Reference
Money glossary
136 personal finance words explained in plain language — from interest and inflation to budgets, credit and index funds — each with an everyday example.
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Plain-language definitions of the words that come up when people talk about money. Each one has an everyday example and points to the lessons that use it.
Alternative asset
An investment outside the main classes of shares, bonds and cash — such as private companies, collectibles or digital currencies. Often harder to value and sell, and riskier.
Example: A painting bought in the hope that its value will rise is an alternative asset.
Anchoring
The tendency for the first number you see to pull your later judgements toward it, even when that number is irrelevant.
Example: A “was 300, now 150” label makes 150 feel like a bargain because 300 came first.
APR (annual percentage rate)
The yearly cost of borrowing expressed as a percentage, including interest and some fees, so different loans can be compared.
Example: Two loans with the same monthly payment can have very different APRs and total costs.
Asset
Something you own that has value, such as savings, a home, tools, investments or a business.
Example: A savings account and a delivery bike used for work are both assets.
Asset class
A group of investments that behave in similar ways, such as shares, bonds, cash, property or commodities.
Example: Bonds are one asset class; shares are another.
Bank
A licensed institution that holds deposits, makes loans and moves money between people and businesses.
Example: When you are paid into an account, your bank owes you that amount on request.
Barter
Trading goods or services directly for other goods or services, without money.
Example: Swapping a bag of rice for a pair of shoes is barter.
Bear market
A period when investment prices fall substantially and pessimism is widespread.
Example: After a sharp fall in share prices, commentators may describe the market as a bear market.
Behavioral economics
The study of how real people make economic decisions, including the predictable ways they depart from purely rational choice.
Example: Finding that more people save when they are enrolled by default is a behavioral economics result.
Bond
A loan you make to a government or company, which usually pays you interest and returns the original amount at the end of its term.
Example: Lending 1,000 to a government for five years at a set yearly interest is buying a bond.
Budget
A plan for the money you expect to have: where it comes from and where you want it to go.
Example: Deciding before the month starts how much goes to rent, food, savings and fun is making a budget.
Bull market
A period when investment prices rise substantially and optimism is widespread.
Example: Several years of rising share prices are often called a bull market.
Buy now, pay later
A way of paying for a purchase in several instalments, often with no interest if every payment is on time and fees if one is missed.
Example: Splitting a jacket into four payments at the checkout is buy now, pay later.
Capital
Resources used to produce more value in the future — money and assets (financial capital) or skills and health (human capital).
Example: Savings used to buy a sewing machine for a tailoring business are capital.
Capital gain
The profit when you sell something for more than you paid for it.
Example: Buying shares for 500 and selling them for 700 gives a capital gain of 200.
Capital gains tax
A tax, where it exists, on the profit from selling an asset that has risen in value — not on the whole sale price.
Example: If a house bought for 100,000 sells for 130,000, any capital gains tax applies to the 30,000 gain.
Cash equivalent
A very safe, very liquid holding that can be turned into cash quickly with little change in value, such as a short-term deposit.
Example: A savings deposit you can withdraw within days is close to a cash equivalent.
Cash flow
The movement of money in and out over time — and the timing of it.
Example: Being paid on the 28th while rent leaves on the 1st is a cash-flow problem, even if the month balances.
Central bank
The institution that manages a country’s or region’s currency and banking system, including setting a key interest rate.
Example: When the central bank raises its rate, loans across the country tend to become more expensive.
Cognitive bias
A predictable mental shortcut that usually helps us decide quickly but can lead us astray in particular situations.
Example: Feeling a loss more strongly than an equal gain is a cognitive bias.
Collateral
Something of value that a borrower pledges to a lender, which the lender can take if the loan is not repaid.
Example: A home is the collateral for a home loan.
Commission
Pay based on a share of what you sell, rather than a fixed amount.
Example: A salesperson earning a small percentage of every sale is paid commission.
Commodity
A raw material or basic good, such as gold, oil, metals or grain, that is traded in large quantities.
Example: Wheat traded on international markets is a commodity.
Compound interest
Interest charged or earned on both the original amount and the interest already added — interest on interest.
Example: Savings of 1,000 earning 5% a year grow to about 1,629 after ten years because each year’s interest also earns interest.
