Financial Glossary

APR is the yearly cost of borrowing, shown as a percentage that folds the lender's required fees in with the interest rate.

APR exists so you can compare loans that are packaged differently, because a low rate with high fees can cost more than a higher rate with none. The catch is that the calculation assumes you hold the loan for its full term, and that assumption cuts two ways. Stretch the same fee across more years and the APR shrinks, even when the loan costs you more in total. Pay the loan off early and the opposite happens, because the up front fee cannot be recovered, so the yearly rate you effectively paid ends up higher than the APR you were quoted.

Reviewed 2026-08-08

APY is the total percentage your money grows in a savings account over a year, including the effect of interest earning interest.

APY is the number that lets you compare two savings accounts honestly. It already folds in how often the interest compounds and normalizes everything to a full year, and every bank has to calculate it the same way, so two APYs are genuinely apples to apples. The catch is that a savings APY is not locked. Banks can change the rate after your money is already there, and promotional rates often carry balance minimums or an expiry date. Even so, the spread is worth chasing, because large banks commonly pay a fraction of a percent while online banks pay several percent on the same federally insured deposit.

Reviewed 2026-08-08

Compound interest is interest that earns interest, because each period's interest is added to your balance and the next period is calculated on the larger number.

Compound interest works in both directions, which is what makes it so important to understand. On savings, each period's interest joins your balance, so the next period earns on a slightly larger number, and the growth curve starts nearly flat before it steepens. On debt, the same mechanic runs in reverse, adding unpaid interest to what you owe so it starts charging interest of its own. This is how a balance can grow even in a month when you made a payment. The deciding factor is the rate, not how often it compounds. At savings rates, compounding takes decades to become obvious. At credit card rates, it shows up in months.

Reviewed 2026-08-17

An emergency fund is money kept in a savings account for unexpected expenses, so that a surprise does not turn into debt.

The point of an emergency fund is not the return it earns. It is that the alternative to having cash on hand is usually a credit card charging 20 percent or more. An emergency fund is best understood as insurance against expensive borrowing, and its real return is the interest you never pay. Common guidance is three to six months of essential expenses, but the right number depends on how stable your income is and how many people depend on it.

Reviewed 2026-08-07

FDIC insurance is a federal government guarantee that protects the money in your bank account if the bank fails.

FDIC insurance is the reason chasing a higher APY at an unfamiliar online bank is not the risk most people assume it is. An online bank you have never heard of carries the same federal guarantee as the largest bank in the country, provided it is FDIC insured. Credit unions have an equivalent through the NCUA. Coverage applies per depositor, per insured bank, per ownership category, which is how a couple with both individual and joint accounts can be covered well beyond the headline limit at a single bank.

Reviewed 2026-08-17

PMI is an extra monthly charge required when a mortgage starts above 80% of the home's value, and it protects the lender rather than you.

This is the term people misunderstand most often. PMI is insurance that you pay for to protect your lender if you default. You receive nothing from it except the ability to buy sooner with less cash down. It typically costs a few tenths of a percent of the loan balance each year, and it is not permanent. On a conventional loan the servicer must cancel it automatically once the balance reaches 78% of the original value, and you can usually request cancellation at 80%. FHA loans work differently, and their equivalent charge often lasts the life of the loan.

Reviewed 2026-08-17