Money talk is dry – but understanding the most common financial terms will help you when you need to discuss your money issues with a financial planner. ‘Understanding finance lingo is useful when you’re trying to get to know your own finances,’ says Nitesh Patel, head of Customer Financial Solutions: Personal Banking at Standard Bank. Here are the most common terms used in the banking industry.
1 Consumer Price Index/CPI
This is the amount by which the general level of prices increases on certain goods and services – food, transport, housing, electricity. It helps economists to monitor inflation: the higher the cost of the service, the higher the rate of inflation.
This is an index that the Reserve Bank uses to measure inflation in terms of its inflation targets. CPIX is simply the CPI, but it excludes interest rates on mortgage bonds.
This is the total amount of money, usually paid twice a year, by a company to its shareholders from the company’s profits. A dividend is a fixed amount paid per share.
4 Endowment policy
An individual can take out an endowment policy to save for retirement or other financial goals. A policy-holder agrees to save a fixed amount every month for a period of five years, for example. The annual premium increase is sometimes linked so that the savings accumulated will simultaneously link to inflation. The full amount of savings will be paid out as a lump sum at the time of maturity (or when the policy-holder dies), and is tax-free as the tax is deducted off the monthly premium.
When referring to shares in the stock market, equity means ownership interest in a corporation in the form of shares. In real estate, equity refers to the difference between what a property is worth and what the owner owes on the property.
Inflation is the continuous and significant rise of prices in general, from year to year (sometimes from month to month). It has an effect on the economy and can affect the Reserve Bank’s decisions to raise or lower interest rates.
7 Interest rate
This is the rate that is charged or paid for the use of money. Interest rates usually change due to inflation and Reserve Bank policies. Interest can work for or against the consumer. For example: if you have extra money saved in an investment account, an increase in rates will generate more income (interest) but if you have a lot of debt, an increase in interest rates will cause you to lose money because it becomes more expensive to settle the debt.
8 Maturity date
If you have an investment that has a maturity date, it means that you can withdraw the money on that date.
9 Net worth
The net worth of a person refers to the amount by which the individual’s assets exceed their liabilities. So if you have assets of R1-million (lucky you!) and liabilities of R400 000, your net worth is R600 000.
10 Pension fund
Employees (and sometimes employers) contribute to this fund; pensions are paid to the employee out of this fund when she retires. When you resign from a company, you can take the cash or reinvest it into a preservation fund. It’s always better to reinvest the money: if you take it, you will be taxed on it – and you need it for your retirement! If you spend six years of accumulated pension funds you will have effectively cut six years off your retirement savings.
11 Prime rate
Prime rate is the interest rate that commercial banks charge their most credit-worthy borrowers. These are usually large organisations and individuals with a good credit record.
12 Provident fund
This is similar to the pension fund, but the provident fund member can receive the benefit in a lump sum of cash at retirement age. A pension fund limits you to withdraw only one-third of the lump sum upfront, and then receive monthly annuity payments on retirement.
13 Repo rate
The rate at which banks borrow money from the Reserve Bank. Banks usually increase their prime lending rates when the repo rate rises.
14 Retirement annuity
An investment instrument that provides tax-deferred growth on money. You cannot access the money in an RA until you turn 55.
Large corporations are listed on the stock exchange, and sell shares to the public and institutions to raise capital to grow the company. You can sell shares that you bought on the stock exchange and even earn a percentage of the company’s profits through dividends.
16 Unit trusts
Unit trusts are the pooled money of thousands of investors who have entrusted their money to a fund-management company. The management company buys shares on the stock exchange on behalf of the investors. The trust combines shares in different portfolios.
The income return on an investment.
Article credit: http://www.cosmopolitan.co.za/career-money/money-talk-17-wealth-terms-you-should-know