Assets are property or resources owned by you that are regarded to have value. Examples include cash, real estate and shares in a company. The value of some assets can change over time based on the perceived future benefit of that asset and/or with supply & demand forces. For example the value of a company is likely to increase as the business becomes more profitable.
The Australian Securities Exchange, sometimes referred to as the stock exchange, is the main place which records all the owners of shares in a company that is listed on the ASX. The ASX records changes in ownership (shares bought and sold) as well as the price at which transactions are made.
A balloon payment is the lump sum amount that a borrower still owes to a lender at the end of the loan term after all monthly loan repayments have been made. Balloon payments only exist in certain loans, in particular they are common in car loans where the total value of the car is not repaid over the life of the loan. Typically the balloon payment is similar to the value of the car at the end of the loan term with the idea that the car can be sold to settle the loan.
A commission is a form of payment to someone in response to services they have done. For financial products, it is a payment to the sales person that sells/ distributes the financial product. The commission can either be paid up front as a “lump sum” or paid over time as a “trail commission”. Often commissions will be calculated as a percentage value of the financial product sold.
For example a home loan broker may earn a trail commission of 0.05% per annum of the amount borrowed for a home loan that they sold. So with a loan $100,000 with a 0.05% trail commission, the client would pay the broker $50 in the first year for the home loan and subsequent yearly payments would be less as the amount borrowed reduces.
Compound interest is interest paid on the initial principle as well as any accumulated interest on money that is borrowed or invested.
For example of $100 deposited with a interest rate of 10% per annum
Year 0: $100 (invested)
Year 1: $100 + (10% x $100) = $110.00 —> cumulative interest = $10
Year 2: $110 + (10% x $110) = $121.00 —-> cumulative interest = $21
Year 3: $121 + (10% x $121) = $133.10 —-> cumulative interest =
$33.10
Conveyancing is part of buying and selling a home, it is the process of ensuring that the title of the property is transferred to the new owner, along with other legal obligations, once the money has paid by the property buyer. Conveyancing is often carried out by a licensed conveyancer and can also be done by a solicitor
The Consumer Price Index is measure of inflation over time and in Australia is calculated by the Australian Bureau of Statistics. The index measures the change in the price of a “basket” of goods and services each quarter. The basket of goods and services chosen is designed to roughly mimic the expenditure pattern of the population and includes things like food, clothing, housing, heath, education and financial services.
Growth in the CPI over time demonstrates a rise in inflation which subsequently can impact interest rates, exchange rates and business decisions.
A credit card is a form of short term borrowing from a bank. When a credit card is used to purchase something from a merchant, the bank lends the money for the purchase to the customer and pays the merchant. In exchange for lending the money the bank will charge fees and interest to the holder of the credit card as well as fees to the merchant. The borrowing is unsecured (that is the bank does not hold any security (e.g. property or other items worth value) for the borrowing) however the credit card will have a maximum limit to the amount that can be borrowed.
Each month the holder of a credit card will be required to make a minimum repayment of the credit card, however there isn’t a fixed lending term and money can be borrowed indefinitely so long as the credit limit isn’t breached.
A credit assessment will need to be completed before the bank will approve a credit card.
There are many different types of credit cards with many features such as reward points for purchases, interest free periods, insurance and concierge services.
Dividends are a sum of money that a company decides to pay out to shareholders out of its profits. Dividend are usually stated as an amount per share and are typically paid once or twice a year. Entitlement to any dividends is dependant on date of ownership of shares. The owner of the shares up to a specific date may be entitled to the dividend even if they sell the shares before the dividend are actually paid.
When you get insurance, the excess is the amount you agree to contribute towards the cost of a claim, with the insurer covering the remainder.
These are funds that trade on a stock exchange (e.g. the ASX) that normally follows an index or benchmark (e.g. the
top 100 shares on the ASX). You can buy these the same way you would buy other ordinary shares (but minimum investment is $500) or go through a micro investment company such as FirstStep or Raiz.
A person’s ability to make confident money decisions resulting in financial security for the now and the future.” Financial fitness impacts people’s livelihoods, happiness & health and lack of financial fitness is the number one cause of stress in the workplace (costing Australian companies $47 billion p.a.).
These are tax credits provided by Australian companies to their shareholders.
Companies get taxed at the Australian corporate tax rate (~30%), then if you own shares in a company and you receive dividends on the company’s profit, you will get taxed on these as part of your taxable income.
