It can be frustrating to say the least, agrees Ken Okoroafor, founder of thehumblepenny.com
“When I think of money and all things related to it, I realise that there are typical terms that people use a lot of time, which can appear complex and easily overwhelm.
“It’s important to take steps to actually understand what these terms mean practically, not only because it helps to build personal confidence but also because it eventually leads to passing onto children the right attitudes and approach to money.”
There’s lots of jargon out there – here’s our list of some of the more common ones and simple explanations.
One you’re likely to see if you’re taking out a loan – including a student loan – or making a large purchase such as a sofa or car on a repayment plan. APR stands for ‘annual percentage rate’.
In simple terms, this shows how much you are charged every year for a loan, or money you’ve borrowed on a credit card, for example, including any fees. It normally gives you the overall cost of a debt.
What this actually means in money terms is that when you borrow £1,000 over one year at 10% APR, it costs you £100 in interest on top of your loan (10% of £1,000); taking the total you need to repay to £1,100 over that year. Source: Money Saving Expert.
Yes, financial services love an acronym. AER stands for ‘annual equivalent rate’ and refers to earning interest on your savings, for example in a bank savings account. The higher the AER, the more interest you can get.
Something we hear a lot about on the news, inflation is any rise in the cost of the everyday goods and services we buy.
Inflation means your money loses value over time and buys less than it did in the past. For example, a house that cost a few hundred or thousands of pounds a few decades ago could sell for a few hundred thousand pounds today.
And inflation can eat into your savings too. As the Money Advice Service explains: “It’s important to know the inflation rate when you’re thinking about savings and investments, since it makes a big difference to whether or not you make a profit in real terms (after inflation).
“Say you put your money in a bank account that pays you interest at 2%. A year later you’ll have 2% more money.
But what if inflation is more than 2%? In that case, although you’ve got more money, it can purchase less than the amount that you began with.”
4. Base rate
You’ve probably heard about the base rate on the news: there’s always a big story when the Bank of England’s Monetary Policy Committee – which decides on the rate – makes a change to it.
The base rate is used by many financial institutions to set the interest rates they charge and pay customers. When you hear that the base rate has risen, you’d expect savings and mortgage rates to rise, too, although this doesn’t always happen.
Not to be confused with the interest rate or base rate – see point 4.
You earn interest on your savings or pay interest on your borrowings at the rate set, based on the APR or AER.
You can invest your money direct into things like stocks and shares and bonds or indirectly through funds. Many people aren’t aware that if they have a modern pension, their money is invested.
If your money is invested, it has more potential to grow in value over the medium to long term (at least five years) than if you save into a bank or building society account – although money is generally secure in a bank or building society. Because it is invested there’s also greater risk of it falling in value.
There’s no guarantee you’ll get back all the money you invested or make a profit.
In simple terms, a modern, flexible pension is a long-term savings plan and a tax-efficient way to save money during your working life. You pay in, and if you have a workplace pension, your employer contributes too. That money is then invested, usually in funds. You get potential for growth but it can go down in value as well as up, and you could get back less than was paid in.
How much you get when you’re ready to take your pension – normally from the age of 55 – will depend on how much you save, how your pension investments perform and how long you’re invested for.
Get to know more on this in what’s so good about a pension.
ISAs, or ‘individual savings accounts’ are talked about a lot and no wonder, they’re a popular way to save or invest, because you can grow your money tax free.
You can save into a Cash ISA and earn interest, or invest into a Stocks and Shares ISA – and you can save up to £20,000 tax efficiently each tax year.
You can find out more about how ISAs and pensions compare in our getting to know your pensions from your ISAs infographic. [link]
The information here should not be taken as financial advice. If you need help and don’t have an adviser you can find one near you on unbiased.co.uk or find out more about Standard Life Aberdeen’s financial planning arm at standardlife.co.uk/1825. There will likely be a cost for advice.
It’s important to note that laws and tax rules may change in the future and your own personal circumstances will have an impact on tax. The information here is correct in March 2019 and shouldn’t be taken as financial advice.