A quick guide to some important financial terms

 

 If you ever got confused or just needed a bit more information on a financial term or phrase, you might find this guide useful. We prepared a quick guide of commonly used terms and phrases in the world of finances.

 Account
A mutual arrangement with a financial institution, including debit or credit funds, and records of your transactions. Businesses might use a more complex account structure, to keep track of their goods and services, etc.

Asset
A tangible or intangible item, that has a certain value or benefit, such as the capacity of generating interest or revenue.
An example of a tangible asset would be real estate, as for an intangible asset, it can be copyrights, business brand names and similar.

Balance sheet
A statement including assets, liabilities, and equities, showing the financial position of an organization or an individual.

Balance transfer
The movement of the amount owed, from one account to the other.
For example; a credit card balance transfer, which involves the movement of the amount owed, from one or more credit cards to another institution or account. This is usually done to unite debt, and/or to take advantage of better interest rates or payment terms.

Borrowing power
The amount which an individual or organization can borrow, typically calculated based on the available income/revenue, expenses, and other debt commitments.

Budget
Usually a time-limited plan, that uses estimates of possible revenue and payouts when relocating funds.

Capital
The net worth of an organization or an individual, or value of the assets after deducted costs.

Capital gain
The growth in value for an asset, after deducting the purchase costs.

Cash
Any of the readily available money, mainly in the form of banknotes and coins, but can also be in the form of the available funds in savings or debit accounts.

Cash flow
The rotation of money coming in and out of the account, depending on the income, revenue, and expenses. Negative cash flow appears when expenses fall due before the income is available, so the account undergoes a shortfall. Positive cash flow is, when income is larger than the expenses, meaning there is an excess of cash in the cycle.

Cash flow management
Handling a cycle of money that includes predicting potential cash requirements, ensuring an individual or organisation can meet them.

Cash management account
CM account is an account held with the financial institution, that allows you to manage your transactions through one channel.

Collateral, also known as security
An asset used by the borrower to secure funding from the lender. If the borrower can’t repay the debt, this asset can be obtained by the lender.

Compound interest
Interest calculated based on the total amount of funds, including principal and previously accumulated interest. Compared to simple interest, which is calculated solely on the principal amount.

Construction loan
A loan used to fund construction or renovation of a property. The funds are released in stages, according to the development of the construction or renovation. This allows for the funds to be accessed gradually, so the borrower doesn’t accumulate interest on the entire loan until the final part of the loan has been released.

Credit
In association with the loan or credit card, this is the available spending amount, based on one’s ability to pay back.
Credit is the amount of money, received on the account

Credit assessment
An assessment done for an individual or business, that demonstrates their ability to repay the borrowed amount, normally based on their credit history, their income and expenses.

Credit limit
The approved amount of funds, available for the borrower to use accordingly for the purpose previously agreed.

Credit score
It’s a score specifying how creditworthy an individual or organisation is. The score is calculated based on the analysis of a person’s credit history, as it was provided by past creditors. This score is held by the credit bureau.

Creditor
A person or organisation to whom money is owed, usually a lender.

Debt
An amount of money one party owes to another.

Deposit
An amount of money paid to an account.
An amount of money paid for goods or service, with arrangements to pay the rest of the amount at a later date.
An amount of money held in trust by the lending party, as proof of intent from the borrower to repay the loan.

Depreciation
The loss in value of an asset over time.

Dividends
An amount that is paid to shareholders, from the profits of an organisation, relative to the number of the shares owned.

Encumbered asset
An item of value used as a warranty or security for a loan, which holds registered interest against it. For example, a property for which a person has a mortgage is an encumbered asset.
An unencumbered asset is one without debt or interest, such as property for which you have already paid the complete mortgage.

Equity
The asset’s value, after all the debts against it, has been calculated. If the property’s value is $ 800,000, but there is a $500,000 mortgage on the property, the owner’s equity is $300 000.

Finance
Usually borrowed funds in the form of a loan used to purchase something.

Fixed interest
An amount earned on the funds to be paid, on top of the calculated principal. As a percentage that remains unchanged, for the period of the loan.
A loan type in which the interest rate doesn’t fluctuate during a certain period,
being the fixed-rate term.

Gross income
The complete amount of money received, before any relevant deductions, such as levies and taxes.

Guarantee
A guarantee is a compensation bond with no option of cancellation, backed by the insurer. It offers security to the investor, that the investment will be repaid.
A limited guarantee is when the amount is limited to a specific sum or a time frame. A non-limited guarantee means, that the guarantor has to repay all the amounts due.

Interest
An amount earned on the funds to be paid, on top of the principal.
An amount paid in 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 the account, up to a
specified limit. See Line of Credit Home Loan

Loan term
The time specified by the lender, for the borrower to pay back the amount he borrowed, usually in pre-determined instalments, including interest.

Loan to value ratio (LVR)
The amount in percentage borrowed for an asset, against the value of the asset.

Managed fund
An investment account supported by a security guarantee from several investors.

Margin call
An amount that is requested by the lender, when the loan value is too high, compared to the value of security guarantee that the borrower has offered. The margin call is related to the loan to value ration. It generally relates to loans used in purchasing shares.

Mortgage, or home loan
An agreement between the property owner (lender) and the borrower, where the property is used as a security guarantee for the amount borrowed, to purchase the property.

Negative gearing
Process of using borrowed money to fund an investment, where the amount in investment returns is less than the repayments of borrowed funds, allowing a deduction of losses in taxed income.

Net income
The 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. Used to denote interest rates, which are paid by financial institutions to borrow or charge when lending funds on the money market (on an overnight basis).

Offset account

An account linked to the loan account, where any amount in credit can reduce the principal of the loan to calculate interest. An offset a. is used to reduce interest, calculated based on the principal, but has the flexibility of transaction accounts.

Principal
The amount borrowed, that needs to be repaid.

Product disclosure statement (PDS)
A document provided to a client, containing details of the financial product that is 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 as a loan. > more

Reserve Bank of Australia (RBA)
RBA is Australia’s central bank. In addition to setting the official cash rate to manage the economy, it also provides banking services to the Australian government and its agencies.

Security, also named collateral
An asset used by the borrower, to secure funding from the lender. If the borrower can’t repay the debt, this asset can be obtained by the lender.

Self-managed super fund (SMSF)
An investment program that holds your retirement savings/fund, that you can manage by yourself, subjected to some determined legal rules. SMSF’s are regulated by the Australian Taxation office.

Stamp duty
A tax imposed by a state or territory government, that comes with purchasing a property or a 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 allowing frequent access to funds, through deposits, transfers, and withdrawals.

Unencumbered security
Security for an unencumbered asset, is one without debt or interest, such as property for which you have already paid the complete mortgage.

Variable interest
An amount earned on funds to be paid, on top of the calculated principal,
as a percentage that changes throughout the term of the loan.
A loan type where the interest rate fluctuates with market changes, often as a response to changes in the official cash rate.

 

 

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The information shown on this site is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed hereto.


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