Money words, stripped of the fog

Annual percentage rate is a standardised yearly expression of borrowing cost, generally including interest and certain fees. It makes credit offers easier to compare, but it does not mean you will literally pay that percentage if the balance changes.

Example: a card with a lower APR usually costs less when you carry the same balance for the same time. Paying the statement in full can avoid purchase interest entirely, depending on the terms.

Cash flow is money entering and leaving over time. Timing is as important as the total. A month can be profitable overall and still produce a negative balance on the day rent, insurance and a credit-card payment arrive together.

Example: £2,500 enters during August and £2,300 leaves, but a £900 low point on the 19th may require a buffer. This is where Moneyhub’s forecasting strength, covered in our full review, becomes useful.

Compound interest means interest is calculated on the original amount and on interest already added. It accelerates savings over long periods and accelerates debt when unpaid interest joins the balance.

Example: £1,000 earning 5% annually becomes £1,050 after one year, then earns the next year’s interest on £1,050. Real accounts may calculate interest daily or monthly.

A debit is an entry that removes money from a cash account, such as a card purchase, direct debit or withdrawal. In formal accounting the word has a broader meaning, but budgeting apps commonly use it to identify money out.

Example: a £42 supermarket transaction appears as a debit in your current account and should reduce the app’s grocery balance by £42.

Discretionary spending is flexible rather than contractually or practically essential. It can include restaurant meals, entertainment and upgrades, but the boundary is personal. Calling it discretionary does not call it worthless.

Example: a £16 cinema ticket may be adjustable this month, while a prescribed medication is not. A useful budget protects some enjoyable spending instead of pretending it will be zero forever.

An emergency fund is cash reserved for unexpected, necessary costs or loss of income. It should be accessible and separate enough that ordinary overspending does not absorb it. The right size depends on job stability, dependants, insurance and essential monthly costs.

Example: a first £500 or $500 buffer can prevent a repair becoming card debt; a later target might cover several months of essentials.

A fixed expense is predictable in amount and frequency, although it can still change after renewal. Rent, a standard loan payment and a flat subscription are common examples. “Fixed” does not mean untouchable; it means easy to schedule.

Example: £950 rent due on the first is fixed. It belongs in the cash-flow forecast before flexible category limits are set.

The minimum payment is the least a lender requires by a due date to keep an account contractually current. Paying only that amount can extend debt for years and increase total interest, especially when new spending continues.

Example: a card statement may request £35 even though £800 is owed. The £35 is a floor, not a recommended repayment plan.

Net worth is assets minus liabilities: what you own minus what you owe at one point in time. It is a planning measure, not a score of personal worth, and estimates such as property values can make it imprecise.

Example: £18,000 across cash and pensions minus £4,000 of debt gives a £14,000 net worth.

A sinking fund is money accumulated gradually for a known future cost. Unlike an emergency fund, its purpose and approximate date are expected. It converts an irregular bill into a regular budget item.

Example: putting £50 aside monthly creates £600 for annual car insurance. Our app selection guide explains which methods handle these funds well.

A variable expense changes in amount from period to period. Groceries, fuel and utility usage are common examples. Variable does not necessarily mean optional, so cutting the category to an unrealistic number usually produces a broken plan.

Example: use the last three to six months of grocery spending, then adjust for household changes instead of guessing from the cheapest week.

Zero-based budgeting assigns every available pound or dollar to spending, saving or debt categories until nothing remains unassigned. “Zero” describes the plan, not the bank balance. Money can be assigned to future bills or savings.

Example: £2,400 available is divided across rent, food, transport, fun, a sinking fund and savings until all £2,400 has a job. YNAB is a prominent app built around this logic.