Money fuels passions, but financial terminology can make you yawn.
We believe that knowing the key concepts will help everyone manage their money better. Refinancing, APR, or Euribor sound boring, but they are as common in life as morning coffee. Often, they are even more important. Note that it’s not how much you earn but how you handle your money that matters.
We’ve put together some financial wisdom here to help you be on good terms with your money. If you are already familiar with these tips, let this page give you the confidence that you are on the right track.
Simple but effective tips
- Build up a savings buffer for the unexpected. It will help with unforeseen expenses such as replacing a damaged phone screen or paying a larger than expected electricity bill.
- Your emergency fund should be large enough to cover all your expenses for the next three months. The golden rule is to set at least 10% of your salary aside in your emergency fund every payday.
- However, if you find it difficult to set aside a large amount at once, start by saving small amounts every week. To do this, set up a weekly standing order to your savings account.
- Keep a simple and clear record of your income and expenses. This way you can find out what your money is actually being spent on.
- Look for expenses in your budget that can be reduced or eliminated. These amounts can be used to start saving in your emergency fund.
- Don’t buy things you don’t need – it’s that simple.
- Always plan for bigger purchases and use budgeting as a helpful tool. Since every month is different, draw up your budget on a monthly basis, and be honest.
- Remember that living beyond your means is not sustainable.
- If you have or plan to take out a loan, find out all costs related to the loan and make sure you can afford the total cost of the loan.
- Many people underestimate the costs associated with a loan. Be aware and consider that, in addition to the interest, the price of the loan also depends on other charges, such as contract and management fees.
- To find out the total cost of the loan, always look at the Annual Percentage Rate (APR): it shows the actual cost of the loan per annum and is certainly a more important indicator than the interest rate.
- Remember that a loan is always a liability rather than additional income.
- If you get the feeling that you are going to be overwhelmed by your monthly loan payment for some reason, then explore the possibility of extending your loan repayment time, thereby reducing your monthly payment.
- In the case of loan obligations, it is also possible to apply for a grace period of up to 6 months. During this time, you only have to make interest payments.
- Remember that in the case of payment difficulties, taking out an instant loan or another loan will not help solve the problem. Instead, this will make the problem worse.
- Be aware that if you do not pay your invoices by the due date, it will hinder your chances of receiving loans in the future.
- Know how to recognise phishing, and don’t click on suspicious links in your email.
- Remember: if a website asks for your PIN2 when logging in to the internet bank, it is criminals who want to get access to your money.
- Only use trusted websites to make online purchases.
- Do not share your bank card details and keep the daily and monthly payment limits of your account as low as possible.
Test your knowledge
A loan contract states that interest is calculated on the credit balance per annum.
What does this mean?
You receive an urgent call from your bank saying that someone is trying to transfer money from your bank account. The caller asks if it’s you doing so. After you say no, the caller offers you help to stop the transactions. They ask for your username and PIN2 for authentication.
What do you do?
How do you get the best overview of your expenses and income?
What does APR show?
How do you manage when prices are rising?
You are a customer of LHV Bank and receive the following text message:
An unauthorised transaction was made to your LHV account. You can approve or withdraw this request at lhvee-pank.com.
Since you haven’t made any payments recently, you suspect it’s a scam. How do you proceed?
How do you build an emergency fund?
What is the maximum possible loss of money invested in stocks?
What operations do not require PIN2 from your Smart-ID or mobile-ID?
What is loan refinancing?
You realise that you will no longer be able to pay your hire-purchase instalments in the following months.
How do you proceed?
What happens if you decide to stop contributions to the second pension pillar and withdraw the money accumulated there before retirement age?
How much can your monthly hire-purchase instalments, leasing, and loan payments take of your salary to leave enough money for everyday expenses and unexpected costs?
You won a large amount in the lottery and want to pay back your loans before the deadline.
Can you do it?
How much can a member of the second pension pillar contribute to the pension fund(s) of their choice every month?
Who is responsible if your investments lose money?
Explanation of financial terms
An annuity schedule is a type of loan repayment schedule. In an annuity schedule, the monthly repayment amount is the same throughout the repayment period. The interest portion decreases with each payment, while the principal portion increases. The interest portion decreases because interest is calculated from the balance of the loan principal, which decreases after each subsequent payment.
A wealthy person investing in early-stage companies (start-ups). Also: angel investor.
The Annual Percentage Rate shows the actual annual cost of the loan for the borrower, expressed as a percentage. To calculate the rate, all known costs the borrower has to pay are taken into account: interest, contract fee, loan administration fee, and other fees. For example, the cost of compulsory comprehensive insurance or home insurance is taken into account in the case of a car lease or home loan, respectively. APR allows you to compare loan offers much more accurately than the interest rate.
