Money Management and Financial Glossary

See also: Talking About Money

Asset.

An item of property owned by an individual or company that has a clear financial value, and can be used to meet debts or commitments, either in itself, or by selling it. In economic terms, it provides a current or future benefit to the holder.

Bankrupt, bankruptcy.

Bankruptcy is a legal process started when an individual or company cannot repay existing debts or obligations (for example, bills or employee salaries). When it is complete, the individual or company is legally declared unable to pay their debts, and they are known as bankrupt. For more about the benefits and drawbacks of applying for bankruptcy, see our page on Getting out of Debt.

Base rate.

The rate at which the ‘lender of last resort’ or central bank lends to other banks. In the UK, the lender of last resort is the Bank of England, in the eurozone, it is the European Central Bank, and in the US, it is the Federal Reserve. The base rate is usually lower than other banks’ standard interest rate for loans.

Bonds.

Also known as fixed interest securities. These are promises to pay issued by governments or large companies. They are a way for these organisations to borrow money at relatively low cost.

Budget.

A plan of how you are going to spend your money. Budgeting is the process of planning your spending to ensure that you do not spend more than you can afford.

Capital.

Money or other assets owned by an individual or organisation.

Cash.

Money, in the form of notes or coins: the physical form of a currency.

Cashflow.

The amount of money moving into and out of a business or individual’s bank account at a particular time. Cashflow is important, because if a business does not have money available at the point at which a bill falls due, it will not be able to pay. This could have serious implications. There is more about how to manage cashflow in our page on Spending Less.

Contingency fund.

A pot of money that is available to meet unforeseen issues (contingencies). Financial experts usually recommend that individuals hold a contingency fund of around three months’ income.

Credit.

The ability to obtain goods or services before payment.

Credit card.

A card that allows the holder to purchase goods on credit, that is, without paying for them immediately. The payment will be made by the credit card company, which will then issue a bill to the cardholder periodically (usually each month).

Credit limit.

The maximum amount of money that you can borrow using a particular method. For example, on a credit card, the total amount of money that you can owe the credit card company at any one time.

Creditor.

Someone who is owed money.

Credit rating (credit score).

A number used by financial institutions to decide whether to lend money to an individual. It judges how likely the individual is to repay a loan. Credit scores can be generic or custom. Generic scores are held by credit reporting agencies, drawing on information like credit history and electoral registration information. Custom scores are held by individual institutions and reflect the individual’s history with that institution. See Understanding and Improving Your Credit Score for more.

Credit reference agency (or credit reporting agency).

An organisation that provides credit ratings (credit scores) to help lenders make decisions about whether to provide a loan or credit to an individual.

Credit utilisation.

The amount or percentage of available credit that an individual uses each month.

Cryptocurrency.

A form of digital currency that uses coding to secure and verify transactions. See our page on Understanding Digital Currencies and Cryptocurrencies.

Day-trading.

The practice of buying and selling stocks in a single day, to profit from small fluctuations in the market.

Debit card.

A card that allows the holder to purchase goods electronically with money held in their bank account.

Debt.

Money that is owed to a creditor. This may be through a short- or long-term loan, which may also be formal or informal.

Debt consolidation.

The practice of bringing together several loans into a single vehicle, usually be refinancing the loans to get a cheaper rate of interest. See Getting Out of Debt for ideas and tips for reducing debt.

Deflation.

An increase in the value of money and/or a decrease in prices over time. The opposite of inflation.

Digital currency.

A currency or money system that is only available electronically, and can therefore only be accessed using a computer. Cryptocurrencies are a form of digital currency. There is more information in our page on Understanding Digital Currencies and Cryptocurrencies.

Direct debit.

An arrangement you make with a bank to allow a third party to transfer money from your bank account on agreed dates, for example, each month or year to cover bills or subscriptions. You do not control the amount, and the third party organisation can alter the amount, and also not take the payment if it wishes. Differs from a standing order, where you are in control of the amount and whether it is paid.

Discretionary spending.

Spending on non-essential or luxury items.

Equity.

The shareholders’ stake in a company. It is defined as total assets minus total liabilities. It is also used in the context of property, to mean the proportion of the value of a property that is held by the owner (that is, the part that is not mortgaged).

Expenditure.

A formal word for spending.

Expense.

A cost.

Financial contingency planning.

Planning ahead to manage the risks arising from events such as natural disasters, or changes in your circumstances, and ensure that you can cope in financial terms. For more see Financial Contingency Planning.

Financial planning.

The process of working out your long-term financial goals, and how you plan to achieve them. See our page on Financial Planning.

Fund.

A pool of money. In investing, the term is used specifically for a pool of money from multiple investors that is brought together and managed with a view to growing the amount of money. Funds are managed by fund managers, who invest the money in stocks, shares, property, and bonds. Some funds, known as funds of funds, invest in other funds.

Hyperinflation.

When inflation is completely out of control, and growing by thousands or even millions of percent over a period. This can result in a national currency being completely devalued, and becoming practically worthless, as happened in Weimar Germany in the 1920s, and again in Zimbabwe in the late 2000s.



Income.

