Personal finance glossary

Plain-English definitions of the financial terms you encounter most. Each entry explains the concept, shows the formula where relevant, and links to the calculator that uses it.

Mortgages & property

Amortization: Amortization is the process of paying off a loan through scheduled, equal payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal.; Try the calculator →
Principal: The principal is the original amount borrowed on a loan, or the outstanding balance still owed — excluding interest. On a mortgage, principal is the portion of each payment that reduces the loan balance.; Try the calculator →
Loan-to-Value Ratio (LTV): The loan-to-value (LTV) ratio is the mortgage amount divided by the property's appraised value, expressed as a percentage. An LTV above 80% typically requires private mortgage insurance (PMI) in the US.; Try the calculator →
Mortgage Payment: A mortgage payment is the fixed monthly amount owed to a lender, covering principal and interest (P&I). It may also include escrow for property tax and homeowners insurance (PITI).; Try the calculator →
Debt-to-Income Ratio (DTI): The debt-to-income (DTI) ratio is your monthly debt payments divided by your gross monthly income, expressed as a percentage. Most lenders require a DTI below 43% to qualify for a mortgage.; Try the calculator →
Break-Even Point: The break-even point is the moment at which total revenue or savings equals total costs — beyond which an action becomes profitable. In refinancing, it's when cumulative savings exceed closing costs.; Try the calculator →
Refinancing: Refinancing replaces an existing loan with a new one, typically at a lower interest rate, different term, or both. The goal is usually to reduce monthly payments or total interest paid.; Try the calculator →
Home Appraisal: A home appraisal is an unbiased estimate of a property's fair market value, conducted by a licensed appraiser. Lenders require an appraisal before approving a mortgage to ensure the loan amount does not exceed the property's value. If the appraisal comes in below the purchase price, the deal may need to be renegotiated.; Try the calculator →
Mortgage Pre-Approval: A mortgage pre-approval is a conditional commitment from a lender stating how much they are willing to lend you, based on verified income, assets, credit, and debt. Pre-approval gives sellers confidence you can close and is effectively required in competitive housing markets.; Try the calculator →
Down Payment: A down payment is the upfront cash you pay toward a home purchase. It equals the purchase price minus the loan amount. Most conventional loans require 3–20%; putting 20% down avoids private mortgage insurance (PMI).; Try the calculator →
Closing Costs: Closing costs are fees paid at the end of a real estate transaction to complete the mortgage. They typically range from 2–5% of the loan amount and include lender fees, title insurance, appraisal, and prepaid items.; Try the calculator →
Home Equity: Home equity is the portion of your home's value that you actually own — the market value minus any outstanding mortgage balance. Equity grows as you pay down principal and as the home appreciates.; Try the calculator →
Private Mortgage Insurance (PMI): Private mortgage insurance (PMI) is a premium charged by lenders when a borrower puts less than 20% down on a conventional loan. PMI protects the lender — not the borrower — against default. It typically costs 0.5–1.5% of the loan balance annually.; Try the calculator →
Mortgage Points (Discount Points): Mortgage points are upfront fees paid to a lender to reduce (buy down) the interest rate on a loan. One point equals 1% of the loan amount. Paying points makes sense if you plan to stay in the home long enough to recoup the upfront cost.; Try the calculator →
Escrow: In real estate, an escrow account is a third-party account that holds funds — such as property taxes and homeowners insurance — on behalf of a homeowner. Lenders use escrow to ensure these bills are paid on time, as non-payment could threaten the collateral.; Try the calculator →

