Glossary

Finance terms, explained the way we'd explain them to a friend.

4% Rule: A rule of thumb suggesting you can withdraw 4% of your portfolio in year one of retirement, then adjust for inflation, with a low risk of running out of money over 30 years.
401(k): An employer-sponsored retirement account that lets you contribute pre-tax (or Roth) income, often with a partial employer match.
72(t) Distribution: A method for taking penalty-free withdrawals from a retirement account before age 59½, via a series of substantially equal periodic payments.
Asset Allocation: How your portfolio is divided across asset classes like stocks, bonds, and cash, based on your risk tolerance and time horizon.
Bond: A loan you make to a government or company that pays you interest over time and returns your principal at maturity.
Brokerage Account: A taxable investment account, opened with a broker, used to buy and sell stocks, bonds, and funds.
Coast FIRE: A stage of financial independence where your existing investments will grow to cover retirement on their own, letting you stop saving (but not necessarily working).
Compound Interest: Interest earned on both your original investment and on the interest it has already earned. It's the mechanism that makes long-term investing powerful.
Dollar-Cost Averaging (DCA): Investing a fixed amount on a regular schedule regardless of price, which smooths out the impact of market swings.
Emergency Fund: Cash set aside in an accessible account to cover unexpected expenses or income loss, typically 3–6 months of essential spending.
ETF (Exchange-Traded Fund): A fund that holds a basket of assets and trades on an exchange like a stock, often with lower costs than mutual funds.
Expense Ratio: The annual fee a fund charges, expressed as a percentage of your investment, that's deducted automatically from returns.
FIRE: Financial Independence, Retire Early: a movement focused on aggressive saving and investing to leave traditional work well before typical retirement age.
Fund Fact Sheet: A short document summarizing a fund's holdings, fees, performance, and risk. It's the fastest way to evaluate a fund before buying.
HSA (Health Savings Account): A tax-advantaged account for medical expenses, available with high-deductible health plans, that can also function as a retirement account.
Index Fund: A fund designed to track a market index, like the S&P 500, rather than have a manager pick individual investments.
IRA (Individual Retirement Account): A personal retirement account, separate from an employer, available in Traditional (pre-tax) and Roth (after-tax) versions.
Lifestyle Creep: The tendency to increase spending as income rises, which can quietly erase the benefit of a raise or promotion.
Net Worth: Everything you own minus everything you owe. It's the single number that best tracks overall financial progress.
Rebalancing: Periodically buying or selling investments to bring your portfolio back to its target asset allocation.
Roth IRA: An IRA funded with after-tax dollars, where qualified withdrawals in retirement are tax-free.
Savings Rate: The percentage of your income you save and invest rather than spend. It's the single biggest lever in how fast you reach financial independence.
Sequence of Returns Risk: The risk that poor investment returns early in retirement, combined with ongoing withdrawals, can permanently damage a portfolio's longevity.
Sinking Fund: Money saved in advance, in regular installments, for a specific and predictable future expense.
Target-Date Fund: A fund that automatically adjusts its asset allocation to grow more conservative as a chosen retirement year approaches.
Three-Fund Portfolio: A simple, diversified investing approach using just three low-cost index funds, typically total U.S. stock, total international stock, and total bond.
Traditional IRA: An IRA funded with pre-tax dollars, where contributions may be tax-deductible and withdrawals are taxed in retirement.
Withdrawal Rate: The percentage of your portfolio you withdraw each year in retirement to cover living expenses.
Zero-Based Budget: A budgeting method where every dollar of income is assigned a job (spending, saving, or debt repayment) until the total reaches zero.