The Ultimate Money Management Jargon Buster

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Get your head are around your AER’s and your APR’s once and for all. If the many money management acronyms have you confused, you can make sense of it all with our ultimate money management jargon buster.

Drop a comment at the bottom of the article if there are any other terms you’d like to see added to the list! Don’t forget to spread the knowledge too – share this pic on Pinterest so others can find it 🙂

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AER – Annual Equivalent RateThis is the rate of return you can expect from savings or investments, including interest, if the money is left in the account for a year. If you see 1.5% AER, it means that the account pays you 1.5% at the end of the year, or the equivalent of that spread throughout the year.
APR – Annual Percentage Rate
Whereas AER relates to saving, APR relates to borrowing. The Annual Percentage Rate is the cost or charges of your borrowing, over a 12 month period, including interest rates and charges. You might see an advert that quotes an interest rate of 13% and an APR of 15% – this means the cost of the borrowing includes fees and charges which equal another 2% interest. Whilst confusing to quote both – APR is the true number you will pay.

This is a fixed sum of money that is paid to someone each year, usually forever. You usually buy it with a pension, and it allows you to swop your pension savings for a monthly income.

The Annual Percentage Rate of Charge is the same as APR, is that it tells you how much interest you will pay back on borrowing. APR is used for loans and credit cards, whereas APRC is used for mortgages and loans secured against a home.

When you fall behind with a scheduled payment – such as missing a credit card or mortgage payment – you are in arrears. It means money that is owed and should have been paid.

Audit is a fancy word fo going back over your finances. When you ‘Audit your accounts’ you examine them to make sure everything is correct and true.

Balloon Payment
Often due at the end of a loan, a balloon payment is a lump sum of money to complete the credit agreement. You often see this with car finance where you have lower monthly payments, but have a larger lump sum to pay at the end or the car is returned/exchanged.

Base Rate
This is the interest rate set by the Bank of England, which is the lowest rate it will lend money to other banks. Banks who lend to us, will add an amount above that base rate so that they ensure they make money.

To plan! To budget is to list all your income and all your outgoings to make sure you are not spending more than you are earning. Budgeting is essential to financial success.

Capital Gains Tax
A tax that is applied to an asset you sell that has increased in value since you bought it. Your home, if it is your only one, and money held in tax-efficient accounts are not liable. What you pay will depend on how much the asset has increased, what the tax-free allowance is and what you earn. 

Money given to you once you complete a purchase, usually as an incentive to buy a product or use a service.

Compound interest
Put simply, this is interest on interest, and one of the most important concepts to get your head around when managing your finances. If you have savings that pay interest and that interest is reinvested into your savings pot, the next time you get paid interest it will be on your initial savings AND the interest you reinvested. Your pot grows quicker than if you didn’t reinvest the interest earned. If you have debt, and interest is charged on it, the principle is the same but in reverse – which is bad for your finances. If you have £1000 on a credit card, and the interest added to the borrowing is £75 a month, the amount you owe is going up, and the interest charges will also increase.

A way of bringing lots of accounts together into one place, to make it more manageable. For example, you can consolidate several credit card accounts into one account to give you just one monthly payment or consolidate several pensions pots from different employers into one place.

Cooling off period
When you sign a contract for a new product you are given a cooling off period, in which you are allowed to change your mind and back out of the contract. This is useful if you take out a loan for example, but change your mind about borrowing that much money a day or two later. Make sure you read the contracts BEFORE you sign them, to understand what you can and can’t do.

Credit Score
A credit score in a number assigned to you, based on knowledge about your finances and how you manage them. A good credit score is usually a higher number, which means you manage your money well. Creditors often use these scores to assess whether they should lend you money, or not. The lower the score, the more risk they have to take as a business.

Someone you owe money to, such as a mortgage or credit card company. They are also called lenders.

When you fail to make a the obligations of your loan, such as a missed loan payment. A default, or default notice, is usually issued to you if you miss between 3 and 6 payments, depending on the lender. A default notice will seriously damage your credit rating, so it’s important to have any debt under control.

EAR – Equivalent Annual Rate
This is the interest you are charged if you go overdrawn on an account, usually as a daily or monthly charge until the amount owed is repaid.

Emergency Fund
As essential! You should aim to have cash in an easy access account, of an amount between 3 and 12 months of your normal spending, to cover big mishaps such as redundancy, the car blowing up or the dog needing surgery. Having this  in reserve stops you needing to borrow money when live happens.

Equity means ownership. In financial terms, it means an asset you own (a house) that has debt attached to it (the mortgage). For example, the current market value of your house  minus the mortgage you owe on it is your equity amount. Negative equity exists if your house value is less than the mortgage owed on it.

A fund is an investment vehicle or wrapper, that invests in a range of assets. A fund may invest in 15 companies, and allows you to invest in the one fund, rather than the individual companies. Funds are managed by a fund manager to make sure the split between the different companies gives the best rate of return for investors. 

Being economical when it comes to spending eg i’ve cut back on eating out as I’m being frugal.

Gross amount
An amount of money, before and taxes and expenses are deducted. Your gross pay is your pay check before tax, national insurance or pension contributions are taken off.

An independent Financial Advisor can we worth their weight in gold when deciding how to manage your money. They find the best products available to suit your individual circumstances, though this often comes with a fee.

Expressed as a percentage, inflation is a measurement that shows how the average price of selected goods and services increases over time. If inflation is at 2%, as consumers we have generally seen a 2% increase in the prices of the goods and services we use. 

Net amount
An amount of money, after taxes and expenses are deducted. Your net pay is your pay check after tax, national insurance and pension contributions have been taken off.

Individual Savings Account – this is a savings account, but one that is tax efficient. That is, is offers tax-free interest payments so you could get more for your money. Because it’s a tax-efficient account, there is a maximum amount you can put into one in any 12 month period.

An Individual Voluntary Arrangement is an agreement that can be put in place to avoid bankruptcy. You agree to pay back an amount of your debt owed, and some of it is written off. This is a pretty serious step to take and mustn’t be taken without advice from a debt professional.

Anything of value that serves as a method of exchange

Open Banking
A new initiative in banking, to allow increased competition amongst banks. Third party companies can now pull of our bank accounts, credit cards and loans into one place, so you have a snap-shot of your finances. This is great if you have accounts with many providers and have to log in and out of many online banking sites to access your money.

A type of saving that is to be used after you have retired. You could have a state pension, a private pension or both.

Rule of 72
This rule is used to find out the number of years it would take for your money to double at any given interest rate. For example, if you want to know how long your savings pot will take to double in an account that is giving you 5% interest, divide 72 by 5. Your money will take 14.4 years to double in value.

When you spend more than you earn, you have a shortfall. Ie you are ‘short’ of the money required to meet your spending.

A tax is a compulsory charge imposed by the government, so that they can pay for people that work for them, such as the police, or for services such as the NHS and schools. National Insurance, VAT and stamp duty are all taxes.


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