Cost of Money vocab

Interest

In the context of credit, Interest is the amount of money you will pay over the life of a loan as the price of borrowing the principal. In this sense, interest is also known as the "cost of capital". In the context of investment and savings, Interest is the amount of money you earn as a return on your savings or investment.

Compound Interest

Interest that is added back to the principal amount of an investment or loan. The original principal plus the added interest amount becomes the new principal amount for the next compounding period.

Simple Interest

Interest that is paid only on the original principal amount of a loan or investment. Simple interest can be calculated using the formula I = P x R x T.

Interest Rate

The amount of Interest that a bank or other lender charges as the cost of borrowing. The Interest Rate is usually expressed as a percentage of the loan amount.

Rule of 72

The formula used to calculate how long it will take for a sum of money that you have saved or invested to double at a given rate of interest.

Inflation

The gradual increase in overall prices over time.

Federal Reserve

The independent federal agency that regulates banks and controls interest rates and the money supply.

Fed Funds Rate

The interest rate that the Federal Reserve charges commercial banks to borrow money from the Fed.

Principal

The original sum of money that you borrow, in the case of a loan, or that you invest or save. In the case of consumer loans (car loans, mortgages, etc.), the principal usually equals the purchase price of the good or service.

Time Value of Money

The principle that the value of a dollar today is greater than the value of a dollar in the future.

Buying Power

The quantity of goods and services you can buy with your money.

Annual Percentage Rate

The yearly cost of a loan or revolving credit vehicle (such as a line of credit or credit card). The APR includes all interest, charges, and fees that apply to the loan or credit arrangement.