Investing

Compound Interest: Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.; Try the calculator →
Rule of 72: The Rule of 72 is a quick mental maths shortcut: divide 72 by an annual interest rate to estimate the number of years it takes for an investment to double.
Rate of Return: A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.; Try the calculator →
Dollar-Cost Averaging (DCA): Dollar-cost averaging is an investment strategy where you invest a fixed dollar amount at regular intervals, regardless of price. It reduces the risk of investing a large sum at the wrong time.; Try the calculator →
Index Fund: An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.
Asset Allocation: Asset allocation is the percentage split of a portfolio among different asset classes — typically stocks, bonds, and cash. It is the primary driver of long-term portfolio risk and return.
Annual Percentage Yield (APY): APY is the real rate of return on a savings account or investment after compounding is factored in for one year. A higher compounding frequency means APY > APR at the same nominal rate.
Portfolio Rebalancing: Rebalancing is the process of realigning the weights of portfolio holdings back to a target asset allocation — selling assets that have grown above target and buying those that have fallen below.
Expense Ratio: An expense ratio is the annual fee a fund charges investors, expressed as a percentage of assets under management. It is deducted automatically from the fund's returns. Lower is almost always better.
Diversification: Diversification is the practice of spreading investments across different assets, sectors, or geographies to reduce risk. A diversified portfolio is less volatile than any single holding because losses in one area are offset by gains in others.
Dividend: A dividend is a cash payment made by a company to its shareholders, typically quarterly, as a distribution of profits. Dividends provide income without selling shares and are common among mature, profitable companies.
Bond: A bond is a fixed-income debt security in which an investor loans money to a government or corporation for a defined period at a fixed interest rate. Bonds are generally less volatile than stocks but provide lower long-term returns.
Market Capitalisation: Market capitalisation (market cap) is the total market value of a company's outstanding shares. It is calculated as share price × total shares outstanding. Market cap determines a company's weight in most stock indices.
Net Present Value (NPV): Net present value (NPV) is the sum of all future cash flows from an investment, discounted back to today's value. A positive NPV means the investment creates value; negative NPV means it destroys value.
Capital Loss: A capital loss occurs when you sell an asset for less than its cost basis (purchase price plus adjustments). Capital losses can offset capital gains dollar-for-dollar, and up to $3,000 of net losses can be deducted against ordinary income per year. Unused losses carry forward indefinitely.; Try the calculator →
Net Asset Value (NAV): Net asset value (NAV) is the per-share value of a mutual fund or ETF, calculated by dividing total assets minus liabilities by the number of shares outstanding. Mutual funds are priced once daily at NAV; ETF shares trade throughout the day at market prices that may differ slightly from NAV.
Bull Market: A bull market is a prolonged period of rising asset prices, typically defined as a 20% or greater rise from a recent low. Bull markets are driven by economic expansion, rising corporate earnings, and investor optimism.
Bear Market: A bear market is a prolonged decline in asset prices — commonly defined as a 20% or greater fall from a recent peak, sustained for at least two months. Bear markets are associated with recessions, declining corporate earnings, or systemic financial stress.
ETF (Exchange-Traded Fund): An ETF is a basket of securities — stocks, bonds, or other assets — that trades on a stock exchange like a single share. ETFs combine the diversification of a mutual fund with the flexibility of stock trading and typically have very low expense ratios.
Mutual Fund: A mutual fund pools money from many investors to buy a diversified portfolio of securities. Unlike ETFs, mutual funds are priced once daily after market close. They come in two types: actively managed (a manager selects securities) and passively managed index funds.
Investment Portfolio: An investment portfolio is the complete collection of financial assets you own — stocks, bonds, ETFs, real estate, cash, and other investments. Portfolio construction involves selecting a mix of assets that matches your risk tolerance, time horizon, and goals.
Yield: Yield is the income generated by an investment as a percentage of its cost or current value. For bonds, it is the interest payment divided by price. For stocks, it is the annual dividend divided by share price. Higher yield often signals higher risk.
Volatility: Volatility measures how much an investment's price fluctuates over time. High volatility means large, unpredictable price swings; low volatility means stable prices. Standard deviation is the most common volatility measure; the VIX index measures expected S&P 500 volatility.

