Talking about your money needn’t be a baffling experience. But you may have to get used to a few terms and phrases. Here’s a simple A to Z to get you going.
Anything owned by you that has monetary value, from the cash in your bank account to property, bonds and stocks. It’s smart to have assets in different investment – such as savings and investment accounts, property or shares – to minimise losses if one area isn’t performing well.
- ACCUMULATION FUND
The state of any superannuation fund before it begins paying a pension. The retirement benefit depends on contributions by you and employers, and the fund’s investment return.
- AGE PENSION
A fortnightly payment from the federal government. You must meet various criteria to qualify in part or full. Not to be confused with Allocation pensions which are paid from superannuation.
Annuities are bought with a one-off payment and provide a fixed income for a set number of years or life. Generally your money is locked away for the period of the annuity, although some permit withdrawals or a “residual capital value”. There is no capital left at the end of the specific period. Payments may be indexed, often in line with inflation. Some annuities allow for reversionary beneficiaries, or payment of the annuity upon the death of the recipient to a qualifying family member.
- BALANCED FUND
A fund that invests across a mix of asset classes like cash, fixed interest investments, property and shares, to achieve medium- to long-term capital growth and a reasonable level of income.
If you can make budgeting a lifelong habit, you should stay out of debt, have money for incidentals and build solid savings. Bankruptcy is what may happen if you don’t budget. People unable to pay their debts may formally ask to declared bankrupt. Creditors to whom they owe money may also apply for this declaration. Bankrupts cede control of their finances to a manager and a permanent record is created on the National Insolvency Index.
A medium- to long-term investment issued by governments and some companies. They pay regular, fixed amounts of interest for the term bond. Since they are usually low-risk, returns are commensurately lower. The invested funds (the principal) are repaid at the end of the long term (maturity).
For individuals, the money or other assets owned for the purpose of investing. For a company, the funds received from owners or investors to further its business objectives.
- COMPARISON RATE
A national interest rate that combines any fees and charges relating to a loan with the basic interest rate to reveal the true cost of the loan.
- CREDIT SCORES
Your credit score is calculated from information such as unpaid and overdue mortgage repayments, plus credit card and other defaults. It also factors in your lender request and credit enquiries history. You can order a credit report from a bureau like Veda. Want to improve your score?Consolidate all your debts, so you can pay loans off faster and on time.
A payment made by a company to shareholders. It is a share of profits based on the number of shares a person holds. A franked dividend is from profits on which tax has been paid, which translates to big savings at tax time.
A diversification strategy involves spreading your money across different asset types such as cash, fixed interest, property and shares, in the hope that if one investment loses money, the others will perform and help make up for the loss.
The value of an asset – your house, shares, and so on – less any money owed against it.
- ESTATE PLANNING
Estate planning might not top the list of fun things to do, but creating a will is a crucial part of securing your family’s future. Nominating beneficiaries on your superannuation account is equally important. Developing an estate plan ensures your assets are given the right beneficiaries and are also protected of a beneficiary has legal issues.
- FINANCIAL PLANNER/ADVISER
These terms mean the same thing. A financial adviser reviews your circumstances, then puts together a plan to help you reach your goals – whether that’s investing in shares or planning to retire. When choosing an adviser, ensure they are licensed and have the qualifications and knowledge of your situation.
- FINANCIAL PLAN
A strategy, usually created with help from a financial adviser, that defines your current financial position and goals, and sets out investment strategies to reach those goals.
- FIXED INTEREST RATE
Interest paid at a fixed rate over the term of a loan or investment. Opposite of a variable interest rate.
- GROWING WEALTH
Keeping track of your net worth is the first step to increasing your wealth. Even on a budget, you can gradually increase your net worth by adding assets and decreasing debt. Spend weekly discretionary income wisely – avoid splurging too often on things that don’t appreciate in value, such as clothes, dining, and nights out. They might be fun, but won’t make you rich.
A person who guarantees a loan for someone else. The guarantor is legally responsible for paying the other person’s debts if the debtor can’t pay them.
- HOME BUYING/HOME LOANS
Do it right. Research properties and neighbourhoods, then set your budget: aim for a 20 per cent deposit and factor in costs such as stamp duty. Ask mortgage providers for fact sheets so you can compare like with like. Many websites and apps can help. Work out repayments you are sure you can handle. If possible, build a reserve in case interest rates rise, as most home loans apply variable rather than fixed interest rates.
- HONEYMOON OR INTRODUCTORY INTEREST RATE
An interest rate offered for a short period: reduced, for a new loan or credit card account; or raised, for new savings account or term deposit. Remember, it will eventually revert to the standard rate.
The increase in the cost of goods, services and wages over time.
Whether you are looking into shares, managed funds or property, investing is a key way to grow your wealth. An investment needs to make you money, or a “return”. Before deciding on an investment, read its product disclosure statement to understand the fees or financial risk involved. Depending on where you are in life and your risk level, you will probably have many types of insurance. Whether choosing life, health care, home or consumer credit insurance, research the details, know what they do and don’t cover, and what they cost.
Have you heard the terms “good debt” or borrowing “solutions”? The finance industry is loaded with cringeworthy phrases and jargon. Don’t let marketing copy or think pieces on the state of the economy cloud your judgement – if something doesn’t make sense, ask questions.