Assets are any possessions that may have value when exchanged.
A banking day is a calendar day that is not a Saturday, Sunday or national or public holiday.
A market situation where there is general pessimism and stocks are in a downtrend. According to a common adage, it is a bear market when the value of a stock index has fallen by at least 20%.
A bond is a security bearing the borrower’s obligation to repay the loan to the lender within the agreed term and to pay interest.
Collateral is an agreement on assets to secure a loan contract.
Compound interest is interest on a loan or deposit calculated based on both the initial principal amount and the accrued interest from previous periods. Compound interest accrues when interest payments are invested rather than paid out.
A contract fee is a service fee that the borrower pays each time for the preparation, conclusion and/or modification of the contract.
A digital or virtual currency characterised by decentralisation and security provided through cryptography.
The portion of a company’s profits paid to holders of common and preferred stock.
A down payment is the borrower’s co-payment for the purchase of the product or service financed by the loan contract.
A service fee charged for early termination of a contract or bond.
EBITDA (earnings before interest, taxes, depreciation, and amortization)
Environmental, social and corporate governance related criteria against which the sustainability of a company is assessed. The fulfilment of these criteria are often taken by investors as a basis for making investments in the company.
The Euro Interbank Offered Rate, which changes daily. Effectively, Euribor is the recommended interest rate at which commercial banks are willing to lend money to each other. Predicting how Euribor will change (go up or down) is difficult. Euribor is used, for example, as a component of loan or lease interest rates and is determined for the period agreed in the loan contract.
A security that follows an index, commodity, or asset class in the same way as an index fund but is exchange-traded. Exchange-traded funds can be bought with leverage and short sold. One of the best-known ETFs that follows the movement of the S&P 500 index trades under the symbol SXR8.
An exchange-traded fund has five advantages over a traditional open-ended investment fund:
- units can be purchased directly on the market;
- the price moves throughout the day, while the price of a traditional fund is fixed once a day;
- can be bought and sold at any time;
- can be short sold and options may be used as underlying assets;
- purchase costs are lower.
A fine for delay is a penalty (late interest) calculated from the principal debt and other fees agreed in the contract that have fallen overdue (except for interest and fines for delay).
A company whose business model consists of providing technology-based financial or banking services and which uses fintech methods in its work. This type of company wants to replace traditional financial methods and improve and automate the provision of financial services. Also: fintech company.
A fixed interest rate is an interest rate that does not change during the term of the contract.
A floating interest rate consists of a base rate and a margin and may change during the term of the contract.
Less than one share (fraction) of a stock.
A risk management strategy using counter-transactions to avoid the effects of adverse price movements. For example, it is possible to purchase a put option to mitigate the effect of a decrease in the price of a stock.
Initial sale of shares to the public by the company. An initial public offering can be undertaken by both a small company that wants to receive additional capital to expand and a large company that wants its shares to be traded on the stock exchange.
An investment fund that invests in the constituents of indices with the aim of achieving the fund’s rate of return in a similar way to the selected index. Since portfolio-related decisions are made automatically and transactions take place infrequently, the expenses of an index fund are lower than those of an actively managed fund.
The decrease in the value of money over time. Inflation is pushing up the prices of goods and services. Hyperinflation is a situation where inflation has spiralled out of control, exceeding 50% per month.
Insolvency is a situation where the debtor cannot repay the loan amount or pay interest. The borrower becomes insolvent when they are unable or unwilling to meet their debt obligations.
An instalment is a periodic (usually monthly) payment the borrower pays to the lender for using the credit amount. An instalment consists of repayment of the credit amount for the respective period, interest, monthly fee and other agreed fees.
Interest is a charge that the borrower pays for using the loan amount. An interest rate can be fixed or floating (also known as a variable interest rate).
Interest on the loan amount is calculated from the total loan amount. The interest payment is the same throughout the loan period.
Interest on the loan balance is calculated from the remaining balance of the loan amount. Therefore, the monthly interest payments decrease as the loan balance decreases.
Key investor information is a short document prepared for the public offering of a fund, containing key information about the fund.
When investing, borrowed money is used to increase the possible rate of return. Example 1: In the case of a leverage of 4, the share of own funds is 25%, and the remaining amount required for the investment is borrowed. If the broker offers leverage of 1:4 and the investor has EUR 1000 to invest, then he can buy securities worth EUR 4000 using the maximum leverage. Using leverage, the investor risks more.
Loan insurance ensures that the policyholder will not have difficulties repaying the loan in the case of unexpected events.
A management company is a company whose main activity is the management of one or more funds. A management company of pension funds is licenced to manage a mandatory or voluntary pension fund.
A management fee is a fee paid by the borrower for operations related to the management of the loan contract.
