Definitions for APY, APR, compound interest, simple interest, principal, yield, diversification, liquidity, portfolio, and ROI.
- APY includes compounding, while APR usually states an annual rate before compounding effects.
- Principal, contributions, and interest earned are separated so users can see where the projected balance comes from.
- Risk, diversification, liquidity, and ROI help frame the projection as a planning example rather than a guarantee.
Core terms for reading the calculator
Principal is the money you start with, before any growth or additional contributions. In the calculator it is the initial investment field. Contributions are the deposits you add on a recurring schedule; together with principal they make up everything you personally put in. Interest earned, sometimes called the return or growth, is the difference between your ending balance and everything you contributed.
Compound interest is interest calculated on the principal plus previously accumulated interest, so the base keeps expanding. Simple interest, by contrast, is calculated only on the original principal and grows in a straight line. Over short periods the two are similar, but over decades compound interest pulls dramatically ahead, which is why the distinction sits at the heart of every long-term plan.
Rate and yield terms
APR, or annual percentage rate, usually states a yearly rate before the effect of compounding is included. APY, or annual percentage yield, states the effective yearly rate after compounding is taken into account, so for the same nominal rate APY is always equal to or higher than APR. When comparing savings accounts or loans, comparing APY to APY avoids being misled by how often interest compounds. Yield is a general term for the income an investment produces relative to its price, often expressed as an annual percentage.
Return on investment, or ROI, measures how much an investment has gained or lost relative to its cost, usually as a percentage. It is a simple way to compare outcomes but, on its own, ignores how long the investment was held; a 50% ROI over one year is very different from 50% over ten. Annualized return restates a gain as an equivalent steady yearly rate, which makes investments of different lengths comparable.
Portfolio and risk terms
A portfolio is the full collection of investments a person or institution holds. Diversification is the practice of spreading a portfolio across many assets so that the poor performance of any one holding has a limited effect on the whole. Liquidity describes how quickly an asset can be converted to cash without a meaningful loss in value; a savings account is highly liquid, while real estate is not.
Risk, in investing, refers to the chance and size of losing money or of returns differing from what you expected. Assets with higher expected returns generally carry higher risk, meaning larger and more frequent swings in value. Understanding these terms turns the calculator's output from a single number into a set of assumptions you can question, which is exactly how a projection should be read.
Frequently asked questions
What is the difference between APR and APY?
APR is an annual rate quoted before compounding, while APY reflects the effective annual rate after compounding is included. For the same nominal rate, APY is equal to or greater than APR, so comparing APY to APY gives a fairer picture.
What does ROI tell me, and what does it leave out?
ROI shows the percentage gain or loss relative to the amount invested. It does not account for how long the money was invested, so two investments with the same ROI can be very different once you consider the time involved.
Why is liquidity important?
Liquidity determines how easily you can access your money. Highly liquid assets like cash or savings accounts can be spent immediately, while less liquid assets may take time to sell or may lose value if sold quickly, which matters when you need funds on short notice.
Is yield the same as interest rate?
Not exactly. An interest rate is the stated cost or earning rate on a balance, while yield expresses the income an investment produces relative to its current price. They can differ, especially for bonds and dividend-paying assets whose prices change over time.