Money glossary

5

50/30/20 rule

The 50/30/20 rule is a simple budget that splits your after-tax income into three parts: 50% for needs such as housing and groceries, 30% for wants such as dining out and entertainment, and 20% for savings and extra debt payments.

A

APR

APR (annual percentage rate) is the yearly cost of borrowing money, shown as a percentage. On a credit card it is the interest rate; on a loan or mortgage it also includes certain fees, so it shows the full cost of credit and lets you compare offers.

APY

APY (annual percentage yield) is the real amount a savings account or CD earns in one year, including compound interest, shown as a percentage. Because it counts compounding, APY is the fairest way to compare savings accounts.

C

Cap rate

The cap rate (capitalization rate) is a rental property's yearly net operating income (NOI) divided by its price or value. It shows the return a property would produce if you bought it with cash, which makes it a quick way to compare properties regardless of financing.

Compound interest

Compound interest is interest calculated on your original money and on the interest it has already earned. Each time interest is added, the next round is calculated on a bigger balance — so savings grow faster over time, and unpaid debt grows faster too.

D

Debt avalanche

The debt avalanche is a debt payoff method where you pay the minimum on every debt and put all extra money toward the debt with the highest interest rate (APR) first. It is usually the cheapest way out of debt because it attacks the most expensive interest first.

Debt snowball

The debt snowball is a debt payoff method where you pay the minimum on every debt and put all extra money toward the smallest balance first. When it's paid off, its payment rolls into the next-smallest debt, so your payments grow like a snowball.

Debt-to-income ratio (DTI)

Your debt-to-income ratio (DTI) is the share of your gross monthly income that goes to debt payments — rent or mortgage, car loans, student loans, credit card minimums and other loans. Lenders use it to judge whether you can afford a new payment; under 36% is generally seen as healthy.

E

Emergency fund

An emergency fund is cash you keep for unexpected essential costs or lost income — a job loss, a medical bill or an urgent car repair. A common guideline is three to six months of essential expenses, kept in an easy-to-reach savings account.

M

Minimum payment

A minimum payment is the smallest amount you must pay on a credit card or loan by the due date to keep the account in good standing. On credit cards it is usually a small percentage of the balance plus interest and fees — so paying only the minimum can take many years and cost a lot of interest.

N

Net worth

Net worth is the value of everything you own (assets) minus everything you owe (liabilities). It is a snapshot of your overall financial position: tracking it every month shows whether saving and paying off debt are really moving you forward.

P

Profit margin

Profit margin is the percentage of each sale you keep as profit after costs. A 40% margin means you keep $40 of every $100 in sales. It is calculated by dividing profit by the selling price — not by the cost, which would be markup.

Q

Quarterly estimated taxes

Quarterly estimated taxes are payments you make to the IRS during the year on income that has no tax withheld — such as freelance, self-employment, rental or investment income. They cover income tax and self-employment tax and are usually due in April, June, September and January.

S

Safe to spend

A safe-to-spend number is the amount you can spend freely right now after setting aside money for upcoming bills, savings goals and planned spending until your next payday. It answers "what can I actually spend?" better than your bank balance does.

Self-employment tax

Self-employment tax is the Social Security and Medicare tax that freelancers and self-employed people pay on their net earnings. The rate is 15.3% — 12.4% for Social Security and 2.9% for Medicare — applied to 92.35% of net self-employment profit.

Sinking fund

A sinking fund is money you set aside a little at a time for a specific expense you know is coming — like car insurance, holidays or a new laptop — so you can pay for it in cash when it arrives instead of using a credit card.

T

Take-home pay

Take-home pay (net pay) is the money you actually receive after taxes and payroll deductions are taken out of your gross pay — federal and state income tax, Social Security, Medicare and pre-tax benefits such as 401(k) contributions and health insurance.

Z

Zero-based budget

A zero-based budget is a monthly plan that gives every dollar of your income a job — bills, spending, savings or debt payments — until income minus everything you've planned equals exactly zero. Zero doesn't mean an empty bank account; it means no dollar is left without a purpose.