Finance Glossary: 60 Terms in Plain English

Amortization: The process of paying off a loan through regular payments over a set period. Each payment covers the interest due and reduces the amount owed. Early payments are mostly interest, and later payments are mostly principal. Read the guide
Appreciation: An increase in the value of an asset over time. A home bought for $200,000 that is later worth $230,000 has appreciated by $30,000, or 15%. The opposite is depreciation.
APR (annual percentage rate): The yearly cost of borrowing, shown as a percentage. It includes the interest rate plus certain lender fees, so it gives a fuller picture of what a loan costs than the interest rate alone. Open the calculator
APY (annual percentage yield): The yearly rate earned on savings once compounding is included. Because interest is earned on earlier interest, APY is slightly higher than the stated rate whenever interest is added more than once a year. Open the calculator
Asset: Anything of value that a person or business owns. Cash, investments, property, equipment, inventory and money owed by customers are all assets. Assets minus liabilities equals net worth, or equity.
Balloon payment: A large final payment due at the end of some loans. Regular payments on these loans are kept low and do not fully repay the balance, so the remaining amount comes due all at once. Open the calculator
Basis point: One hundredth of one percentage point, or 0.01%. It is used to describe small changes in rates. A move from 5.00% to 5.25% is a rise of 25 basis points. One hundred basis points equal 1%.
Break-even point: The level of sales where total revenue equals total costs, so profit is zero. It is found by dividing fixed costs by the contribution margin per unit. Sales above this point produce a profit. Open the calculator
CAGR (compound annual growth rate): The steady yearly rate at which a starting value would grow to reach an ending value over a set number of years. It smooths out the ups and downs so different investments can be compared. Open the calculator
Cap rate: Short for capitalization rate. It is a property's yearly net operating income divided by its price or value. A building that earns $50,000 a year and costs $1,000,000 has a 5% cap rate. Open the calculator
Cash flow: The money moving into and out of a business, property or household over a period. Positive cash flow means more came in than went out. It is different from profit, which can include unpaid sales.
Certificate of deposit (CD): A savings account that holds a fixed sum for a fixed term, such as one year, usually at a fixed interest rate. Taking the money out before the term ends often brings a penalty. Open the calculator
Collateral: An asset a borrower pledges to secure a loan. If the borrower stops paying, the lender can take and sell the asset to recover its money. A home is the collateral for a mortgage.
Compound interest: Interest earned on both the original amount and the interest already added. Because each period's interest joins the balance, growth speeds up over time. The same effect makes unpaid debt grow faster. Open the calculator
Compounding frequency: How often interest is added to a balance, such as yearly, monthly or daily. The more often interest is added, the faster the balance grows at the same stated rate, though the difference is usually small. Read the guide
Contribution margin: The selling price of a unit minus the variable cost of producing it. It is the amount each sale contributes toward covering fixed costs and, once those are covered, toward profit. Read the guide
Cost of goods sold (COGS): The direct cost of making or buying the products a business sold in a period, such as materials and production labor. Revenue minus cost of goods sold equals gross profit. Open the calculator
Current ratio: Current assets divided by current liabilities. It shows whether a business can cover the bills due within a year using cash and assets that turn into cash soon. A ratio above 1 means it can. Open the calculator
Debt avalanche: A payoff method that sends all extra money to the debt with the highest interest rate while paying minimums on the rest. It keeps the total interest paid as low as possible. Read the guide
Debt snowball: A payoff method that sends all extra money to the debt with the smallest balance while paying minimums on the rest. Clearing small debts first gives quick wins that help people stay with the plan. Read the guide
Debt-to-income ratio (DTI): Total monthly debt payments divided by gross monthly income, shown as a percentage. Lenders use it to judge whether a borrower can handle a new payment. A lower ratio signals more room in the budget. Open the calculator
Depreciation: A fall in the value of an asset over time, often from wear or age. In business accounting, it also means spreading the cost of equipment over the years it is expected to be used.
Discount rate: The rate used to convert future money into its value today. It reflects the return that could be earned elsewhere and the risk involved. A higher discount rate makes future cash flows worth less now. Open the calculator
Diversification: Spreading money across different investments so that a loss in one has a smaller effect on the whole. It lowers the risk tied to any single holding but does not remove the risk of loss.
Down payment: The part of a purchase price paid upfront in cash, with the rest borrowed. A larger down payment means a smaller loan, lower monthly payments and less interest paid over the life of the loan. Open the calculator
DSCR (debt service coverage ratio): Net operating income divided by total loan payments for the same period. A ratio of 1.25 means income is 25% more than the payments due. Lenders use it to check that income can cover the debt. Open the calculator
Equity: The value of ownership after debts are subtracted. Home equity is the home's value minus the mortgage balance. In a business, equity is total assets minus total liabilities, the share that belongs to the owners.
