Glossary
61 terms in plain language. Definitions are written for this site; they explain, and do not replace the legal terms of any product.
- Amortisation
- Repaying a loan in regular instalments so that the balance reaches zero at the end of the term. Early instalments are mostly interest; later ones are mostly principal. Ch 11, Ch 13
- APR (annual percentage rate)
- A yearly cost-of-borrowing figure. Definitions vary by country; in some places it includes fees, in others only interest. Always ask what it includes. Ch 11, Ch 12
- Asset
- Something you own that has value: cash, investments, property, a business, a pension. Ch 1, Ch 6
- Asset allocation
- How an investment portfolio is divided between kinds of assets, such as shares, bonds and cash. Ch 19, Ch 22
- Balance
- The amount owed on a loan or card, or held in an account, at a point in time. Ch 1
- Behavioural bias
- A predictable mental shortcut that nudges us away from good decisions, such as overconfidence or loss aversion. Ch 5
- Bond
- A loan you make to a government or company, which promises to pay interest and return your money at a set date. Ch 19, Ch 20
- Buffer (emergency fund)
- Accessible money set aside to absorb shocks, so a surprise bill does not become a debt. Ch 7, Ch 8
- Capital
- Money or assets used to produce more money. Also the amount of a loan still owed, in banking, as opposed to interest. Ch 1
- Collateral
- An asset pledged to a lender, which the lender can take if the loan is not repaid. Ch 10, Ch 13
- Compounding
- Earning (or paying) interest on interest. Growth builds on earlier growth, which is why time is so powerful for savers and so costly for borrowers. Ch 3
- Credit score
- A number or rating that summarises how reliably you have borrowed in the past. Different countries and agencies use different methods. Ch 10
- Credit utilisation
- The share of your available credit limit that you are using. High utilisation can signal stress to lenders. Ch 10, Ch 12
- Debt-to-income ratio (DTI)
- Your monthly debt payments divided by your monthly income. Lenders use it to judge how stretched you are. Ch 10, Ch 14
- Default
- Failing to meet the terms of a loan, usually by missing payments for a defined period. Ch 10, Ch 14
- Diversification
- Spreading money across many holdings so that no single failure can badly damage the whole. Ch 20, Ch 22
- Effective annual rate (EAR)
- The rate that a year of borrowing or saving really adds up to once compounding is included. Ch 3, Ch 11
- Equity (in a home)
- The part of a home’s value you own: its value minus the mortgage still owed. Ch 13
- ETF (exchange-traded fund)
- A fund that holds many investments and trades on an exchange like a share. Many track an index at low cost. Ch 19, Ch 21
- Excess (deductible)
- The part of a loss that you pay before an insurer pays the rest. A higher excess lowers the premium. Ch 17
- Expected value
- The average outcome of an uncertain event, found by weighting each outcome by its probability. Ch 16, Ch 17
- Fee
- A charge for a service. In finance, fees are often small in percentage terms but large over time. Ch 11, Ch 21
- Flat rate
- A way of quoting interest on the original loan amount for the whole term, even as the balance falls. It costs far more than the same figure on a reducing balance. Ch 11
- Fraud
- Deliberate deception to obtain money or advantage, such as a fake investment or impersonation. Ch 18
- Fund
- A pooled investment in which many people’s money is invested together by a manager. Ch 19, Ch 21
- Incentive
- What motivates someone to act, including how a seller, adviser or lender gets paid. Ch 4, Ch 15
- Income
- Money received, usually per month or year, before or after tax. Always check which. Ch 1, Ch 6
- Inflation
- A general rise in prices, which reduces what each unit of money can buy. Ch 2
- Insurance
- A contract that moves the financial risk of a defined loss to an insurer in return for a premium. Ch 17
- Liquidity
- How quickly and cheaply something can be turned into cash without losing value. Ch 7, Ch 19
- Loading (insurance)
- The amount by which a premium exceeds the average claim cost; covers the insurer’s costs and profit. Ch 17
- Loan-to-value (LTV)
- The loan as a share of the asset’s value. A 90% LTV mortgage means a 10% deposit. Ch 13
- Monthly margin
- What is left of take-home pay after commitments and everyday spending. The raw material of wealth. Ch 1, Ch 6
- Mortgage
- A loan to buy property, secured on that property. Ch 13
- Nominal (vs real)
- A figure not adjusted for inflation. Real figures are adjusted so they show buying power. Ch 2
- Opportunity cost
- What you give up by choosing one option over the next best. Ch 4
- Overdraft
- Borrowing by spending more than your account holds. Usually expensive and sometimes automatic. Ch 12
- Pension
- A scheme that provides income in retirement, either from a pot you own or a promised amount. Ch 24
- Portfolio
- All your investments considered together. Ch 22
- Principal
- The amount borrowed, as opposed to the interest charged on it. Ch 11
- Purchasing power
- What a given amount of money can buy. Inflation reduces it. Ch 2
- Real return
- An investment’s return after subtracting inflation: what it adds to buying power. Ch 2, Ch 20
- Rebalancing
- Restoring a portfolio to its target mix after some holdings have grown or fallen more than others. Ch 22
- Reducing balance
- Interest charged only on what you still owe. The fair basis for comparing loans. Ch 11
- Revolving credit
- Credit you can use, repay and use again up to a limit, such as a card or overdraft. Ch 12
- Risk
- The possibility that outcomes differ from what you expect, including losing money. Not the same as volatility. Ch 16, Ch 20
- Rule of 72
- A shortcut: divide 72 by the yearly percentage return to estimate how many years it takes to double. Ch 3
- Scam
- A scheme to trick you out of money, often using urgency, trust or fear. Ch 18
- Secured loan
- A loan backed by collateral. Rates are usually lower, but the lender can take the asset. Ch 10, Ch 14
- Sequence risk
- The danger that poor returns arrive early in retirement, when you are withdrawing money, doing lasting damage. Ch 20, Ch 24
- Stress test
- Checking whether a plan would survive a bad but plausible event, such as higher rates or lost income. Ch 13, Ch 14
- Unsecured loan
- A loan not backed by collateral, such as a card or personal loan. Rates are usually higher. Ch 10, Ch 12
- Volatility
- How much an investment’s value swings. A measure of bumpiness, not of permanent loss. Ch 20
- Withdrawal rate
- The share of a pot taken as income in the first year of drawing, usually then raised with inflation. Ch 24
- Yield
- Income from an investment as a share of its price. Ch 19