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Personal finance glossary

Plain definitions of the money terms that come up most, each with a link to a guide that goes deeper.

50/30/20 rule

A simple budget that splits take-home pay into 50% for needs, 30% for wants and 20% for savings and extra debt payments. The 50/30/20 rule

Amortization

Paying off a loan through regular payments that cover both interest and principal. Early payments are mostly interest; later ones are mostly principal. An amortization schedule lists every payment and how it splits. See a full payoff schedule

APR (annual percentage rate)

The yearly cost of borrowing, expressed as a percentage. On credit cards it is usually applied as a daily rate (the APR divided by 365) to your balance each day. How credit card interest works

Balance transfer

Moving a credit card balance to another card, usually to get a low or 0% promotional rate for a set period. There is typically a one-time fee, and the regular rate applies once the promotion ends. Balance transfer vs. consolidation loan

Cash flow

The money coming in and going out over a period. Positive cash flow means more arrives than leaves; projecting it day by day shows when the balance will be lowest. Budgeting on real pay dates

Credit utilization

The share of your available credit card limits that you are using. A major factor in credit scores, and one that can change quickly as balances are paid down. Credit utilization explained

Debt avalanche

Paying the minimum on every debt and putting all extra money toward the one with the highest interest rate first. It costs the least in total interest. Snowball vs. avalanche

Debt consolidation loan

A personal loan used to pay off several debts, leaving one fixed monthly payment at a fixed rate over a set term. Balance transfer vs. consolidation loan

Debt snowball

Paying the minimum on every debt and putting all extra money toward the smallest balance first, for quicker early wins. Snowball vs. avalanche

Debt-free date

The month your last debt is projected to be paid off, given your balances, rates and the amount you pay each month. Find your debt-free date

Debt-to-income ratio (DTI)

Your monthly debt payments divided by your gross monthly income. Lenders use it to judge how much room you have for a new payment. How to calculate your DTI

Emergency fund

Savings set aside only for unexpected costs such as a job loss, a medical bill or a car repair, so they do not end up on a credit card. Building an emergency fund

Grace period

The time between the end of a credit card billing cycle and the payment due date. Pay the full statement balance within it and most cards charge no interest on new purchases. How credit card interest works

Gross income

Pay before taxes and deductions. Lenders use it for ratios such as debt-to-income; budgets should use take-home pay instead.

Minimum payment

The smallest amount you must pay on a debt by its due date to stay current. On credit cards it shrinks as the balance falls, which stretches repayment out for years. Why minimum payments take so long

Net worth

Everything you own minus everything you owe. It can be negative, and its direction over time matters more than any single reading. How to calculate net worth

Payment rollover

When a debt is paid off, adding its old payment to the next debt in line instead of spending it. Rollover is what makes the snowball and avalanche methods speed up over time. Snowball vs. avalanche

Principal

The amount you borrowed, or the part of a balance that is not interest. Payments above the minimum usually go straight to principal.

Promotional rate

A temporary low or 0% interest rate, often on balance transfers or new purchases. When it ends, the remaining balance starts charging the regular rate.

Refinancing

Replacing an existing loan with a new one, usually to get a lower rate or different term. Refinancing federal student loans into a private loan gives up federal protections. Paying off student loans

Residual value

In a car lease, the car's estimated worth at the end of the lease. Your payments mostly cover the difference between the price and the residual. Lease or finance a car?

Safe to spend

The money you can use without shorting a bill or going over budget. In My AI Fin App it is your monthly spending limits minus what you have already spent, as a daily figure. Safe to spend explained

Sinking fund

Money set aside a little at a time for a known future cost, such as insurance, a holiday or car repairs, so the bill is covered when it arrives. Sinking funds explained

Take-home pay

The amount that actually reaches your account after taxes, retirement contributions and other payroll deductions. The right starting point for a budget. How to make a budget

Zero-based budget

A budget where every dollar of income is assigned a job (spending, saving or debt) until income minus planned spending equals zero. Budgeting methods compared