in Lesson 2 apply to taxable income.
Refund: Money returned to the filer when withholding exceeded actual tax owed. Not a windfall; it is your own money returning. Large refunds suggest the W-4 should be adjusted to reduce withholding.
Form 1040: The standard U.S. individual income tax return form. The arithmetic of this lesson lives on the 1040: gross income, deductions, taxable income, tax owed, withholding already paid, refund or amount due.

L04 Stocks: shares, dividends, return. Open Lesson 4 →

Share: A single unit of ownership in a company. A typical public company has hundreds of millions or billions of shares outstanding; owning 100 is a small but meaningful (and tradable) position.
Share price: The dollar amount one share trades for. Determined moment-to-moment by buyers and sellers in the open market. The share-price ticker on financial news websites is the most-watched number in finance.
Dividend: A cash payment made by the company to shareholders, usually quarterly, on a per-share basis. Companies that pay dividends are typically more mature; younger, growth-focused companies often pay none and reinvest profits internally.
Capital gain (or loss): The change in the value of the position due to share-price movement, not including dividends. Realized when you sell the shares; until then, the gain is unrealized and not yet taxed.
Return on investment (ROI): Total return divided by amount invested, expressed as a percent. ROI lets you compare investments of very different sizes on the same scale: 20% on $5,000 and 20% on $5,000,000 are the same rate of return, even though the dollar gains differ by a thousandfold.

L05 Bonds: face value, coupon, yield. Open Lesson 5 →

Face value (par): The amount the bond's issuer promises to return at maturity. Almost always $1,000 for U.S. corporate bonds; sometimes $5,000 or $10,000 for institutional issues; sometimes smaller for retail-oriented products.
Coupon rate: The annual interest rate the bond pays, as a percentage of face value. A 5% coupon on a $1,000 bond pays $50 per year. Often paid in two semiannual installments of $25 each, though introductory courses simplify to annual payments.
Maturity: The date (or remaining number of years) until the bond's face value is returned. U.S. Treasury bonds run up to 30 years; corporate bonds commonly 5, 10, or 20 years. Longer maturities expose the investor to more interest-rate risk.
Current yield: Annual coupon divided by current market price, expressed as a percent. A $50 coupon on a bond currently trading for $1,025 has a current yield of 50/1,025 ≈ 4.88%. The current yield differs from the coupon rate whenever the bond's market price differs from its face value.
Premium vs discount: A bond trading above face value is a premium bond (price > $1,000); below face value is a discount bond (price < $1,000). Prices drift based on prevailing interest rates: when rates rise, existing bonds become less attractive and their prices fall (discount); when rates fall, existing bonds become more attractive and their prices rise (premium).

L06 Diversification and the stock-bond split. Open Lesson 6 →

Asset class: A broad category of investment with similar risk-return characteristics. The three classic ones are stocks (equities), bonds (fixed income), and cash (money-market funds, short-term Treasury bills). Real estate, commodities, and others are commonly added in more sophisticated portfolios.
Expected return: The long-run average annual return of an asset class. Expected in the statistical sense (Lesson 5 of Topic 6: E(X) = Σ x · P(x)) — not a guarantee for any single year.
Volatility: The standard deviation of annual returns. (Topic 5 standard-deviation math applied to the annual-return distribution.) Higher volatility means wider year-to-year swings around the expected return.
Asset allocation: The percentages of a portfolio assigned to each asset class. "60/40" is shorthand for 60% stocks, 40% bonds. The biggest single decision in personal investing — far more impactful than picking individual stocks within the stock allocation.
Time horizon: The number of years until you expect to need the money. Drives the asset allocation: longer = more stocks. A common rule of thumb is percent in stocks = 110 − age, which gradually shifts from stock-heavy in youth to bond-heavy approaching retirement.

Vocabulary & key terms