Direct debit: An instruction to your bank, issued with your permission by the person you’re paying. You might pay bills by direct debit, and the money is taken each month (usually) without you needing to do anything. You can cancel direct debits with your bank, but you should always let the company know in advance.
Equity
Usually used with companies, houses or sometimes cars, the equity that you hold in something is the value or percentage of it that you own. So, if you buy a house with a 10% deposit, at first, you will have 10% equity in your home. As you pay off your mortgage or the value of the house increases, you will gain more equity. If the value of your home decreases, your equity will decrease too – which is why we hear talk of negative equity if house price crashes are discussed.
Funds
If you’re just starting to dip your toe in the water with investing, it’s likely that you’re using a robo-investor app, in which case you will be investing in funds. A fund is a basket of stocks, shares, bonds and equities that usually have something in common – for example, a ‘tech fund’ might include stocks from tech and innovation companies only, while a ‘sustainable fund’ would only include stocks that meet certain economic, social and governance criteria. Using funds is a great way to diversify your investments, which can help to mitigate risk – with investing, your capital is always at risk.
Guarantor
A guarantor is someone – usually a family member – who formally promises (guarantees) to pay your debt if you fall behind on certain payments, such as rent. This means if you can’t pay your landlord what you owe, they can ask your guarantor to pay instead.
Interest
Most of us know the basics of interest, but crucially there are two types that you should be aware of, for interest on your savings and for interest on any debt that you might have.
Simple interest is interest that is only ever paid or charged on the principal of your debt or savings deposit i.e. how much you borrowed or deposited in the first place.
Compound interest, on the other hand, means that interest is paid or charged on the principal amount plus any interest that accrues in the meantime. Accounts might compound daily, weekly, monthly or annually. Compound interest is great news for savings and investments, especially those long term ones, but it can spell trouble on loans and credit cards.
Inflation: An increase in the price of something – for example, goods and services – over time.
ISA: An Individual Savings Account is a savings account that you can deposit or invest funds into without paying income tax on any earned interest. In the current tax year, you can save up to £20,000 in an ISA. For more information on the four types of ISAs, head to our explainer.
Mortgage
A mortgage is a type of loan specifically used to purchase property. For everything you need to know about mortages, including how to save for a deposit, whether to go for a fixed or variable rate, and how to look after your credit score, visit our in-depth explainer.
Overdraft
OK, so you might already be familiar with this one. An overdraft is a temporary bank loan which covers expenses when your account is empty. It is repayable – and banks often charge interest fees for the privilege.
Pension
Don’t fancy working till your 80? Then you need to start thinking about a pension now. A pension is effectively a long-term saving scheme, allowing you to save funds for your retirement. There are three different types of pension: a State pension, workplace pension, and private pension. For more details – including how to consolidate all your pensions – visit our explainer.
Stocks and Shares
Very simply put, a stock or share is a little piece of a company which you own. If the company increases in value, the value of your stock will increase, too, whereas if the company loses value, your stock will be worth less. The two terms are used fairly interchangeably.
Standing order: A regular payment set up by you, to transfer money to a different account. You might use this for your rent, to transfer money to your savings or to send money regularly to a joint or bills account.
Hopefully, some of these explanations have cleared some of the fog and helped you to feel more confident about your financial choices. If you come across any jargon that you don’t understand, why not drop a post into our Money Matters Facebook Group?
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