Effortless Math › Personal Finance › Personal Finance Glossary
Personal Finance Glossary
129 terms, in the order a course actually meets them rather than alphabetically, each in one sentence. Where a term has a formula, it is on the line with it.
Paychecks and taxes 25 terms
Gross payEverything you earned in a pay period, before anything is taken out.
rate × hoursNet payWhat actually reaches your account after every deduction. Also called take-home pay.
gross − deductionsFICASocial Security and Medicare together. 7.65% of wages from you, matched by your employer.
6.2% + 1.45%Social Security tax6.2% of wages, up to a yearly wage base of $184,500 in 2026.
wages × 0.062Medicare tax1.45% of every dollar of wages. No cap, ever.
wages × 0.0145WithholdingIncome tax your employer sends to the IRS on your behalf, from tables, not a flat rate.
Pre-tax deductionComes out before tax is figured, lowering the wages the tax is based on.
Section 125 planThe rule that makes health, dental and vision premiums pre-tax for income tax and FICA both.
Post-tax deductionComes out after tax. Roth contributions, union dues, garnishments.
Year-to-date (YTD)Running total for the calendar year, shown beside the current-period column.
Exempt employeeA salaried worker not entitled to overtime under federal law.
Non-exempt employeeEntitled to 1.5× pay for hours over 40 in a workweek.
W-4The form you complete at hire that tells payroll how much income tax to withhold.
W-2The January summary of a year’s wages and withholding, used to file your return.
1099-NECWhat a contractor receives instead of a W-2. No tax is withheld.
1040The US individual income tax return.
Standard deductionA flat amount subtracted from income before tax is calculated.
Taxable incomeIncome after deductions. The figure the brackets are applied to.
AGI − deductionsMarginal tax rateThe rate on your next dollar of income, not on all of it.
Effective tax rateTotal tax divided by total income. Always lower than the marginal rate.
tax ÷ incomeProgressive taxA tax whose rate rises as income rises, applied in layers.
Tax creditSubtracts from the tax you owe, dollar for dollar. Worth more than a deduction.
Tax deductionSubtracts from the income the tax is figured on.
RefundWhat comes back when withholding exceeded the tax owed. Not a bonus — your own money.
Self-employment taxBoth halves of FICA, 15.3%, paid by people who work for themselves.
Budgeting 15 terms
Fixed expenseSame amount every period. Rent, a car payment, insurance.
Variable expenseChanges period to period. Groceries, gas, electricity.
Periodic expenseArrives quarterly, semiannually or annually. The usual cause of a broken budget.
Sinking fundMoney set aside monthly for a periodic bill, so it is paid for before it arrives.
bill ÷ monthsNeedSomething that changes your ability to live or work if you stop paying it.
WantEverything else. The category depends on the amount as often as the item.
50/30/20A guideline splitting net pay into 50% needs, 30% wants, 20% saving.
Zero-based budgetEvery dollar of income is assigned a job until nothing is unallocated.
Envelope methodA fixed amount per category. When the envelope is empty, that category is done.
Discretionary incomeWhat is left after needs are covered.
Emergency fundCash held for unexpected costs. One month first; three to six eventually.
Housing burdenHousing as a share of net pay. Above 30% squeezes everything else.
housing ÷ net payPay yourself firstMoving money to saving before spending starts, rather than saving the remainder.
Cash flowMoney in against money out over a period. Positive means you kept some.
Net worthEverything you own minus everything you owe.
assets − liabilitiesCredit and debt 27 terms
Credit scoreA number, usually 300–850, predicting how likely you are to repay.
FICO scoreThe scoring model most lenders use. Five factors, weighted.
Payment historyWhether you paid on time. The largest factor, at 35% of a FICO score.
Credit utilizationBalance divided by credit limit. 30% of the score. Under 30% is the usual advice.
balance ÷ limitLength of credit historyHow long your accounts have been open. 15% of the score.
Credit mixHaving both revolving and installment accounts. 10%.
New creditRecent applications and hard inquiries. 10%.
Hard inquiryA lender checking your credit for an application. Can lower the score slightly.
Soft inquiryChecking your own credit, or a pre-approval. No effect on the score.
Credit reportThe record of your accounts and payment history. Free weekly from each bureau.
Revolving creditA line you can borrow against repeatedly, such as a credit card.
Installment creditA fixed amount repaid in fixed payments, such as a car loan.
APRAnnual percentage rate. The yearly cost of borrowing, including some fees.
Monthly periodic rateThe APR divided by twelve. What is actually applied each month.
APR ÷ 12Finance chargeThe interest added to a balance for the period.
balance × monthly rateMinimum paymentThe least you can pay without defaulting. Usually $35 or interest plus 1%.
Grace periodThe window, usually 21–25 days, in which paying the full statement balance means no interest.
Average daily balanceHow most issuers actually compute interest across a billing cycle.
Cash advanceBorrowing cash on a card. No grace period, higher APR, plus a fee.
Schumer boxThe standardized table of rates and fees on every card agreement.
Secured cardA card backed by a cash deposit. The usual way to start a credit history.
AmortizationPaying off a debt through scheduled payments split between interest and principal.
PrincipalThe amount borrowed, separate from the interest charged on it.
DefaultFailing to meet the terms of a loan. Severe and long-lasting credit damage.
CollectionsA defaulted debt sold or assigned to a collection agency.
Debt-to-income ratioMonthly debt payments divided by gross monthly income. Lenders watch it closely.
payments ÷ incomePredatory lendingLoans designed to trap the borrower — payday and car title loans, at triple-digit APRs.
Saving, banking and investing 28 terms
Simple interestInterest on the original principal only.
I = P × r × tCompound interestInterest on the principal plus everything already earned.
