Finance has its own language. Here's your cheat sheet to understanding it.
Banking Terms
| Term | Plain English |
|---|---|
| The real you earn on savings (includes compounding) | |
| The real interest rate you pay on debt (includes fees) | |
| insured | Your money is protected up to $250k if the bank fails |
| Routing number | The bank's ID number (for transfers) |
| Account number | Your specific account's ID |
| Wire transfer | Instant money transfer (usually has fees) |
| ACH transfer | Regular bank transfer (usually free, takes 1-3 days) |
Credit Terms
| Term | Plain English |
|---|---|
| A number (300-850) that shows how reliable you are with debt | |
| Your complete borrowing history | |
| What percent of your credit limit you're using | |
| Hard inquiry | When a lender checks your credit (dings your score slightly) |
| Soft inquiry | When you check your own credit (no impact) |
| Secured card | Credit card with a deposit as collateral (for building credit) |
Investment Terms
| Term | Plain English |
|---|---|
| Ownership pieces of a company | |
| Loans you make to companies or governments | |
| A basket of investments you can buy like a stock | |
| A fund that tracks a market index (like the S&P 500) | |
| Cash payments some stocks pay you | |
| Capital gains | Profit when you sell an investment for more than you paid |
| The annual fee a fund charges (lower is better) |
Retirement Terms
| Term | Plain English |
|---|---|
| 401k | Retirement account through your employer |
| Retirement account you open yourself | |
| Roth | You pay taxes now; withdrawals in retirement are tax-free |
| Traditional | You get a tax break now; pay taxes when you withdraw |
| Free money your employer adds to your 401k | |
| Vesting | How long until the employer match is truly yours |
Tax Terms
| Term | Plain English |
|---|---|
| Your total earnings before taxes | |
| What you actually take home | |
| The rate applied to a portion of your income | |
| Deduction | Reduces the amount of income that gets taxed |
| Reduces your actual tax bill (better than deductions) | |
| W-4 | Form that tells your employer how much tax to withhold |
| Form showing how much you earned and paid in taxes |
Debt Terms
| Term | Plain English |
|---|---|
| Principal | The original amount borrowed |
| The cost of borrowing (or reward for lending) | |
| Smallest amount to avoid late fees (not enough to pay off debt quickly) | |
| Pay off smallest debts first for momentum | |
| Pay off highest interest first to save money | |
| Refinance | Replace a loan with a new one (usually better terms) |
Quick Win
Bookmark this page. Next time you see a term you don't understand in a financial document, come back here first.