When it comes to money, one of the things that stops us from feeling confident and empowered is the abundance of financial jargon we encounter when trying to be proactive.
In fact, research indicates that seven in 10 Brits feel overwhelmed by financial jargon about money and savings (via the Post Office). The same study found that 20% of us are put off applying for loans because we can't get to grips with “confusing” financial terminology.
It's tempting to bury our heads in the sand instead of grappling with the lingo, but lack of financial literacy actually costs the average UK household an extra £2,850 per year (per Allianze).
While nobody’s suggesting that you need to be clued up on all of the intricate terms of corporate finance, there are some words and phrases that can be really useful in helping you navigate your personal finances, make informed decisions and, above all else, be happy and confident when dealing with your money.
Here’s GLAMOUR's A-Z guide to financial jargon:
AER/APR
An AER (Annual Equivalent Rate) is the rate of interest you’ll earn on savings and investments after a year, whereas the APR (Annual Percentage Rate) represents the cost of borrowing money after a year – this can include fees as well as interest. To borrow cheaply, you are looking for a low or even 0% APR, whereas with savings, a higher AER is better.
Balance
The balance of an account is simply how much money is in the account, but this can work in a number of different ways. The balance of your current account is how much money you have in the bank, but if you have an overdraft, your available balance will likely include this. So, if you have £200 in your account, and a £500 overdraft, your available balance will be £700 – but not all of that money belongs to you.
You might also have a balance on a loan account or credit card – this is the amount that you owe, rather than the amount that you have available. Many banks now have a helpful balance after bills function, which tells you how much you will have left over after your regular payments, and can help you to budget.
Capital
Capital is the amount of money held by a person or organisation. In its most common use in personal finance, your capital is the money that you put into an investment account or stocks and shares ISA. When you see the message, ‘capital at risk’, it essentially means that you could lose the money that you put in, as well as any gains.
Debt
If you have debt, you might be confused as to whether it's secured or unsecured in nature. Put very simply, secured debt is tied to an asset, like a property. A mortgage is an example of secured debt, which essentially means that your property may be used to pay back the bank if you don’t keep up with repayments. Credit cards and some loans are examples of unsecured debt, because they are not tied to an asset.
Direct debit: An instruction to your bank, issued with your permission by the person you’re paying. You might pay bills by direct debit, and the money is taken each month (usually) without you needing to do anything. You can cancel direct debits with your bank, but you should always let the company know in advance.
Equity
Usually used with companies, houses or sometimes cars, the equity that you hold in something is the value or percentage of it that you own. So, if you buy a house with a 10% deposit, at first, you will have 10% equity in your home. As you pay off your mortgage or the value of the house increases, you will gain more equity. If the value of your home decreases, your equity will decrease too – which is why we hear talk of negative equity if house price crashes are discussed.
It's been 50 years since women in the UK were legally allowed to apply for a mortgage without a male guarantor. But the home ownership gap is still very much a thing.
Funds
If you’re just starting to dip your toe in the water with investing, it’s likely that you’re using a robo-investor app, in which case you will be investing in funds. A fund is a basket of stocks, shares, bonds and equities that usually have something in common – for example, a ‘tech fund’ might include stocks from tech and innovation companies only, while a ‘sustainable fund’ would only include stocks that meet certain economic, social and governance criteria. Using funds is a great way to diversify your investments, which can help to mitigate risk – with investing, your capital is always at risk.
Guarantor
A guarantor is someone – usually a family member – who formally promises (guarantees) to pay your debt if you fall behind on certain payments, such as rent. This means if you can't pay your landlord what you owe, they can ask your guarantor to pay instead.
Interest
Most of us know the basics of interest, but crucially there are two types that you should be aware of, for interest on your savings and for interest on any debt that you might have.
Simple interest is interest that is only ever paid or charged on the principal of your debt or savings deposit i.e. how much you borrowed or deposited in the first place.
Compound interest, on the other hand, means that interest is paid or charged on the principal amount plus any interest that accrues in the meantime. Accounts might compound daily, weekly, monthly or annually. Compound interest is great news for savings and investments, especially those long term ones, but it can spell trouble on loans and credit cards.
Inflation: An increase in the price of something – for example, goods and services – over time.
ISA: An Individual Savings Account is a savings account that you can deposit or invest funds into without paying income tax on any earned interest. In the current tax year, you can save up to £20,000 in an ISA. For more information on the four types of ISAs, head to our explainer.
We spoke to a financial expert to find out.
Mortgage
A mortgage is a type of loan specifically used to purchase property. For everything you need to know about mortages, including how to save for a deposit, whether to go for a fixed or variable rate, and how to look after your credit score, visit our in-depth explainer.
Overdraft
OK, so you might already be familiar with this one. An overdraft is a temporary bank loan which covers expenses when your account is empty. It is repayable – and banks often charge interest fees for the privilege.
Pension
Don't fancy working till your 80? Then you need to start thinking about a pension now. A pension is effectively a long-term saving scheme, allowing you to save funds for your retirement. There are three different types of pension: a State pension, workplace pension, and private pension. For more details – including how to consolidate all your pensions – visit our explainer.
Stocks and Shares
Very simply put, a stock or share is a little piece of a company which you own. If the company increases in value, the value of your stock will increase, too, whereas if the company loses value, your stock will be worth less. The two terms are used fairly interchangeably.
Standing order: A regular payment set up by you, to transfer money to a different account. You might use this for your rent, to transfer money to your savings or to send money regularly to a joint or bills account.
Hopefully, some of these explanations have cleared some of the fog and helped you to feel more confident about your financial choices. If you come across any jargon that you don’t understand, why not drop a post into our Money Matters Facebook Group?
To submit your own anonymous money diary and get top expert tips tailored to you, simply submit your entry here.
We spoke to a financial expert to find out.
