Finances can be overwhelming enough without the copious amounts of elaborate words thrown around that make you feel like you’re drowning in overcomplicated jargon. Whether you’re just starting out on your financial independence journey, buying your first home or investing, we are here to help. We will break down common financial phrases to help you understand what is happening. From interest to inflation, this list contains a few key terms that can often confuse, so let’s dive!

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Interest

‍The price that a person pays for borrowing money as a percentage of the amount borrowed over a period of time (0.06% interest on £1000 is £60). 

Type 1 - Simple: only ever paid or charged on the principal of your debt or savings deposit.

Type 2 - Compound: paid or charged on the principal amount plus any interest that accrues in the meantime. This is great for savings and investments but not for loans and credit cards.

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Equity

‍The percentage of something that you own. Often, home equity is spoken about - if you put down a 10% deposit, then you own 10% of that home. This will gradually increase as you make your mortgage payments. 

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Guarantor

‍This is someone who formally guarantees to make your payments if you cannot (mortgage or car payments, for example). 

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Overdraft

An overdraft lets you borrow money from your bank when your account balance is £0. It can be arranged (with an agreed limit) or unarranged. 

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Stocks and Shares

‍A small piece of a company that you own. So if you have shares in a particular company and their value goes up, so does the value of your stocks/shares. 

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Bonds

‍Unlike stocks, you do not have any ownership of bonds. A bond is a loan taken out by a company, and the company gets the money from investors who buy its bonds and pay them interest. 

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Capital

‍Have you heard ‘Your capital may be at risk’ but have no idea what it means? Well capital is the amount of money that a person holds. So, if you invest in a stocks and shares ISA, the amount of money you put in is at risk. 

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Credit Score

‍A way for banks to tell if you qualify for a loan. This is a number calculated on things including debt you have, your history of paying bills (on time or not), other loans you have and how long you have had them. 

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Inflation

‍An overall increase in the price of goods and services over time (as we face the cost of living crisis). When prices rise, but your income doesn’t, your money is worth less than before because you can’t buy as much. 

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Hopefully, something in this list now makes a lot more sense to you. Understanding your finances can be really difficult, but getting your head around the seemingly confusing language is a great place to start.