Confirmation bias
The tendency to notice and favour information that supports what we already believe.
Example: After buying a car, reading only the positive reviews of that model is confirmation bias.
Consumer debt
Borrowing to pay for everyday spending and goods rather than for things that grow in value.
Example: A card balance built up from clothes and meals out is consumer debt.
Consumption tax
A tax charged when you buy goods or services, usually included in the price, such as a sales tax or value-added tax.
Example: Part of the price of most things you buy in a shop can be consumption tax.
Cost per use
The price of something divided by the number of times you use it.
Example: A coat costing 200 worn 400 times costs 0.5 per wear.
Coverage
What an insurance policy includes, up to what limits, and what it excludes.
Example: A home policy may cover fire but exclude gradual leaks.
Credit
The ability to borrow, based on a lender’s trust that you will repay.
Example: Being approved for a loan means a lender is offering you credit.
Credit card
A card that lets you borrow up to a limit, repay some or all each month, and borrow again.
Example: Paying a card in full each month avoids interest; carrying a balance usually does not.
Credit score
In many countries, a number summarising your borrowing and repayment history, used by lenders to decide whether and on what terms to lend.
Example: Missing loan payments can lower a credit score for years.
Currency
A specific form of money, usually issued by a country, such as its notes, coins and official unit of account.
Example: A country’s national currency is one form of money; not every form of money is a currency.
Debt
Money you have borrowed and promised to repay, usually with interest.
Example: A loan for a motorbike, repaid monthly over two years, is a debt.
Debt avalanche
A repayment method that pays the minimum on every debt and puts any extra toward the debt with the highest interest rate first.
Example: Clearing a card at 24% before a loan at 9% is the avalanche method.
Debt snowball
A repayment method that pays the minimum on every debt and puts any extra toward the smallest balance first.
Example: Paying off a small store card first, for a quick win, is the snowball method.
Debt-to-income
The share of your monthly income that goes to debt repayments.
Example: Paying 300 a month toward debts on a take-home income of 1,500 is a debt-to-income of one fifth.
Deductible (excess)
The amount you pay yourself on an insurance claim before the insurer pays anything.
Example: With a deductible of 200, a repair costing 1,000 is paid 200 by you and 800 by the insurer.
Deflation
A general fall in prices over time.
Example: If a typical basket of goods costs 100 this year and 98 next year, that is deflation.
Deposit
Money placed with a bank, which the bank owes back to you.
Example: Paying cash into your account makes a deposit.
Deposit insurance
A scheme in many countries that protects bank deposits up to a limit if a licensed bank fails.
Example: If a protected bank failed, savers would get back their deposits up to the scheme’s limit.
Discretionary spending
Spending on things you could choose to do without.
Example: Cinema tickets and takeaway meals are discretionary spending.
Diversification
Spreading money across many different investments so that one failure cannot sink everything.
Example: Owning small pieces of hundreds of companies instead of one is diversification.
Dividend
A share of a company’s profits paid to its shareholders.
Example: A company might pay a small dividend on each share twice a year.
Emergency fund
Money kept only for genuine emergencies, such as losing income or an urgent repair.
Example: Three months of essential costs kept in a separate savings account is an emergency fund.
Envelope budgeting
A budgeting method that splits money into separate “envelopes” for each category and stops spending in a category when its envelope is empty.
Example: Keeping a separate account for food and stopping takeaways when it runs out is envelope budgeting.
Equity
The part of something you truly own — its value minus what you owe on it. In investing, it also means shares in companies.
Example: A home worth 200,000 with a loan of 150,000 gives 50,000 of equity.
ETF (exchange-traded fund)
A fund that trades on a stock exchange like a share; many simply track an index at low cost.
Example: An ETF tracking a broad index lets you own many companies in a single purchase.
Expected value
The average result you would get if you could repeat a choice many times, weighing each outcome by its chance.
Example: A bet with a half chance of winning 10 and a half chance of losing 4 has an expected value of 3.
Expense ratio
The yearly fee a fund charges, as a percentage of what you have invested in it.
Example: An expense ratio of 0.2% costs 2 a year for every 1,000 invested.
Fee
A charge for a service — in investing, charges for managing, holding or trading investments.
