Financial glossary

The vocabulary lenders, banks, and brokers use — defined in plain English, each linked to the calculators where the term actually matters.

• Amortization

  The scheduled repayment of a loan through fixed payments that cover interest first and gradually retire the principal.

• APR (Annual Percentage Rate)

  The yearly cost of borrowing money, including interest and certain fees, expressed as one percentage for comparing loan offers.

• APY (Annual Percentage Yield)

  The effective annual return on a deposit account once compounding is included — the number that makes savings rates comparable.

• Capital Gains

  Profit from selling an investment for more than you paid; long-term gains get favorable tax rates in the US.

• Certificate of Deposit (CD)

  A bank deposit that locks your money for a fixed term in exchange for a guaranteed, usually higher, interest rate.

• Closing Costs

  The fees paid to finalize a mortgage or refinance — typically 2–6% of the loan — covering origination, appraisal, title, and taxes.

• Compound Interest

  Interest earned on both the original amount and previously earned interest, producing accelerating growth over time.

• Credit Score (FICO)

  A number, typically 300–850, summarizing your borrowing history; it heavily influences the interest rates lenders offer you.

• Diversification

  Spreading investments across many assets so no single failure can sink the portfolio — the one reliable free lunch in investing.

• Down Payment

  The upfront cash you pay toward a purchase, reducing the amount financed; 20% down on a home avoids PMI.

• DTI (Debt-to-Income Ratio)

  Your monthly debt payments divided by gross monthly income — the percentage lenders use to judge how much more you can borrow.

• Emergency Fund

  Cash reserved for genuine surprises — job loss, medical bills, urgent repairs — typically sized at 3–6 months of essential expenses.

• Employer Match

  Money your employer adds to your 401(k) when you contribute, typically 50–100% of your contributions up to a salary percentage.

• Escrow

  An account your mortgage servicer uses to collect and pay property taxes and insurance as part of your monthly payment.

• Expense Ratio

  The annual percentage of your money a fund charges for management — a cost that compounds against you over decades.

• Financial Independence (FIRE)

  Having enough invested that portfolio withdrawals can cover living expenses indefinitely, making work optional.

• Grace Period

  A window when interest or penalties don't apply — on cards, between statement and due date; on student loans, after leaving school.

• Index Fund

  A fund that passively tracks a market index like the S&P 500, delivering the market's return at very low cost.

• Inflation

  The general rise in prices over time, which steadily reduces what each dollar buys — roughly 2–3% per year in the US long term.

• Liquidity

  How quickly an asset converts to spendable cash without losing value — cash is fully liquid; home equity is not.

• Loan Term

  The scheduled length of a loan; longer terms lower the payment but raise total interest substantially.

• Minimum Payment

  The smallest payment a credit card issuer accepts each month — designed to keep the account current, not to pay off the debt.

• Net Worth

  Everything you own minus everything you owe — the single number that tracks overall financial progress.

• PMI (Private Mortgage Insurance)

  Insurance protecting the lender when a conventional mortgage down payment is below 20%, paid by the borrower until enough equity builds.

• Principal

  The original amount borrowed or invested, before interest — the base on which all interest is calculated.

• Refinancing

  Replacing an existing loan with a new one at different terms — usually to lower the rate, the payment, or the payoff time.

• Roth IRA

  An individual retirement account funded with after-tax money whose qualified withdrawals — contributions and earnings — are tax-free.

• Safe Withdrawal Rate

  The percentage of a portfolio you can withdraw annually with high odds it lasts through retirement — 4% is the classic benchmark.

• Simple Interest

  Interest calculated only on the principal balance, never on accumulated interest — the method most federal student loans use daily.

• Traditional IRA

  An individual retirement account funded with potentially tax-deductible contributions; withdrawals in retirement are taxed as income.