Glossary

Financial terms, plainly defined.

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Terms

401(k) #: An employer-sponsored retirement account in the U.S. that lets you contribute pre-tax (or after-tax, for a Roth version) income, often with an employer match.
50/30/20 Rule #: A budgeting guideline that splits take-home pay into 50% needs, 30% wants, and 20% savings or extra debt payoff. See our full article for where it works and where it doesn't, or try it on the budget planner.
Amortization #: The process of paying off a loan through regular payments, where each payment covers that period's interest plus a portion of the principal — the principal share grows over time as the balance shrinks. The mortgage calculator shows a full amortization schedule.
Annual Percentage Rate (APR) #: The yearly cost of a loan expressed as a percentage, including most fees — a more complete picture than the interest rate alone, which is why comparing APRs is usually more useful than comparing rates.
Annual Percentage Yield (APY) #: The real yearly return on savings or an investment, including the effect of compounding — higher than the stated interest rate if interest compounds more often than once a year.
Asset #: Anything you own that has monetary value — cash, investments, a home, a car. Assets minus liabilities equals net worth.
Bear Market #: A period when investment prices fall broadly and significantly (commonly defined as a 20% drop from a recent high), usually alongside pessimism about the economy.
Bull Market #: A period when investment prices are broadly rising, usually alongside optimism about the economy.
Capital Gain #: The profit made when you sell an asset (like a stock or property) for more than you paid for it. Capital gains are typically taxed, often at a different rate than regular income.
Closing Costs #: The one-time fees paid when a home purchase or refinance closes — lender fees, title work, appraisal, and prepaid tax and insurance items. Typically around 2–5% of the loan amount, on top of your down payment.
Compound Interest #: Interest calculated on both the original amount and any interest already earned — meaning growth (or debt) accelerates over time rather than staying flat. Watch it work in the savings growth calculator.
Credit Utilization #: The percentage of your available credit that you're currently using, recalculated each billing cycle. Lower utilization generally helps your credit score, with under 30% commonly recommended.
Debt-to-Income Ratio (DTI) #: Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders use it to judge how much more debt you can reasonably take on — it's the core of the home affordability calculator.
Deductible #: The amount you pay out of pocket on an insurance claim before your insurance starts covering the rest. Higher deductibles usually mean lower premiums.
Diversification #: Spreading investments across different assets so that a loss in any single one has a smaller effect on your overall portfolio.
Dividend #: A portion of a company's profit paid out to shareholders, usually on a regular schedule, separate from any gain in the stock's price.
Emergency Fund #: Money set aside specifically to cover unexpected expenses or lost income, kept liquid (easy to access) rather than invested — commonly targeted at 3-6 months of essential expenses. Size yours with the emergency fund calculator.
Equity (Home) #: The portion of your home's value that you actually own outright — the home's current value minus whatever you still owe on the mortgage.
Escrow #: An account, usually managed by your mortgage lender, that collects a portion of your monthly payment to cover property taxes and homeowners insurance, then pays those bills on your behalf when due.
FICO Score #: The most widely used type of credit score, ranging roughly from 300 to 850, calculated from your payment history, credit utilization, length of credit history, credit mix, and new credit activity. Our credit score article explains each factor.
Fixed-Rate Mortgage #: A mortgage where the interest rate stays the same for the entire loan term, so your principal-and-interest payment never changes.
Gross Income #: Your total income before any taxes or deductions are taken out — different from net income, which is what actually reaches your bank account.
HOA (Homeowners Association) Fee #: A recurring fee charged in some communities or condo buildings to cover shared maintenance and amenities, separate from your mortgage payment.
Index Fund #: A fund that holds the same investments as a market index (like the S&P 500) in the same proportions, aiming to match that index's performance rather than beat it, typically with low fees.
Individual Retirement Account (IRA) #: A tax-advantaged retirement account you open yourself, separate from any employer. Traditional IRA contributions may be tax-deductible now (withdrawals are taxed later); Roth IRA contributions are taxed now, and qualified withdrawals in retirement are tax-free.
Inflation #: The general rise in prices over time, which reduces how much a given amount of money can buy. A dollar today typically buys less than the same dollar bought a decade ago.
Interest Rate #: The percentage a lender charges you to borrow money (or pays you to hold your deposit), usually expressed as an annual rate.
Liability #: Anything you owe — a mortgage, a car loan, credit card debt. Total liabilities are subtracted from total assets to calculate net worth.
Liquidity #: How quickly and easily an asset can be converted to cash without losing significant value. Cash is fully liquid; a house is not.
Net Income #: The amount of money you actually receive after taxes and deductions — often called take-home pay. Budgets should generally be based on net income, not gross.
Net Worth #: The total value of everything you own (assets) minus everything you owe (liabilities). It can be negative, especially early on if you have student or auto debt.
Origination Fee #: A fee a lender charges for processing a new loan, usually a percentage of the loan amount, typically paid at closing.
PITI #: Shorthand for the four components of a typical monthly mortgage payment: Principal, Interest, Taxes, and Insurance.
PMI (Private Mortgage Insurance) #: Insurance most lenders require when your down payment is under 20% of the home's price. It protects the lender, not you, and can usually be removed once you've built enough equity. The mortgage calculator estimates it automatically.
Premium (Insurance) #: The amount you pay, usually monthly or annually, to keep an insurance policy active — separate from your deductible, which you pay only when you file a claim.
Principal #: The original amount borrowed on a loan, not counting interest. Payments reduce the principal over time as part of amortization.
Refinance #: Replacing an existing loan with a new one, usually to get a lower interest rate, a different term length, or to access home equity. See whether it pays off with the refinance break-even calculator.
Take-Home Pay #: See net income — the amount that actually lands in your bank account after taxes and other paycheck deductions.
Term (Loan) #: The length of time you have to repay a loan in full — for example, a 30-year mortgage or a 60-month auto loan. Shorter terms usually mean higher payments but less total interest.
Variable-Rate Loan #: A loan whose interest rate can change over time based on a benchmark rate, meaning your payment can go up or down during the loan term — the opposite of a fixed-rate loan.
Vesting #: The process of earning full ownership of employer-contributed retirement funds (like a 401(k) match) over time — leaving a job before you're fully vested can mean forfeiting some of that employer money.