Example: An account fee taken every year reduces what your investments grow to.
Fiat money
Money whose value comes from law, trust and the institutions behind it, not from being exchangeable for gold or another commodity.
Example: Most national currencies today are fiat money.
Financial capital
Money and assets — savings, investments, property — that can produce income or growth.
Example: Savings built up over a working life are financial capital.
Financial crisis
A period when confidence in the financial system breaks down, lending dries up and asset prices fall sharply.
Example: A wave of loan defaults that makes banks stop lending to each other can turn into a financial crisis.
Financial independence
Having enough savings and non-work income to cover your living costs without needing to work.
Example: Someone whose investments reliably cover their yearly costs has reached financial independence.
Financial regulator
A public body that licenses and supervises banks, insurers, lenders and investment firms and protects consumers.
Example: Checking a firm on the regulator’s register is a simple protection against scams.
Fixed expense
A cost that is about the same every month and hard to change quickly.
Example: Rent and a loan repayment are fixed expenses.
FOMO (fear of missing out)
The anxious feeling that others are gaining something you will regret not having, which pushes people to act quickly.
Example: Rushing to invest because friends say they made money is often FOMO.
Fund
A pool of money from many investors, invested together in many holdings.
Example: A fund might hold shares in hundreds of companies on behalf of thousands of investors.
Generational wealth
Wealth — and advantages such as education and knowledge — passed from one generation to the next.
Example: A home inherited from grandparents is part of generational wealth.
Gross income
What you earn before deductions such as tax and contributions.
Example: A salary quoted as 30,000 a year is gross income.
Hedonic adaptation
The tendency to get used to changes in our lives and return to roughly the same level of happiness.
Example: The thrill of a new phone fading within weeks is hedonic adaptation.
Human capital
The value of your ability to earn — your skills, knowledge, health and experience.
Example: A course that raises your pay for decades is an investment in human capital.
Income
Money that comes to you over a period, such as wages, profits, interest or rent.
Example: A monthly salary and rent from a lodger are both income.
Income tax
A tax on what you earn, often deducted automatically from wages.
Example: The tax deducted on a payslip is usually income tax.
Index fund
A fund that simply holds all the investments in a market index, at low cost, rather than trying to pick winners.
Example: An index fund tracking the largest companies in a country owns a slice of each of them.
Inequality
How unevenly income or wealth is spread across a society.
Example: A society where the top tenth owns most of the wealth has high wealth inequality.
Inflation
The general rise in prices over time, which reduces what each unit of money can buy.
Example: If a basket of goods costs 100 this year and 105 next year, inflation was about 5%.
Instalment
One of a series of regular payments toward a loan or purchase.
Example: Paying for a fridge in twelve monthly payments means paying it in instalments.
Insurance
An arrangement in which you pay a premium so that an insurer pays for covered losses.
Example: Home insurance pays for repairs after a covered fire.
Insurance policy
The contract setting out what an insurance covers, its limits, exclusions, premium and deductible.
Example: Reading a policy’s exclusions shows what it will not pay for.
Interest
The price of borrowing money, or the reward for lending or saving it, usually a percentage per year.
Example: Borrowing 1,000 at 10% a year costs 100 in interest over the year.
Interest rate
The percentage charged on a loan or paid on savings over a period, usually a year.
Example: A savings account with an interest rate of 3% pays 30 a year on 1,000.
Investing
Putting money into something in the hope that it will grow in value or produce income over time, accepting that it may fall.
Example: Buying a share in a fund for a goal twenty years away is investing.
Irregular expense
A cost that does not come every month but does come, such as annual fees or festivals.
Example: A yearly insurance renewal is an irregular expense.
Leverage
Using borrowed money to increase the size of an investment, which magnifies both gains and losses.
Example: Buying a house mostly with a loan is using leverage.
Liability
Something you owe, such as a loan or unpaid bill. In insurance, liability also means legal responsibility for harm to others.
Example: A car loan is a liability; liability insurance covers damage you cause to someone else.
Lifestyle inflation
Spending rising to match a rising income, so that a higher income leaves you no better off.
Example: Moving to a bigger flat and eating out more after every raise is lifestyle inflation.
Liquidity
How quickly and cheaply something can be turned into money you can spend.
