Glossary of financial terms
Glossary of financial planning terms
Financial planning terms
Ever come across an acronym or term you didn’t understand? We can help with that. This glossary defines common terms related to financial planning.
Asset
An asset is a physical or non-physical item that gets its value from a contractual right or ownership claim. These can include your home, your vehicles, an insurance policy, or different types of accounts and investments that you may hold (stocks, bonds, mutual funds, ETFs). Assets are items that positively influence your net worth.
Asset allocation
Asset allocation is the distribution of investments across asset classes based on risk tolerance and goals.
Balanced portfolio
A balanced portfolio is typically divided between stocks and bonds, either equally or with a slight preference for one, such as 60% in stocks and 40% in bonds. Balanced portfolios may also maintain a small cash or money market component for liquidity purposes. This strategy combines these different types of investments to balance risk and return.
Beneficiary
A beneficiary is a person (or legal entity) who receives property left to them by another individual. For example, you can name a beneficiary in your will and designate that they receive part or all of your money as an inheritance.
Budget
A budget estimates the expected income and expenses for a specific time frame, typically a month. It helps allocated resources, control spending, and achieve financial goals.
Capital preservation
Capital preservation is an investment strategy that aims to preserve capital and prevent loss in a portfolio. This protects initial investment, preserves the long-term value of investments, and minimizes the risk of losing money.
Capital gains
Capital gains refers to the profit from selling an asset for more than the purchase price. This profit is taxable in non-registered accounts.
Cash
Cash refers to money that's not invested in the stock market. It has little to no market risk and is easily accessible, but offers the lowest return.
Cash flow
Cash flow refers to the net movement of money into and out of a business or personal account. It is the sum of cash being deposited into your personal or business account minus the expenses that are being debited from your personal or business account. It can be positive or negative and is the basis for understanding your budget.
Cash reserve
Cash reserves are funds set aside for emergencies or short-term needs. They help cover unexpected expenses without disrupting long-term investments. See also: Emergency fund.
Compound interest
Compound interest is the process of earning interest on both the original amount (principal) and the interest that has already been added to it. This leads to exponential growth in savings or investments, especially when compounded frequently.
CPP (Canada Pension Plan)
The CPP (Canada Pension Plan) is a defined-benefit pension administered by the government that pays a monthly taxable benefit intended to replace part of your income when you retire. If you qualify, based on your contributions and your age, you’ll receive the CPP retirement pension for the rest of your life.
Answers to 10 questions about CPP and OAS
Debt
Debt is money that's borrowed and must be repaid. It can come in different forms, such as credit cards, loans, lines of credit, or mortgages. It's a financial obligation where one party (the borrower) owes money to another party (the lender). It includes the principal amount borrowed plus any interest and fees accrued over time. See also: Liability
Defined benefit plan
A defined benefit plan is a type of employer-sponsored retirement plan that guarantees employees a fixed, pre-determined benefit upon retirement. The amount is calculated using a formula that typically considers years of service, average salary during peak earning years, and age at retirement. This type of plan promises a specific monthly income regardless of market fluctuations.
Defined contribution plan
A defined contribution plan is a type of retirement savings plan where both the employee and employer contribute a fixed amount – usually a percentage of the employee’s earnings – into an individual account set up in the employee’s name. The final retirement benefit depends on the total contributions made and the investment performance of those funds over time. The amount an employee contributes is usually static and stays the same over their career with the employer, while the amount the employer contributes increases slightly every year until a cap is reached. For example, the employee may be required to contribute 3% of every pay cheque after their probationary period, whereas the employer may start at 3%, but increase it to 4% after one year, 5% after 2 years, etc.
Dependants
Dependants are individuals financially supported by a family member, such as children, spouses, or elderly parents.
Desired retirement age
Your desired retirement age is the age when you plan to retire and begin drawing on your retirement income sources. It guides how much you need to save to support your lifestyle after work.
Dividend
A dividend is a payment made by a corporation to its shareholders as a distribution of profits. It represents a reward to investors for placing their capital in the company.
Diversification
Diversification is the process of reducing risk by investing in a variety of assets or sectors. This can include different industries or geographic markets.