A = P(1 + r/n)ntAPYAnnual percentage yield. The rate with compounding folded in. The only fair comparison.
Rule of 72Divide 72 by the rate for a fast estimate of doubling time.
72 ÷ rateFuture valueWhat an amount, or a stream of deposits, grows to by a future date.
LiquidityHow quickly something converts to cash without losing value.
FDIC insuranceFederal deposit insurance covering $250,000 per depositor, per bank, per ownership category.
NCUA insuranceThe credit union equivalent of FDIC insurance, at the same limit.
Certificate of depositA deposit locked for a set term at a set rate. Early withdrawal costs a penalty.
High-yield savingsA savings account at a much higher APY, usually online-only.
Overdraft feeCharged when a transaction exceeds your balance. Often around $35 per item.
Direct depositWages paid straight into an account. Usually faster and often fee-free.
AssetSomething you own that has value.
LiabilitySomething you owe.
DiversificationSpreading money across investments so no single loss is decisive.
Index fundA fund that holds an entire market index. Low fees, no stock picking.
Expense ratioThe annual fee a fund charges, as a percentage of what you hold.
StockA share of ownership in a company.
BondA loan to a company or government, repaid with interest.
DividendA share of company profit paid to shareholders.
Capital gainThe profit from selling an investment for more than you paid.
401(k)An employer retirement plan. Traditional contributions are pre-tax for income tax, not FICA.
Roth IRAA retirement account funded with after-tax money. Qualified withdrawals are tax-free.
Employer matchMoney your employer adds to your 401(k) when you contribute. The closest thing to free money.
VestingHow long you must stay before the employer’s contributions are fully yours.
Risk toleranceHow much volatility you can hold without selling at the wrong moment.
InflationThe general rise in prices, which lowers what a dollar buys.
Real rate of returnReturn after inflation. The only rate that describes purchasing power.
nominal − inflationMajor purchases and insurance 19 terms
Out-the-door priceThe total to drive away: price, sales tax, title, registration, and dealer fees.
DepreciationThe loss of value over time. A new car loses much of it in the first year.
Negative equityOwing more on a loan than the thing is worth. Also called being underwater.
balance − valueDown paymentCash paid up front, reducing the amount financed.
Loan termThe number of months you repay over. Longer terms mean smaller payments and more interest.
Total cost of creditEverything paid minus the amount borrowed.
payments − principalLeasePaying to use a vehicle for a term. You return it at the end and own nothing.
PremiumWhat you pay for insurance, monthly or per term, whether or not you claim.
DeductibleWhat you pay yourself before the insurer pays anything.
CopayA fixed amount for a specific service, such as $30 for an office visit.
CoinsuranceYour share of the cost after the deductible, usually a percentage.
Out-of-pocket maximumThe annual cap on what you can pay. Beyond it, the insurer pays everything covered.
Liability coveragePays for damage you cause to other people and their property.
Collision coveragePays for damage to your own vehicle in a crash.
Comprehensive coverageDamage from everything other than a crash — theft, hail, a tree.
30/60/25Texas minimum auto liability: $30,000 per person, $60,000 per crash, $25,000 property.
Risk poolMany people paying premiums so the few who have losses can be covered.
ClaimA request for the insurer to pay. Filing one can raise your future premiums.
Umbrella policyExtra liability coverage above the limits of your auto and home policies.
College, careers and the economy 15 terms
FAFSAThe Free Application for Federal Student Aid. The gateway to nearly all aid.
Student Aid IndexThe figure from the FAFSA that determines what aid you qualify for.
GrantAid you do not repay, usually need-based.
ScholarshipAid you do not repay, usually merit-based.
Subsidized loanA federal loan where the government pays the interest while you are in school.
Unsubsidized loanA federal loan that accrues interest from the day it is disbursed.
Award letterA school’s offer of aid. Read it carefully — loans are listed alongside grants.
Cost of attendanceTuition, fees, housing, food, books and transport for a year.
Opportunity costThe value of the next best thing you gave up to make a choice.
ScarcityUnlimited wants against limited resources. The reason economics exists.
Human capitalThe skills and credentials that raise what your work is worth.
Gross domestic productThe total value of goods and services an economy produces.
RecessionA significant, broad decline in economic activity lasting more than a few months.
Unemployment rateThe share of the labor force actively looking for work and not finding it.
BenefitsNon-wage compensation — health insurance, retirement match, paid leave. Often 20–30% of pay.
Keep going
- How to read a pay stub — the first fifteen terms, in context
- Compound interest, worked out — the formulas behind the saving terms
- The 50/30/20 budget — needs, wants, sinking funds, and the rest
Questions people ask
What is the difference between APR and APY?
APR is the yearly rate you are charged to borrow, and it does not account for compounding within the year. APY is the yearly rate you earn, with compounding folded in. When comparing savings accounts, compare APY; when comparing loans, compare APR.
What is the difference between gross pay and net pay?
Gross pay is everything you earned before anything is taken out. Net pay is what reaches your account after income tax withholding, Social Security, Medicare, and any deductions. Net pay is the number you budget from.
What is a good credit utilization ratio?
Balance divided by credit limit, kept under 30%, is the usual advice, and lower is better. It is the second largest factor in a FICO score at 30%, and unlike payment history it can be changed in a single billing cycle.
What is a sinking fund?
Money set aside monthly for a bill that does not arrive monthly. Car insurance at $642 every six months is $107 a month into a sinking fund, so the bill is already paid for when it lands.
What does it mean to be underwater on a car loan?
You owe more on the loan than the car is worth, because the car depreciates faster than the loan balance falls. It matters if the car is totaled or you want to sell, because the gap is yours to cover.
Part of the Personal Finance hub — ten units, a free pacing guide, and worked examples with answers.