Glossary

44 terms, each explained in a sentence or two.

401(k): An employer sponsored retirement plan. Contributions come out of your paycheck before tax and grow tax deferred.
Amortization: Paying off a loan with regular payments that cover interest and reduce the balance until it reaches zero.
Annuity: A series of equal payments at regular intervals. Also an insurance product that pays an income for life.
APR: Annual percentage rate. The yearly cost of borrowing, including interest and some fees, without compounding.
APY: Annual percentage yield. The yearly return on savings once compounding is included.
Asset allocation: How your money is split between stocks, bonds, cash and other assets.
Basis point: One hundredth of a percent. 50 basis points is 0.5%.
CAGR: Compound annual growth rate. The steady yearly rate that would take a starting value to an ending value over a period.
Capital gain: The profit when you sell an asset for more than you paid.
Certificate of deposit (CD): A bank deposit locked for a fixed term at a fixed rate.
Compound interest: Interest earned on both the original amount and the interest already added to it.
Compounding frequency: How often interest is added to the balance. Daily, monthly, quarterly or yearly.
Debt to income ratio: Monthly debt payments divided by gross monthly income.
Diversification: Spreading money across many investments so no single one can sink you.
Dividend: A cash payment a company makes to its shareholders out of profits.
Dividend yield: Annual dividends per share divided by the share price.
Dollar cost averaging: Investing a fixed amount at regular intervals regardless of price.
Effective annual rate: The true yearly rate after compounding. The same thing as APY.
Emergency fund: Cash set aside for unexpected costs, usually three to six months of essential expenses.
Equity: Ownership. In a home it is the value minus the mortgage, and in investing it means stocks.
Expense ratio: The yearly fee a fund charges, as a percentage of assets.
FDIC insurance: Federal insurance on bank deposits up to $250,000 per depositor, per bank, per ownership category.
Fixed rate: An interest rate that stays the same for the whole term.
Future value: What an amount of money today will be worth at a future date after earning a return.
HELOC: Home equity line of credit. A revolving credit line secured on your home.
Index fund: A fund that holds every stock in an index, such as the S&P 500, at very low cost.
Inflation: The general rise in prices over time. It shrinks what each dollar can buy.
Interest: The cost of borrowing money, or the reward for lending it.
Interest only: A loan where payments cover only the interest for a period. The balance does not fall.
IRA: Individual retirement account. A tax advantaged account you open yourself.
Liquidity: How quickly an asset can be turned into cash without losing value.
Minimum payment: The smallest amount a credit card issuer will accept each month.
Net worth: Everything you own minus everything you owe.
Nominal return: The headline return before inflation is taken out.
Present value: What a future sum of money is worth today, given a rate of return.
Principal: The original amount of money saved, invested or borrowed, before interest.
Real return: The return after inflation. The growth in what your money can actually buy.
Roth: A type of retirement account funded with after tax money. Qualified withdrawals are tax free.
Rule of 72: Divide 72 by the interest rate to estimate the years it takes money to double.
Simple interest: Interest paid only on the original amount, never on past interest.
Time value of money: The idea that a dollar today is worth more than a dollar tomorrow, because today's dollar can earn a return.
Total return: Price change plus dividends or interest, usually with the income reinvested.
Variable rate: An interest rate that moves with a benchmark, so payments can rise or fall.
Yield: The income an investment pays each year as a percentage of its price.