Personal finance glossary
Short, quotable definitions of the terms used across these guides, each with a worked example. Written to be understood on first reading rather than to be technically exhaustive.
- 50/30/20 rule
- The 50/30/20 rule splits after-tax income into 50% needs, 30% wants and 20% savings or debt repayment. It is a starting allocation, not a law, and is meant to be adjusted to your cost of living.
- Base currency
- Your base currency is the single currency all totals are reported in. Accounts can be held in any currency; each balance is converted to the base currency before net worth, budgets and reports are calculated.
- Cash flow
- Cash flow is the money that came in minus the money that went out over a period. Positive cash flow means you finished the period with more than you started; negative means you drew down savings.
- Discretionary spending
- Discretionary spending is money spent on things you chose rather than things you were committed to. It is the part of a budget that can change next month without renegotiating anything.
- Emergency fund
- An emergency fund is money set aside to cover essential expenses if income stops. You hold it in an account you can draw on the same day, sized in months of expenses, commonly three to six.
- Fixed expense
- A fixed expense is a recurring cost of roughly the same amount each period: rent, a loan instalment, insurance, a subscription. It is predictable, which makes it easy to plan and easy to forget.
- Net worth
- Net worth is everything you own minus everything you owe. In a personal finance app it is the sum of every account balance, converted to one currency, with debts counted as negative balances.
- Savings rate
- Savings rate is the share of your income you did not spend, expressed as a percentage. It is calculated as income minus expenses, divided by income, over the same period.
- Sinking fund
- A sinking fund is money saved gradually for a known future expense, such as an annual insurance premium or a replacement laptop, so the payment does not arrive as a shock.
- Zero-based budgeting
- Zero-based budgeting assigns every unit of income a job: spending, saving or debt repayment, until nothing is unassigned. The budget balances at zero, which describes a plan rather than an empty account.
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