Money terms in plain words

How to use this page

Each calculator has small "i" buttons next to its inputs that explain what to enter. When a definition needs more than a sentence, the button points here. Jump to a section: debt and loans · saving and budgeting · investing and retirement · home and car · insurance and pay.

Debt and loans

APR (annual percentage rate). The yearly cost of borrowing, including interest and most fees, shown as a percentage. Credit cards, car loans and mortgages all quote one. The calculators divide it by 12 to work out each month's interest. Used in: Debt Payoff, Car True Cost.

Principal. The amount you borrowed, or the part of a balance that is not interest. Each payment covers that month's interest first; whatever is left reduces the principal. Used in: Mortgage Analyzer, Debt Payoff.

Interest. What a lender charges you for using its money, or what a bank pays you for holding yours. It is always a percentage of the balance, so a bigger balance means more interest. See how interest really works.

Minimum payment. The smallest amount a lender accepts each month without a penalty. Paying only the minimum keeps the account in good standing but stretches the payoff for years and raises the total interest paid.

Amortization. The schedule that splits each fixed loan payment between interest and principal. Early payments are mostly interest; the last ones are almost all principal. That is why extra payments early in a loan save the most.

Debt avalanche. A payoff order: pay the minimum on every debt, then send every extra dollar to the debt with the highest interest rate. When it is gone, roll its payment into the next-highest rate. It costs the least total interest. Used in: Debt Payoff.

Debt snowball. The same idea, but extra money goes to the smallest balance first. Accounts disappear sooner, which some people find easier to stick with; it usually costs a little more interest than the avalanche. Compared in snowball vs avalanche, explained.

Debt-free date. The month your last balance reaches zero under a given plan. The Debt Payoff calculator can also work backwards from a date you choose to the payment it takes.

Extra payment. Any amount above the minimums. In these calculators it goes straight to principal, which shortens the payoff and cuts interest.

Refinance. Replacing a loan with a new one, usually to get a lower rate, a different term, or both. A refinance has its own closing costs, so it only pays off if you keep the new loan long enough. Used in: Mortgage Analyzer.

Break-even point. For a refinance, the number of months of monthly savings it takes to earn back the closing costs. Sell or refinance again before that month and the refinance lost money.

Closing costs. The fees paid to set up a mortgage or refinance: lender fees, appraisal, title work, recording and similar charges.

Saving and budgeting

Emergency fund. Cash set aside for an unplanned expense or a loss of income, kept where you can reach it within days. It is usually sized in months of essential expenses. Used in: Emergency Fund.

Essential expenses. The bills that keep coming if your income stops: housing, utilities, groceries, insurance, minimum debt payments, transportation. Not restaurants, travel, or subscriptions you could cancel tomorrow.

Months of coverage. Your emergency fund divided by your essential expenses per month. $12,000 saved against $4,000 a month of essentials is three months of coverage.

APY (annual percentage yield). The yearly return on a savings account after compounding is counted. It is the number to compare when choosing where to keep cash. APR is for borrowing; APY is for saving.

High-yield savings account. A savings account, often from an online bank, that pays a much higher APY than a typical branch account. Deposits are insured by the FDIC (or the NCUA at credit unions) within the published limits (FDIC).

Savings rate. The share of your income that you save or invest. Use gross or net income, but keep it consistent. Used in: Retirement & FIRE.

Net worth. Everything you own minus everything you owe. It is the one number that goes up when you pay down debt, save, or invest, so it is the simplest scorecard for progress. Used in: Net Worth.

Assets. Things you own that have value: cash, savings, investments, retirement accounts, your home, vehicles.

Liabilities. What you owe: mortgage, credit cards, student loans, car loans, anything with a balance.

Liquid. How quickly an asset turns into spendable cash without losing value. Cash and savings are liquid; a house is not. An emergency fund has to be liquid.

Inflation. The general rise in prices over time, which lowers what a dollar buys. The Bureau of Labor Statistics measures it as the Consumer Price Index (BLS). Long projections either add inflation to costs or take it out of returns; the calculators say which.

Today's dollars. A future amount restated in what it would buy now. A projection "in today's dollars" has already removed inflation, so you can compare it with your current budget.

Investing and retirement

Compound growth (compound interest). Earning returns on your earlier returns as well as on the money you put in. It is slow at first and fast later, which is why starting early matters more than the exact return. Used in: Investment Projection.

Rate of return. The yearly percentage an investment gains or loses. A calculator's return is an assumed average; real years land above and below it, and some are negative.

Real return vs nominal return. Nominal is the headline number; real is the return after inflation. If you enter spending in today's dollars, pair it with a real return so the two match.

Contribution. Money you add to an account. A step-up or contribution increase is a yearly raise to that amount.