For example, if you hold shares in Company ABC and receive a fully franked dividend of $700, with a franking credit of $300 (the tax already paid by the company on the profits). The total dividend is $1,000.
At your tax time, you need to declare the $1,000 as part of your taxable income, but you can receive a refund on the
$300 depending on your tax bracket either in the form of paying less tax or in month in your bank account.
Inflation is the rise in prices of things over time, measured by CPI increase.
Inflation is the reason why sunny boys at the tuck shop used to cost 50 cents and now they cost $2.00.
It is the cost of using someone else’s money.
When you borrow money you pay interest at the amount of borrowing you have outstanding x the interest rate. This is to compensate the lender for the risk of lending to you and also for their inability to use that money for another purpose.
When you lend someone else money (which is also applied when you give the bank money as a deposit/savings), they pay you interest at the amount they owe to you (or you they have of yours) x interest rate. This compensates you for opportunity cost (you could have done something else with the money) and risk of lending/depositing it.
In both instances, interest is often paid periodically, but calculated annually and the amount you pay depends on the interest rate, amount of the loan outstanding and how long it takes to repay.
Is the rate at which you pay/receive interest on a loan/deposit. It is usually denoted as a percentage per annum. Interest rates can be variable and move according to market conditions or fixed (via a contractual agreement).
Something you owe.
Liabilities are obligations or debts that you are servicing, for example your home loan, maximum limit on a credit
card (that’s what banks look at as opposed to the amount you have owing), maximum limit on personal loan, overdraft and study loans.
Liabilities for companies are the debts or obligations held by the company.
LMI protects the lenders (i.e. banks, brokers etc.) in the case of the customer not being able to repay their loan
(i.e. defaulting) and is normally added as a one off fee as part of the home loan to the lender.
LMI depends on the LVR (how much of the loan you can cover) & the provided. For example may cost over $10,000 for a home loan of $500,000 for which you’ve saved $50,000 deposit.
The proportion of the value you borrow. It is used by the lender as a risk factor.
For example, if you want to buy a $1m house (including all upfront costs) and have saved up $200k, therefore need a
$800k loan – your LVR is 20% (200k/1m).
This is an account linked to your home loan. The money in the account is ‘offset’ daily against your home loan
balance and as a result, the interest you pay is the difference between the home loan balance and the offset.
Only some home loans offer offsets and need to check they are 100% offset and apply for the duration of the loan
(vs. only a specified time). Some banks also offer multiple offsets accounts against the one home loan which can
help with saving towards multiple goals.
For example, if you have a $500k loan with $100k in a 100% offset account and have paid off $150k, you only pay interest on the balance less the offset i.e. $250k.
An insurance premium is the amount that you pay to receive the insurance policy that you have chosen. Insurance premiums are set by the insurance company based on their assessment of the likelihood that a claim will be made on the insurance, the higher the likelihood the higher the premium.
Insurance premiums are usually reviewed annually and there is often the choice to pay the premium annually or in monthly installments
A redraw facility allows you to make additional payments above your minimum required repayment on your home loan. It often applies to most variable rate home loans, typically without fees. You also can redraw a certain amount of the repayments in times of need. It can help you get rid of your loan faster due to the benefits of compound interest.
But note, as compared with an offset account, for investors there may be tax implications – best to consult your accountant/expert which option is better.
A tax effective way to save towards retirement. Your employer is mandated to pay minimum 9.5% of your ordinary time earnings into superannuation. You can also top up your super yourself, often ‘salary sacrificing’ to contribute money into your super from your before tax income.
Your monthly income (less tax) less your expenses using monthly averages.
What is considered income?
When considering your monthly income you should include any salary (average salary if your income is variable), any Centrelink payments, interest, dividends or other investment income
What is considered an expense?
You expenses should include housing, food, clothing, utilities, entertainment, transportation, healthcare, travel, interest on debts, insurance. Try to collate all expenses over a year and then divide by 12 to obtain a monthly average.
The value of what you own (your assets) less what you owe (your liabilities)
What are examples of assets?
Cash in the bank, value of any investments such as shares, value of your home or any property, car. You should also include your superannuation however remembering this cannot be accessed until you retire. Generally other valuables should not be included unless there is a ready market for the item
What are examples of liabilities?
Any borrow or loans that you have, this would include credit cards, personal loans, car loans, home mortgage, study loan (HECS). You should also include any money that has been borrowed from family or friends if there is the xpectation that this is to be repaid.