Escrow: Money held by a neutral third party until agreed conditions are met. With a mortgage, an escrow account often collects part of each payment to cover property taxes and home insurance when they come due. Open the calculator
Fixed costs: Business costs that stay the same regardless of how much is sold in a period. Rent, salaries and insurance are common examples. They must be paid even when sales are zero. Open the calculator
Fixed-rate loan: A loan with an interest rate that stays the same for the whole term. The payment of principal and interest does not change, which makes budgeting simpler than with a rate that can move. Open the calculator
Future value: What a sum of money today will be worth at a later date if it grows at a given rate. For example, $1,000 growing at 5% a year becomes $1,050 after one year. Open the calculator
Gross margin: Gross profit as a percentage of revenue. Gross profit is revenue minus the direct cost of the goods sold. A product that sells for $100 and costs $60 has a gross margin of 40%. Open the calculator
Hurdle rate: The minimum return a project or investment must be expected to earn before it is approved. Businesses often base it on their cost of capital and add extra for riskier projects. Read the guide
Inflation: A general rise in prices over time, which reduces what each dollar can buy. At 3% inflation, something that costs $100 today would cost about $103 a year from now. Open the calculator
Interest rate: The price of borrowing money, or the reward for saving it, shown as a yearly percentage of the balance. A $1,000 loan at a 6% rate costs about $60 in interest over one year. Open the calculator
IRR (internal rate of return): The yearly rate of return at which the present value of an investment's cash inflows equals its cash outflows, making net present value zero. It accounts for both the size and timing of every cash flow. Open the calculator
Liability: Money that a person or business owes to someone else. Loans, credit card balances, unpaid bills and taxes due are all liabilities. Subtracting liabilities from assets gives net worth, or equity.
Liquidity: How quickly and easily an asset can be turned into cash without losing much value. Cash in a bank account is highly liquid. Property is not, because selling it takes time and has costs. Read the guide
Loan-to-value ratio (LTV): The loan amount divided by the value of the asset securing it, shown as a percentage. A $160,000 mortgage on a $200,000 home has an LTV of 80%. A lower ratio means less risk for the lender. Open the calculator
Markup: The amount added to the cost of a product to set its selling price, shown as a percentage of cost. An item that costs $60 and sells for $90 has a markup of 50%. Open the calculator
Net operating income (NOI): The income a property produces after operating expenses such as maintenance, insurance and management, but before loan payments and income taxes. It is the starting point for cap rate and DSCR. Open the calculator
Net profit margin: Net profit as a percentage of revenue. Net profit is what remains after every cost, including overhead, interest and taxes. A business that keeps $8 from each $100 of sales has an 8% net margin. Open the calculator
NPV (net present value): The value today of all future cash flows from an investment, minus the upfront cost. A positive NPV means the investment is expected to earn more than the discount rate used. Open the calculator
Opportunity cost: The benefit given up by choosing one option over the next best one. If cash sits idle when it could have earned 4% elsewhere, that lost 4% is the opportunity cost.
Payback period: The time it takes for an investment to return its upfront cost through the cash it brings in. A $10,000 machine that saves $2,500 a year has a payback period of four years. Open the calculator
Present value: What a future sum of money is worth today, given a rate of return. At a 5% rate, $1,050 received one year from now has a present value of $1,000. Open the calculator
Principal: The original amount borrowed or invested, not counting interest. On a loan, each payment covers the interest due and then reduces the principal. Interest is charged on the principal that remains. Open the calculator
Real rate of return: The return on an investment after subtracting inflation. If an investment earns 7% in a year when prices rise 3%, the real return is roughly 4%. It shows the true change in buying power. Open the calculator
Refinancing: Replacing an existing loan with a new one, usually to get a lower rate, a different term or a lower payment. The new loan pays off the old one. Fees can offset part of the savings. Open the calculator
Revenue: The total money a business brings in from sales before any costs are subtracted. It is also called sales or the top line. Revenue minus all costs equals net profit.
ROI (return on investment): The gain or loss on an investment as a percentage of its cost. Subtract the cost from the final value, then divide by the cost. A $1,000 investment that grows to $1,200 has a 20% ROI. Open the calculator
Rule of 72: A shortcut for estimating how long money takes to double with compound growth. Divide 72 by the yearly rate in percent. At 6% a year, money doubles in about 12 years. Open the calculator
Simple interest: Interest calculated only on the original amount, never on interest already earned. It equals principal times rate times time. A $1,000 loan at 5% simple interest costs $50 each year. Open the calculator
Term: The length of time over which a loan is repaid or a deposit is held. A longer loan term lowers the monthly payment but usually raises the total interest paid. Open the calculator
Time value of money: The idea that money available now is worth more than the same amount later, because money in hand can be invested to earn a return. It is the basis for present value and future value. Open the calculator
Variable costs: Business costs that rise and fall with the number of units made or sold. Materials, packaging, shipping and sales commissions are common examples. With zero sales, variable costs are close to zero. Open the calculator
Variable-rate loan: A loan with an interest rate that can change over time, usually in step with a benchmark rate. Payments can rise or fall as the rate moves, so the total cost is less predictable. Open the calculator
WACC (weighted average cost of capital): The average rate a company pays for its funding, combining the cost of equity and the after-tax cost of debt in proportion to how much of each it uses. It is often used as a hurdle rate. Open the calculator
Working capital: Current assets minus current liabilities. It measures the short-term funds a business has to run day-to-day operations after covering bills due within a year. Positive working capital means there is a cushion. Open the calculator
Yield: The income an investment produces in a year, shown as a percentage of its price or value. A bond bought for $1,000 that pays $40 of interest a year has a yield of 4%. Open the calculator

Finance glossary