The financial world can be intimidating, particularly if you don’t understand key financial terms (which is described as financial literacy). Sometimes you don’t even know what you don’t know!

To demystify the industry we’ve pulled together some key terms that you should know, and split them up into categories which are based on activities you may undertake. It’s not the most comprehensive list but it should help you build up some confidence when it comes to speaking to a financial professional.

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Seeking Financial Advice:

AFSL: A licence given by ASIC that allows people or companies to legally carry on a financial services business, including selling, advising or dealing in financial products. You should only deal with licensed businesses as you are better protected if things go wrong and you will have access to free dispute resolution services.

Short term plan: a financial plan with goals intended to be achieved within 3-5 years.

Long term plan: a financial plan with goals intended to be achieved within 15-20 years.

Investible assets:assets that you can afford to invest without impacting your lifestyle, such as bank account balances, certificates of deposit, mutual funds, stocks and bonds. Assets such as your primary residence, home contents, and car, tend not to be included in this calculation.

Net worth:The difference between the total value of everything you own (assets), and the total value of all of your debts (liabilities).

Risk tolerance: the degree of uncertainty you are prepared to accept in relation to investment returns, in particular the extent to which you are prepared to experience a negative investment return while trying to achieve positive investment returns.

Debt consolidation: when several loans are combined into one, with the aim of reducing repayments.

Applying For A Loan:

Interest: the cost of borrowing money on a loan or earned on an interest-bearing account.

Comparison rate:a rate that helps you work out the true cost of a loan. It includes the interest rate, and most fees and charges relating to a loan, reduced to a single percentage figure.

Fixed interest rate:when the interest rate of a loan remains the same for the term of the loan or an agreed timeframe.

Variable interest rate: when the interest rate of a loan changes with market conditions for the duration of the loan.

Loan to value ratio (LVR):your loan amount shown as a percentage of the market value of the property or asset that will be purchased. The ratio helps a lender work out if the loan amount can be recouped in the event a loan goes into default.

Guarantor: a person who promises to pay a loan in the event the borrower cannot meet the repayments. The guarantor is legally responsible for the debt.

Overdraft facility:a finance arrangement where a lender allows a business to withdraw more than the balance of an account.

Offset account:a transaction account that is linked to a mortgage account. It reduces your interest payable as interest is only charged on the net balance, i.e. your mortgage balance less your offset account balance.

Hire-purchase: a type of finance contract where a good is purchased through an initial deposit and then rented while the good is paid off in instalments plus interest charges. Once the good is fully paid the ownership of the good transfers to the purchaser.

Refinancing: the process of remortgaging your property with a new mortgage under more favourable terms. A good example of this is moving to another lender.

Closing costs: Fees incurred when taking on a new loan, including application fees, solicitor’s costs, and stamp duty.

Capital gains tax: a tax on profits made from buying or selling certain assets.


Diversification: spreading investments across a variety of different asset classes or within an asset class to reduce risk.

Dividend: a payment made by a company to its shareholders. The payment is a share of the profits of the company and is based on the number of shares a person holds. A franked dividend consists of profits the company has already paid tax on.

Dividend yield: a financial ratio that measures how much a company pays out in dividends each year relative to its share price.

Gearing: borrowing to invest, such as when you buy a house using a mortgage or buy shares using a margin loan.

Income producing asset: any asset that generates an income. For example, dividends are paid on shares, investment properties generate rental income, bonds and bank accounts produce interest.

Risk/return trade-off: Higher risk tends to be associated with higher returns, and lower risk with a greater probability of smaller returns. It’s what investors need to face when considering investment decisions.

Managed fund:an investment fund where your money and that of other investors is pooled and used to buy assets such as cash, shares, bonds and listed property trusts. The fund is managed by a fund manager.

Balanced fund: a fund that invests across a mix of asset classes like cash, fixed interest investments, property and shares, to achieve medium- to long-term capital growth and a reasonable level of income.


Superannuation: money set aside for retirement, that must be paid into a complying superannuation fund.

After-tax super contribution: Money deposited into a super fund after you have paid any tax on it. Different from pre-tax contributions (salary sacrificing), which are contributions made before income tax or where a tax deduction is claimed.

Industry fund: a superannuation fund that originally catered to workers from a particular employment industry or industrial award. Most are now open to the general public. They are usually low cost, have limited investment options and return profits to members.

SMSF: Stands for self-managed superannuation fund. An SMSF is a way of saving for your retirement. Unlike other super funds, an SMSF is self-managed, which means you’re responsible for making sure the super fund complies with super and tax laws.

Beneficiary: someone who will receive a benefit or asset in the event of the owner’s death. Beneficiaries of a super fund are the members, and their dependants (if the member dies).

For a more comprehensive list, go to MoneySmart’s Glossary:

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