Behavioral finance & general glossary

A–H

• Anchoring — fixating on the first number you encounter (e.g., the list price) and making decisions relative to it.
• Behavioral finance — the study of how psychological biases affect financial decisions.
• Confirmation bias — seeking information that supports what you already believe.
• Compound growth — growth on growth. The principle behind why starting early matters so much.
• Emergency fund — liquid savings set aside for unexpected expenses. Usually 3–6 months of essential costs.
• Fiduciary — someone legally obligated to act in your best interest. Fee-only advisors operate under this standard.
• Financial independence — having enough passive income or invested assets to cover living expenses without working.
• Hedonic adaptation (hedonic treadmill) — the tendency to return to a baseline level of happiness regardless of income changes.

L–N

• Lifestyle creep — the gradual increase of spending to match income growth, preventing savings rate improvement.
• Liquidity — how quickly and easily an asset can be converted to cash without significant loss of value.
• Loss aversion — feeling losses roughly twice as intensely as equivalent gains.
• Mental accounting — treating money differently based on its source or intended purpose, even though money is fungible.
• Net worth — everything you own minus everything you owe. The single most important number in personal finance.
• Nominal vs. real — nominal returns are before inflation adjustment. Real returns subtract inflation. Real is what matters.

O–S

• Opportunity cost — what you give up by choosing one option over another. Every dollar spent is a dollar not invested.
• Pay yourself first — saving before spending by automating transfers on payday.
• Power of attorney — a legal document granting someone authority to make financial or medical decisions on your behalf.
• Risk tolerance — how much investment volatility you can emotionally and financially handle without panic-selling.
• Savings rate — the percentage of after-tax income you save or invest. The single biggest driver of wealth accumulation.
• Sinking fund — a dedicated savings bucket for predictable irregular expenses (car repairs, gifts, insurance premiums).