Tax & pay

Marginal Tax Rate: Your marginal tax rate is the rate you pay on the last dollar of income earned — the rate of the highest tax bracket you fall into. It is not the rate applied to your entire income.; Try the calculator →
Effective Tax Rate: Your effective tax rate is your total tax paid divided by your total income, expressed as a percentage. It is always lower than your marginal rate in a progressive tax system.; Try the calculator →
Tax Bracket: A tax bracket is a range of income taxed at a specific rate in a progressive tax system. Each bracket rate applies only to the income within that range, not to your entire income.; Try the calculator →
Standard Deduction: The standard deduction is a fixed amount the IRS lets US taxpayers subtract from gross income before calculating tax, without itemising individual deductions. For 2025: $15,000 (single) or $30,000 (married filing jointly).; Try the calculator →
Gross Income: Gross income is your total income before any taxes, deductions, or withholdings. It is the starting figure used by lenders for DTI calculations and by tax authorities to determine your tax bracket.; Try the calculator →
Net Income (Take-Home Pay): Net income is your earnings after all taxes and deductions have been removed. It is the amount that actually lands in your bank account — also called take-home pay.; Try the calculator →
Take-Home Pay: Take-home pay is the net amount deposited after all payroll taxes and deductions. It is the practical number to use for monthly budgeting and affordability calculations.; Try the calculator →
Cost Basis: Cost basis is the original value or purchase price of an asset for tax purposes. Capital gains tax is calculated on the difference between the sale price and the cost basis.; Try the calculator →
Capital Gains: A capital gain is the profit from selling an asset (stock, real estate, crypto, etc.) for more than you paid. In most countries, capital gains are taxed differently from ordinary income.; Try the calculator →
Tax-Loss Harvesting: Tax-loss harvesting is the practice of selling investments at a loss to offset capital gains, reducing your tax bill. The proceeds are reinvested in a similar (but not identical) asset to maintain market exposure.; Try the calculator →
Health Savings Account (HSA): An HSA is a US tax-advantaged account for individuals enrolled in a high-deductible health plan (HDHP). Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free — making it the only triple-tax-advantaged account.; Try the calculator →
Gross vs. Net Income: Gross income is total earnings before any deductions. Net income is what remains after taxes, social contributions, and other withholdings are removed. Budgeting and borrowing decisions should always be based on net income.; Try the calculator →
Adjusted Gross Income (AGI): Adjusted gross income (AGI) is your total gross income minus specific 'above-the-line' deductions such as student loan interest, IRA contributions, and self-employment taxes. AGI is the starting point for calculating taxable income and determines eligibility for many tax credits and deductions.; Try the calculator →
Taxable Income: Taxable income is the portion of your income that is actually subject to income tax. It equals adjusted gross income (AGI) minus either the standard deduction or itemised deductions. Federal income tax brackets are applied to this number — not your gross salary.; Try the calculator →
Tax Refund: A tax refund is a reimbursement from the IRS when your tax withholding or estimated payments during the year exceeded your actual tax liability. A refund is not free money — it means you gave the government an interest-free loan.; Try the calculator →
FICA Taxes: FICA (Federal Insurance Contributions Act) taxes fund Social Security and Medicare. Employees pay 7.65% of gross wages — 6.2% for Social Security (up to the wage base) and 1.45% for Medicare — and employers match these contributions.; Try the calculator →
Tax Withholding: Tax withholding is the amount your employer deducts from each paycheck and remits directly to the IRS on your behalf. It is an advance payment toward your annual tax liability — not an extra tax. If too much is withheld, you get a refund; too little, and you owe at filing.; Try the calculator →
W-2 Form: A W-2 (Wage and Tax Statement) is a form employers send to employees each January. It reports total wages paid and all taxes withheld during the prior year. You need it to file your federal and state income tax returns.; Try the calculator →
1099 Form: A 1099 is an IRS information return reporting income you received outside of regular employment — such as freelance income, dividends, interest, or retirement distributions. Unlike a W-2, no taxes are withheld from 1099 income, so recipients must pay taxes themselves.; Try the calculator →
529 Education Savings Plan: A 529 plan is a tax-advantaged savings account designed for education expenses. Contributions grow tax-free and withdrawals for qualified education costs (tuition, room & board, books) are also tax-free. Most states offer a deduction or credit for contributions.

