7 important financial expressions to help your teenagers become savvier with money
01/03/2023As clients of Douglas White Financial Planning (DWFP), you’ll know that helping every age understand the jargon-filled world of finance is something we are passionate about achieving. We know the value of helping you understand what financial terms mean, so that you can make the right choices with your money.
Yet, research by Aviva reveals that fewer than two-thirds (61%) of UK adults aged 18-24 have heard of the term “pension”. Furthermore, just 57% of UK adults in the age group are familiar with the financial term “inflation”.
So, with this in mind, read on to discover seven financial terms that you may want to teach young people in your life so that they can be savvier with their money – and perhaps even give yourself a quick refresher on them, too!
1. Inflation
Inflation is the increasing cost of goods and services over time, which means that £10 will typically buy you more today than it will in the future. While a small amount of inflation is seen as good for the economy, if it rises too high it can stifle economic growth. One reason for this is that it can push the cost of raw materials up.
If you use an inflation calculator, you’ll see that you would need £204 in January 2023 to have the same spending power as £100 did in January 2003. This means your money needed to grow by 104% during the period to keep pace with inflation, which averaged 3.6% a year.
By teaching your teenager about the effects of inflation, they could ensure their money retains its spending power, perhaps by speaking to a financial planner and investing it when they’re an adult. This could ensure that your teenager’s wealth does not drop in value in real terms later on.
2. Compounding
Compounding is where growth or interest is added to the growth or interest your money has already accrued. To demonstrate this, consider the following.
If you use a compound interest calculator, you’ll see that if you invested £10,000 and achieved an average 2.5% compounded growth every year, at the end of year one you’ll receive around £250. This means you have £10,250 invested.
In year two, the 2.5% growth would be based on the £10,250, which means you’ll receive £259. By the end of year 10, you’ll earn around £2,836, compared to the £2,500 you would have earned at the end of the decade if your investment paid 2.5% interest on the original amount every year.
Helping your teenager understand compounding could help them identify opportunities that might boost their money’s growth potential. More importantly, it means they’ll understand the potential perils of compound interest, such as the interest charged on credit cards which could result in their debt spiralling out of control.
3. Credit
Credit is where you borrow money on the understanding you’ll repay it later, typically with interest added. Lenders and credit card providers decide whether to accept your application for credit based on your borrowing record, otherwise known as your “credit score”.
You will have a “good” credit score if you have a record of managing previous or existing credit, and have paid your bills on time. If you haven’t, your credit score could be “poor”, meaning you’re unlikely to be approved for a loan or credit card, or will be charged more interest.
Understanding the importance of a good credit score will not only increase the chances of your child securing a loan later on, but may mean they can benefit from more beneficial interest rates. This is because those with a poor credit score are seen as high-risk by lenders. This might see them charge higher levels of interest to compensate for the additional risk they are taking in lending the money.
4. Debt
Unlike credit, debt refers to money you’ve already borrowed that’s still outstanding. Being “in debt” is not necessarily a negative, as you are deemed to be in debt even when you’re paying a loan or credit card off in a responsible way.
Any debt that you cannot settle immediately will usually incur interest, which could significantly increase the amount you owe. Teaching your child to understand that debt can be useful if it’s managed properly could help them increase their wealth and minimise the costs and potential dangers involved with borrowing money.
5. Annual percentage rate
The annual percentage rate (APR) breaks down the cost of your borrowing as a proportion of the total amount you have borrowed. It also includes, for example, upfront fees that have been charged by the lender, which are spread over the duration of the loan.
So, if you’re borrowing £1,000 at an APR of 10%, you will pay £100 in interest and charges over the year. Lenders often quote a “typical APR” as many adjust the interest rate they charge to the borrower’s personal circumstances and credit score.
Helping your teenager understand this could help them identify the best deals that are on offer. Furthermore, as they will understand the cost of borrowing, this could reduce the chance of them inadvertently taking on too much debt and potentially getting into financial trouble.
6. Mortgage
A mortgage is a loan that’s used to buy a property or land. As the building or plot is used as collateral against the loan, the lender has the right to take it back if you default on payments. The cost of a mortgage will depend on:
- The number of years the mortgage is for, also known as the “term”
- The rate of interest charged.
It will also depend on the type of mortgage you have. For example, the monthly repayments on “tracker” and “standard variable rate” (SVR) mortgages usually fluctuate as they follow the Bank of England’s (BoE) interest rate as it moves up and down.
A “fixed-rate” mortgage, on the other hand, retains the same level of interest throughout its term, and typically does not move in line with the BoE’s interest rate. Understanding this will not only help your teenager recognise the best possible mortgage deal, but could also help protect them from significant hikes in their monthly repayments, something millions of homeowners were faced with in 2022.
7. Overdraft
An overdraft allows you to effectively borrow money through your current account, as your bank allows you to draw more money than you have in the account. If you do go “overdrawn” your bank usually charges you.
Going overdrawn is another form of debt, and should be used as short-term borrowing. Helping your teenager understand that an overdraft is a debt they’re going to be paying for could encourage them to budget more effectively and make smarter choices with their cash.
Get in touch
As clients of DWFP, it’s likely we will have discussed the above terms with you at some point during our conversations. That said, if there are any financial terms you’re unfamiliar with, you might want to familiarise yourself with their meaning to ensure you fully understand how they could affect your wealth.
If you would like to discuss any of them, or have a question about any other term you’re unsure about, please get in touch at info@douglaswhiteltd.com or call 0151 345 6828. We’d be happy to explain it to you.
Please note
This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation will be different. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The information is aimed at retail clients only. Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy-to-let (pure) and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.
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