It’s no secret we’re big believers in positive financial wellbeing – helping everyday people feel on top of their money. And if you’re reading this, chances are it’s something you’re passionate about too.
But what about financial literacy? Do you know your compound interest from your credit score? Your emergency fund from your loan commitments? This introduction to some common financial terms will help you on your way to becoming the master of money matters – a goal we can all get behind.
Your repayment commitments
If you have debts, you need to think about how you are going to meet your repayments. For example, you might have a student loan or a credit card – and you may have to allocate some money each payday to these debts.
In order to create a savvy and realistic budget, you need to have a thorough understanding of your debts. Start by thinking about what debts do you have? How much you owe? What are your minimum repayments? Are you able to make more than the minimum repayment? You will need to work out what your obligations are, and what works for you and your circumstances. Unsure? Gather your credit card statements and loan account info together – and then go through them systematically. We recommend writing down each of your debts under headings (such as credit card, car loan, student loan), working out the repayment schedule for each debt, then displaying these figures somewhere prominent like the fridge as a reminder of when they are due. If you have a partner, make sure you take into account any shared debts too.
Your credit score is a number based on your credit history that lenders and banks take into account when deciding whether or not to lend you money. Your credit score is based on factors including the number of loans you have, your usual repayment amount and whether you make your repayments on time – among other things. Understanding your credit score and how to improve it is a great incentive to help you better manage debt. You can get your credit score and a free credit report from a number of different agencies, including those listed here on the Australian Government’s MoneySmart website.
An emergency fund is a lump sum that acts like a buffer in case of serious financial hardship (you lose your job, your car breaks down or your heating carks it in the middle of winter, for example). Also known as a ‘rainy day fund’, the emergency fund needs to consider your outgoings. Do you have dependents or pets? How much does your life cost? How long would you need if you had a break in income? Experts recommend aiming for six months’ worth of expenses as a minimum, but even a few thousand dollars stashed away could provide a crucial bubble of protection.
Interest is the extra money you pay or earn when investing or purchasing something. When it comes to understanding interest, it helps to know the two types of categories: interest earned, and interest paid.
As you might expect, the first refers to the interest you can earn on, for example, a bank account. The latter refers to the interest you pay for taking out a loan – in other words, for borrowing money – on a purchase like a house or car. There’s lots of different types of interest and interest rates, which you can read about on our website.
Compound interest is the interest you can earn on your interest. Confused? Let us break it down. Compound interest accounts have a snowball effect on your savings – meaning you earn interest on your initial deposit, as well as any extra interest you’ve earned. It’s like a bonus for your savings. If you’re looking to set up a compound interest account, make sure you choose one that works for you, then get saving – maximising your interest is an important part of organising your accounts.
Put simply, inflation is the change in price of common goods and services over time. This includes everything from groceries to clothing, housing and transport.
The rate of inflation in Australia is determined by something called the Consumer Price Index (CPI) – essentially, this is an index of everyday items around the country. This is compiled quarterly by the Australian Bureau of Statistics (ABS). You can read more about inflation, how it’s calculated and why it matters in our guide to inflation.
Refinancing is the process of paying off an existing loan by taking out a new one. The term is commonly used in the home loan context: homeowners consider refinancing in order to get a better (lower) interest rate, to capitalise on a product or cash offer, or to consolidate loans. If you’re interested in refinancing, consider talking to your bank first and see if you can get a better deal.
Redraw, also known as a redraw facility, allows you to access any extra money you have paid on your home loan. Think of it like a savings scheme that, if unused, may allow you to pay your mortgage off earlier. You can build a redraw facility by paying extra on your regular home loan repayments, or by making a one-off payment. There’s more about redraw and how it works in the linked article.
If you don’t have enough money in your account when a payment in processed, your account may become overdrawn. This essentially means there are negative funds in your bank account (that you’ll need to pay back) – and you may be charged a dishonour fee as a result.
All Ordinaries Index
The All Ordinaries Index (or ‘All Ords’) lists the share prices for the top 500 largest companies listed on the Australian Stock Exchange. Many people use the index to track the performance of companies for investment purposes (aka buying shares). If you’re interested in investing or just starting out, check out our beginners guide to share investing.
Of course, if you’ve already completed our free six-week Financial Wellbeing Challenge, you’ve got a multitude of tips and tools at your disposal to help you get on top of your money. Bonus points for taking our simple quiz to determine your financial wellbeing score! Our glossary of terms is a great resource for learning the lingo when you’re investing, buying a home, or upping your financial game.
And remember, no matter where you are in your financial journey, you never stop learning.