Finance terms in plain English

The process of gradually paying off a loan through regular payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal.

The total annual cost of borrowing, including interest rate plus fees (origination, closing costs, etc.). Always higher than or equal to the interest rate. Use APR — not interest rate — when comparing loans.

A mortgage with an interest rate that changes periodically after an initial fixed period (e.g., 5/1 ARM = fixed for 5 years, then adjusts annually). Riskier than fixed-rate but often starts with lower rates.

One one-hundredth of a percent (0.01%). 100 basis points = 1%. Used to describe small changes in interest rates or investment returns. A rate increase from 7.00% to 7.25% is a 25 basis point increase.

The sales volume at which total revenue equals total costs — no profit, no loss. Formula: Fixed Costs ÷ (Selling Price − Variable Cost per Unit). Every sale above break-even generates profit.

The annualized rate of return that an investment would need to achieve to grow from its beginning value to its ending value over a given period. Formula: (Ending Value / Beginning Value)^(1/n) − 1.

Profit from selling a capital asset (stocks, real estate, crypto). Short-term (held ≤ 1 year): taxed as ordinary income (10–37%). Long-term (held > 1 year): taxed at 0%, 15%, or 20% depending on income.

The net amount of cash moving in and out of a business. Operating cash flow = revenue − operating expenses. Positive cash flow means more money coming in than going out.

Interest earned on both your principal and previously accumulated interest. Formula: A = P(1 + r/n)^(nt). The most powerful force in finance — $10,000 at 10% for 30 years grows to $198,374.

Your total monthly debt payments divided by gross monthly income, expressed as a percentage. Lenders prefer 36% or lower. The 28/36 rule: housing ≤ 28%, total debt ≤ 36% of gross income.

Investing a fixed dollar amount at regular intervals regardless of price. Buys more shares when prices are low, fewer when high. Reduces timing risk and emotional investing.

The systematic allocation of an asset's cost over its useful life. Straight-line: (Cost − Salvage Value) ÷ Useful Life. Reduces taxable income for businesses.

The interest rate used to calculate present value of future cash flows in NPV/DCF analysis. Represents the opportunity cost of capital. Typical rates: 8–10% (large public), 12–15% (private), 20–30% (startups).

Automatically reinvesting dividends to buy more shares. Creates compounding growth. Over 20+ years, DRIP can add 30–50% to total returns versus taking dividends as cash.

Your total tax divided by total income. Always lower than your marginal rate because the US uses progressive brackets. Example: $100,000 income → 22% marginal, ~13–14% effective.

The portion of a property you actually own — current market value minus outstanding mortgage balance. Building equity happens through principal payments and property appreciation.

A movement to achieve financial independence through aggressive saving (50%+ of income) and investing. FIRE number = annual expenses × 25 (based on the 4% rule).

Federal Insurance Contributions Act tax — Social Security (6.2% up to wage base) + Medicare (1.45% on all income). Employed individuals pay half; self-employed pay both halves (15.3% total, known as SE tax).

Revenue minus Cost of Goods Sold (COGS), expressed as a percentage of revenue. Formula: (Revenue − COGS) / Revenue × 100%. Measures production efficiency before operating expenses.

The discount rate that makes NPV equal zero. Represents the annualized rate of return of an investment accounting for the timing of cash flows. IRR above your hurdle rate (8–12%) = attractive investment.

The loan amount divided by the property's appraised value, expressed as a percentage. A $300,000 loan on a $400,000 home = 75% LTV. Below 80% LTV eliminates PMI on conventional loans.

The tax rate applied to your next dollar of income — the bracket your taxable income falls into. US has progressive brackets: 10%, 12%, 22%, 24%, 32%, 35%, 37%.

The amount added to cost to determine selling price, expressed as a percentage of cost. Formula: (Price − Cost) / Cost × 100%. A 50% markup on $100 = $150 price. Not the same as margin (33.3% in this case).

Total Assets minus Total Liabilities. Assets: cash, investments, real estate equity, valuables. Liabilities: mortgages, loans, credit card debt. A positive, growing net worth indicates financial health.

A 3.8% surtax on investment income (interest, dividends, capital gains) for high earners. Applies to single filers with MAGI > $200,000 and MFJ > $250,000. Added on top of capital gains tax.

The present value of all future cash flows minus the initial investment. Positive NPV = creates value (do it). Negative NPV = destroys value (don't). Uses a discount rate to account for time value of money.

Principal, Interest, Taxes, and Insurance — the four components of a real monthly mortgage payment. P&I is the loan payment; T&I are escrowed for property taxes and homeowners insurance. Always calculate PITI, not just P&I.

Insurance required on conventional loans with less than 20% down payment. Typically costs 0.5–1.5% of the loan amount annually. Automatically cancels at 78% LTV. Can be requested to cancel at 80% LTV.

The time required to recover an initial investment. Simple payback = Initial Investment ÷ Annual Cash Flow. Shorter payback = lower risk. Doesn't account for time value of money (use NPV for that).

Profit divided by cost, expressed as a percentage. Formula: (Final Value − Initial Investment) / Initial Investment × 100%. Doesn't account for time — use CAGR for time-adjusted returns.

Replacing an existing mortgage with a new one, typically to get a lower interest rate, change the loan term, or cash out equity. Worth it if interest savings exceed closing costs within your time in the home.

A mental math shortcut: 72 ÷ annual return rate = years to double your money. At 10% returns, money doubles in 7.2 years. At 7%, in 10.3 years. Most accurate for returns between 6% and 12%.

Social Security (12.4%) + Medicare (2.9%) = 15.3% on 92.35% of net business profit. Self-employed pay both employer and employee halves. Half is deductible as an above-the-line adjustment to AGI.

A fixed dollar amount that reduces taxable income without needing to itemize. 2026: $15,000 (Single), $30,000 (MFJ), $22,500 (HoH). Take the standard deduction if it exceeds your total itemized deductions.

A disciplined investment approach where you invest a fixed amount at regular intervals (monthly, quarterly). Similar to DCA. Popular in India and emerging markets for mutual fund investing.

A company's average cost of financing, weighted by the proportion of debt vs equity. Used as the discount rate in DCF valuation. Formula: (E/V × Cost of Equity) + (D/V × Cost of Debt × (1 − Tax Rate)).

IRS rule: if you sell a security at a loss and buy the same or substantially identical security within 30 days before or after, the loss is disallowed. As of 2026, this rule applies to crypto transactions.

The income returned on an investment, usually expressed as an annual percentage. Dividend yield = Annual Dividend / Stock Price. Bond yield = Annual Interest / Bond Price. Higher yield often means higher risk.