The financial world can sound very complicated if you don’t understand the terms. In our super simple guide below, we explain some of the basic financial that will help you prepare for your better financial future. It will increase your financial literacy and possibly help you to grow your wealth as well.
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An asset is something with value. It’s worth something. You can sell it for cash or you can keep it to capitalize on its growth potential (possible increase in value). Assets may require a bit of maintenance (costs to ensure its upkeep), but assets cause income or growth in wealth.
Your personal car may have value but it doesn’t supply income and therefore is mostly not classified as an asset. It’s a piece of equipment, a means to an end, something that gets you from A to B. However, an antique vehicle you bought in the hope of reselling at a higher value is an asset.
A type of investment that requires monthly deposits for a set number of months (or years). On a set date an annuity starts paying a monthly amount into your bank account. You stop making deposits into an annuity when it reaches that date and then capitalize on the monthly payouts. An annuity reaches a maturity date when the owner (you) reach a specific age (usually between 85 - 100) whereupon it cash’s out completely in the agreed manner.
The payouts are determined by an APR (Annual Percentage Rate) of the total amount you’ve saved over the years of deposits made. The annuity pays out to its beneficiary until the investment is liquidated, sold, or closed down due to stipulations in the annuity agreement (the contract with the company who offers the annuity).
Annual Percentage Rate (APR)
A yearly interest rate charged on either an investment or form of credit. It determines how fast interest accumulates on the investment or debt.
A R1000 investment with an APR of 5% generates R50 of interest in its first year. The following year the total investment is worth R1050 and the 5% APR generates R52.50 of interest. The investment total increases to R1102.50.
A legal procedure that involves a person or business who can’t repay their debt anymore. Most probably because their debt has exceeded the value of their assets and they have lost the ability to make sufficient income. The said party files a petition for their wealth to be measured, evaluated, and eventually used to repay portions of their creditors and debt.
A business that owes R15’000 per month in debt repayments but only earns R10’000 per month may possibly have to file for bankruptcy. Let’s say their debt totals to R1’000’000. But their business is only worth R800’000. When they file for bankruptcy their business assets are sold for R800’000 and used to partially repay their debts. This may include complex legal matters because even though their debts aren’t fully settled, the courts will judge them settled because of their bankruptcy.
A combination of income and expenses. A budget usually pertains to a period of time like a year or a month. People and businesses use budgets to regulate their spending and to determine their profitability. Draw up your own budget to make sure you spend less than you earn. In so doing you can grow your wealth.
You can draw up a monthly budget with estimates of your projected income and expenses. Add up all your income like your salary, investment proceeds and business profits. Then subtract your expenses. Change your intended expenses so that it won’t exceed your income. Your expenses must be less than your income, or else you will lose wealth. Even if you spend money through credit cards and loans now, you’ll be required to pay for it later. So budget well to spend less than what you earn, and then keep to that budget.
Capital is the term used for financial assets in both forms namely assets or equity financing. Financing capital usually refers to the cost of a project. Capital may also be seen as a type of investment into a project.
Someone who joins a partnership usually needs to invest an amount of capital to become part of the partnership. Perhaps they need to invest a specific amount of money. Or they could possibly invest assets of the same value into the business.
There are two forms of credit called secured debt or unsecured debt. The absence of collateral makes debt unsecured. The presence of collateral makes it a secured debt. Assets or similar things of value can serve as collateral.
A borrower can submit collateral for their debt. It decreases the risks involved for the lender, because the collateral serves as payment for the debt if the borrower defaults. The lender then offers a lower interest rate which cheapens the borrower’s credit payments. A property bought on a home loan typically serves as collateral for the said home loan.
Interest increases whatever it is applied to. But over time interest is added on interest. This is called compound interest (when interest is added to interest). The power of compound interest on a specific financial tool increases as time progresses. This gives way to exponential growth possibilities wherever compound interest has enough time to work its magic.
An investment of R1000 with an APR of 5% increases with R50 of interest in the first year. The following year it’s worth R1050 and increases with R52.50 (on an APR of 5%). But let this run for 60 years and you’ll see the exceptional power of compound interest. At the beginning of the 60th year the investment is worth R17’789.70 and with the same 5% APR it increases with R889.49. In year one the investment increased with R50 but in year 60 it increased with R889.49 even though the APR remained the same, because compound interest had time to accumulate more momentum.
A form of debt offered by lenders. A credit card is linked to an account with a maximum limit and an interest rate. The credit card holder can use money up to the maximum limit but has to make monthly payments based on the interest rate applied to the credit card.
