§ Glossary

52 money terms, in plain English.

Plain-English definitions of common financial terms. No jargon, no fine print.

401(k)

An employer-sponsored retirement savings plan that lets you contribute pre-tax dollars, often with an employer match. Contribution limit is $23,500 in 2026.

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APR includes the interest rate plus any additional fees charged by the lender (origination fees, closing costs, etc.), giving you a more complete picture of what a loan actually costs compared to the interest rate alone.

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Amortization

The process of spreading a loan into a series of fixed payments over time, where each payment covers both principal and interest.

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Auto Loan

A fixed-term loan used to purchase a vehicle, with the car serving as collateral. Typical terms range from 36 to 72 months.

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APY

Annual Percentage Yield -- the total amount of interest earned on a savings account in one year, including the effect of compound interest.

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Asset Allocation

How you divide your investments among different asset categories like stocks, bonds, and cash. Your ideal mix depends on your age, goals, and risk tolerance.

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Adjustable Rate Mortgage

A mortgage with an interest rate that changes after an initial fixed period. Often starts lower than fixed rates but carries risk of future increases.

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Balance Transfer

Moving debt from one credit card to another, typically to take advantage of a lower interest rate or 0% promotional APR.

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Back-End Ratio

The percentage of your gross monthly income that goes toward all monthly debt payments combined. Lenders typically prefer 36% or less.

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Closing Costs

Fees and expenses you pay when finalizing a real estate transaction, typically 2-5% of the home price. Includes appraisal, title insurance, and attorney fees.

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Credit Score

A three-digit number (300-850) that represents your creditworthiness. Higher scores get better loan rates and terms.

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Compound Interest

Interest calculated on both the initial principal and the accumulated interest from previous periods -- your money earning money on its money.

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CD (Certificate of Deposit)

A savings product that pays a fixed interest rate for a set period (3 months to 5 years). Higher rates than regular savings but your money is locked until maturity.

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Collateral

An asset pledged as security for a loan. If you default on the loan, the lender can seize the collateral -- your home for a mortgage, your car for an auto loan.

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Capital Gains

The profit from selling an investment or property for more than you paid. Short-term gains (held less than a year) are taxed higher than long-term gains.

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DTI

Lenders use DTI to assess your ability to manage monthly payments. Most mortgage lenders prefer a DTI below 43%, with many preferring 36% or less.

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Down Payment

The upfront cash you pay when purchasing a home or car, expressed as a percentage of the total price.

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Deduction

An expense that reduces your taxable income. Standard deduction is a flat amount; itemized deductions are specific expenses like mortgage interest or charitable donations.

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Depreciation

The decrease in an asset's value over time. New cars typically depreciate 20-30% in the first two years of ownership.

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Diversification

Spreading investments across different assets to reduce risk. If one investment drops, others may hold steady or grow, protecting your overall portfolio.

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Debt Consolidation

Combining multiple debts into a single loan, usually to get a lower interest rate or simplify payments. Common for credit card and student loan debt.

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Escrow

A third-party account where funds are held during a transaction, commonly used for property taxes and insurance in mortgage payments.

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Equity

The portion of your home that you actually own -- the difference between your home's value and what you still owe on the mortgage.

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Emergency Fund

Money set aside for unexpected expenses like medical bills, car repairs, or job loss. Most experts recommend 3-6 months of living expenses.

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Effective Tax Rate

The average rate at which your total income is taxed, calculated by dividing total tax paid by total income. Always lower than your marginal rate.

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Fixed Rate

An interest rate that stays the same for the entire life of the loan, making your monthly payments predictable.

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Filing Status

Your tax category based on marital and family status (single, married filing jointly, head of household, etc.) that determines your tax brackets and standard deduction.

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FICO Score

The most widely used credit scoring model, ranging from 300 to 850, developed by Fair Isaac Corporation.

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Front-End Ratio

The percentage of your gross monthly income that goes toward housing costs (mortgage, taxes, insurance). Lenders typically prefer 28% or less.

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FDIC Insurance

Federal Deposit Insurance Corporation coverage that protects bank deposits up to $250,000 per depositor, per bank, per ownership category.

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Forbearance

A temporary pause or reduction in loan payments granted by a lender during financial hardship. Interest usually continues to accrue during forbearance.

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Gross Income

Your total income before taxes and other deductions are taken out. This is the number lenders and landlords typically use.

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Grace Period

The time between the end of a billing cycle and the payment due date during which no interest is charged. Credit cards typically offer 21-25 days.

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Interest

The cost of borrowing money, usually expressed as an annual percentage of the loan balance.

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Inflation

The rate at which prices for goods and services increase over time, reducing the purchasing power of your money.

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Index Fund

A type of investment fund that tracks a market index like the S&P 500, offering broad diversification at low cost. A popular choice for long-term investing.

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Liquidity

How easily an asset can be converted to cash without losing value. Savings accounts are highly liquid; real estate is not.

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Lien

A legal claim on an asset as security for a debt. A mortgage is a lien on your home; an auto loan creates a lien on your car.

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Minimum Payment

The smallest amount you must pay on a credit card balance each month to avoid penalties -- usually 1-3% of the balance or a flat $25, whichever is greater.

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Marginal Tax Rate

The tax rate applied to your last dollar of income -- the highest bracket your income falls into. Not the rate you pay on all your income.

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Net Worth

The total value of everything you own (assets) minus everything you owe (liabilities). A snapshot of your financial health.

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Opportunity Cost

The potential gain you miss out on when choosing one option over another. For example, money used for a down payment could have been invested in the stock market.

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Principal

The original amount of money borrowed in a loan, not including interest.

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PMI

Private Mortgage Insurance -- extra insurance you pay when your down payment is less than 20% of the home price. It protects the lender, not you.

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Pre-approval

A lender's conditional commitment to lend you a specific amount, based on a review of your credit, income, and assets. Stronger than pre-qualification.

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Pre-Qualification

A preliminary estimate of how much a lender might offer you, based on self-reported financial information. Less rigorous than pre-approval.

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Refinancing

Replacing an existing loan with a new one, usually to get a lower interest rate, reduce monthly payments, or change the loan term.

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Roth IRA

An individual retirement account funded with after-tax dollars. Withdrawals in retirement are tax-free. Income limits apply for contributions.

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Tax Bracket

The range of income taxed at a particular rate. The US uses progressive brackets, so only the income within each range is taxed at that range's rate.

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Traditional IRA

An individual retirement account funded with pre-tax dollars (tax-deductible contributions). Withdrawals in retirement are taxed as ordinary income.

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Underwriting

The process a lender uses to evaluate your financial profile and determine whether to approve your loan application and at what terms.

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Variable Rate

An interest rate that can change periodically based on market conditions, meaning your payments may go up or down over time.