Blog

What Is Adjusted Gross Income (AGI)? When it comes to taxes, what you earn and what the IRS considers your income aren't always the same thing. That's where Adjusted Gross Income (AGI) comes into play. Definition: Adjusted Gross Income (AGI) is your total taxable income from all sources minus certain IRS-approved adjustments to income. It's an important number used to determine your eligibility for various tax deductions, credits, and other financial benefits.

What Is Taxable Income? Taxable Income is the portion of your income that is subject to income taxes after allowable deductions have been subtracted. Simply put, it's the amount of income the government uses to determine how much income tax you owe. Here's something that may surprise you: Just because you earn $100,000 a year doesn't mean you pay federal income taxes on all $100,000. Understanding taxable income is important because it can help you legally reduce your tax

What Is a Progressive Tax? A progressive tax is a tax system in which the tax rate increases as your taxable income increases. In simple terms, people who earn more money generally pay a higher percentage of their income in taxes than people who earn less. The U.S. federal income tax system is one of the most familiar examples of a progressive tax system. But there’s an important detail many people misunderstand...

What Is a Tax Bracket? A tax bracket is a range of income that is taxed at a specific tax rate. The United States uses a progressive income tax system, which means that as your taxable income increases, different portions of your income are taxed at different rates. That last part is important because tax brackets are often misunderstood. If someone says, “I’m in the 24% tax bracket,” that does not mean all of their income is taxed at 24%. Instead, income is taxed in laye

What Is Tax Deferral? Tax deferral means postponing the payment of taxes until a future date. The tax doesn’t necessarily disappear. Instead, the government allows you to delay paying it, often giving your money more time to remain invested and potentially grow. Think of it as telling the tax bill, “I’ll deal with you later.” And sometimes, “later” can be very valuable. How Does Tax Deferral Work? One of the most familiar examples is a traditional retirement account.

Nobody likes talking about death and taxes. Put them together, and you have today's financial term: Estate Tax. The good news? Most Americans will never owe federal estate tax. But if you're serious about building wealth, owning businesses, investing in real estate, or leaving money to the next generation, this is still a term worth knowing. Definition of Estate Tax An Estate Tax is a tax that may be imposed on the transfer of a person's assets after they die.

What Is Capital Gains Tax? Capital gains tax is the tax you may owe when you sell an asset for more than you paid for it. The IRS considers many things you own to be capital assets, including stocks, bonds, real estate, and other investments. Your capital gain is generally the difference between what you received when you sold the asset and your adjusted cost basis in that asset. Here’s a simple example: Suppose you purchase $10,000 worth of stock...

What Is Principal? In lending, principal is the amount of money you actually borrow. Suppose you buy a $300,000 house and make a $60,000 down payment. You borrow the remaining $240,000. That $240,000 is your original principal. But your mortgage payment doesn’t simply repay the $240,000. Part of your payment goes toward interest—the price you pay the lender for using their money—and part goes toward reducing the principal. That distinction matters.

Purchasing Power What your money can actually buy. You can have more dollars and still be able to afford less. That sounds strange, but it’s one of the most important financial concepts to understand. The number of dollars in your bank account matters—but what those dollars can buy matters even more. That’s where purchasing power comes in. The Definition of Purchasing Power Purchasing power is the amount of goods and services that a specific amount of money can buy.

What Is Inflation Risk? Inflation Risk is the possibility that rising prices will reduce the purchasing power of your money over time. In simple terms: Your money may grow—but not fast enough to keep up with the rising cost of living. Suppose you have $100,000 earning 2% annually while inflation averages 3%. On paper, you’re making money. In reality, you’re losing purchasing power. Your investment is growing at 2%, but the things you want to buy are becoming 3% more expe

What Is Reinvestment Risk? Reinvestment risk is the possibility that you'll have to reinvest money from an investment at a lower interest rate or rate of return than you were previously earning. In simple terms, your investment pays you interest, dividends, or principal, but when it's time to put that money back to work, attractive investment opportunities may no longer exist. The result? Your future earnings may be lower than you originally expected.

What Is Default Risk? Every time you lend someone money, there's one important question in the back of your mind: Will I get paid back? In the financial world, that question is known as default risk. Default risk is the possibility that a borrower will fail to make the required payments on a loan, bond, mortgage, or other debt obligation. In simple terms, it's the risk that someone who owes money won't pay it back according to the agreed terms.

What Is Unsystematic Risk? Have you ever heard someone say, "Don't put all your eggs in one basket"? That old saying perfectly describes today's financial term: Unsystematic Risk. Unsystematic risk is the risk that affects a single company, industry, or investment rather than the entire market. Unlike broader economic risks that impact nearly every investment, unsystematic risk is unique to a specific business or sector and can often be reduced or even eliminated through di

What Is Systematic Risk? Systematic risk is the risk that broad economic or market forces will negatively affect most or all investments. It’s sometimes called market risk or non-diversifiable risk because it impacts the overall financial system rather than one particular company. Common sources of systematic risk include...

What Is Liquidity Risk? Liquidity risk is the risk that you won’t be able to quickly convert an asset into cash without losing a significant amount of its value. In simple terms, you may have something worth a lot of money, but that doesn’t necessarily mean you can turn it into cash when you need it. Cash is highly liquid. You can use it immediately. A publicly traded stock is generally liquid because you can usually sell it quickly during market hours.

What Is Currency Risk? Currency risk (also called exchange rate risk) is the possibility that changes in the value of one country's currency relative to another will affect the value of an investment, business transaction, or purchase. Simply put, if you own assets or conduct business in another country's currency, fluctuations in exchange rates can either help or hurt your financial results.

What Is Market Risk? Have you ever checked your investment account and noticed it was worth less than it was yesterday, even though you didn't buy or sell anything? That's market risk in action. Market risk is the possibility that the value of an investment will decrease because of factors that affect the overall financial markets. These factors can include economic conditions, interest rates, inflation, geopolitical events, government policies, or investor sentiment...

What Is a Financial Ratio? A financial ratio is a calculation that compares two or more financial numbers to help measure the health, performance, or efficiency of a business or investment. Rather than looking at raw numbers alone, financial ratios provide context, making it easier to understand what those numbers actually mean. Think of financial ratios as the "vital signs" of a business...

A Simple Example of Cost-Benefit Analysis Imagine you're considering purchasing a new laptop for $1,500. At first glance, the cost seems high. But what if that laptop allows you to work faster, save several hours each week, earn additional income, and lasts for five years? Now compare the cost against the long-term benefits: - Cost: $1,500 purchase price - Benefits: Increased productivity, higher income potential, fewer repairs, and years of reliable performance.

What Is Breakeven Analysis? Breakeven analysis is the process of calculating the point where total revenue equals total costs. At this point, you've covered every expense—but you haven't made a profit yet. In other words: Revenue = Expenses = Breakeven Once you sell one more product, gain one more customer, or generate one more dollar beyond the breakeven point, you begin earning a profit. Think of breakeven as the financial starting line—not the finish line.