If you've ever been confused, muddled or just in need of further information about a word or financial phrase, here's a basic run-down of a few terms and important words that we use from time to time.
Account
An arrangement with a financial institution for the debit and credit of funds; also the record or statement of these transactions. Businesses may use an account structure with another party to keep track of goods or services rendered and payments owing.
Asset
An item of a tangible or intangible nature that has value or benefit, such as the capacity to generate revenue or interest. An example of a tangible asset is real estate and an intangible asset is a business brand name.
Balance sheet
A statement of assets, liabilities and equity that shows the financial position of the individual or organisation.
Balance transfer
The movement of the amount owing from one account to another account. A credit card balance transfer, for example, involves the movement of the amount owed on one or more credit cards to another account or institution, usually for the purposes of consolidating debt and/or taking advantage of better interest rates and/or payment terms.
Borrowing power
The amount an individual or organisation can borrow, usually calculated using income/revenue, expenses and other debt obligations.
Budget
A plan, usually limited by time period, that uses estimates of likely revenue and expenditure to allocate funds.
Capital
The net worth of an individual or organisation, or the value of an asset after deducting costs.
Capital gain
The growth in value of an asset after deducting the cost of the purchase.
Cash
Any readily available money, especially banknotes and coins, but also funds in savings or debit accounts.
Cash flow
The cycle of money coming into and out of an account according to income/revenue and expenses. Negative cash flow is when expenses fall due before income/revenue is available and the account experiences a shortfall. Positive cash flow is when income/revenue outstrips expenses and there is excess cash in the cycle.
Cash flow management
The handling of a cycle of money that includes forecasting possible cash requirements to ensure an individual or organisation can meet them.
Cash management account
A cash management account is an account held with a financial institution that allows you to manage your cash transactions through one portal.
Collateral, also security
An asset which a borrower uses to secure funding from a lender. In the event that the borrower cannot repay their debt, this asset can be acquired by the lender.
Compound interest
Interest calculated on the total amount of funds including the principal and any previously accumulated interest. Compare with simple interest, which is calculated only on the principal amount.
Construction loan
A loan which funds the construction or renovation of a property. The funds are released to the borrower in stages in line with the development of the property. This allows the borrower access to the funds as they need them so the borrower does not accrue interest on the entire loan until the whole amount of the loan has been released.
Credit
- In relation to a loan or credit card this is the amount available to spend, based on an ability to pay
- In relation to an account, credit is an amount received into an account.
Credit report
A report on an individual or organisation identifying:
- defaults
- judgments
- bankruptcies
- directorships
- prompt payment of obligations.
Credit assessment
An assessment of an individual or business that indicates their ability to repay a borrowed amount, usually based on their credit history along with their income and expenses.
Credit limit
The approved amount of funds available to a borrower to use according to the agreed purpose.
Credit score
A credit score is a numeric expression that indicates how credit worthy someone is. The score is created using an analysis of a person's credit history as provided by past creditors. The score is held by a credit bureau.
Creditor
A party to whom money is owed, usually a lender.
Debt
An amount of money one party owes to another.
Deposit
An amount of money paid into an account.
- an amount of money paid towards a good or service with an arrangement to pay the outstanding amount at a later date
- an amount of money held in trust by the lender as proof of intent from the borrower to repay the loan.
Depreciation
The loss in value of an asset over time.
Dividends
An amount paid to shareholders from an organisation's profits, relative to the number of shares held.
Encumbered asset
An item of value used as collateral or security for a loan, which has a registered interest against it, for example a property for which you have a mortgage is an encumbered asset. An unencumbered asset is one without any debt or interest registered against it, such as property for which you have paid off the mortgage.
Equity
The value of an asset after all debts against it have been calculated. A property may be worth $800,000, for example, but if it has a $500,000 mortgage against it, the equity the owner has is $300,000.
Finance
Funds, usually borrowed as a loan, used to purchase something.
Fixed interest
- an amount earned on funds to be paid on top of a principal calculated as a percentage that remains unchanged for the term of the loan, or
- a loan type where the interest rate doesn't fluctuate during a period, being the fixed rate term.
Gross income
Total amount of money received prior to relevant deductions, such as taxes and levies.
Guarantee
A guarantee is a non-cancellable indemnity bond, backed by an insurer. It offers investors security that an investment will be repaid. A limited guarantee is when the amount the guarantor is responsible for is limited to a set sum or time frame. A non limited guarantee is when the guarantor is obligated to repay all amounts due.
Interest
- an amount earned on funds to be paid on top of a principal, or
- an amount paid at regular intervals on borrowed funds.
Investment loan
An amount borrowed to purchase an asset that will generate revenue.
Line of credit
A loan that allows the borrower to withdraw money from an account up to a specified limit.
Loan term
The period of time specified by the lender for the borrower to repay the amount owing to the lender, usually in set instalments including interest.
Loan to value ratio (LVR)
The amount, as a percentage, borrowed for an asset against the value of the asset.
Managed fund
An investment account supported by collateral or security from a number of different investors.
Margin call
An amount requested by a lender when the value of a loan is too high compared to the value of the collateral or security the borrower has offered. This is related to the loan to value ratio. This generally relates to loans used to purchase shares.
Mortgage, or home loan
An agreement between a lender and a borrower who is a property owner where the property is used as collateral or security for an amount borrowed to purchase it. Another example may include where a borrower has refinanced their existing property to a new lender.
Negative gearing
The process of using borrowed money to fund an investment where the returns from the investment are less than the interest repayments on the borrowed funds, allowing a deduction of losses against taxed income.
Net income
Total amount of money received after relevant deductions, such as taxes and levies.
Official cash rate (OCR)
Defined by the Reserve Bank of Australia (RBA) as an operational target for the implementation of monetary policy. Broadly speaking, it is is used to denote the interest rate which financial institutions pay to borrow or charge to lend funds in the money market on an overnight basis.
Offset account
An account linked to a loan account where any amount in credit reduces the principal of the loan for the purpose of calculating interest. An offset account is used to reduce interest calculated on the principal but has the flexibility of transaction accounts.
Principal
The amount borrowed to be repaid.
Product disclosure statement (PDS)
A document provided to a client containing details of the financial product subject to legislation.
Real estate
A tangible property asset consisting of land and/or buildings.
Redraw facility
A feature that allows a borrower to access excess funds that have been paid towards a loan.
Reserve Bank of Australia (RBA)
Australia's central bank. In addition to setting the official cash rate in order to manage the economy, it provides banking services to the Australian government and its agencies.
Security, also collateral
An asset which a borrower uses to secure funding from a lender. In the event that the borrower cannot repay their debt, this asset can be acquired by the lender.
Self managed super fund (SMSF)
An investment vehicle that houses your retirement savings that you can manage yourself, subject to certain legal rules. SMSFs are regulated by the Australian Taxation Office.
Stamp duty
A tax imposed by a state or territory government incurred upon purchasing a property or business.
Term deposit
A deposit held with a financial institution that has a fixed term with maturities ranging from a month to few years.
Transaction account
An account that allows frequent access to funds through deposits, withdrawals and transfers.
Unencumbered security
An asset or property that is not encumbered by creditor claim or liens. A house without a mortgage is an unencumbered security. An encumbered asset is one with a registered interest against it, for example a property for which you have a mortgage.
Variable interest
- an amount earned on funds to be paid on top of a principal calculated as a percentage that changes throughout the term of the loan, or
- a loan type where the interest rate fluctuates with market forces, often in response to changes to the official cash rate.