A member of the stock exchange who has agreed to constantly display buy and sell quotes for some stocks, thereby improving the liquidity of the stock.
The part of the financial markets in which short-term (up to one year) and liquid debt instruments are traded. The main instruments of the money market are deposits, bank guarantees, short-term government bonds, repos and municipal bonds. Market participants use the term ‘money market’ to refer to the short-term debt market.
A mortgage is a pledge on real estate. For example, when issuing a housing loan, a mortgage in favour of the bank is formalised at a notary’s office. This means that a mortgage provides an opportunity to obtain a loan on the one hand and is a guarantee for the lender on the other. A mortgage gives the lender the right to cover the claim secured by the mortgage on account of the pledged real estate.
An investment entity that collects money from shareholders and invests it in various securities (e.g., shares and bonds). An open-ended fund always issues new units in the case of a new buyer and, at the request of the unit-holder, repurchases units within a month. A closed fund does not redeem its units upon request.
Net asset value is the fair value of a fund’s assets less the fund’s liabilities.
Nominal value is the value of a security determined at the time of issuance.
An order is a client’s request to a broker to buy (purchase order) or sell (sales order) a specified amount of securities either at the price indicated on the order or at the market price.
A payment schedule is a schedule for the payment of instalments under a contract.
A payment schedule with fixed or even principal repayments is a type of loan repayment schedule. In this case, equal amounts of loan principal are repaid every month, and interest is added. The interest part decreases with each payment, because it is calculated from the balance of the loan principal. As interest payments decrease and principal payments are even, the overall monthly payment decreases with each month for this type of schedule.
A stock below $ 5.
Dangers associated with penny stocks:
- There is usually not enough information about them, since analysts do not monitor such stocks.
- They are easily manipulated and inflated.
- A stock is a part of a company, so you’re probably buying a worthless company.
A pension is a regular payment in the case of old age, incapacity for work or loss of provider.
The principal amount is the amount of money that is initially borrowed, paid in or financed.
An official document for the offering of shares, bonds, and mutual funds that helps investors make more informed investment decisions, as it describes the content of the offer in detail.
By a refinancing loan, the borrower can exchange an existing loan for a loan with more suitable conditions or combine several loans into one. Refinancing also helps prevent indebtedness and to repay an existing loan on time.
ROE = net income/shareholders’ equity
Shows the return on investment and allows you to decide on the efficiency of the enterprise. The higher the return on equity, the more effective the investments in the company have been.
A right or pre-emptive right allows existing shareholders, for example, to buy shares during a new issue in priority order. This privilege is usually valid for two to four weeks, and the price of the offer may be lower for these buyers than for other buyers. Rights can also be tradable. Stocks, for example, are tradable rights.
The second pillar is a tax-advantaged savings pension, in which the state adds an additional 4% from social tax receipts to the 2% contributed by the pension investor. For the investor, it makes a total of 6%.
A security is an agreement between an investor and an issuer (a legal entity that develops, registers and sells securities to finance its activities). The most common securities are stocks/shares, bonds and fund units.
Increasing the number of shares, which simultaneously reduces the nominal share value. The reason for a split is usually the high price of the stock, which is done to make the stock price more suitable for small investors. A split requires permission from the company’s supervisory board and shareholders.
Example. A share costing EUR 100 will be subject to 2:1 split. Following the split, the price of one share is EUR 50. Former stockholders have twice as many shares after the split, but each of them costs half of the former: EUR 50 There may also be a reverse stock split, in which case the share price increases. Synonyms: share split, stock split, split.
An index measuring market value that follows the price movement of ordinary shares of the 500 highest-market companies in the U.S.
Dividend, paid in shares.
A type of security that entitles the holder to a share in the company’s assets and profits.
The management fee component paid by the fund (hence also the unit-holder) to the management company if the management company has been able to earn a certain income for unit-holders when investing the fund’s assets.
A surety is a guarantee given by a guarantor. With a surety, the guarantor agrees to be responsible for the obligation assumed by the principal. If the borrower becomes indebted to the bank, the guarantor has to pay the debt. The amount of the surety is agreed in the contract of suretyship.
The third pillar is an additional savings pension where the investor is refunded 20% income tax on contributions made during the previous calendar year, which do not exceed 15% of gross income or 6,000 euros.
The total cost of credit is the total amount of all payments the borrower makes to repay the credit and cover the costs of using the credit. The total cost of credit consists of the credit amount, interest, contract fee, monthly fee and other fees.
Venture capital is capital invested in transactions involving significant risk, as well as in start-up or early-stage companies whose chances of success are uncertain.
Fluctuations in the price of a security over the short term. The more the stock price fluctuates in the short term, the higher the volatility. Typically, a stock’s volatility is measured using a beta coefficient. Portfolio volatility can be lowered by diversification.