Principal

In lending, principal refers to the original sum of money borrowed, separate from any interest or fees. Each loan payment is divided between principal reduction and interest charges. Over time, the principal balance decreases until the loan is fully repaid.

In investing, principal is the original amount of money you put into an investment, also known as your cost basis. When calculating investment returns, the distinction between principal and earnings matters for tax purposes, as you are only taxed on gains, not the return of your original principal.

Protecting your principal is a key consideration for conservative investors, particularly those near or in retirement. Principal-protected investments like Treasury bonds, FDIC-insured CDs, and fixed annuities guarantee the return of your original investment, though they typically offer lower returns in exchange for that security.