9 Common financial terms you should understand

Talking about financial matters can quickly become complicated, especially when terms like “financial gains” and “stock market options” are thrown around.

Financial jargon can be an unnecessary barrier to managing your finances appropriately. We got in touch with a wealth manager to help demystify common financial terms everyone should understand.

Lack of education on financial matters

According to Geo Botha, wealth manager and director at Bovest Wealth Management, South Africans often overcomplicate things when it comes to personal finance.

“We use jargon and difficult terms that end up confusing those who are not in the financial planning field. There is a massive need for clear, straightforward financial advice and education,” says Botha.

He believes that the South African school curriculum should include material to educate learners about financial matters from an early age. 

“As a wealth manager, I regularly meet with people who have very limited- or no knowledge about their own personal finances, and I see the sad results when people realise the importance thereof too late,” says Botha.

Start understanding financial terms today

Botha believes it’s important for you to understand your finances, and that you shouldn’t rely on your parents or spouse to manage your finances for you because you struggle to understand the jargon.

He identifies the following nine common terms that every South African should understand so that they can make the right financial decisions.

1. Compound interest (or interest on interest)

This can either work for you or against you. When you start investing, the growth is minimal. But as your money grows, you benefit from growth on the previous month’s growth.

The best way to describe it is to look at how a snowball is formed. At first it’s small and harmless, but as one layer builds on top of another, the snowball becomes a powerful force to be reckoned with. The problem is that it takes time and patience to reach a substantial size.

2. Financial goals 

Most people don’t have financial goals, and therefore they feel that investing is boring and serves no purpose. However, when you start differentiating between short, medium, and long-term goals, and you make it personal, like preparing for a holiday, wedding, or car, you will be a lot more likely to stick to your goals.

3. Net worth versus income

When someone earns a good salary, they think they’re rich. But if your income only keeps up with your expenses, you are going nowhere. Rather make sure that your net worth, which is your assets minus your liabilities, grows.

4. Budget

Budgeting is something you may have heard about from your parents or friends. But most people find it very boring, intimidating, and negative, and they don’t know where to start. However, it’s important to track where your money is going and guide it in the right direction.

Make it personal, turn it into a game, and you will beat the odds and stick to it. If you’re still struggling with your budget, try this budget calculator for some assistance.

Tip: Get your finances organised by using our budget calculator. 

5. Income protector

This is often mistaken for a retrenchment protector. But income protection insurance applies when you are booked off work for any medical reason and you’re unable to earn your salary.

Credit life cover can also assist you with your outstanding debt if you are retrenched or suffer an injury that prevents you from earning an income. Click here to find out more about this.

6. Normal asset vs income-producing asset

It’s important to know the difference between these two terms if you want to build wealth. An asset is something with a specific value that you can sell to another person in exchange for money - for example, your primary residence.

An income-producing asset is also something with a specific value, but while you hold it, it works for you to produce income. This includes, for example, renting out a secondary property, earning returns on your share portfolio, or any formal training that you may have received.

7. Investment portfolio

This is an amount of money that is distributed largely between four asset classes: shares, listed property, bonds, and the money market. It can also be distributed between local and offshore accounts.

READ MORE: What are the risks of investing in the money market?

8. Offshore investment

This is money that’s being invested in an asset class that is outside the borders of South Africa. For example, if you buy Apple shares, you’re investing in offshore equity.

9. Retirement savings

This an investment that enables you to earn a salary for the 30 or so years following retirement. It can take different forms, such as a pension fund, provident fund, or retirement annuity.

Find out more about a retirement annuity by clicking here.