DPSP (Deferred Profit Sharing Plan)
A DPSP (Deferred Profit Sharing Plan) is an employer-sponsored savings plan where your employer shares company profits with you by making contributions to your account. These contributions grow tax-free until you withdraw the funds, usually at retirement or when you leave your employer. Employees typically do not contribute directly to a DPSP.
Emergency fund
An emergency fund is a dedicated pool of money set aside to cover unexpected financial expenses or income disruptions – such as job loss, medical emergencies, urgent home or car repairs, or other unforeseen events. It is typically recommended to have between three- and six-months’ worth of fixed costs set aside in your emergency fund.
EPSP (Employee Profit Sharing Plan)
An EPSP (Employee Profit Sharing Plan) is a tax-reportable plan where employers share profits with employees via a trust. Contributions are reported on a T4PS slip. No CPP, EI, or income tax is withheld at source.
Equity fund
An equity fund is a type of investment fund that pools money from investors to trade primarily a portfolio of stocks, also known as equity securities. These funds are professionally managed and aim to generate returns for the fund's investors. Equity funds are also known as stock funds.
Estate planning
Estate planning refers to everything involved in managing your finances and property in the event of your incapacitation or death. This includes distributing assets to your heirs and the settlement of estate taxes and debts, along with other considerations like the guardianship of your minor children and pets.
Estate Planning and Settlement Services from Meridian
ETF (Exchange-traded funds)
Funds traded on stock exchanges that hold a basket of securities, often with low fees.
FHSA (First Home Savings Account)
An FHSA (First Home Savings Account) is a registered plan that helps first-time home buyers save to buy or build a qualifying first home, tax-free (up to certain limits). FHSA contributions are tax deductible, and your savings will grow tax-free. You can also take money out of your FHSA for a qualifying home purchase without paying tax. Learn more about FHSAs
Fixed income investments
Fixed income investments pay investors a fixed rate of return for a set period of time. Fixed income investments can include investments such as government and corporate bonds.
GIC (Guaranteed Investment Certificate)
A GIC (Guaranteed Investment Certificate) is a secure, low-risk investment that offers a guaranteed rate of return over a fixed period, ranging from a few months to several years. There are many different types of GICs, offering different terms and interest rates.
Group RRSP
A group RRSP is a retirement savings plan offered by employers. Contributions are deducted from pay and may be matched by the employer. It is tax-deferred until withdrawal.
Growth portfolio
A growth fund is a diversified portfolio of investments that’s primarily stocks focused on capital appreciation (the increase in an investment’s market value). Most growth funds offer higher potential capital appreciation but above-average risk due to marker volatility
Income
Income is money received from employment, investments, pensions, or other sources. It’s used to cover expenses and build savings.
Income portfolio
Income investing is a strategy centered on building an investment portfolio specifically structured to generate regular income, usually in the form of dividends or interest payments.
Index to inflation
Index to inflation refers to an adjustment made to the value of an investment or payment so that it keeps pace with changes in the cost of living over time. If an investment or benefit is indexed to inflation, its value will increase periodically to reflect rising prices, helping to maintain your purchasing power.
Index rate
An index rate is a benchmark interest rate used to calculate returns or loan costs. It’s often tied to inflation or market performance.
Interest
Interest is the cost of borrowing money or the earnings from savings and investments. It’s expressed as a percentage.
Liability
A liability is a financial obligation or debt owed to others, such as loans, credit cards, or mortgages.
Life expectancy
Life expectancy refers to the number of years a person can expect to live. By definition, life expectancy is based on an estimate of the average age that members of a particular population group will be when they die.
LIF (Life Income Fund)
A LIF (Life Income Fund) is a type of Registered Retirement Income Fund (RRIF) used to hold pension funds that have been locked-in – meaning they cannot be withdrawn in a lump sum and must be used to provide income. The source of these funds is typically a LIRA.
LIRA (Locked-In Retirement Account)
A LIRA (Locked-In Retirement Account) is a type of registered retirement savings plan you can use to hold pension funds if you are a former pension plan member.
Mutual fund
A mutual fund pools together money from many investors to include a portfolio of diverse investments like stocks, bonds, and other funds. It is professionally managed.
Net worth
Net worth is a measure of the financial health of an individual or a household. It represents the difference between what you own (assets) and what you owe (liabilities).
