Educational content only. Not financial advice. This glossary provides general educational information about financial literacy. It does not provide financial, investment, tax, or legal advice and should not be relied upon for making financial decisions. Please consult a licensed financial adviser for guidance specific to your situation. Read full disclaimer.
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Amortisation refers to the gradual repayment of a debt over a set period through regular scheduled payments. Each payment typically covers both interest charges and a portion of the original loan principal. In the early stages of an amortising loan, a larger proportion of each payment goes toward interest. As the outstanding balance decreases over time, a greater share of each payment is applied to reducing the principal. This is why the total interest paid over the life of a loan can be significantly more than many borrowers initially expect.
Example
If someone has a $300,000 home loan over 30 years, their monthly repayments stay the same amount throughout the loan term. However, in month one, most of that payment covers interest. By year 25, the majority of each payment reduces the principal balance.
An asset is anything of economic value that an individual, company, or entity owns or controls with the expectation that it will provide future benefit. In personal finance, assets are commonly grouped into categories. Liquid assets include cash and savings accounts that can be accessed quickly. Fixed assets include property and vehicles. Financial assets include shares, bonds, and managed fund units. Understanding the distinction between different types of assets is fundamental to grasping concepts like net worth, diversification, and balance sheets. An individual's net worth is calculated by subtracting total liabilities from total assets.
Example
A person who owns a home valued at $600,000, has $15,000 in savings, and holds $25,000 in superannuation has total assets of $640,000. If they owe $400,000 on a mortgage, their net worth would be $240,000.
Asset allocation is an academic concept that describes how an investment portfolio is divided among different asset categories, such as equities (shares), fixed income (bonds), property, and cash. The idea behind asset allocation is that different asset classes behave differently under various economic conditions. By spreading holdings across multiple categories, the overall risk profile of a portfolio may differ from holding a single asset class alone. The appropriate allocation for any individual depends on factors such as time horizon, financial goals, and personal tolerance for risk, and is best determined with the help of a qualified financial adviser.
A budget is a financial plan that outlines expected income and planned expenditure over a specific period, most commonly a week, fortnight, or month. Budgeting enables individuals and households to track where their money goes, identify areas where spending might be reduced, and allocate funds toward specific goals like building an emergency fund or paying down debt. Effective budgeting does not necessarily mean spending less on everything; rather, it means making deliberate choices about how money is used, based on priorities and financial circumstances. Several frameworks exist for structuring a budget, including the 50/30/20 method and zero-based budgeting, both of which are explored in our budgeting guide.
A bond is a type of fixed-income security where the bondholder lends money to an issuer (typically a government or corporation) for a defined period at a fixed or variable interest rate. The issuer agrees to pay interest, known as the coupon, at regular intervals and return the face value of the bond at maturity. Bonds are generally considered to carry less volatility than equities, though they are not risk-free. Factors that affect a bond's value include changes in interest rates, the creditworthiness of the issuer, and the time remaining until maturity. In Australia, the Australian Government issues Commonwealth Government Securities (CGS) as a form of government bond.
These are terms used to describe the general direction of a financial market over a sustained period. A bear market refers to a period where market prices fall by 20% or more from recent highs, typically accompanied by negative investor sentiment and declining economic indicators. A bull market describes a sustained period of rising prices, generally with an increase of 20% or more from a recent low. These terms originate from the way each animal attacks: a bull thrusts its horns upward, while a bear swipes its paws downward. Market cycles are a natural part of how financial markets have historically behaved, and understanding these terms helps readers interpret financial news and economic commentary.
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. This differs from simple interest, which is calculated only on the original principal. The compounding effect means that money can grow at an accelerating rate over time, because each period's interest adds to the base on which future interest is calculated. The frequency of compounding (daily, monthly, quarterly, or annually) also affects the outcome. More frequent compounding periods result in slightly more total interest earned or owed. This concept is equally important for understanding savings growth and debt accumulation.
Example
Suppose $10,000 is placed in an account earning 5% per annum, compounded annually. After year one, the balance is $10,500. After year two, interest is calculated on $10,500, yielding $10,500 x 1.05 = $11,025. After 20 years, the balance would grow to approximately $26,533 without any additional contributions. Under simple interest at the same rate, the balance would only reach $20,000.
A capital gain occurs when an asset is sold or disposed of for more than its original purchase price (known as the cost base). In Australia, capital gains are included in a taxpayer's assessable income and taxed at their marginal tax rate. Capital Gains Tax (CGT) is not a separate tax but rather part of the income tax system. Individuals who hold an asset for more than 12 months before selling may be eligible for a CGT discount, which historically has been 50% for individual taxpayers. This means only half the capital gain is included in their assessable income. The rules around CGT are detailed and depend on the type of asset, the taxpayer's circumstances, and the dates involved. It is important to seek professional tax advice for individual situations.