Example: Cash is highly liquid; a house is not.
Loan
A fixed amount borrowed and repaid over an agreed period, usually with interest.
Example: A three-year loan for a car, repaid monthly, is a loan.
Loss aversion
The tendency for losses to feel more painful than equal gains feel good.
Example: Refusing to sell a fallen investment to avoid “making the loss real” is loss aversion.
Marginal tax rate
The tax rate on your last unit of income — the rate any extra income would be taxed at.
Example: If income above 30,000 is taxed at 20%, someone earning 35,000 has a marginal rate of 20%.
Mental accounting
Treating money differently depending on where it came from or what it is labelled for, even though money is interchangeable.
Example: Spending a tax refund freely while guarding the same amount of salary is mental accounting.
Minimum payment
The smallest amount a lender requires each month to keep an account in good standing.
Example: Paying only the minimum on a card balance can keep you in debt for years.
Monetary policy
How a central bank uses interest rates and other tools to influence inflation and employment.
Example: Raising interest rates to slow inflation is monetary policy.
Mortgage (home loan)
A loan to buy property, secured against that property.
Example: Borrowing to buy a flat, repaid over twenty-five years, is usually a mortgage.
Net income
What you actually receive after deductions such as tax and contributions — your take-home pay.
Example: A gross salary of 2,500 a month might become 2,000 of net income.
Net worth
Everything you own minus everything you owe.
Example: Savings of 5,000 and a loan of 2,000 give a net worth of 3,000.
Opportunity cost
The best alternative you give up when you make a choice.
Example: The opportunity cost of spending savings on a holiday might be the course you could have taken.
Optimism bias
The tendency to believe bad things are more likely to happen to other people than to yourself.
Example: Skipping an emergency fund because “nothing will go wrong” is optimism bias.
Passive income
Income that keeps arriving without much ongoing work, such as rent or dividends — usually after substantial work or money up front.
Example: Rent from a room in your home can be passive income, once the room is ready and let.
Pay yourself first
Moving money to savings as soon as income arrives, before spending anything else.
Example: An automatic transfer to savings the day after payday is paying yourself first.
Payment network
The system that passes payment instructions between banks, card companies and other providers.
Example: A card payment travels over a payment network between your bank and the shop’s bank.
Pension
Savings or entitlements built up during working life to provide income in retirement.
Example: Contributions from your pay and your employer into a retirement scheme build a pension.
Ponzi scheme
A fraud that pays early investors with money from newer investors rather than from real profits, and collapses when new money stops.
Example: A scheme promising high monthly returns that only pays out while new members keep joining may be a Ponzi scheme.
Premium
The amount you pay, monthly or yearly, to be covered by insurance.
Example: A monthly payment of 20 for health cover is its premium.
Present bias
Giving much more weight to rewards now than to rewards later.
Example: Planning to save “next month” every month is present bias at work.
Principal
The original amount borrowed or invested, before interest.
Example: On a loan of 1,000, the principal is 1,000; the interest is extra.
Profit
What a business keeps after paying all its costs.
Example: Sales of 5,000 with costs of 3,500 leave a profit of 1,500.
Purchasing power
How much a unit of money can buy.
Example: When prices rise, the purchasing power of the money in your pocket falls.
Real estate
Land and buildings, owned to live in, rent out or invest in.
Example: A flat bought to rent to tenants is real estate.
Real return
The return on money after inflation is taken into account.
Example: Earning 4% while prices rise 3% is a real return of about 1%.
Recession
A period when a whole economy shrinks, usually with rising unemployment.
Example: Two consecutive quarters of falling national output are often described as a recession.
Refinancing
Replacing one or more debts with a new one on different terms, such as a lower rate or a single payment.
Example: Taking a new loan at a lower rate to pay off a more expensive one is refinancing.
Return
What an investment gains or loses over a period, often shown as a percentage.
Example: An investment worth 1,000 that grows to 1,060 in a year returned 6%.
Revenue
All the money a business takes in from sales, before costs.
Example: A stall selling 200 meals at 5 each has revenue of 1,000 — not all of it is profit.
Risk
The chance that an outcome differs from what you expect — in money, often the chance of loss.
Example: An investment that could fall by half in a bad year carries high risk.