Debt

Debt Snowball Method: The debt snowball method pays off debts from smallest to largest balance, regardless of interest rate. Each paid-off debt frees up cash to accelerate the next — creating a growing 'snowball' of payments.; Try the calculator →
Debt Avalanche Method: The debt avalanche method pays off debts in order of highest interest rate first. It minimises total interest paid and is the mathematically optimal debt payoff strategy.; Try the calculator →
Debt Consolidation: Debt consolidation combines multiple debts into a single loan, ideally at a lower interest rate. The goal is to simplify repayment and reduce total interest paid.; Try the calculator →
Balance Transfer: A balance transfer moves existing credit card debt to a new card, typically at a 0% promotional APR for 12–21 months. It can save significant interest if the full balance is paid before the promotional period ends.; Try the calculator →
Minimum Payment: The minimum payment is the smallest amount a credit card issuer requires you to pay each month to keep your account in good standing. Paying only the minimum is extremely expensive: most of the payment covers interest, leaving the principal nearly unchanged.; Try the calculator →
Origination Fee: An origination fee is a charge by a lender to process a new loan application. It covers the cost of underwriting, administrative work, and loan setup. It is expressed as a percentage of the loan amount (typically 0.5–1%) or as a flat dollar amount.; Try the calculator →
Grace Period: A grace period is a window of time after a bill is due during which you can pay without penalty or additional charges. For credit cards, the grace period (typically 21–25 days) is the time between statement closing and the payment due date — during which no interest accrues on new purchases.

Retirement

Safe Withdrawal Rate (SWR): The safe withdrawal rate is the maximum percentage of a retirement portfolio you can withdraw annually without running out of money over a given time horizon. The 4% rule is the most widely cited guideline.; Try the calculator →
FIRE Number: Your FIRE number is the portfolio size needed to retire early and live off investment returns indefinitely. It is calculated as your annual expenses multiplied by 25 (the inverse of the 4% safe withdrawal rate).; Try the calculator →
Financial Independence (FI): Financial independence means having enough invested assets to cover your living expenses indefinitely without working. It is the point where your investment returns equal or exceed your annual spending.; Try the calculator →
401(k): A 401(k) is a US employer-sponsored retirement savings account. Contributions are pre-tax (traditional) or post-tax (Roth), grow tax-deferred or tax-free, and benefit from compound growth over decades.; Try the calculator →
Roth IRA: A Roth IRA is a US individual retirement account funded with after-tax dollars. Investments grow tax-free, and qualified withdrawals in retirement are completely tax-free.; Try the calculator →
Savings Rate: Your savings rate is the percentage of your income you save and invest rather than spend. It is the single most powerful lever for reaching financial independence — more important than investment returns for most people.; Try the calculator →
Required Minimum Distribution (RMD): A required minimum distribution (RMD) is the minimum amount the IRS requires you to withdraw from traditional retirement accounts (401k, traditional IRA) each year starting at age 73.; Try the calculator →
IRA / 401(k) Rollover: A rollover is the transfer of retirement funds from one tax-advantaged account to another — such as moving a 401(k) from an old employer into an IRA. Done correctly (direct rollover), no taxes or penalties apply. Indirect rollovers must be completed within 60 days to avoid taxes.; Try the calculator →
Sequence of Returns Risk: Sequence of returns risk is the danger that a series of poor investment returns early in retirement — combined with ongoing withdrawals — will permanently deplete a portfolio, even if long-run average returns are acceptable. It is the primary financial risk of early retirement.; Try the calculator →
Annuity: An annuity is a financial product that converts a lump sum into a stream of periodic payments, either for a fixed period or for life. Annuities are issued by insurance companies and provide longevity protection — you cannot outlive the payments. They are commonly used to guarantee retirement income.; Try the calculator →
Traditional IRA: A traditional IRA (Individual Retirement Account) is a tax-deferred retirement account. Contributions may be tax-deductible (depending on income and whether you have a workplace plan), and withdrawals in retirement are taxed as ordinary income.; Try the calculator →
SEP-IRA (Simplified Employee Pension): A SEP-IRA is a tax-deferred retirement account for self-employed individuals and small business owners. Contribution limits are far higher than a traditional IRA — up to 25% of net self-employment income, capped at $70,000 in 2025.; Try the calculator →
Social Security: Social Security is a US federal program that provides retirement income, disability benefits, and survivors benefits. Benefits are funded by FICA payroll taxes. The amount you receive in retirement depends on your 35 highest earning years and the age you claim.; Try the calculator →
Pension (Defined Benefit Plan): A pension is a defined benefit (DB) retirement plan that pays a guaranteed monthly income for life, based on your years of service and salary history. The employer bears the investment risk, unlike a 401(k) where the employee does.; Try the calculator →
Vesting: Vesting is the process by which an employee earns the right to keep employer-contributed retirement benefits over time. Before you are fully vested, leaving your job means forfeiting unvested employer contributions. Your own contributions always vest immediately.
Catch-Up Contribution: A catch-up contribution is an additional amount workers aged 50 and older can contribute to retirement accounts above the standard limit. The IRS allows this to help older workers accelerate retirement savings as they approach retirement age.; Try the calculator →

