Money Words: A to F
The vocabulary Rich Sense is built from, explained the way someone would explain it to you rather than the way a bank would.
Amortization
Paying off a debt through regular payments where each payment covers some interest and some of the original balance.
On a long mortgage, the early payments are mostly interest. Years pass before you are meaningfully reducing what you owe.
Appreciation
An increase in the value of something you own.
The opposite of depreciation. Property and investments can appreciate. Cars almost never do.
APR
Annual percentage rate. The yearly cost of borrowing, including the interest rate plus most fees.
This is the number to compare between loans or credit cards, because it captures more than the headline rate does.
Asset
Something you own that has value.
A useful split to keep in mind is between assets that produce income and assets that only cost you money to keep.
Bear market
A sustained fall in market prices, conventionally a drop of 20 percent or more from a recent peak.
Bear markets are normal and recurring. Knowing that in advance is most of what makes them survivable.
Budget
A plan for where your money goes before it goes there.
A budget is not a restriction. It is a decision made in advance, when you are calm, instead of in the moment, when you are not.
Bull market
A sustained rise in market prices.
Easy to feel like skill while it is happening. Worth remembering it is a condition, not a talent.
Capital gain
The profit when you sell something for more than you paid for it.
Usually taxable, and often taxed at a different rate depending on how long you held it.
Compound interest
Interest calculated on your original amount plus all the interest it has already earned.
Working for you in savings and investments. Working against you on credit card balances. It is the same mechanism in both directions.
Credit score
A number summarizing how reliably you have repaid borrowed money.
It affects what you can borrow and at what rate, and in some places it affects insurance and rental applications too.
Depreciation
A fall in the value of something you own as it ages or wears out.
A new car depreciates fastest in its first years. For a business, depreciation is also a tax deduction spread across an asset's useful life.
Diversification
Spreading money across different investments so that one bad outcome does not take everything with it.
The least glamorous idea in investing and one of the few that reliably works.
Dividend
A share of a company's profits paid out to shareholders.
Some companies pay them, many do not. A high dividend is not automatically a sign of a healthy company.
Emergency fund
Money set aside purely to cover unexpected costs or a loss of income.
Its job is to sit still and be boring. Three to six months of expenses is the usual target, but any amount beats none.
Equity
The part of something you own outright, after subtracting what you still owe on it.
If a house is worth $300,000 and the mortgage balance is $200,000, your equity is $100,000.
Expense ratio
The annual fee a fund charges, shown as a percentage of the money you have in it.
Small differences compound enormously over decades. This is one of the few investment costs entirely within your control.
Fixed cost
A cost that stays the same regardless of how much you produce or sell.
Rent is fixed. Materials are not. Knowing which of your costs are fixed tells you what you have to cover in a slow month.