- JOINT ACCOUNT
An account with a financial institution in the name of more than one person. Many families and married couples have their assets in joint accounts. Anyone named as a joint account holder can operate it (unless any activity requires two signatures), so the account can still be accessed in the event of death of an account holder.
As they say, knowledge is power and that’s definitely the case in the finance world. By keeping up to date with the latest economic developments, financial products and services, you will be better equipped to discuss your options with your accountant, adviser and financial institution.
A measure of how easy it is to turn an investment or financial product into cash. Shares, for instance, can be traded daily and considered liquid. Property, on the other hand, can take weeks or months to sell.
- LOAN-TO-VALUE RATIO
The LVR is the size of the loan compared to the value of the property. The higher the LVR, the greater the risk to the lender. Avoid high-risk loans, such as one with a 90 per cent LVR, as will incur extra costs such as lender’s mortgage insurance.
- MANAGING DEBT
From owning a small fortune on the credit card to getting behind on your mortgage repayments, debt can easily creep into your life/ But don’t let it become unmanageable – find an ASIC-licensed debt consolidator or speak to a financial adviser about your options.
The date on which a debt or investment and all outstanding interest payments must be paid in full.
- NEGATIVE GEARING
Gearing is the process of borrowing money to invest in assets such as property. Negative gearing is when the cost of owning an asset is higher than the income it generates. Under current tax law, this loss can be used to offset tax on profits on other income-producing properties.
An overdraft is when you withdraw more money than you have in your bank account. You can also arrange an overdraft with your bank if you are in need of emergency cash. Extra interest is charged for as long as the account remains in overdraft and other fees may also apply.
- PAYDAY LOAN
A cash advance against your next pay. These short-term loans charge high interest rates and often very high fees, and usually must be repaid within a single pay cycle. There are many warnings about such products, as they often lead borrowers into spiralling debt traps.
Profit is what you make after accounting for all expenses.
- QUARTERLY EARNINGS
It is a good idea to keep track of the quarterly earnings reports of the investment decisions based on a single quarter’s data.
Having a financial plan for your retirement is essential. You can increase your retirement income by investing in assets, watching your spending and continuing to work longer. Don’t forget to take advantage of increased entitlement as you age, such as travel concessions and reduced council and water rates.
- REVERSE MORTGAGE
A loan used by retirees to boost their cash holdings without having to sell their their home. Interest is added to the loan and does not have to be repaid until the house is sold, usually as part of a deceased estate.
“Risk tolerance” means the amount of of chance you are prepared to take on investment returns and how your finances would be affected by losses. You’ll often hear “the greater the risk, the greater the return.” Of course, the greater the risk, the greater the chance of losses.
- SALARY SACRIFICING
You and your employer agree to pay a portion of your pre-tax salary as an additional contribution to your superannuation. Assets that help you produce an income, such as laptop computer, may also be paid for via salary sacrifice.
Usually, a deposit at a bank or credit union that offers a higher interest rate than basic transaction accounts. Accounts holders can generally access their accounts at any time, but time restrictions may apply to withdrawals.
- SUPERANNUATION/SELF-MANAGED SUPER FUNDS
Always aim to build on your superannuation. Choose the investment option – balanced, conservative or growth – that suits your risk profile. Upping your contributions either by salary sacrifice or making after-tax contributions are key ways to boost your super. If you want to access a broader range of investments, such as antiques, cash and bonds, a self-managed super fund (SMSF) might be for you.
Know your marginal tax bracket to help you understand how tax affects you and your income. Those earning between $37,001 and $80,000, for example, are taxed $3, 572 plus 32.5 cents for each $1 over $37, 000. However, if you earn between $80, 001 and $180, 000 you will be slugged $17, 547 plus 37 cents for each $0 over $80, 000.
The length of time a loan or an investment will run. Regular interest is usually paid until they mature, when any remaining interest accrued, plus the original deposit, are paid in full. For a loan, the term is the point at which it must be fully repaid.
Someone appointed to carry out a legal duty – often to manage a super fund on your behalf.
- UNIT INVESTMENT TRUST
An investment vehicle that pools the resources of a group of investors. In Australia, a unit trust must be registered with ASIC as a managed investment scheme.
- VARIABLE RATE HOME LOAN
A mortgage where the interest charged changes, usually in line with the Reserve Bank’s official cash rate. The possibility of rises in mortgage payments must be allowed for in your financial planning. The opposite is fixed rate.
One of the many terms used to explain that investments carry risk, and that markets can fall as well as rise. When they fluctuate rapidly, they are described as volatile: may not be the best time to make investment decisions.
A warrant is a financial product issued by banks and traded on the Australian Securities Exchange (ASX). Somewhat like a lay-by, warrant lets you lock in the price of an asset to buy at some point in the future.
Getting divorced takes such a toll people forget the many practicalities and decisions involved in decoupling. When splitting assets, seek advice from a financial adviser on how to divvy up everything.
Yield is the income you receive from an asset on an annual basis.
- ZERO PER CENT LOANS
A loan with “zero per cent” interest sounds enticing. White-goods and car dealers use this marketing come-on, but the cost of the offer will be built into the pricing at some point. Remember: if it looks too good to be true, it probably is.
THE REALLY SIMPLE GUIDE TO MONEY | OCTOBER 2015
The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.
AUSTRALIAN MORTGAGE AND FINANCIAL ADVISERS (AMAFA)
Phone: 07 3378 2056
Fax: 07 3378 2069