10 important financial expressions to teach your teenage children

Research by pension provider Aviva makes for interesting reading. It reveals that fewer than two-thirds (61%) of British adults aged between 18 and 24 have heard of the term “pension”.

Furthermore, just 57% of young adults are familiar with the term “inflation”. It reminds us that the world of finance is a complicated one, full of jargon and can all too often lead to confusion. Yet understanding them is vital to ensuring you’re getting the best from your money and wider wealth.

With this in mind, read on to discover 10 succinct definitions of common financial expressions that you can teach your teenage children, so that they will be savvier with their money.

1. Pension

A pension is effectively a savings plan that allows you to put money aside that you can then use to generate an income in retirement. While there are variations across different countries around the world, and within counties there are sometimes different types of pensions, more frequently, the money placed in a pension is invested in stocks and shares or other assets to expose it to potential growth.

Depending on where you live within the EU, and when and where you want to retire, pensions can help give a boost to your future retirement income. That said, there are strict rules around how and when you can access pensions, so it’s important to ensure you fully understand them, something a financial planner can help you with.

An important lesson for teenagers to understand is that the younger they are when they start to invest for their retirement the better. This is because it will have longer to grow, which means that they could be contributing significantly less money each month if they start early, and still have a pension that is big enough to provide the lifestyle they would want later on.

2. Compounding

Compounding is where growth or interest is added to the growth or interest your money has already accrued. If you use a compound interest calculator you will see that if you invested €10,000 and achieved an average 3% compounded growth every year, at the end of year one you’ll receive €300. This means you now have €10,300 invested.

In year two, the 3% growth would be based on the €10,300, which means you’ll receive €309. By the end of year 10, you’ll earn around €3,493 in compounded growth, compared to €3,000 if you had received 3% interest on the original amount every year.

Remember that while compounding can boost growth potential, it can also significantly increase the level of interest you might be paying on a debt like a credit card.

3. Inflation

Inflation is the increasing cost of goods and services over time, meaning €10 will typically buy you more today than it will in the future.

If you use an inflation calculator you’ll see that you need €150 in January 2023 to have the same spending power as €100 in January 2003. This means that your money needed to grow by 50% during the period to keep pace with an average inflation rate of 2.06% a year.

If it didn’t, your money’s spending power would have reduced, meaning your cash fell in value in real terms.

4. Credit

Credit is where you borrow money on the understanding that you’ll repay it later with interest added. Lenders and credit providers decide whether to accept your application for credit based on your credit rating, which is a record of how well you managed previous or existing credit.

5. Debt

Debt typically refers to money you’ve already borrowed and is still outstanding, such as a loan, mortgage or credit card. Being “in debt” is not necessarily a bad thing as long as it’s being managed in a responsible way.

6. Investment

Investing means putting your money into assets such as stocks and shares, in a bid to make a profit or income. Investing should never be entered into lightly as it carries risks, and is typically a long-term venture.

Investments may be able to help you reach a long-term goal. While investing can expose your money to growth potential, you should remember that it also exposes it to potential losses, which is why working with a financial planner is typically a shrewd move.

They can help you understand the level of risk your money is exposed to, and whether it’s right for you and your circumstances. It’s also important to remember that past performance is no guarantee of future performance.

7. Overdraft

An overdraft is where your bank allows you to effectively borrow money through your current account. If you do go “overdrawn” your bank will usually charge you. Going overdrawn is a form of debt, and should be seen as short-term borrowing and, if possible, for emergencies only.

8. Asset

An asset is anything of value that you own that can be converted into cash. Some assets, such as your home, could increase in value over time, while others – such as your car – could decrease in value.

9. Annual percentage rate (APR)

The annual percentage rate (APR) is used across Europe and breaks down the cost of your borrowing as a proportion of the total amount you have borrowed. It includes upfront fees that have been charged by the lender, which are spread over the duration of the loan.

So, if you borrow €1,000 at an APR of 10%, you will pay €100 in interest and charges over the year.

10. Debtor and creditor

A debtor is someone who borrows money, meaning you’re in debt to the company that lent you the money. This may include your mortgage provider, a credit card company and a bank that you have a loan with.

The opposite of the debtor is the creditor, who is the person lending you the money. This is typically a bank, credit card or other bona fide company that provides loans.

Get in touch

We hope the above list helps you teach your teenage children about financial expressions that they need to know. We specialise in working with expats in Europe to help them get the most from their wealth in the most tax-efficient way, so please contact us if we can help you.

You can get in touch on info@extinvestments.comand we’d be happy to help.

Please note

This article is for information only. Please do not take action that is based on anything you read in this article until you have sought professional advice.