Non-registered accounts
In financial planning, a non-registered account is an investment account that isn’t registered for tax advantages. Unlike RRSPs or RESPs, you pay tax on any investment income earned each year. These accounts offer flexibility — no limits on contributions, and withdrawals are free from penalties. People often use non-registered accounts after maximizing registered plans, or for goals outside tax-sheltered rules, such as major purchases or supplemental retirement savings.
OAS (Old Age Security) pension
The OAS (Old Age Security) pension provides monthly payments to seniors who are 65 and older and meet the Canadian legal status and residence requirements.
Answers to 10 questions about CPP and OAS
ODSP (Ontario Disability Support Program)
The ODSP (Ontario Disability Support Program) provides income and employment support to people with disabilities. If you meet the eligibility requirements, ODSP offers: Money to help you and your eligible family members with living expenses, including food and rent. Health benefits, including prescription drugs and vision care. Employment support to help you find and keep a job or advance your career.
Pension
A pension is a regular payment made to individuals during retirement, typically funded by contributions from their employer, themselves or both during their working years. It serves as a form of income replacement after retirement. The two main types of pensions are Defined Benefit Plans and Defined Contribution plans.
Principal amount
Principal or principal amount refers to the original amount of money invested or borrowed, excluding any interest, fees, or additional charges. It represents the base amount on which interest is calculated and which must be repaid or returned.
RDSP (Registered Disability Savings Plan)
An RDSP (Registered Disability Savings Plan) is a Canadian government-registered savings plan designed to help individuals with disabilities – and their families – save for long-term financial security. It is a tax-deferred savings plan that allows contributions to grow over time, with generous government support through the Canada Disability Savings Grant (CDSG) which matches contributions up to 300% with a lifetime maximum of $70,000, and the Canada Disability Savings Bond (CDSB) which provides up to $1,000 annually for low-income beneficiaries, with a lifetime maximum of $20,000.
RESP (Registered Education Savings Plan)
An RESP (Registered Education Savings Plan) is a tax-deferred savings plan that helps parents, family and friends save for a child’s post-secondary education. Savings grow tax-free and there are government grants that can help with your contributions.
Return of capital
The return of capital is a payment from an investment that comes from the original principal, not earnings. It reduces the adjusted cost base.
Risk tolerance
Risk tolerance is your comfort level with the ups and downs of investing. It reflects how much risk you’re willing to take with your investments to reach your financial goals. Knowing your risk tolerance helps you choose the right investment mix for your needs.
What kind of investor are you?
RLIF (Restricted Life Income Fund)
The RLIF (Restricted Life Income Fund) is a federally regulated retirement account for locked-in pension funds. Up to 50% can be unlocked at age 55. Withdrawals follow federal limits.
RRSP (Registered Retirement Savings Plan)
An RRSP (Registered Retirement Savings Plan) is an investment account registered with the Canadian Federal Government. It helps you save for retirement by growing your money and sheltering it from taxes. Each dollar you contribute to your RRSP (up to a defined maximum) can be deducted from that year’s income, potentially reducing the amount of tax you pay. The investment income you earn within your RRSP grows on a tax-deferred basis, so unlike non-registered investments, you don’t pay taxes on your retirement savings until you withdraw them.
RRIF (Registered Retirement Income Fund)
When you retire, you must convert your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) by the end of the year you turn 71. A RRIF provides regular income in retirement, with mandatory minimum withdrawals each year. Unlike an RRSP, where you contribute, a RRIF lets you withdraw funds, and your investments continue to grow tax-deferred until you take the money out, which is then taxed as income. Learn more about RRIFs.
TFSA (Tax Free Savings Account)
A TFSA (Tax Free Savings Account) is a savings program open to Canadian residents over the age of 18 with a valid Social Insurance Number. Contributions to a TFSA are not tax deductible; meaning, contributions don’t reduce your taxable income the way that RRSP contributions do. However, the contributions to your TFSA are tax sheltered, and any income generated in your TFSA grows on a tax-free basis. Also, any withdrawals you make from your TFSA are tax free.
Variable benefit
Variable benefit is a flexible retirement income option from defined contribution pension plans. Members choose withdrawal amounts and timing. Subject to minimum and maximum limits.
Variable benefit (unlocked)
A version of variable benefit where funds are not locked-in. Members can withdraw any amount at any time. Payments are taxable and unrestricted.
Yield to maturity
Yield to maturity is the total return anticipated on a bond if held until it matures.