Financial glossary

26 personal finance terms explained in a sentence, with context, examples and the formula when there is one.

Net worth

Financial independence: Financial independence is the point at which income from your invested net worth covers your expenses, so working stops being mandatory.
Liquidity: Liquidity is how easily an asset can be converted into available cash without losing value.
Net worth: Net worth is the difference between everything you own (assets) and everything you owe (liabilities), valued at the same point in time.
Withdrawal rate: Withdrawal rate is the percentage of net worth withdrawn in the first year of retirement, later adjusted for inflation; the classic reference is 4%.

Compound interest: Compound interest is the return generated on both the original principal and the interest already accumulated in prior periods.
Diversification: Diversification means spreading investments across assets, sectors, countries and currencies whose behavior isn't perfectly correlated.
Dividend: A dividend is the share of profit a company distributes to its shareholders, usually in cash and on a regular schedule.
IRR: IRR (internal rate of return) is the annual rate that equates the present value of an investment with all its cash inflows and outflows on their actual dates.
Real return: Real return is the nominal return adjusted for inflation: it measures the actual increase in purchasing power.
Rebalancing: Rebalancing is periodically adjusting a portfolio back to its target split between asset types.
Risk profile: Risk profile is the level of loss an investor can bear without jeopardizing their goals (capacity) and without selling in a panic (tolerance).
Rule of 110: The rule of 110 suggests putting a percentage equal to 110 minus your age into stocks, and the rest into bonds.
Volatility: Volatility measures how much an investment's value swings around its average: higher volatility means bigger short-term ups and downs.

Amortizing loan: An amortizing loan (level-payment schedule) is a repayment method where the instalment stays constant while, within it, the interest portion shrinks and the principal portion grows over time.
APR: APR (annual percentage rate) is the effective annual cost or yield of a financial product, including interest, fees and charges, and it's the figure that lets you compare offers.
Extra mortgage payment: An extra mortgage payment is money applied to a loan ahead of schedule to reduce the outstanding principal early, choosing between shortening the term or lowering the instalment.

50/30/20 rule: The 50/30/20 rule splits monthly take-home income into 50% for needs, 30% for wants, and 20% for savings and debt repayment.
Budget: A budget is the advance allocation of your income to spending and saving categories, with later tracking of the differences.
Budget variance: Budget variance is the difference between the amount planned for a category and the income or expense actually recorded during the period.
Emergency fund: An emergency fund is a liquid cushion equal to three to six months of fixed expenses, set aside exclusively for unexpected events.
Inflation: Inflation is a broad, sustained rise in prices that reduces the purchasing power of money over time.
Savings rate: Savings rate is the percentage of your take-home income that you don't spend and instead put toward saving, investing or paying down debt.

Asset: An asset is anything of economic value you own: cash, investments, real estate, vehicles or loans made to others.
Bank reconciliation: Reconciliation is checking that the balance recorded in your system matches the actual balance of the account at the bank.
Double-entry bookkeeping: Double-entry bookkeeping is the accounting principle where every transaction is recorded in at least two accounts, so total debits always equal total credits.
Liability: A liability is an outstanding payment obligation: a mortgage, personal loan, consumer credit, card balance or debt owed to someone else.

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Educational content. netclariq does not provide financial, investment, tax or legal advice.