Finance Glossary
Plain-English definitions of the money terms that matter — no jargon.
401(k)
US employer retirement plan with tax advantages and often free employer matching.
Amortization
Paying off a loan in fixed installments, with each payment split between interest and principal.
APR (Annual Percentage Rate)
The total yearly cost of borrowing including interest plus most fees — the fairest way to compare loans.
APY (Annual Percentage Yield)
What savings earn including compounding. The counterpart to APR.
Asset
Anything you own with value: cash, stocks, property.
Avalanche method
Debt strategy: pay minimums everywhere, attack the highest-APR debt first. Mathematically cheapest.
Bear market
A prolonged period of falling prices (typically −20%+).
Bond
A loan to a company/government paying fixed interest.
Bull market
A prolonged period of rising prices.
Bull/Bear
See bull/bear market above.
CAGR
Compound Annual Growth Rate — the smoothed yearly return of an investment.
Capital gain
Profit from selling an asset for more than you paid.
Collateral
An asset pledged against a loan; the lender can seize it if you default.
Compound interest
Earning interest on previously earned interest — growth that accelerates over time.
Credit score
A number (300–850 in the US) summarizing your creditworthiness. Higher = cheaper borrowing.
Debt-to-income ratio
Monthly debt payments ÷ gross monthly income. Lenders want this under ~36–43%.
Diversification
Spreading investments across assets so no single one can sink you.
Dividend
A company's cash payout to shareholders, usually quarterly.
Down payment
Cash paid upfront when buying — the rest is borrowed.
Effective tax rate
Total tax ÷ total income — what you really pay on average.
Emergency fund
3–6 months of expenses in safe, instant-access savings.
Equity
Ownership value: what you own minus what you owe. Home equity = value − mortgage.
Escrow
A neutral account holding your tax/insurance money until due.
ETF
Exchange-traded fund — a basket of stocks/bonds trading like a single stock.
Expense ratio
A fund's yearly fee as % of assets. Lower is better; 0.03–0.20% is excellent.
FICA
US payroll tax: 6.2% Social Security + 1.45% Medicare (employee share).
Index fund
A fund mirroring a market index (e.g., S&P 500) — low fees, broad diversification.
Inflation
The general rise of prices over time, eroding purchasing power.
Interest
The price of borrowing money — or the reward for lending/saving it.
IRA
Individual Retirement Arrangement — personal tax-advantaged retirement account.
Liability
Anything you owe: debts and obligations.
Liquidity
How fast an asset converts to cash without loss. Cash is perfectly liquid; houses aren't.
Marginal tax rate
The rate on your next dollar of income — higher than your effective rate.
Net worth
Assets minus liabilities. The single best measure of financial health.
PMI
Private Mortgage Insurance — extra cost when your down payment is under 20%.
Principal
The original loan amount (excluding interest), or the face value of an investment.
Refinancing
Replacing a loan with a new one, usually for a lower rate.
Roth vs Traditional
Roth: pay tax now, withdraw tax-free later. Traditional: deduct now, pay later.
Snowball method
Debt strategy: attack the smallest balance first for quick motivational wins.
Stock
A slice of ownership in a company.
Volatility
How much prices swing. High volatility = bigger ups and downs.
Yield
Income from an investment as % of its price (dividends ÷ price).