Employer match. Money your employer adds to your 401(k) when you contribute, up to a limit the plan sets. It counts as part of your contribution.

401(k). A retirement account offered through an employer. Traditional contributions go in before tax and withdrawals are taxed; Roth contributions go in after tax and qualified withdrawals are tax-free. Withdrawals before age 59½ generally face an additional 10% tax unless an exception applies (IRS).

IRA (individual retirement account). A retirement account you open yourself, traditional or Roth, with the same tax pattern as a 401(k) and its own contribution limits.

FIRE. Financial independence, retire early. Saving and investing enough that your portfolio covers your spending, so paid work becomes optional. Used in: Retirement & FIRE, Barista FIRE.

FIRE number. Annual spending multiplied by 1 ÷ withdrawal rate. At a 4% withdrawal rate that is 25 times spending: $50,000 a year needs $1.25 million.

Withdrawal rate and the 4% rule. The share of your portfolio you take out each year to live on. The 4% figure comes from studies of 30-year retirements funded by stock-heavy portfolios (summary and sources); longer retirements often use 3–3.5%.

Coast FIRE. You have saved enough that, with no more contributions, growth alone reaches your FIRE number by your target age. You still work to cover today's bills; you have stopped saving for retirement.

Barista FIRE. Your portfolio covers part of your spending and a part-time job covers the rest, so you can leave full-time work on a smaller number. Named for part-time jobs that carry health benefits. Used in: Barista FIRE.

Lean FIRE and fat FIRE. FIRE on a small budget or a large one. The math is identical; only the spending, and therefore the number, changes.

Sequence-of-returns risk. Once you are withdrawing, the order of good and bad years matters. A bad stretch right at the start does more damage than the same years later, because you are selling low to pay bills. Calculators that apply an even average return cannot show it.

529 plan. A state-sponsored account for education savings. Growth is not taxed when the money is spent on qualified education costs (IRS). Used in: College Savings.

Tuition inflation. The yearly rate at which college costs rise. It has run above general inflation for decades; the College Board tracks it (Trends in College Pricing).

Home and car

PITI. Principal, interest, taxes and insurance: the four parts of a typical monthly mortgage payment. Lenders quote PITI when they decide what you can afford. Used in: Cost of Homeownership, Mortgage Analyzer.

PMI (private mortgage insurance). Insurance a lender usually requires when your down payment is below 20% of the price. It protects the lender, not you, and can normally be cancelled once you have enough equity (CFPB).

Equity. Your home's current value minus what you still owe on it. It grows as you pay down principal and as the home appreciates.

Appreciation. The rise in a home's value over time. It is an assumption in projections, not a promise; home prices also fall.

HOA fees. Monthly dues to a homeowners association or condo board for shared upkeep, amenities and insurance on common areas.

Property tax. A yearly tax on the home's assessed value, set by your county or city, usually collected in monthly pieces through the mortgage escrow account.

Escrow. The account your lender uses to collect property tax and insurance along with your payment, then pay them when they come due.

CapEx reserve (capital expenditure reserve). Money set aside every month for the big replacements a home needs on a schedule: roof, furnace, water heater, appliances. Owners who skip it meet the same bills as surprises. Used in: Cost of Homeownership.

Depreciation. The drop in a car's value over time, the difference between what you paid and what you will get back. It is usually the largest single cost of owning a car, larger than fuel. Used in: Car True Cost, Net Worth.

Total cost of ownership. Everything a car costs over the years you keep it: depreciation, loan interest, insurance, fuel, maintenance and registration, not just the monthly payment.

Cost per mile. Total cost of ownership divided by the miles you drive. It makes cars, commutes and trips comparable.

Insurance and pay

Term life insurance. Coverage for a fixed number of years that pays a set amount if you die during the term. It has no savings component, which is why it costs far less than permanent policies. Used in: Life Insurance Needs.

Income replacement. The years of income your household would need if your earnings stopped. It is usually the largest part of a life insurance needs estimate.

DIME method. Debt, income, mortgage, education: a quick way to add up life insurance needs by summing debts to clear, years of income to replace, the mortgage balance and future education costs.

Gross pay and net pay. Gross is your pay before anything is taken out; net, or take-home, is what lands in your account after taxes and deductions. A raise is quoted gross and felt net. Used in: Pay Raise Impact.

Effective tax rate. Total tax paid divided by total income: your average rate. It is lower than the rate on your top dollars.

Marginal tax rate. The rate on your next dollar of income. A raise is taxed at this rate, which is why the after-tax raise is smaller than the headline number.

FICA. The payroll tax for Social Security and Medicare, taken from every paycheck alongside income tax (IRS).

Pay frequency. How often you are paid: weekly (52 checks a year), every two weeks (26), twice a month (24) or monthly (12). It decides how a yearly raise shows up per paycheck.