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Money glossary

Plain definitions of the words the calculators and the lessons use. Each one has a worked example with the numbers written out.

• Budget

  A budget is a written plan for the money that actually lands in your account. It names the bills that must be paid, the spending you choose, and the amount you keep.

• 50/30/20 rule

  The 50/30/20 rule is a first draft for a budget: about half of take-home pay for needs, about 30 percent for wants, and about 20 percent for savings and extra debt payments.

• Emergency fund

  An emergency fund is cash you do not spend on plans. It covers a lost paycheck or a bill that cannot wait, such as a car repair that keeps you at work.

• Net worth

  Net worth is the value of what you own minus the balances you owe. Own more than you owe, and it is positive. Owe more than you own, and it is negative. Negative is common at the start and is still a real number.

• APR

  APR is the annual percentage rate: the yearly interest price of borrowing, written as a percent. On a credit card it is the rate the issuer uses to figure the interest added to what you still owe.

• Credit score

  A credit score is a three-digit number a scoring company builds from your credit report. Lenders use it to decide whether to lend and what rate to charge. It is not a grade of whether you are good with money.

• Credit utilization

  Credit utilization is the percentage of your revolving credit limits that you are currently using. A $900 balance on a card with a $1,000 limit is 90 percent utilization.

• Take-home pay

  Take-home pay is the amount deposited in your account after taxes and the deductions your employer takes out, such as health insurance and a retirement contribution.

• Paycheck

  A paycheck is the record of one pay period: gross pay at the top, then taxes and other deductions, then the net amount that is paid to you.

• Needs and wants

  A need is a cost that keeps the household housed, fed, insured, and able to work. A want is spending you could cancel. The grocery bill is a need. The brand upgrade inside that bill is often a want.

• Savings rate

  A savings rate is the percentage of take-home pay you did not spend. Money moved to savings, and extra payments that reduce what you owe, both count. A transfer you move back and spend does not.

• Debt payoff

  A debt payoff plan is a decision about extra money: which balance gets it, after every minimum is paid. Avalanche sends the extra to the highest APR. Snowball sends it to the smallest balance.

• Compound interest

  Compound interest means the interest itself starts earning interest. On savings, that grows the balance. On a debt you do not pay off, that grows what you owe.

• Rent versus buy

  A rent-versus-buy comparison puts the monthly rent next to the monthly cost of owning: mortgage principal and interest, property tax, insurance, and maintenance. The mortgage payment alone is not the cost of owning.

• Subscription creep

  Subscription creep is what happens when small recurring charges accumulate without a fresh decision. Each one was reasonable on the day it started. Together they are a bill.

• APY

  APY is the annual percentage yield: the yearly return on a savings product after compounding is included. It is the number you use to compare savings accounts.

• Overdraft

  An overdraft happens when a debit, check, or automatic payment is paid even though the checking balance is too small. The bank covers it and charges a fee, or the payment is declined.

• Sinking fund

  A sinking fund is money you set aside, a little each payday, for a cost you already know is coming: car insurance, a flight, a laptop, holiday gifts.

• Grace period

  A grace period is the time between the end of a billing cycle and the payment due date, during which new purchases usually do not accrue interest if the previous statement was paid in full.

• Minimum payment

  The minimum payment is the floor the card issuer will accept by the due date. It is usually a small percent of the balance plus interest and fees, or a dollar floor, whichever is larger.

• FICO score

  FICO is a brand of credit score built from your credit reports. Many lenders still buy a FICO score when they price a loan. Other companies sell other scores, including VantageScore.

• Debt snowball

  The debt snowball is a payoff order: pay the required minimum on every debt, then send every extra dollar to the smallest balance. When that one is gone, send that whole payment to the next-smallest.

• Debt avalanche

  The debt avalanche is a payoff order: pay the required minimum on every debt, then send every extra dollar to the debt with the highest APR. When that one is gone, send that payment to the next-highest APR.

• Withholding

  Withholding is money taken from gross pay before you see it: federal income tax, Social Security and Medicare, state tax where it applies, and benefits you chose.

• 401(k) match

  A 401(k) match is an employer contribution that arrives only if you put in whatever the plan formula requires. It is part of pay. It is not a market return.

• Roth account

  A Roth account takes after-tax contributions. If the account meets the IRS rules for a qualified withdrawal, the growth can come out without a second tax bill.

• Health savings account

  A health savings account can be opened only with an eligible high-deductible health plan. Contributions, growth, and qualified medical withdrawals each have tax rules. The IRS publishes the contribution cap, and the cap changes.

• FDIC insurance

  The Federal Deposit Insurance Corporation insures qualifying deposits at insured banks up to a limit set in law. The limit can change. The FDIC publishes the current number and what counts as a deposit.

• Principal

  Principal is the remaining borrowed amount. Interest is the fee charged on that remaining amount. A payment is split between the two.

• Deductible

  A deductible is the amount you pay out of pocket on a covered claim before the insurer pays. A higher deductible usually means a lower premium. A lower deductible usually means a higher premium.

• Inflation

  Inflation is when the same basket of goods and services costs more dollars than it did. Your paycheck number can stay the same while the groceries it buys shrink.

• Liquidity

  Liquidity is how quickly you can turn something you own into cash you can spend, at a price close to what it is worth.

• Opportunity cost

  Opportunity cost is the next-best use of the same dollars. Every yes is a no to something else, even if you never write the no down.

• PMI

  Private mortgage insurance protects the lender, not you, when a conventional mortgage is made with a small down payment. You pay the premium. The lender is the one who is insured.

• Escrow

  An escrow account attached to a mortgage is a holding pocket. Each month you pay a slice of next year's property tax and homeowners insurance. The servicer pays those bills from the pocket when they are due.

• Envelope budgeting

  Envelope budgeting assigns a cash amount, or a labeled digital pocket, to each spending category. Groceries get one envelope. Eating out gets another. When the envelope is empty, you stop, or you move money from a different envelope on purpose.