Glossary
Money terms, explained
42 plain-English definitions, each with a formula or worked example where it helps, and links to the guides and calculators that go deeper. Educational information, not personal advice.
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- 50/30/20 rule
- A simple budgeting guideline that splits after-tax income into 50% for needs, 30% for wants and 20% for savings and extra debt payments.
A
- Amortization
- Paying off a loan with regular fixed payments that cover interest and principal. Early payments are mostly interest; later ones are mostly principal.
- APR (annual percentage rate)
- The yearly cost of borrowing expressed as a percentage, including interest and, for many loans, certain fees. It does not reflect compounding within the year.
- APY (annual percentage yield)
- The effective yearly return on savings once compounding is included. It's the fairest way to compare savings accounts.
- Asset allocation
- How your investments are divided among asset classes such as stocks, bonds and cash. It drives most of a portfolio's risk and return.
B
- Balance transfer
- Moving existing credit card debt to another card, usually one with a low or 0% introductory APR. A transfer fee, commonly 3% to 5%, usually applies.
C
- Compound interest
- Interest calculated on both the original amount and the interest already added to it, so growth accelerates over time.
- CPP (Canada Pension Plan)
- Canada's contributory public pension. You can start it between ages 60 and 70; payments are permanently reduced by 0.6% per month if you start before 65 and increased by 0.7% per month if you delay past 65.
- Credit score
- A number, commonly from 300 to 850 for FICO and VantageScore, that summarizes how you've handled credit. Lenders use it to decide whether to lend and at what rate.
- Credit utilization
- The share of your available revolving credit that you're using. Lower utilization generally supports a higher credit score.
D
- Debt avalanche
- A payoff strategy that makes minimum payments on every debt and sends any extra money to the debt with the highest interest rate first. It minimises total interest paid.
- Debt snowball
- A payoff strategy that makes minimum payments on every debt and sends any extra money to the smallest balance first, for faster early wins.
- Debt-to-income ratio (DTI)
- Your monthly debt payments as a share of your gross monthly income. Mortgage lenders use it to judge how much you can afford to borrow.
- Dividend yield
- A company's annual dividends per share as a percentage of its current share price.
- Dollar-cost averaging
- Investing a fixed amount at regular intervals regardless of price, so you buy more shares when prices are low and fewer when they're high.
- Down payment
- The part of a home's price you pay upfront in cash; the rest is financed with a mortgage. A larger down payment means a smaller loan and, often, better terms.
E
- Emergency fund
- Cash set aside for unexpected costs or lost income, kept somewhere safe and easy to reach. A common guideline is three to six months of essential expenses.
- Employer match (401(k))
- Money an employer adds to your workplace retirement plan based on how much you contribute, up to a limit set by the plan.
- ETF (exchange-traded fund)
- A fund that holds a basket of investments and trades on a stock exchange like a single share. Many ETFs track an index.
- Expense ratio
- The annual fee a fund charges, expressed as a percentage of the money you have invested in it. It is deducted from the fund's returns.
F
- FDIC insurance
- U.S. government protection for deposits at FDIC-insured banks if the bank fails, up to $250,000 per depositor, per insured bank, for each account ownership category.
- FIRE (financial independence, retire early)
- A goal of saving and investing aggressively so that investment income can cover living costs well before a traditional retirement age. A common planning guideline targets about 25 times annual expenses.
H
- HECS-HELP
- An Australian Government loan that covers university student contributions. It's repaid through the tax system once your income passes the annual repayment threshold, and the balance is indexed each year.
I
- Index fund
- A mutual fund or ETF that aims to match the performance of a market index, such as the S&P 500, by holding the same securities. Index funds usually have low costs.
- Inflation
- The general rise in prices over time, which reduces what a given amount of money can buy. It is usually measured with a consumer price index (CPI).
- ISA (Individual Savings Account)
- A UK account in which savings and investments grow free of UK income tax and capital gains tax, up to an annual allowance set by the government for each tax year.
M
- Mortgage stress test (Canada)
- A federal rule requiring borrowers to show they could still afford their mortgage at a qualifying rate higher than their actual rate: the greater of the contract rate plus two percentage points or a regulator-set minimum.
N
- Net worth
- The value of everything you own minus everything you owe. It can be positive or negative.
P
- PMI (private mortgage insurance)
- Insurance that protects the lender, not you, when you put less than 20% down on a conventional U.S. mortgage. It can be removed once you build enough equity.
- Price-to-earnings ratio (P/E)
- A valuation measure comparing a company's share price with its earnings per share. It shows how much investors pay for each dollar of profit.
R
- Rebalancing
- Buying and selling investments to bring a portfolio back to its target asset allocation after market moves have shifted it.
- Roth IRA
- A U.S. individual retirement account funded with after-tax money. Investments grow tax-free and qualified withdrawals in retirement are tax-free. Income limits apply to direct contributions.
- RRSP (Registered Retirement Savings Plan)
- A Canadian retirement account where contributions are tax-deductible, growth is tax-deferred and withdrawals are taxed as income. Contribution room is based on your previous year's earned income, up to an annual maximum.
- Rule of 72
- A quick estimate of how long it takes money to double at a fixed annual rate of return: divide 72 by the rate.
S
- Sinking fund
- Money saved gradually for a known, planned expense, such as insurance premiums, holidays or car maintenance, so it doesn't hit your budget all at once.
- Stamp Duty Land Tax (SDLT)
- A tax paid when buying property or land above certain price thresholds in England and Northern Ireland. Scotland and Wales have their own equivalents (LBTT and LTT).
- Superannuation (super)
- Australia's workplace retirement savings system. Employers must pay a legislated percentage of eligible earnings into your super fund, and you can add your own contributions, including through salary sacrifice.
T
- Take-home pay
- What you actually receive after income tax, social insurance contributions and other payroll deductions are taken from your gross pay. Budgets should be built on this figure.
- Term life insurance
- Life insurance that pays a death benefit if you die within a set period, such as 20 or 30 years. It has no savings component, which keeps premiums lower than permanent life insurance.
- TFSA (Tax-Free Savings Account)
- A Canadian account where investment income and withdrawals are tax-free. Contribution room builds each year from age 18, and amounts withdrawn are added back to your room the following calendar year.
U
- UK student loan repayment plan
- The plan type (such as Plan 1, 2, 4 or 5) that sets how an English, Welsh, Scottish or Northern Irish student loan is repaid: a percentage of income above a threshold, collected through payroll.
Z
- Zero-based budgeting
- A budgeting method where every unit of income is assigned a job, spending, saving or debt, until income minus assignments equals zero.
