These Top Ten Money Terms Affect You

There’s nothing quite like Latin for disguising the fact that you’re making it up as you go along
— Ben Aaronovitch

One of the main reason why so many people have a mental block when it comes to the financial world is the absolute abundance of jargon.  With so many confusing terms, acronyms and buzzwords, understanding what exactly is happening with our money can seem darn near impossible.  Fear not – MoneyNotes is here to save the day!  Rather than try to explain every single piece of financial jargon out there (that wouldn’t be so much a blog post as a book to rival Homer’s Odyssey), we’ve put together a quick roundup of the top ten terms that have boggled the minds of many of our MoneyNoters.  Here we go:

1.       APR – Annual Percentage Rate

What does it mean – It is the interest rate or charge on money you borrow such as credit card, bank loan or payday loan. The APR includes the interest rate charged on the loan and all other charges that are payable. This makes APR a good measure to compare loans across different providers.

Why should I care – Because when next you need to borrow money you can ask what the APR is and then use it to compare loans. The higher the APR then the more you have to pay back!

2.       Bank of England Base Rate

What does it mean – It is the interest the Bank of England charges other banks to loan them money over a short term. The rate is currently 0.5% per year as at March 2018. The rate has been as low as 0.25% per year and as high as 17% per year.

Why should I care – Because this is the amount the Bank of England charges other banks including yours, consequently it affects the interest rates your bank pays you for saving with them, charges on loans, mortgages and so many other financial products.

3.       Annual Equivalent Rate

What does it mean – This is the official rate for savings accounts, and is designed to allow for comparison between savings account. Basically how much you get if you put money in a savings account and left it there. It is used to compare the annual interest between loans with different compounding periods like week, month, year, etc.

Why should I care – Because this should help you decide which savings account you should keep your money. However, watch out for bonus rates that expire after one year!

4.        Financial Services Compensation Scheme - FSCS

What does it mean – The Financial Services Compensation Scheme is a free service that protects amongst other financial instruments your money should anything happen to your bank, building society or credit union.  

Why should I care – Because we all have money in the bank and you should feel rest assured that if anything happens to your bank then you can get your money back. The protected amount is up to £85,000 per person per authorised bank or building society (as at March 2018). 

5.       Inflation

What does it mean – Inflation is the rate of increase in prices for goods and services. If inflation is 2%, that means that on average, the prices for goods and services is 2% more than a year ago. Put another way, we will have to pay 2% more for the same products and services from a year ago. There are two main Inflation measures you will hear in the news which are Consumer Prices Index (CPI) and Retail Prices Index (RPI). They are slightly different in how they are calculated but what’s more important is what inflation means.

Why should I care – This one is big, it possibly affects how your pay grows, how benefits and pensions grow and sadly how your rail fare, utility bills, rent and phone tariff increases.

6.       ISA

What does it mean – It stands for Individual Savings Accounts . ISAs qualify for favourable tax status. Payments into the account are made from your income after you have been taxed. However, the account is exempt from tax such as income tax and capital gains tax in the returns you make.

Why should I care – ISAs can be used to save cash or invest in stocks and shares and other financial instruments including peer-to-peer lending. There are several subsets of ISAs out there including Junior ISA (JISA), Help to Buy ISA, Innovative Finance ISA, Lifetime ISA and New ISAs. However, the underlying principle is still the same, which is that payments into the account are made from your income after you have been taxed but interest and growth within the accounts face no further taxation. There is a fixed ISA allowance for each tax year. The allowance for 2017/2018 tax year which comes to an end on 5 April 2018 is £20,000. So hurry up and take advantage of this! Well, that’s if you have some free cash lying around.

7.       "With Investment, your capital is at risk"

What does it mean – Your capital is the money you invest. If you put £100 in your bank account then that’s your capital and you get paid an interest on it. However, to receive higher interest on your capital, you may need to take a bit more risk. Sometimes this level of risk may result in a loss of your capital.

Why should I care – Losing your capital is the last thing you want. For example to receive higher return you may buy a share/equity/stock (ownership) of a company such as Toys R US. This means that if they make a profit then you get rewarded for it and the value of the company could grow over time as well. These interests are usually higher than the interest on your cash at the bank. However if the company goes bust then in most cases as a shareholder of the company you get nothing back. This stresses the importance of diversification.

8.       Diversification

What does it mean – It simply means not putting all your eggs (money) in one basket (one type of investment). Diversification is not only to ensure that you do not lose all your capital but also could mean even greater returns as one of the investments you diversify into could significantly outperform the others.

Why should I care – It is definitely one of the most important aspects of investing. Diversification helps minimise complete loss of capital. So if one of your investments is not performing as expected, then other investments in your portfolio that you have diversified into should compensate.

9.       CCJ

What does it mean – County Court Judgement. CCJ is a type of court order in UK that might be registered against you if you fail to repay money you owe.

Why should I care – Before things get to this point you must have had a lot of warning from the company you owe money. Debt can usually lead us to bury our heads in the sand and ignore request for payments as we discussed in Personal Debt – The Christmas Hangover. However, unless you pay off a CCJ in full within 30 days of receiving the judgment, it will be entered on your credit record and remain there for up to six years. This record can significantly affect your ability to get important things such as a mortgage, a credit card or even a bank account in the future.

10       Invest for the long term

What does it mean – No hard and fast rule as to what “long term” means but you could use over 5 years as a guide. Advisers will say you have to invest for long term as it helps smooth out all the short term swings in your investments and align your investing period to those of the company that you have invested your money with (e.g., a company like BP or Shell).

Why should I care – Investing regularly and over the long term means that you are not only buying into investments when they are expensive but also when they are cheap which helps smooth out your entry prices into your investments. Over the long term you should then expect to share in the profits of businesses (Dividends) which when reinvested helps compound returns.

Ok, there are actually many more of these but the above is a good start. So if you wish to learn more and we highly recommend you do then the list below should be of help.

Further Reading

Rich Bitch: A Simple 12-Step Plan to Decoding Financial Jargon and Having the Life You Want

Financial Terms Dictionary - Premium Edition - Over 800 Financial Terms Explained

An A - Z of Finance: A Jargon Free Guide to Investment and the City ("Daily Telegraph")

The A-Z of Personal loans jargon-busting

Household Budget Series - Part 1, the £205,000 Household

Household Budget Series - Part 1, the £205,000 Household

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