Personal Finance Terms Alphabet A to M
Personal finances can be tricky, and there are a lot of terms to remember if you’re new to it. Luckily, we’ve compiled an A-Z of some of the more basic but important personal finance terms we think you’ll come across. We will break it down in to two halves. In the first half we’ll explore from A-M, and in the next half we’ll see from N-Z.
This term relates to loans and borrowing money. It’s the lender’s official yearly rate which borrowing is charged at. It’s calculated to incorporate both the cost of borrowing as well as the lender’s own fees. It helps you work out the overall cost of taking out and paying off a loan.
You can use APR to compare different credit cards to work out how much the whole thing will cost. However APR can be higher than the interest rate on the loan, which is important to watch out for. For example a 14% interest rate loan can have 17% APR as the additional costs are folded into the figure.
A regular income and a smart budget can be the best way to keep yourself afloat. Budgeting is the practice of allocating funds and accounting costs for a set period. It could be a quarter, a week, or a month. The budgeter tallies up what they think their income and outgoings will be and makes sure to allocate funds to make things go according to budget.
If you’re in credit you’re in the black – this means you are owed or you are in possession of funds. If your account is ‘due to be credited’ it means you are soon to be paid an amount of money. Credit can also be another word for getting a loan or a person who sells a loan, the Creditor. Credit can also relate to a credit rating, which is a numerical figure based on your financial history which shows if you’re applicable for a loan.
The management of debt is one of the biggest financial institutions in the world, and debt itself is one of the most prominent forces in the financial world. Debt means money owed, and it’s important to not the difference between ‘debt’ and ‘debit’, the latter being an accounting term for balancing the books.
Dealing with debt is something many people struggle with, and debts unpaid can leave a permanent negative record on your credit rating, making it harder to get credit in the future.
For a lot of credit rating related articles, check out our short series of articles filled with tips on how to manage your credit rating.
The economy is a global or local financial entity, which has so many facets that it’s almost completely unpredictable, even by lifelong economists who learn the science or the daily going on of an economy. The economy concerns production and distribution of goods and services as well as trade and financial institutions.
For the individual, the economy may or may not hold significance – its fluctuating nature can suddenly leave some of us in difficulties, or provide unexpected boons. In a way, the economy runs a good portion of our daily lives.
The modern institution of finance harks back to renaissance Italy, where in 1397 Giovanni Medici established the famous Medici bank in the republic of Florence. Since then, banks and loan agents have managed borrowing and lending, credit and debt, and a host of monetary dealings categorised under the general umbrella of ‘investments’.
Finance makes up the backbone of the economy, from the simple banking transactions we make on a daily basis, all the way up to the hedge funds of the big cities which deal with all sorts of investments. Workers of all stripes in the money business ride the waves of global finance, some to great success and wealth, and others unfortunately not. As they say, that’s just the way the cookie crumbles.
In your own personal finances, setting goals is highly important – having a plan and sticking to it is similar to budgeting, except the goals you set can be linked to or entirely separate from your budget. Say you need to save £400 by February you can incorporate that goal into your budget.
Goals are also important for your personal well-being – having a plan that you stick to and achieving goals is a habit forming exercise. The more you achieve goals, the more motivated you will feel to setting more in the future. The motivational aspect of goals is in fact what makes them so good to start setting. Try it yourself.
Home Finance Apps
There’s no real disadvantages to home finance apps, except if the app itself isn’t very good – so the best thing you can do before committing to using one is to do your research and see which app best suits your particular needs.
The rate of interest is the amount of interest that accrues over time when a lump sum of money is concerned. Interest itself is the practice of charging, or paying out, money that has sat in a specific position for a certain time. Interest may be paid on a loan, a mortgage, an amount of money sat in an account, and many other things.
The interest practice is a way for bankers and lenders to profit from their transactions, but it also allows people to store money and let it make more money. Of course you have to have a large amount to get a huge payoff.
The rate of interest is usually expressed as a percentage – the percentage of the amount of the lump sum that the interest is being charged or paid on. Obviously, 14% interest on £100 is £14. This amount of interest may be accrued of a fixed period, such as a few months or over a year.
The bottom layer of finances is the job market. Workers creating products, or providing a service that are sold to other people. This is known as the theory of surplus value, where workers are paid less than the value of what they create, which creates additional money for the company which is selling the goods, known as profit.
This adds money to the pockets of the company owner, who may keep or reinvest the profits from the work the workers have done. The workers are also paid their wages, which in turn go back into other areas of the economy.
Finding jobs is arguably becoming more difficult, and unemployment is obviously a problem as it means less profit is being created and less money goes back into the economy.
The method known as ‘Kickstarting’ is a relatively new term, but it’s also known as ‘Crowdfunding’ in some places. It’s basically the practice of attracting a lot of people to invest in a product that isn’t being created yet or is in the process of creation.
Investors into a crowdfunding project are known as backers and early backers are often offered rewards or discounts on the final product when it is released. This is because the project sometimes isn’t fully funded but the creators have decided to start work with the funds they have already. Some crowdfunding efforts avoid this model and wait until all the money is collected before going ahead.
Crowdfunding or Kickstarting a project is a great way to attract investment in your new business or idea, but it’s sometimes a little bit tricky and requires a good ability to market your product and get the word out that the funds are being looked for. Above all, one must inspire potential investors with faith that the product will be created and they will see a return.
Another aspect of credit, loans are a lump sum of money that is lent to an individual. Loans are required to be returned within a set time, or otherwise will be subject to interest. The loan will usually be given under the promise that interest will be paid anyway, as this is how the lender profits off lending.
The long history of banking has pretty much always included loans in some form, and in a way it’s one of the main jobs of a bank to manage and offer loans.
Applying for a loan requires a good credit rating, otherwise a very high rate of interest may be charged to you, especially if you have a very low credit rating. However, successful repayment of loans can result in a boost in your credit rating.
A mortgage is a type of loan taken out to ensure there are enough funds to buy a house or other piece of real estate. The loan is guaranteed against the property itself, and is repaid over a long period of time, presumably while the person repaying it is living in the property.
There are various types of mortgages available, including ‘Buy to Let’ mortgages which are used to purchase a house which is then rented out to tenants. This usually costs more overall as interest rates are generally higher on this type of mortgage.
When you take out a mortgage it is also subject to interest, which can be both; a fixed or a variable rate. We’ll examine this in detail later in the next article, but what that means is the rate of interest on your mortgage is subject to change according to what the economy dictates.
Obviously when a mortgage isn’t repaid, the property itself serves as ‘collateral’, meaning the bank can repossess the property and claim ownership. They can then sell the property to repay the money they initially lent out to the purchaser.
Keep an eye out over the next few weeks for the next installment covering the N to Z of personal finance terms.