Glossary: Cash Flow and Debt Terms
Introduction
This glossary defines 28 cash flow and debt management terms with practical definitions focused on household financial planning. Terms are organized alphabetically for quick reference.
Terms
Amortization: The process of spreading loan payments over time so that each payment includes both principal and interest, with the principal portion increasing and interest portion decreasing over the loan term.
Annual Percentage Rate (APR): The yearly cost of borrowing expressed as a percentage, including interest rate plus fees, used to compare loan costs across lenders.
Avalanche Method: Debt repayment strategy that prioritizes paying off debts with the highest interest rates first while making minimum payments on all other debts, minimizing total interest paid.
Cash Flow: The net amount of money moving into and out of a household during a specific period, calculated as income minus expenses.
Certificate of Deposit (CD): A time deposit account that pays a fixed interest rate for a specified term (typically 3 months to 5 years), with penalties for early withdrawal.
Credit Limit: The maximum amount a lender allows a borrower to access on a revolving credit account such as a credit card or line of credit.
Credit Utilization Ratio: The percentage of available credit currently being used, calculated by dividing total credit card balances by total credit limits, with ratios below 30% generally considered favorable for credit scores.
Debt-to-Income Ratio (DTI): The percentage of gross monthly income that goes toward debt payments, calculated by dividing monthly debt payments by gross monthly income, with lenders typically preferring ratios below 36-43%.
Draw Period: The time frame during which a borrower can access funds from a line of credit, typically 5-10 years for HELOCs, after which the repayment period begins.
Emergency Fund: Liquid savings reserved for unexpected expenses or income disruption, typically recommended at 3-6 months of essential expenses held in accessible accounts.
Fixed Expense: A recurring cost that remains constant each month regardless of usage, such as mortgage payments, insurance premiums, or subscription services.
Grace Period: The time between a billing statement date and payment due date during which no interest accrues on new purchases, typically 21-25 days for credit cards.
High-Yield Savings Account (HYSA): A savings account offering interest rates significantly above the national average, typically offered by online banks, currently yielding 4-5% APY compared to 0.01-0.50% at traditional banks.
Home Equity Line of Credit (HELOC): A revolving credit line secured by home equity, typically offering lower interest rates than unsecured debt, with rates usually expressed as prime rate plus a margin.
I-Bond (Series I Savings Bond): A U.S. Treasury savings bond that earns interest based on a fixed rate plus an inflation-adjusted variable rate, with annual purchase limits of $10,000 per person.
Interest-Only Payment: A minimum payment that covers only the interest accrued, with no reduction to principal balance, common during HELOC draw periods.
Lifestyle Creep: The gradual increase in spending that occurs as income rises, often resulting in minimal improvement in savings rate despite higher earnings.
Liquidity: The ease with which an asset can be converted to cash without significant loss of value, with savings accounts being highly liquid and real estate being less liquid.
Minimum Payment: The lowest amount a borrower must pay by the due date to keep an account current, typically 1-3% of the balance for credit cards.
Net Worth: Total assets minus total liabilities, representing the household's overall financial position at a point in time.
Personal Line of Credit (PLOC): An unsecured revolving credit account that allows borrowing up to a set limit without collateral, typically at higher rates than secured options.
Prime Rate: The interest rate that banks charge their most creditworthy customers, currently 7.50% as of December 2024, used as the base rate for many variable-rate loans.
Principal: The original amount borrowed or the remaining balance of a loan excluding interest, with principal payments reducing the outstanding debt.
Revolving Credit: A type of credit that allows repeated borrowing up to a set limit, with the borrowed amount becoming available again as it is repaid, such as credit cards and lines of credit.
Sinking Fund: Money set aside regularly for a specific future expense, such as saving $200/month for an expected $2,400 annual insurance premium.
Snowball Method: Debt repayment strategy that prioritizes paying off debts with the smallest balances first while making minimum payments on larger debts, providing psychological momentum through quick wins.
Variable Expense: A recurring cost that fluctuates based on usage or consumption, such as utilities, groceries, or fuel.
Variable Rate: An interest rate that changes periodically based on an underlying index (typically prime rate), causing monthly payments to fluctuate as rates move.
Cross-References
For detailed application of these concepts, see:
- Cash Flow Tracking for Variable Earnings
- Debt Snowball vs. Avalanche at Scale
- Line of Credit Management
- Cash Flow Stress Tests
- Short-Term Goal Funding Plans
Updates
This glossary is updated as new terms become relevant to cash flow and debt management practices. Terms are added based on curriculum expansion and reader feedback.