Glossary
Personal-finance glossary
The 15 terms you keep running into when you read about investing, returns and compound interest. Plain language, links to where each one matters on this site.
These are the terms that show up over and over in the calculators and guides on this site. They're written without jargon, in two-to-four-sentence blocks, with a link to where you can put each one into practice.
- CAGR · Compound Annual Growth Rate
- The constant annual rate that, compounded year after year for n years, takes you from an initial value to a final value. It is the standard way fund factsheets express long-term performance. Formula: CAGR = (Vf / Vi)^(1/n) − 1. Calculator.
- IRR / XIRR · Internal Rate of Return
- The discount rate that makes the net present value of all cash flows (contributions and withdrawals) equal to zero. Unlike CAGR, it accounts for the size and timing of every flow, which is why XIRR (the Excel extension that takes dates) is the "real" return when you contribute irregularly.
- TWR · Time-Weighted Return
- The return of an investment ignoring the timing of contributions and withdrawals. It splits the period into sub-periods between cash flows and chain-links the returns. Used to compare fund managers, since it strips out flows the manager does not control.
- ROI · Return on Investment
- The simplest profitability ratio: (final value − cost) / cost. It is informative as a headline number but does not say in how long the gain was made — that is why CAGR / IRR exist. Calculator.
- Compound interest
- Reinvesting the interest you earn so that it, in turn, generates new interest. Final capital = initial × (1 + r)^n, plus the future value of any periodic contributions. Multiplicative, not additive, and it is what makes long horizons matter so much. Calculator · Guide.
- Simple interest
- Interest calculated only on the initial capital, never on the accumulated interest. Common in short-term loans and some bonds. Over decades it falls dramatically behind compound interest.
- Nominal vs real capital
- Nominal is the final number in euros. Real divides that by (1 + inflation)^n, so it tells you what you can actually buy with that money. €100,000 nominal in 20 years at 2 % inflation equals ~€67,000 of today's purchasing power. Inflation calculator.
- Ordinary vs due annuity
- Whether each periodic contribution is added at the end of the period (ordinary, the default) or the beginning (due, "annuity due"). A due annuity earns one extra period of interest per contribution, producing a slightly higher final result.
- French amortization
- The standard Spanish mortgage system: constant monthly payment, mostly interest in the early years, mostly principal at the end. Formula: payment = principal × i × (1+i)^n / ((1+i)^n − 1), with i = monthly rate. Mortgage calculator.
- TIN · Nominal Interest Rate (Spain)
- The headline rate Spanish banks publish for mortgages and loans, expressed as a simple annual figure. The monthly rate used to compute the payment is TIN/12, no compounding. Always paired with TAE for fair comparison.
- TAE / APR · Annual Effective Rate
- The annualised cost of credit including fees and commissions, computed with compound interest. By law, Spanish banks must publish it next to the TIN; it is the figure to compare across lenders.
- Rule of 72
- A mental shortcut to estimate how long it takes to double your money: years ≈ 72 / r %. At 6 %, twelve years; at 8 %, nine; at 12 %, six. Works well for rates between 4 % and 12 %. Calculator.
- Effective vs nominal rate
- A 6 % nominal annual rate compounded monthly produces an effective rate of (1 + 0.06/12)^12 − 1 ≈ 6.17 %. The effective rate is what your money actually earns; the nominal is a quoting convention.
- Dollar Cost Averaging (DCA)
- Investing a fixed amount on a fixed schedule (for example €200 every month) regardless of price. It removes the temptation to time the market and mechanically makes you buy more units when prices fall. It does not maximise return on average vs investing a lump sum, but it lowers psychological risk.
- Drawdown
- The maximum peak-to-trough drop of a portfolio in a given period, expressed as a percentage. Useful for measuring how much pain a strategy can inflict during a crisis. The S&P 500 maximum drawdown in 2008 was about −55 %.