Money: what you need to know

A guide to handling your personal finances

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There are many things to understand about money and how it works. If you are like most people, you'll continue to learn throughout your life. So following these insights won't tell you everything. But they will give you a great start.

Interest makes money grow

Interest grows money so amazingly that some people call it magic. This is especially true of compound interest, where interest earned is added to your savings and itself starts to earn interest. Time does all the work.

Even at low interest rates of 2%, £1,000 will earn around £220 interest after 10 years - and nearly £500 after 20 years.

When you are young, you may not have much money. But you do have time ahead of you. Save a little on a regular basis, let it earn interest and forget about it. It will grow as the years pass.

Sadly, the same compound interest growth happens with money you borrow. Because interest rates for borrowers are higher than for savers, debt that is not paid off gets bigger even faster. A store card might charge more than 25% interest. If you have £200 that you don’t pay off, after two years the debt will have grown to more than £320.

Magic - but only for the saver or lender.

A lot of money words are off-putting, but can be quite simple

Lots of words in the financial world don’t make much sense at first glance. Some are odd and unfamiliar. Others look like familiar words, but are used differently. And some mean different things in different settings.

  • Words such as account, mortgage, asset, credit, principal, default and payee seem strange, but the ideas behind them are quite straightforward
  • Security has an everyday meaning in English, which isn't what finance people mean by it
  • Deposit can mean different things, depending what you are discussing

Don’t be put off by such words. You don’t even need to learn what they all mean in every circumstance. But do check what people mean by them each time they use them. Make sure you are clear what is being proposed or agreed before you sign on the dotted line or click the ‘apply now’ button.

People may try to sell you a financial service or product that is not right for you

There are rip-off merchants in many industries. In the money business, dodgy traders are not just at the shady end of the market. Some apparently respectable banks have been found guilty of widespread mis-selling and had to pay large sums in fines and compensation to mis-sold consumers.

Mis-selling, which means selling someone a product that isn’t right for them, could happen again. Don’t panic.

Instead, if someone tries to interest you in a financial product or service, particularly a new one, be very cautious, read the terms and conditions carefully and take time to consider whether it’s really right for you. Don’t rush your decision.

Unsecured is better than secured when borrowing money

To many people, this doesn’t sound right. Secured sounds better, more solid and dependable. It is - for the lender.

If you are unable to repay a secured loan, the lender can sell something of yours -usually property, and take what you owe. They don’t even have to sell it at market rate, just enough to cover what you owe them.

Secured loans may be cheaper because the lender perceives them as lower risk. But you risk your property if your loan is secured.

If you are unsure about secured and unsecured, take advice before signing anything.

Banks make a lot of money from forgetful savers

Banks and building societies try to attract savers by offering accounts with a good interest rate. After a year or so, they may drop the rate to a very poor one. This makes money for them.

They can do it because they know that lots of people won’t get round to moving their money when the rate drops. So beat the banks and make a note to regularly check your savings rate and move your money to a better deal if needed.

Many people get obsessed with small differences in interest rates for savings

People who shop around for good interest rates are wise. But the difference between annual rates of 1.25 and 1.4% on savings of £1,000 is just £1.50 year.

There are probably many other things you do over a year that could cost or save £1.50. Don’t obsess with small differences in interest rates.

Understanding yourself is an important part of managing your money

For instance, if you know that you are impetuous, and are easily tempted to spend, you might decide to put your money out of your own reach.

There are savings accounts that help this. Known as notice accounts, they will not release money immediately but ask you to wait a set period, perhaps one or two months, or more, before you can withdraw the cash.

But if you feel you have good self-control, you might want to avoid notice accounts. That way you can move your money to a better-paying account whenever it suits you.

Poor people pay more to borrow money than rich people

The interest rate that you pay when borrowing money can vary enormously. The theory is that if you have money, you are a good risk for the lender. If you have a low income, the lender needs to charge more in case you can’t pay the money back.

These differences are not small. One person might be able to get a personal loan from a bank of £10,000 at 2.8%. Someone who is not rich enough to qualify for that might end up buying a fridge freezer, say, on a loan agreement with an interest rate of more like 69%.

Using tools like our Eligibility Checker will help you to see which loans and credit cards you’re more likely to be accepted for, and give you an idea of interest rates, without hurting your credit score.

You can also check your credit score for free with MoneySuperMarket’s Credit Monitor. It uses a ‘soft check’ so it won’t affect your credit score and offers handy tips on how to improve your score. The better your score, the more likely you are to be accepted for better interest rates on loans and credit cards.

Insurance is best for unlikely events that would be more serious if they happened

That is because insurance is cheap for you and yet makes a massive difference in the unlikely event that you need to claim.

You are not very likely to experience a medical emergency on your holiday that means you need to be repatriated home. But if you did, it would cost thousands. That’s why travel insurance is worth having. Claiming is unlikely, which is why it’s not too expensive.

Other things, such as losing a phone, are much more likely to happen. So taking out an insurance policy specifically for that tends to be more expensive - and possibly not worth considering, especially if you have a budget phone.

You might be better off putting the money you would have paid for insurance in your own savings, earmarked for a replacement phone.

Money mistakes are not the end of the world

Try to keep calm if you get into debt, make a purchasing mistake or feel that money is too complicated. It will get easier, and you can learn from your mistakes.

Even major debt problems can be sorted. It usually just takes patience, good advice and time. Don’t despair, and don’t put your life on hold as you get out of debt.

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