Risk capacity
How much loss your finances can absorb without damaging your goals.
Example: Someone with decades until retirement usually has more risk capacity than someone retiring next year.
Risk pooling
Many people each paying a little so that the few who suffer a large loss can be covered.
Example: Thousands of households paying home insurance premiums is risk pooling.
Risk tolerance
How much ups and downs you can emotionally handle without making poor decisions.
Example: Someone who would panic-sell after a small fall has low risk tolerance.
ROI (return on investment)
The gain from an investment compared with what was put in, usually as a percentage.
Example: Spending 500 on a course that raises yearly earnings by 1,000 is a high return on investment.
Salary
A fixed yearly amount of pay, usually paid in equal monthly instalments.
Example: A job paying 24,000 a year, paid as 2,000 a month before deductions, pays a salary.
Savings account
A bank account designed for keeping money safe and reachable, usually paying some interest.
Example: An emergency fund is often kept in a savings account.
Secured loan
A loan backed by collateral that the lender can take if you stop paying.
Example: A vehicle loan the lender can reclaim the vehicle for is a secured loan.
Simple interest
Interest charged only on the original amount, not on interest already added.
Example: Borrowing 1,000 at 10% simple interest for two years costs 200 in interest.
Sinking fund
Money set aside a little at a time for a specific future cost you know is coming.
Example: Saving 50 a month for a yearly insurance bill of 600 is a sinking fund.
Social mobility
How easily people can move up or down in income or status compared with where they started.
Example: Children from poorer families reaching high incomes as adults is a sign of social mobility.
Social proof
Treating what others do as a guide to what is right.
Example: Choosing the busiest restaurant because it must be good is social proof.
Speculation
Trying to profit from short-term price moves rather than from owning something productive over time.
Example: Buying a coin because you expect its price to jump next week is speculation.
Stock (share)
A small piece of ownership in a company.
Example: Owning 10 shares of a company makes you one of its many part-owners.
Subscription
A regular payment that repeats automatically until you stop it.
Example: A monthly streaming service is a subscription.
Sunk cost
Money, time or effort already spent that cannot be recovered.
Example: The price of a non-refundable ticket is a sunk cost whether or not you go.
Supply and demand
How the amount available and the amount people want together push prices up or down.
Example: When a crop fails and supply falls, its price usually rises.
Tax
Money that governments collect to pay for shared services and to shape behaviour.
Example: Part of your wages and part of what you pay in shops go to tax.
Tax bracket
A slice of income taxed at a particular rate. Each rate applies only to the income within its slice.
Example: Crossing into a higher bracket taxes only the income above the threshold at the higher rate.
Tax credit
An amount that reduces the tax you owe directly.
Example: A tax credit of 100 cuts a tax bill of 1,000 to 900.
Tax deduction
An amount that reduces the income on which tax is calculated.
Example: A deduction of 1,000 lowers taxable income by 1,000, saving that amount times your tax rate.
Tax evasion
Illegally avoiding tax, for example by hiding income or inventing expenses.
Example: Not declaring cash income is tax evasion; using a legal allowance is not.
Time horizon
How long until you will need a particular sum of money.
Example: Money for a deposit in two years has a shorter time horizon than money for retirement in thirty.
Total cost of ownership
Everything something costs over its life — price, running costs, maintenance, insurance — minus anything you get back when you sell it.
Example: A cheap printer with expensive ink can have a high total cost of ownership.
Unsecured loan
A loan with no collateral, usually costing more because the lender has less protection.
Example: Most personal loans and card balances are unsecured.
Variable expense
A cost that changes from month to month.
Example: Food, fuel and entertainment are variable expenses.
Volatility
How much and how quickly an investment’s value moves up and down.
Example: An investment that can rise or fall by a fifth in a few months is highly volatile.
Wealth
What you own minus what you owe — and, more broadly, the security and choices that brings.
Example: Years of steady saving can build wealth even on a modest income.
Yield
The income an investment produces, usually as a yearly percentage of its price.
Example: A bond paying 40 a year on a price of 1,000 has a yield of 4%.
Zero-based budget
A budget in which every unit of income is given a job, so income minus planned uses equals zero.
Example: Assigning all of next month’s pay to bills, savings, spending and goals before it arrives is a zero-based budget.