An emergency fund is a key tool for financial fitness as it acts as a buffer (or self insurance) if unforeseen expenses arise or if something happens to your income. The great thing about an emergency fund is that unlike insurance, there isn’t actually a cost unless something goes wrong.
There is no magic number for you to set aside for an emergency and a prudent amount will depend on your circumstances. A good rule of thumb is to set aside an amount that would cover your (and your family’s) expenses for 2 to 6 months.
Best to intentionally set this money aside in an existing interest paying account or better still set up a separate account so you will not be tempted to access it. Whilst it is advantageous to use an account that pays high interest you should ensure that there are no restrictions on withdrawing the money if the need arises.
Typically an online savings account is good for this purpose as they often have low or no fees and pay competitive interest rates.
Insurance can be used to protect you against the negative financial consequences of unexpected events. In simple terms by paying someone else to take on the risk on your behalf. For example, car insurance passes the financial cost of damage to your car or damage done by your car in an accident to the insurance company.
Damage or loss of a building. Note that the definition of a building does not include the contents inside and/or some of the fixtures and fittings
If you own your own home. Most lenders will require this insurance as part of the terms and conditions of any lending
| Insurance Type | Risk it insures | When to consider it | |
|---|---|---|---|
| Home building Insurance | Damage or loss of a building. Note that the definition of a building does not include the contents inside and/or some of the fixtures and fittings | If you own your own home. Most lenders will require this insurance as part of the terms and conditions of any lending | |
| Home contents Insurance | Damage or loss of home contents (clothes, furniture, electronics, jewelry etc) and includes some house fixtures and fittings |
|
|
| Landlord Insurance | Loss of rental income if tenants do not pay rent | If you have an investment property | |
| Lenders Mortgage Insurance | This insurance is often taken out by banks however the costs are passed onto the borrower. It protects the bank/lender in a situation where the borrower is unable to repay the loan and the sale of the security doesn’t cover the loan outstanding |
|
|
| Car insurance | Third Party – damaged caused by your car to other people’s car or property Third Party fire and theft – as per third party but also includes theft or fire of your vehicle =Comprehensive – damage to your vehicle and other people’s property cause by your car as well as theft and fire |
| |
| Travel insurance | Cost of things that can go wrong while travelling such as cancelled flights and accommodation, illness or injury while travelling, loss or damage of personal items
Travel insurance is a bit of a hybrid as it covers both things and people (medical expeses) |
| |
| Health Insurance | Medical expenses such as dental treatment, hospital expenses, optical treatment, ambulance services, physiotherapy and Chiropractic. Different levels of cover available |
| |
| Term Life insurance | Loss of income in the event of premature death |
| |
| Life / Total Permanent Disability Insurance | Loss of income in the event of premature death or a serious permanent disability such as quadriplegia |
| |
| Trauma Insurance | Medical costs and loss of income due to serious illness such as cancer or stroke |
| |
| Income Protection Insurance | Loss of income due to being able to work |
| |
| Travel insurance | Cost of things that can go wrong while travelling such as cancelled flights and accommodation, illness or injury while travelling, loss or damage of personal items
Travel insurance is a bit of a hybrid as it covers both things and people (medical expeses) |
|
• Short term borrowing refers to those loans that need to be repaid within typically one to ~five years.
• It includes what you owe on your credit card(s), personal loans, car loans, student loans etc.
• Banks and financial institutions give you money in exchange for the money back over time plus a little bit extra (interest), they also incur fees per year.
Credit cards are issued by most banks and they enable you to borrow money to use as payment for goods and services up to a pre agreed limit. The bank will expect the customer to pay back the amount borrowed plus additional charges such as interest and fees. Generally the fees and interest rate of credit cards are high.
There are many types of credit cards but the major affiliated companies include Visa, Mastercard and American Express. Credit cards are prevalent and almost all retailers, food and entertainment venues will accept them as a
form of payment.
Often credit cards will carry incentives to encourage customers to use them such as reward points for spending that
can be redeemed for travel, gift vouchers or even cash back.
The costs of a credit card include an annual fee, interest on amounts borrowed (though some credit cards have an
interest free period) and late payment fees. Also the retailer or supplier may add a surcharge to the price of goods or services when paying via credit card as they are also charged a fee by credit card companies when they accept a
payment.
You will be required to make minimum repayments on a credit card each month covering interest charged as well as repaying a proportion of the amount borrowed, however so long as you do not exceed the agreed credit limit and continue to make the minimum repayment there is no set time by which you need to pay off the loan.