General finance

Annual Percentage Rate (APR): APR is the annual cost of borrowing, expressed as a percentage. Unlike an interest rate, APR includes fees and other costs, making it the better figure for comparing loan offers.
Net Worth: Net worth is the total value of everything you own (assets) minus everything you owe (liabilities). It is the most comprehensive single-number measure of financial health.; Try the calculator →
Inflation: Inflation is the rate at which the general price level of goods and services rises over time, reducing the purchasing power of money. It is typically measured by the Consumer Price Index (CPI).; Try the calculator →
Time Value of Money (TVM): The time value of money is the principle that a dollar today is worth more than a dollar in the future because money available now can be invested to earn a return.
Interest Rate: An interest rate is the percentage of the principal charged by a lender to a borrower for the use of money, or paid by a bank on deposited funds. It is quoted as an annual percentage.
Emergency Fund: An emergency fund is a savings buffer covering 3–6 months of essential living expenses, held in liquid, low-risk accounts. It protects against job loss, medical emergencies, and unexpected large expenses.
Liquidity: Liquidity refers to how quickly and easily an asset can be converted to cash without significantly affecting its price. Cash is perfectly liquid; real estate is illiquid.
Opportunity Cost: Opportunity cost is the value of the best alternative you give up when making a choice. In finance, it most commonly refers to the return you forgo by keeping money in a low-yield account instead of investing it.; Try the calculator →
Credit Score: A credit score is a three-digit number (typically 300–850) that summarises your credit history. Higher scores mean lower borrowing costs — a higher score on a mortgage can save tens of thousands of dollars over the loan's life.; Try the calculator →
Budget: A budget is a plan that allocates expected income to expenses, savings, and investments over a set period. It is the foundational tool of personal finance — you cannot consistently save or invest without knowing where your money goes.
Cash Flow: Cash flow is the net movement of money in and out over a period. Positive cash flow (income exceeds expenses) is the foundation of wealth building. Negative cash flow means you're spending more than you earn.; Try the calculator →
Sinking Fund: A sinking fund is money set aside regularly for a specific, planned future expense — car repairs, a holiday, a new appliance. It prevents large irregular expenses from derailing a budget.
Depreciation: Depreciation is the decline in an asset's value over time due to wear, age, or obsolescence. For vehicles, depreciation is typically the largest true cost of ownership — far exceeding fuel, insurance, or maintenance.; Try the calculator →
Cryptocurrency: Cryptocurrency is a digital currency secured by cryptography and recorded on a decentralized blockchain network — not controlled by any government or central bank. Bitcoin and Ethereum are the two largest by market capitalisation. The IRS treats crypto as property for tax purposes.; Try the calculator →
Fiduciary: A fiduciary is a person or organisation legally obligated to act in your best financial interest, not their own. Fee-only financial advisors and Registered Investment Advisors (RIAs) are fiduciaries. Many commission-based brokers are held only to a 'suitability' standard — a meaningfully lower bar.
Certificate of Deposit (CD): A certificate of deposit (CD) is a savings product offered by banks that pays a fixed interest rate in exchange for locking up your money for a set term — typically 3 months to 5 years. CDs are FDIC-insured up to $250,000 and currently offer higher rates than regular savings accounts.
Pay Yourself First: Pay yourself first is the principle of automatically saving or investing a set amount from every paycheck before spending on anything else. By treating savings as a non-negotiable bill, you eliminate the temptation to spend first and save whatever is left.
Equity: Equity is ownership — the residual value of an asset after subtracting all liabilities. In real estate, it's the difference between your home's market value and your mortgage balance. In business, equity represents shareholders' ownership stake after debts are paid.