APR (Annual Percentage Rate)
The yearly cost of borrowing money, including both the interest rate and any mandatory lender fees, allowing fair apples-to-apples comparison across loan offers.
APY (Annual Percentage Yield)
The effective annual return earned on a savings account or investment after compound interest is factored in. APY is always higher than the stated rate when compounding occurs more than once per year.
Amortization
The schedule detailing how each fixed loan payment is allocated between interest charges and principal reduction over the life of a loan. Early payments are heavily weighted toward interest.
Compound Interest
Interest calculated on both the initial principal and all previously accumulated interest. Compounding accelerates growth exponentially over long time horizons compared to simple interest.
Yield Curve
A graph plotting interest rates of Treasury bonds across different maturities. A normal curve slopes upward; an inverted curve (short rates > long rates) has historically predicted recessions.
Prime Rate
The benchmark interest rate commercial banks charge their most creditworthy corporate clients. Most consumer loan rates (credit cards, HELOCs) are set as prime rate + a spread.
Inflation
The rate at which the general price level of goods and services rises over time, eroding the real purchasing power of cash. The U.S. Federal Reserve targets approximately 2% annual inflation.
Refinancing
Replacing an existing debt obligation with a new loan offering more favorable interest terms, a lower monthly payment, or a different loan duration. Success depends on breaking even before you move.
ETF (Exchange-Traded Fund)
A basket of securities — stocks, bonds, or commodities — that trades on a stock exchange like a single share. ETFs offer instant diversification, typically lower fees than mutual funds, and intraday liquidity.
Index Fund
A passively managed fund that tracks a market index such as the S&P 500. Index funds aim to match market returns rather than beat them, typically delivering superior long-run performance versus actively managed funds after fees.
TIPS (Treasury Inflation-Protected Securities)
U.S. Treasury bonds whose principal value adjusts with the Consumer Price Index (CPI). TIPS guarantee a real (inflation-adjusted) return, protecting investors from purchasing power erosion.
FOMC (Federal Open Market Committee)
The policy-setting body of the U.S. Federal Reserve that meets approximately eight times per year to set the target range for the Federal Funds Rate and guide U.S. monetary policy.
Real Yield
The nominal yield on an investment minus the current inflation rate. Real yield reveals the actual purchasing-power gain an investor receives. A 6% nominal return during 4% inflation produces only a 2% real return.
Debt Avalanche
A debt payoff strategy that prioritizes paying off the highest-interest debt first while making minimum payments on all others. Mathematically optimal — it minimizes total interest paid over time.
Debt Snowball
A debt payoff strategy that prioritizes paying off the smallest balance first regardless of interest rate. Provides psychological wins that can improve motivation and adherence to the plan.
ARM (Adjustable-Rate Mortgage)
A mortgage with an initial fixed-rate period (e.g. 5, 7, or 10 years) followed by periodic rate adjustments tied to a benchmark index such as SOFR. Can save money short-term but carries reset risk.
Rule of 72
A mental math shortcut to estimate how long it takes to double an investment: divide 72 by the annual interest rate. At 8%, money doubles roughly every 9 years (72 ÷ 8 = 9).
Net Worth
Total assets minus total liabilities. A comprehensive snapshot of personal financial health. Growing net worth over time — not income alone — is the primary goal of personal wealth building.