A form of debt offered by lenders. A credit card is linked to an account with a maximum limit and an interest rate. The credit cardholder can use money up to the maximum limit but has to make monthly payments based on the interest rate applied to the credit card.
This can be either a business or person you owe money.
Something that needs to be repaid.
This is a way in which lenders measure your capacity for more debt. They take your monthly income and measure how much of it goes to monthly debt repayments. Your debt-to-income ratio (DIR) is 10% if you earn R1,000 per month and need to pay R100 per month to lenders. Your DIR is 80% if you earn R1,000 and must repay R800 to lenders. A high DIR is bad and a low DIR is good. Lenders will deny the loan applications of people with a high DIR.
This is when a loan pays out into your account. It could possibly refer to the transaction when a car dealership gives you the car you bought through a financed deal. In essence, it means a form of credit has been accounted to your name.
This is a security (a type of investment) that consists of multiple stocks trading on the Johannesburg Stock Exchange (JSE).
The documents required by a lender to verify your identity and income.
Someone who signs with a borrower on a form of credit. They also accept responsibility for the debt with the principal beneficiary (the person to whom the loan is disbursed). A guarantor must repay the debt when the principal beneficiary can’t. It’s also called a cosigner.
Gross Domestic Product (GDP)
The total value of services and goods sold by a country.
The amount of income earned before tax and any other deductions.
A loan made on the part of a home that has been repaid. You can take a home loan on the entire value of a home if it is repaid in full. Or you can only take a home-equity loan on 60% of the value if the home still has 40% debt to be settled.
Sales or proceeds made in the order of business. A person’s income usually comes in the form of a salary or wage.
The constant rise in the general price of goods in a specific area. It’s usually measured in a yearly percentage. An inflation rate of 3% means things got more expensive during the last year by 3%.
Someone or a business becomes insolvent when their required debt repayments becomes more than their income (their ability to repay it).
Johannesburg Stock Exchange (JSE)
A financial market that facilitates the sales of stocks, securities and bonds. The biggest one of its kind in Africa.
This usually happens when a business becomes insolvent. It requires the sales of all the business’ current assets. The proceeds of those sales then goes to the partial settlement of the business’ debt.
Liquidity refers to the degree which a security or debt can be bought or sold. Something with a high liquidity can quickly be turned into cash. Cash is probably the most liquid asset available.
A mutual fund is a type of investment that takes a large pool of money gathered from many investors and invested in all kinds of investments. A mutual fund allows someone to invest in opportunities that would have been beyond the capability of their money.
Net Asset Value (NAV)
The NAV of an entity is determined by the total value of their assets minus the total value of their liabilities (debts and creditors). A positive NAV is good. A negative NAV is bad.
Net income is the income that remains after all deductions, expenses, and taxes.
A credit facility added to your current (day-to-day) bank account. An overdraft facility has a maximum limit. Any money spent beyond the cash available in a bank account takes money from the overdraft. An overdraft must be repaid and accumulates interest based on an APR.
The money made over and above the required expenses and deductions of a certain endeavor.
Property or pieces of land that serves as an investment opportunity. Real estate could be used for either residential or retail (business) purposes.
Return On Equity (ROE)
Equity serves as the measurement of exposure towards a business. Your equity will be R100 if you invested R100 into a business. Then you’ll make a yearly ROE of 10% if your R100 investment gives you a R10 pay out per year.
A form of credit that is secured by collateral.
This measures your solvency. It takes the total value of your income for a set period and divides it by the total required debt repayments for that same period. A solvency ratio of more than 1 is good. Anything lower than 1 is bad.
The financial platforms that facilitate the buying and selling of securities, stocks, bonds, and similar financial tools.
A situation in which people are without work either because of a lack of jobs or other social factors.
A form of credit that is not secured by collateral.
Value-Added Tax (VAT)
The percentage of tax added to goods and services taxed by the government. The end consumer (the final consumer) of any good or service pays the full value of VAT. This is usually employed by a government to make up for the shortfall in tax revenues. A tax shortfall means a government won’t have enough money to pay for the things they need to run a country. VAT currently stands at 15% in South Africa.
The measurement of your financial well-being. Assets increase wealth whilst liabilities and debt decreases wealth.
Something that yields brings increase. Financial tools with a good yield brings much increase in value or an increase of money.
These are goods as listed by the government that are taxed at 0% VAT. They include the following.
- Brown bread
- Maize meal
- Fresh fruit and vegetables
- Dried grains and beans
- Tinned sardines (pilchards)
- Milk powder
- Vegetable oil
- Cultured milk
- Edible legumes