Financial Glossary
Key financial terms explained in plain English. No jargon, no textbook speak.
Compound Interest
Interest earned on both your original money and the interest it already earned. Basically, your money makes money, and then that money makes more money. It's the reason a small amount invested early can grow into something huge over decades.
Diversification
Spreading your money across different types of investments so one bad pick doesn't wreck your whole portfolio. Think of it as not putting all your eggs in one basket. If one investment tanks, the others can keep you afloat.
Inflation
When prices go up over time and your money buys less stuff than it used to. A dollar today won't buy as much as a dollar ten years from now. It's basically your money slowly losing its purchasing power if you just let it sit.
Credit Score
A number (usually 300-850) that tells lenders how risky it is to lend you money. Higher score means lower risk, which means better loan terms and interest rates for you. It's basically your financial reputation as a number.
Net Worth
Everything you own minus everything you owe. Add up all your assets (cash, investments, property, car) and subtract all your debts (mortgage, student loans, credit card debt). That number is your net worth.
Asset Allocation
How you divide your investment money between different types of assets like stocks, bonds, and cash. It's the most important investment decision you'll make because it determines about 90% of your portfolio's returns over time.
Liquidity
How quickly and easily you can turn an asset into cash without losing value. Cash is the most liquid. Your house is not. It matters because sometimes you need money fast, and not everything can be sold overnight.
APR vs APY
APR (Annual Percentage Rate) is the yearly interest rate without compounding. APY (Annual Percentage Yield) includes the effect of compounding. APY is always equal to or higher than APR. Banks love showing you APR on loans and APY on savings.
Tax Bracket
The range of income that gets taxed at a specific rate. The US uses a progressive tax system where higher income gets taxed at higher rates. But only the income within each bracket is taxed at that bracket's rate, not all your income.
Emergency Fund
Money set aside specifically for unexpected expenses or financial emergencies. The standard advice is 3-6 months of living expenses in a liquid, easily accessible account. It's your financial safety net that keeps one bad event from becoming a debt spiral.