It's national budget week and the world of finance is full of language and terms that not everyone knows the meaning of.
Ahead of the Finance Minister's speech tomorrow, here are some terms you might find useful.
It's national budget week and the world of finance is full of language and terms that not everyone knows the meaning of.
Ahead of the Finance Minister's speech tomorrow, here are some terms you might find useful.
1. CPI or Consumer Price Index
This is by how much the general level of prices increase on certain goods and services – such as food, transport, housing and electricity. It helps economists monitor inflation – the higher the cost of the good or service, the higher the rate of inflation.
2. CPIX
This is an index that the Reserve Bank uses to measure inflation in terms of its inflation targets. CPIX is simply the Consumer Price Index (CPI) but excludes interest rates on mortgage bonds.
3. Dividend
This is the total amount of money paid out, usually bi-annually, 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, their children’s education or a range of 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.
5. Equity
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.
6. Inflation
Inflation is the continuous and significant rise of prices in general. Inflation is a process in which the prices of most goods and services increase from year to year, and sometimes from month to month. Inflation 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 debts.
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 an individual has assets to the value of R1 Million and liabilities to the value of R400, 000, their net worth is R600, 000.
10. Pension Fund
Employees and sometimes employers contribute to this fund and pensions are paid to the employee out of this fund when they retire. When an individual resigns from a company, they can opt to take the cash or reinvest into a preservation fund. It is always better to reinvest the money for two reasons – firstly, if you take the money you will be taxed on it and secondly, you need the money for retirement. If you spend 6 years of accumulated pension funds you will have effectively cut 6 years off your retirement savings.
11. Prime rate
Prime rate is the interest rate that commercial banks charge their most creditworthy borrowers. These are usually large organisations and individuals with good credit records.
12. Provident Fund
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 up front, and then receive monthly annuity payments on retirement.
13. Repo Rate
It is 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
Is an investment instrument that provides tax-deferred growth on the money. You cannot access the money in an RA until the age of 55.
15. Shares
Large corporations list their company on the stock market and sell shares to the public and institutions to raise capital to grow the company. You can sell shares that you have bought on the stock exchange and even earn a percentage of the company’s profits through dividends. Investors in shares look to growth in the share value to grow their assets.
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 JSE on behalf of the investors. The trust combines shares in different combinations called portfolios. There are over 800 different unit trusts to choose from.
17. Yield
It is the income return on an investment.
Nitesh Patel, Head of Customer Financial Solutions, Personal Banking at Standard Bank says, “Even though the thought of having a good understanding of financial and economic terms may not be the most exciting thing to apply our minds to, understanding them can be useful when getting to know our own finances. “Knowledge is power, and having an understanding of financial terms will help when discussing money with a financial planner. It will also give an overview of how the economy affects each of us personally,” says Patel.
