Your Net WorthGlossary
Plain-English definitions of personal-finance terms. We grow this over time so every article can link to a clear reference instead of repeating the same explanation.
Net worth
Net worth is the total value of everything you own minus everything you owe.
Freedom Fund
Your Freedom Fund is the part of your net worth held in investments that can eventually pay you an income.
FIRE number
Your FIRE number is the portfolio size you need to cover annual spending at a safe withdrawal rate.
Compound interest
Compound interest is interest earned on both the original amount and the interest already added.
Rule of 72
The rule of 72 is a quick way to estimate how long it takes money to double at a given annual return.
ISA
An ISA is a UK account that protects savings and investments from income tax and capital gains tax.
SIPP
A SIPP is a UK pension that gives you full control over the investments inside it.
Withdrawal rate
A withdrawal rate is the percentage of a portfolio you take out each year to live on.
4% rule
The 4% rule is a guideline that says you can withdraw 4% of a retirement portfolio in year one, then adjust for inflation.
Snowball method
The snowball method pays off the smallest debt first, then rolls that payment into the next smallest.
Avalanche method
The avalanche method pays off the highest-interest debt first, then moves to the next highest.
Multi-currency budget
A multi-currency budget tracks income and spending in more than one currency and converts them to a single base currency.
APR
APR is the annual percentage rate: the yearly cost of borrowing, including interest and most fees, expressed as a percentage of the balance.
Minimum payment
The minimum payment is the smallest amount a lender requires you to pay each month to keep the account in good standing.
Emergency fund
An emergency fund is cash set aside to cover essential expenses if your income stops or an unexpected cost hits.
Expense ratio
An expense ratio is the annual fee a fund charges its investors, expressed as a percentage of assets under management.
Fee drag
Fee drag is the long-term wealth you lose to fees and charges, beyond the simple annual percentage.
Inflation
Inflation is the rate at which prices rise and the purchasing power of money falls over time.
Purchasing power
Purchasing power is what a unit of currency can actually buy, after accounting for inflation.
Nominal return
Nominal return is the percentage gain on an investment before adjusting for inflation.
Real return
Real return is the investment gain after accounting for inflation, showing the change in actual purchasing power.
Savings rate
Your savings rate is the percentage of your after-tax income that you save or invest rather than spend.
Time to goal
Time to goal is the number of months or years needed to reach a savings or investment target.
Pound-cost averaging
Pound-cost averaging is investing a fixed amount regularly, buying more units when prices are low and fewer when they are high.
Sequence-of-returns risk
Sequence-of-returns risk is the danger that poor investment returns occur just before or after you start withdrawing from a portfolio.
Coast, Lean and Fat FIRE
Coast, Lean and Fat FIRE are variations of the FIRE movement that trade lifestyle spending against how much capital you need.
Easy-access savings account
An easy-access savings account is a UK account that lets you withdraw money quickly without penalty.
High-yield savings account
A high-yield savings account is a US savings account that pays a higher interest rate than a standard checking or savings account.