Glossary

Personal finance

Month-to-month money: budget, cushion, debt, investing and retirement. With no country and no currency, because tax rules change and principles do not.

63 terms

CKnowWhere your money comes from and where it goes

Asset: Something you own that has value. The useful question is not what it is worth, but whether it produces anything or merely depreciates.
Budget: Deciding where money goes BEFORE it goes. Not a diet: it is swapping the order of deciding and spending.
Cash flow: The difference between what comes in and what goes out over a period. Positive means you can build something; negative means the rest of the plan is moot.
Fixed expense: The one that repeats identically each month regardless of daily choices. The hardest to cut and the one that frees the most room when cut.
Inflation: The general rise in prices. The reason idle money loses value even though the account balance never drops.
Liability: What you owe someone else. Not a failure in itself: it is a future claim on your cash flow, and it is planned as such.
Net income: What actually reaches your account, after everything is taken out. The only figure you can plan with: gross cannot be spent.
Net worth: Everything you own minus everything you owe. The real scoreboard: your salary says how much comes in, this says how much you kept.
Opportunity cost: What you give up doing with that money by doing this instead. Every expense has one, though it appears on no receipt.
Purchasing power: What your money actually buys, not the figure. Earning 3% more with 5% inflation is earning less.
Savings rate: What share of what comes in you do not spend. It matters more than returns for the first years, and by a wide margin.
Variable expense: The one that changes with what you do. Where everyone tries to save first, and where least is achieved if the fixed ones are out of control.

ASecureThe cushion and the cover, before anything else

Coverage: What the policy covers exactly and up to how much. What matters is not what it includes but what it excludes.
Deductible: The share of the blow you pay before cover kicks in. Raising it cheapens the premium, and it is sensible right up to what you can absorb without flinching.
Emergency fundcushion: Money available instantly to cover several months of expenses. Not an investment and not meant to earn: its job is to be there on the bad day.
Insurable risk: The unlikely but catastrophic kind. The likely and small kind is paid out of pocket: insuring it is expensive because the insurer knows it too.
Insurance: Paying a small certain amount to avoid exposure to a large unlikely one. It only makes sense when the blow it covers would ruin you.
Insurance premium: What you pay periodically to stay covered. Comparing premiums without comparing cover is comparing prices of different things.

PPlanThe big decisions and the distant ones

Compound interest: When what your money earns starts earning too. Slow and boring for years, and then abruptly not.
Debt-to-income ratio: What share of your monthly income goes to servicing debt. Above a third, any surprise turns into a problem.
Down payment: The share of the price you put in yourself. The larger it is, the less you owe and the less the loan costs in total.
Financial goal: An amount and a date. Without both it is not a goal but a wish, and there is no way to work out how much to set aside.
Mortgage: A very long-term loan secured on the home itself. The term matters as much as the rate: stretching it lowers the payment and raises the total enormously.
Retirement: The point where your income stops depending on your work. Planned from the amount you need each year, not from a round number.
Rule of 72: Divide 72 by the annual return in percent to get the years it takes money to double. At 6%, twelve years.
Simple interest: Always calculated on the initial amount. The gap with compounding is negligible in year one and vast by year twenty.
Time horizon: When you will need that money. It decides where it can sit: what you need in two years cannot be where it can fall 40%.
Time value of money: One unit today is worth more than one unit a year from now, because today it can be put to work. Everything else follows from this.
Withdrawal rate: What share of your portfolio you take out each year once you stop working. The higher it is, the sooner it runs out: it is the variable that decides whether it lasts.

IInvestPutting the surplus to work

Asset allocation: What proportion goes to each asset type. It explains most of how a portfolio behaves, far more than picking well within each type.
Bond: A loan sliced up and made tradable. When rates rise, existing bonds are worth less, because they pay less than new ones.
Diversification: Spreading out so no single failure takes you down. It does not raise expected return: it lowers how bad things can get.
Equities: Stakes in companies. They pay more over the long run and swing far more: those two are the same fact.
ETFexchange-traded fund: A fund bought and sold like a share. The ease of trading it is both its advantage and its trap.
Fixed income: Lending money for an agreed interest. 'Fixed' refers to the coupon, not the price: a bond's value does move.
Index fund: A fund that copies an index instead of trying to beat it. It charges little precisely because it is not trying to be right.
Management fee: What the manager charges every year, win or lose. One percentage point a year eats a huge share of the outcome over thirty years.
Portfolio: All your investments seen as one thing. Judging a position on its own leads to decisions that make the whole worse.
Real return: The return once inflation is stripped out. The only one that says whether you gained purchasing power or just figures.
Rebalancing: Returning to the proportions you decided, selling what rose and buying what fell. Uncomfortable by design: that is why it works.
Regular contribution: Investing the same amount every month regardless. It does not improve average returns: it removes the decision of when to enter, which is where people lose.
Return: What an investment gains or loses, in percent. Without saying over what period, a percentage means nothing.
Volatility: How much an investment's value swings. Not the same as risk: the real risk is needing the money at exactly the worst moment.

TTackle debtTelling the kind that builds from the kind that sinks

Consumer debt: The kind that funds something which produces nothing and loses value besides. The most expensive and the most urgent to clear.
Debt avalanche: Attacking the highest-rate debt first. Optimal in money terms, and therefore what the arithmetic recommends.
Debt snowball: Attacking the smallest debt first. It costs slightly more and is abandoned less often, because closing a whole debt motivates.
Effective annual rate: The true cost of a loan over a year, including fees and compounding. The number to compare two offers with; the headline rate will not do.
Minimum payment: The least you can pay without defaulting. Paying only that is designed to make the debt last as long as possible.
Productive debt: The kind that funds something generating income or saving a bigger cost. Still debt: making sense does not make it harmless.
Refinancing: Replacing a debt with another on better terms. It only improves things if the total cost falls: stretching the term almost always raises it.
Revolving credit: A line you can reuse as you repay it, with a very low monthly minimum. That minimum is the trap: it stretches the debt for years.

AAutomateSo the plan does not depend on your willpower

Deliberate friction: Deliberately putting obstacles between you and a bad decision. It works better than discipline because it does not depend on how you feel that day.
Pay yourself first: Setting aside savings on payday, not from what is left at month end. Nothing is ever left: that is why the order is the whole rule.
Scheduled transfer: An automatic recurring move between your accounts. It turns an intention into a fact without spending willpower.
Separate accounts: Keeping day-to-day spending, the cushion and savings in different places. Seeing a balance that is not spendable stops you spending it.

LLearn and improveReviewing, spotting traps and correcting

Confirmation bias: Seeking only what proves you right. In money it is expensive: it turns a bad decision into a defended one.
Lifestyle inflation: Spending more as soon as you earn more. It explains how the salary rises and net worth does not.
Loss aversion: Losing hurting more than winning the same amount feels good. It is what makes people sell at the worst moment and hold what is beyond saving.
Mental accounting: Treating money differently depending on where it came from. A windfall and a salary buy the same things, yet almost nobody spends them alike.
Periodic review: Looking at the numbers on a fixed schedule, not when you remember. What is not reviewed drifts without anyone noticing.
Ponzi scheme: Paying the old with the money of the new. It works while people keep joining and collapses the day they stop.
Pyramid scheme: You earn by recruiting, not by selling anything. Arithmetic condemns it: each level needs more people than all the previous ones combined.
Red flag: Promising a fixed, risk-free payout, rushing you, or being unable to explain where the money comes from. Any one of the three is reason enough to walk.