Sometimes, money talks can feel like an alien language; isn’t it? Especially when every other article mentions words like EFTs, tokenisation, compound growth, etc. Financial advisors at Invest N More believe understanding these financial terms is the first step towards financial literacy.
In 2025, financial knowledge isn’t optional anymore. As we all witness the drastic rise in living costs, digital currencies and evolving investing platforms, understanding the basic terms can make one feel financially literate and enable smarter decisions.
In this post, you will know 20 essential financial terms you will frequently hear everywhere, from TikTok to your first payslip. Once you understand these financial terms, you can apply them to real-world examples.
Core Investing Terms
1. Diversification
Meaning: Diversification is spreading your investments across different types of asset groups (like stocks, bonds, and property) so that if one performs badly, the others can help balance it out.
Example: If tech stocks fall but your index fund or government bonds stay stable, your total portfolio won’t drop as much.
2. Compound Interest
Meaning: When your invested money earns interest, that interest also earns interest over time.
Example: If you invest £100 at 5%, you get £105 after one year. In year two, you earn 5% on £105, not £100; that’s money compounding.
3. ETF (Exchange-Traded Fund)
Meaning: A bundle of different investments (like shares or bonds) that you can buy or sell on the stock market, just like a single stock.
Example: Buying an ETF that tracks the FTSE 100 means you invest in all 100 top UK companies with one click.
4. Index Fund
Meaning: A fund designed to match the performance of a specific market index rather than trying to beat it.
Example: A “FTSE All-Share Index Fund” automatically includes the same companies that make up that index.
5. Liquidity
Meaning: How quickly and easily you can turn an asset into cash without losing much value.
Example: Cash and stocks are liquid; property and rare collectables are not.
Market & Risk Concepts
6. Volatility
Meaning: How much an investment’s price moves up and down over time.
Example: Bitcoin is very volatile because its price can swing 10% in a day, whereas bonds are usually steady.
7. Bear vs Bull Market
Bull market: Prices are rising and investors are optimistic.
Bear market: Prices are falling, and confidence is low.
Example: The stock market often goes through both; think of bulls charging upward and bears swiping downward.
8. Inflation
Meaning: The rate at which prices of goods and services rise, reducing your money’s purchasing power.
Example: If the current inflation is 5%, something that costs £100 today could cost £105 next year.
9. APR (Annual Percentage Rate)
Meaning: The true yearly cost of borrowing money, including interest and fees.
Example: A 0% credit card might still have a 25% APR after the offer ends; always check the small print.
10. Risk Tolerance
Meaning: Risk tolerance is how much risk you’re comfortable taking when investing.
Example: A 25-year-old may accept more risk (more stocks) for higher potential returns, while someone near retirement might prefer safer investments (bonds).
Personal Finance Essentials
11. Emergency Fund
Meaning: Money set aside by an individual for unexpected expenses like losing a job, car repairs, or medical bills.
Example: Aim to save 3–6 months’ worth of living costs in an easy-access savings account.
12. Credit Score
Meaning: A number that represents your creditworthiness(trust), how likely you are to repay borrowed money.
Example: A high credit score helps you qualify for loans, credit cards, or even rent a flat more easily.
13. Net Worth
Meaning: The total value of everything a person owns (cash, property, investments) minus everything you owe (debts, loans).
Example: If you own £10,000 in savings and owe £3,000 on a credit card, your net worth is £7,000.
14. 50/30/20 Budget Rule
Meaning: A simple budgeting framework for saving
- 50% of income for needs (rent, bills, food)
- 30% for wants (social life, travel)
- 20% for savings or investments
Example: If you earn £2,000 monthly, save £400, spend £1,000 on essentials, and keep £600 for fun.
15. Debt-to-Income Ratio
Meaning: A measure of how much of your income goes toward paying debt.
Example: If you earn £2,000 and pay £600 monthly toward debt, your DTI ratio is 30%. Lower is better.
Emerging Terms in 2025
16. Tokenisation
Meaning: Turning real-world assets (like property or art) into digital “tokens” on a blockchain so they can be traded more easily.
Example: Instead of buying an entire building, you could buy 1% of it as a digital token.
17. ESG Investing
Meaning: Investing in companies that meet ethical and sustainability standards.
Example: A company that cuts carbon emissions, pays fair wages, and has transparent leadership would rank high on ESG criteria.
18. AI-Powered Investing
Meaning: Using artificial intelligence or algorithms to make investment decisions is often used in robo-advisors and trading platforms.
Example: Apps like Nutmeg or Moneyfarm may use AI to automatically adjust your portfolio based on market data.
19. CBDC / Digital Pound
Meaning: A Central Bank Digital Currency issued by the Bank of England, a digital version of the pound, backed by the government.
Example: It’s not a cryptocurrency like Bitcoin; it would be a regulated digital currency for everyday payments.
20. Financial Wellness
Meaning: The overall state of your financial health, not just wealth, but how confident, stress-free, and in control you feel about money.
Example: Being debt-free, saving regularly, and feeling secure about your future is good financial wellness.
Conclusion
It might be difficult to learn everything about finance overnight. Just try to understand the words people use when talking about money.
To become financially strong, start learning these 20 terms at least once a week, and you will soon find that investing, saving and planning your financial future is less intimidating and a lot more empowering.
If you’re still finding financial terms confusing, Schedule a free 20-minute online session with one of our financial advisors.
