Reference
Personal Finance Glossary
Plain-English definitions of 26+ financial terms — no jargon, no fluff.
4
401(k)
An employer-sponsored retirement savings account. Contributions are pre-tax (traditional) or post-tax (Roth). Many employers match contributions up to a percentage — always capture the full match.
→ Retirement Calculator5
50/30/20 Rule
A budgeting framework: 50% of take-home pay on needs, 30% on wants, 20% on savings and debt repayment. A simple starting point for anyone building a budget.
→ Budget CalculatorA
APR (Annual Percentage Rate)
The yearly cost of borrowing money, expressed as a percentage. APR includes the interest rate plus any fees, making it more accurate than the interest rate alone for comparing loans.
APY (Annual Percentage Yield)
The real rate of return on a savings account or investment, taking compound interest into account. APY is always higher than or equal to APR on savings products.
Amortization
The process of paying off a loan through regular payments over time. With a mortgage, early payments are mostly interest; later payments are mostly principal.
→ Mortgage CalculatorAsset
Anything you own that has monetary value: cash, investments, real estate, vehicles, retirement accounts, and valuables. Assets minus liabilities = net worth.
→ Net Worth CalculatorC
Compound Interest
Interest calculated on both the initial principal and the accumulated interest from previous periods. Called 'interest on interest' — it grows exponentially over time.
→ Compound Interest CalculatorD
Debt Avalanche
A debt payoff strategy where you pay minimums on all debts and put every extra dollar toward the highest interest rate debt first. Saves the most money in interest.
→ Debt Payoff CalculatorDebt Snowball
A debt payoff strategy where you pay minimums on all debts and put every extra dollar toward the smallest balance first. Provides quick psychological wins to stay motivated.
→ Debt Payoff CalculatorDebt-to-Income Ratio (DTI)
Your total monthly debt payments divided by your gross monthly income. Lenders use DTI to assess your ability to repay loans. A DTI below 36% is considered healthy.
Diversification
Spreading investments across different asset classes, sectors, or geographies to reduce risk. The idea: if one investment falls, others may hold or rise.
E
Emergency Fund
3–6 months of living expenses saved in a liquid account. Protects you from going into debt when unexpected expenses arise — job loss, medical bills, car repairs.
→ Emergency Fund CalculatorEquity
The portion of an asset you truly own. Home equity = current market value minus remaining mortgage balance. Equity increases as you pay down debt or as the asset appreciates.
F
FIRE (Financial Independence, Retire Early)
A movement focused on extreme saving and investing to retire far earlier than traditional retirement age. FIRE typically requires a savings rate of 50%+ and follows the 4% withdrawal rule.
G
Gross Income
Your total earnings before taxes and deductions. Gross income is used by lenders for loan qualification. Net income (take-home pay) is what you actually receive.
I
Index Fund
A type of investment fund that tracks a market index (like the S&P 500). Index funds offer broad diversification at very low cost. Warren Buffett famously recommends them for most investors.
Inflation
The rate at which prices rise over time, reducing the purchasing power of money. The US Federal Reserve targets 2% annual inflation. This is why savings must earn more than the inflation rate.
IRA (Individual Retirement Account)
A personal retirement savings account with tax advantages. Traditional IRA contributions may be tax-deductible (pay taxes at withdrawal). Roth IRA contributions are after-tax (withdrawals are tax-free).
→ Retirement CalculatorL
Liability
Money you owe: mortgages, car loans, student loans, credit card balances, personal loans. Liabilities subtract from your net worth.
→ Net Worth CalculatorLiquidity
How quickly and easily an asset can be converted to cash without losing value. Cash is perfectly liquid. Real estate is illiquid. A high-yield savings account is highly liquid.
M
Marginal Tax Rate
The tax rate applied to your last dollar of income — not your entire income. In a progressive tax system, higher income pushes more dollars into higher tax brackets.
→ Tax Bracket CalculatorN
Net Worth
Total assets minus total liabilities. The single most important measure of financial health. Positive net worth means you own more than you owe.
→ Net Worth CalculatorP
Principal
The original amount borrowed or invested, not including interest. When paying off a loan, principal payments reduce the balance you owe.
R
Rebalancing
Periodically adjusting your investment portfolio back to its target allocation. If stocks grow to 80% of your portfolio but your target is 70%, you sell some stocks and buy bonds to rebalance.
Rule of 72
A quick formula to estimate how long it takes to double your money: divide 72 by your annual return rate. At 7% returns, your money doubles in roughly 10 years (72 ÷ 7 ≈ 10).
→ Compound Interest CalculatorS
Savings Rate
The percentage of income you save each month. Financial experts recommend saving at least 20% of gross income. Your savings rate is the #1 predictor of when you can retire.
→ Savings Goal Calculator