Finance has a language of its own, and the jargon can make simple ideas sound complicated. This glossary explains common money terms in plain English. We add to it as the site grows, so check back as you read our guides.
APR (Annual Percentage Rate)
The yearly cost of borrowing, shown as a percentage. APR includes the interest rate plus certain fees, so it gives a fuller picture of what a loan or credit card actually costs than the interest rate alone.
APY (Annual Percentage Yield)
The yearly return on savings or deposits, including the effect of compounding. A higher APY means your money grows faster. APY is the saving counterpart to APR.
Asset
Anything you own that has value, such as cash, a home, investments, or a car. Assets are weighed against liabilities to work out your net worth.
Budget
A plan for how you will spend and save your money over a period, usually a month. A budget matches your income against your expenses so you can direct money toward your goals on purpose rather than by accident.
Compound interest
Interest earned on both your original money and the interest it has already earned. Over time, compounding can grow savings and investments significantly, and it can also make debt grow quickly if left unpaid.
Credit score
A number that lenders use to estimate how likely you are to repay borrowed money. It is based on your borrowing history. A higher score generally means easier approval and lower interest rates.
Diversification
Spreading your investments across different assets so that a loss in one does not sink your whole portfolio. It is the practical version of not putting all your eggs in one basket.
Emergency fund
Money set aside to cover unexpected costs or a loss of income, usually held in an easy-to-access savings account. A common target is three to six months of essential expenses.
Equity
The portion of an asset you truly own. In a home, equity is the property’s value minus what you still owe on the mortgage. In investing, equity can also mean ownership shares in a company.
Inflation
The gradual rise in prices over time, which reduces what a unit of money can buy. If your savings earn less than the inflation rate, their real value shrinks even as the balance stays the same.
Interest
The cost of borrowing money, or the reward for lending or saving it, usually expressed as a percentage. You pay interest on loans and earn interest on savings.
Liability
Money you owe, such as a loan, mortgage, or credit card balance. Liabilities are subtracted from assets to calculate net worth.
Liquidity
How easily an asset can be turned into cash without losing value. Cash is highly liquid; a house is not, because selling it takes time.
Net worth
What you own minus what you owe. It is a single snapshot of your financial position, and watching it trend upward over time is a useful measure of progress.
Principal
The original amount of money borrowed or invested, separate from any interest. On a loan, paying down the principal reduces the balance that future interest is charged on.
Refinancing
Replacing an existing loan with a new one, often to get a lower interest rate, a different term, or a lower monthly payment. It is common with mortgages and student loans.
Return on investment (ROI)
A measure of how much money an investment gains or loses relative to its cost, shown as a percentage. It helps you compare the performance of different options.
Yield
The income an investment produces, such as interest or dividends, expressed as a percentage of its price. Yield helps you compare income-generating investments.
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