How to use this glossary
Every term here appears regularly in real financial documents — pay stubs, account statements, loan agreements, tax forms — and in well-written personal-finance content. Definitions are intentionally short. If you want the deep dive, follow the linked articles where they exist.
If you read all 50 definitions back-to-back you'll be more financially literate than the median US adult. That takes about 20 minutes.
Cash flow and budgeting
- Gross income — total income before taxes and deductions.
- Net income (take-home pay) — what actually lands in your bank account after taxes, benefits and other deductions.
- Fixed expenses — costs that don't change month to month (rent, insurance premium, subscription).
- Variable expenses — costs that fluctuate (groceries, utilities, gas).
- Discretionary spending — non-essential spending (dining out, entertainment, travel).
- Cash flow — the difference between income and expenses in a period; positive means surplus, negative means deficit.
- Zero-based budget — a budget where income minus all allocations equals zero, every dollar assigned a job.
- 50/30/20 rule — a beginner budget framework: 50% needs, 30% wants, 20% savings and debt.
Credit and borrowing
- APR (Annual Percentage Rate) — the yearly cost of borrowing expressed as a percentage, including most fees.
- Interest rate — the percentage charged on borrowed money, excluding fees (APR is usually higher).
- Credit score — a 300–850 number summarising credit risk; FICO and VantageScore are the two main models.
- Credit utilisation — credit-card balance divided by credit limit; below 30% is healthy, below 10% is ideal.
- Hard inquiry — a credit pull from a new credit application; can lower your score by 5–10 points for 12 months.
- Soft inquiry — a credit pull that does not affect your score (your own check, pre-approvals).
- Revolving credit — credit you can repeatedly borrow against and pay down (credit cards, HELOCs).
- Installment loan — a loan with fixed payments over a set term (auto, mortgage, student).
- Amortisation — the schedule by which loan payments are split between principal and interest over time.
- Principal — the original amount borrowed, separate from interest.
Saving and emergency funds
- Emergency fund — liquid savings (usually 3–6 months of expenses) for unexpected events.
- HYSA (High-Yield Savings Account) — an FDIC-insured savings account paying significantly more than a standard bank account.
- Money market account — a hybrid savings/checking account; often a slightly higher yield with check-writing privileges.
- Certificate of Deposit (CD) — a time-locked savings product paying a fixed rate; early withdrawal usually triggers a penalty.
- FDIC insurance — federal insurance protecting up to $250,000 per depositor per bank.
- Liquidity — how quickly an asset can be converted to cash without losing value.
Investing
- Stock — a share of ownership in a public company.
- Bond — a loan to a company or government that pays interest until maturity.
- Mutual fund — a pooled investment vehicle managed by a manager; priced once daily.
- ETF (Exchange-Traded Fund) — like a mutual fund but trades like a stock during the day.
- Index fund — a fund that tracks a market index (e.g., S&P 500); typically very low cost.
- Expense ratio — the annual fee of a fund expressed as a percentage of assets; under 0.10% is excellent.
- Asset allocation — the mix of stocks, bonds and cash in a portfolio.
- Diversification — spreading investments across assets to reduce risk.
- Dollar-cost averaging — investing a fixed amount on a regular schedule regardless of price.
- Compound interest — interest earned on both the principal and previously earned interest.
- Capital gains — the profit from selling an asset for more than you paid; short-term (≤1 year) is taxed as income, long-term (>1 year) at lower rates.
- Dividend — a portion of a company's profit paid to shareholders, usually quarterly.
Retirement accounts
- 401(k) — an employer-sponsored retirement account funded with pre-tax payroll deductions, often with an employer match.
- Roth IRA — an individual retirement account funded with after-tax dollars; qualified withdrawals are tax-free.
- Traditional IRA — an individual retirement account funded with pre-tax dollars; withdrawals are taxed as income.
- Employer match — the percentage your employer contributes to your 401(k) on top of your own contributions.
- Vesting — the schedule by which employer contributions become yours to keep if you leave.
- RMD (Required Minimum Distribution) — the minimum you must withdraw annually from most retirement accounts starting at age 73.
- HSA (Health Savings Account) — a triple-tax-advantaged account for medical expenses, available with high-deductible health plans.
Taxes
- Marginal tax rate — the tax rate on your last dollar of income.
- Effective tax rate — your total tax divided by your total income; always lower than your marginal rate.
- Standard deduction — a flat amount everyone can subtract from income before tax; $14,600 single / $29,200 married filing jointly in 2024.
- Itemised deductions — listed deductions (mortgage interest, state/local taxes, charitable giving) used in place of the standard deduction.
- Tax credit — a dollar-for-dollar reduction in tax owed; usually more valuable than a deduction.
- W-2 — the form employers send showing wages and taxes withheld.
- 1099 — the form used for non-employee income (freelance, interest, dividends, gig work).
- Withholding — taxes taken out of each paycheck and paid to the IRS on your behalf.
Insurance and protection
- Premium — the recurring cost (monthly or annual) of an insurance policy.
- Deductible — what you pay out of pocket before insurance starts covering costs.
- Copay — a fixed dollar amount you pay for a covered service (often for health care).
- Out-of-pocket maximum — the most you'll pay in a year before insurance covers 100%.
- Term life insurance — life insurance for a set period (e.g., 20 years); the cheapest and best option for most families.
- Whole life insurance — permanent life insurance that combines coverage with a cash-value component; usually more expensive than needed.
- Beneficiary — the person or entity designated to receive an account or policy's assets at death.