Money received, especially on a regular basis (for example, from investments or employment).

Income tax.

A tax paid on your income, often at source.

Inflation.

The decrease in the value of money and/or the increase in prices over time. See also deflation, hyperinflation, stagflation.

Insurance.

A risk-pooling arrangement where a company (the insurer) agrees to compensate a policy-holder for a specified loss, damage or expense, in return for the payment of a premium. See Choosing the Right Insurance for more information.

Interest.

This is the money that you pay to a lender for borrowing, or that a bank pays for the use of your savings. It is, effectively, the cost of borrowing money rather than having your own to use. There is more about how interest is calculated in our page on Understanding Interest. See also standard variable rate, base rate.

Investing.

Putting money into a financial scheme or commercial venture in the hope of making a profit. For more, see Understanding Investing.

Leveraging.

The practice of using borrowed money to finance an investment, in the expectation that the profit from the investment will outweigh the cost of borrowing.

Liability.

Something you owe, which must be paid at some point. A company’s liabilities are what it has borrowed, which must be paid back eventually, and also any unpaid bills.

Loan.

Money borrowed from a lender, who may be a financial institution or an individual. The total amount of your loans is your debt. Loans may be either secured or unsecured. A secured loan is guaranteed in some way (for example, a mortgage is secured against your property). See our page on Loans and Savings for more information.

Mortgage.

A loan that is secured against land or property, and which expires only when the borrower has met certain conditions, usually paying off the loan and any associated interest. The word comes from Old French meaning ‘dead’ and ‘gauge’ or ‘promise’. See Understanding Mortgages for more.

Nominal prices.

The actual prices paid for goods, without adjusting for inflation. Over time, therefore, nominal prices will rise considerably.

Opportunity cost.

The cost of investing in one place instead of another. For example, if you invest a certain amount in shares, you cannot also get interest on that amount. The interest that you would have earned is the opportunity cost.

Payday loan.

A short-term loan, so-called because it is designed to tide you over until payday. Payday loans are generally unsecured, and have very high rates of interest. They can therefore be extremely costly, but may also be the only form of credit available to some people. See our page on Loans and Savings.

Pension.

A savings plan designed to help the holder save for retirement.

Portfolio.

Collection of investments held by an individual investor or fund.

Premium.

A payment to an insurer that guarantees you a specified payment to cover a particular loss, damage, illness or death. Premiums vary with risk, and there is more about this in our page on Choosing the Right Insurance. See also insurance.

Quantitative easing.

A term used for central banks and governments increasing the supply of money in the economy, for example, by printing more money. This process is used to stimulate demand in the economy and prevent deflation.

Real prices.

Prices that have been adjusted for inflation over time. They can therefore be directly compared over a long period, and often decrease over time.

Refinancing (a loan).

Taking out a new loan at a cheaper interest rate, or under other favourable conditions, solely to pay off one or more other loans. Often used for mortgages.

Return(s).

The profit that you make from any investment (see investing). Also known as reward when talking about the risk–reward trade-off.

Risk, financial.

The probability that you will lose money on an investment.

Risk–reward trade-off.

A term used to describe the balance between risk and reward in any investment. A higher-risk investment will generally offer greater probabilities of both a higher reward and a greater loss, depending on the outcomes of the investment.

Run on the bank.

A situation where multiple bank account holders all wish to withdraw all their money at the same time. This is problematic because banks do not hold very much cash at any one time, so cannot pay more than about 10% of account holders at once. A run on the bank can therefore lead to the bank being unable to pay, and going bust.

Sales tax.

A tax paid on goods or services at the point of purchase.

Savings.

Money that you keep, usually in a bank account, and that is not routinely spent each month to cover outgoings.

Stagflation.

A term in economics that describes a period of consistent high inflation coupled with stagnation of a country’s economy (no growth). See also inflation.

Standard variable rate.

The standard rate of interest for mortgages set by a lender. If you are not on any special type of mortgage (e.g. a tracker or a discount mortgage) you will be on the standard variable rate. This is usually the highest rate of interest offered by the lender—but there is more flexibility about switching to another lender.

Standing order.

An instruction by a bank account holder to their bank to make regular payments of a fixed amount to another individual or organisation. See also direct debit.

Stock exchange.

A ‘place’ (which may be physical or electronic, and includes websites) where people can trade or exchange shares in companies. A stock market may contain several different stock exchanges.

Stock market.

The collection of stock exchanges that operates in a given country or jurisdiction.

Stocks and shares.

What is traded on the stock market (q.v.). Shares are a stake in a company: literally, your ‘share’ of that company.

Subscription.

An arrangement that allows you to receive something regularly by paying monthly or yearly in advance. Originally largely used for publications (newspapers, magazines) but now often applied to streaming services.

Sunk cost.

Money that you have already spent or lost on an investment, which cannot be recovered. See our page on Investment Tips for more detail.

Tax.

A compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions. See also income tax, sales tax.

Tax band (tax bracket).

A division in a tax system that determines how much tax you have to pay. Bands may be income-based (for example, for income tax) or based on the value of your property or assets (for example, for UK council tax).

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