Pros: Accepted as payment almost anywhere including online, relatively easy to apply for, can have interest free
period, some good incentive/reward plans Cons: High annual fees and interest rates, can make it too easy to spend more than you need
More info: https://www.canstar.com.au/credit-cards/credit-card-types-explained/
You can use a personal loan to borrow a specific amount of money and then repay the bank, including interest of course, over a set period. Generally the money borrowed using a personal loan can be used for any legal purpose and they can be used to fund larger purchases, holidays or small renovations.
Personal loans can be secured (will have a lower interest rate) or unsecured and many personal loans allow the
borrower to make extra repayments and pay back the loan faster reducing interest costs. Also personal loans is are
often cheaper than credit cards and as they have a repayment schedule, encourage people to pay them off.
Personal loans can also be offered with fixed interest rates for those that wish to lock in the price of the loan.
Pros: Can be cheaper than credit cards, discipline of repayment schedule, can use security to lower interest rate
Cons: longer application process
More info and useful questions to ask about personal loans: https://www.canstar.com.au/personal-loans/what-is-a-personal-loan/
A car loan is borrowing for the purpose of buying a car and will usually be secured by the vehicle. You can use a car
loan to purchase a car and pay for it using monthly installments over a period of up to 10 years. The installments will include interest on the loan as well as repayment of the car purchased.
A car loan can be thought of as a secured personal loan with the car used as security. Car loans are available for
new or used cars though generally banks/financiers will only use cars that are less than 5 years old as security. If you are borrowing to buy an older car you may need to consider an unsecured personal loan.
Pros: Secured car loan may have cheaper interest rate, discipline of repayment schedule
Cons: longer application process
More information: https://www.canstar.com.au/car-loans/what-is-a-car-loan/
https://www.canstar.com.au/car-loans/car-loans-work/
A savings account is a secure bank account that earns interest over time. It may be a good place to put money when you are saving up for a goal (e.g. home deposit, car, holiday etc.). This is because you are guaranteed the interest payments (and you get interest on your interest – “cumulative interest”) and your money is secure. They are also a great place to start managing your money.
Offer great flexibility as you can easily move money in and out using internet banking or an app, your money is “at call”. You will also benefit from compounding as interest is paid into the account. You can easily set up a regular contribution to on online account to intentionally save unintentionally. The major downside from a saving psychology perspective is that your money is easily accessible and there is no cost or penalty for making withdrawals.
Can be helpful to use if you deposit say over $10 regularly like once a month and do not make any withdrawals, through this solution you get a bonus amount of interest which makes this solution slightly better for regular savers than online savers. Note, if you withdraw money from this account, you do not earn interest for that period (e.g. that month).
These accounts tap strongly into the savings psyche. The downside of these accounts is that the base interest rate is low and if you need to make any withdrawals you will only be paid that rate for the month so you want to be confident that money you put in will not be required.
Can have sometimes pay interest rates that are higher than online savings accounts or reward saver accounts (even with the bonus interest) and can help to achieve a higher return. The downsides of a term deposit is that they do require some effort when the term ends as you will need to either reinvest into another term deposit or put the money into another account. When you start a term deposit the money is effectively locked away for that term (for example three or six months) and there are significant fees if you need to “break” the term deposit. This can be good from a savings perspective as it helps to lock money away and remove the temptation to spend it.
A wonderful Australian invention that can help you save whilst you have a home loan. This is an account linked to your home loan. The money in the account is ‘offset’ daily against your home loan balance and as a result, the interest you pay is the difference between the home loan balance and the offset. Only some home loans offer offsets and need to check they are 100% offset and apply for the duration of the loan (vs. only a specified time). Some banks also offer multiple offsets accounts against the one home loan which can help with saving towards multiple goals.For example, if you have a $500k loan with $100k in a 100% offset account and have paid off $150k, you only pay interest on the balance less the offset i.e. $250k
Gives you access to an exchange traded fund (ETF) in line with your risk profile and allows you to deposit an amount of your choosing into it each week. Currently they charge a fee of 0.275% on the investment balance subject or $1.25 per month (whichever is greater). Companies like FirstStep and Raiz also offer Roundups – which rounds up purchases to the nearest dollar, putting the difference into the investment account. For example, if you buy a coffee for $3,80, it will charge $4.00 to my credit card and put the $0.20 into the investment account.