The Consumer Price Index is a statistical measure that tracks changes in the price level of a weighted basket of consumer goods and services purchased by Australian households. Published quarterly by the Australian Bureau of Statistics (ABS), the CPI is the most widely used indicator of inflation in Australia. The basket includes categories such as food, housing, transportation, health, education, and recreation. When the CPI rises, it indicates that, on average, the cost of living has increased. The Reserve Bank of Australia monitors CPI closely when making monetary policy decisions, including setting the official cash rate.
Example
If the CPI was 100 at the start of a year and rose to 103.5 by year's end, the annual inflation rate would be 3.5%. This means a basket of goods that cost $100 at the beginning of the year would cost approximately $103.50 at the end.
A credit score is a numerical representation of an individual's creditworthiness, calculated by credit reporting agencies based on a person's credit history. In Australia, the three main credit reporting bodies are Equifax, Experian, and illion. Each uses a slightly different scoring model, but factors that generally influence credit scores include repayment history, the number of credit applications made, the types and amounts of credit currently held, and any defaults or court judgements. Credit scores are used by lenders as one factor in assessing loan and credit applications. Australians have the right to request a free copy of their credit report from each reporting body once every 12 months under the Privacy Act 1988.
Diversification is a risk management concept that involves spreading financial exposure across different asset types, industries, geographic regions, or other categories. The principle is based on the observation that different assets often respond differently to the same economic event. If one investment declines in value, others in the portfolio may remain stable or increase, potentially reducing the overall impact on the portfolio. Diversification does not eliminate risk entirely, and it does not guarantee returns. However, it is one of the most widely studied concepts in portfolio theory, originating from the work of economist Harry Markowitz in the 1950s. The appropriate level and type of diversification for any individual depends on their unique financial situation.
A dividend is a distribution of a portion of a company's earnings to its shareholders, typically paid in cash on a per-share basis. In Australia, dividends may come with franking credits (also known as imputation credits), which represent tax already paid by the company on the profits being distributed. Shareholders can use these franking credits to offset their personal income tax liability. Not all companies pay dividends; some choose to reinvest all profits back into the business. Whether a company pays dividends, and how much, depends on its profitability, cash flow, growth plans, and board decisions. Dividend payments are not guaranteed and can be increased, reduced, or suspended at any time.
The debt-to-income ratio is a measure that compares an individual's total monthly debt payments to their gross monthly income, expressed as a percentage. It is commonly used by lenders to assess a borrower's capacity to manage repayments. A lower DTI generally suggests that a person has a manageable level of debt relative to their income, while a higher DTI may indicate that a significant portion of income is committed to debt servicing. While there is no single threshold that defines a "good" or "bad" ratio, understanding your own DTI can help you evaluate your current financial obligations in the context of your earnings.
Example
If a person earns $6,000 per month before tax and their total monthly debt repayments (mortgage, car loan, credit card minimum) total $2,400, their DTI is 40% ($2,400 / $6,000 = 0.40).
An emergency fund is a dedicated pool of savings set aside to cover unexpected expenses or income disruptions, such as medical costs, car repairs, or a period of unemployment. Financial education resources commonly suggest that an emergency fund should cover between three and six months of essential living expenses, though the appropriate amount varies depending on individual circumstances such as job stability, number of dependents, and existing obligations. The purpose of an emergency fund is to provide a financial buffer that reduces the need to rely on credit or debt during unforeseen events. Emergency funds are typically kept in accessible, liquid accounts so they can be used quickly when needed.
Equity has multiple meanings depending on context. In property, equity refers to the difference between the current market value of a home and the outstanding balance on any loan secured against it. For example, if a home is worth $700,000 and $400,000 is still owed on the mortgage, the homeowner has $300,000 in equity. In the investment context, equity (or equities) refers to shares or ownership stakes in companies. Owning equity in a company means holding partial ownership, which may entitle the holder to a share of profits through dividends and potential capital appreciation. The value of equity holdings fluctuates based on market conditions and company performance.
Franking credits are a feature of Australia's dividend imputation system, introduced in 1987. When an Australian company pays corporate tax on its profits and then distributes those profits as dividends to shareholders, the franking credits represent the tax already paid at the company level. Shareholders include both the dividend and the franking credit in their assessable income, then use the franking credit to offset their personal tax liability. This system is designed to reduce the double taxation of company profits. A fully franked dividend means the company has paid the full corporate tax rate on the underlying profit. A partially franked or unfranked dividend means less or no tax was paid at the company level.
A fixed interest rate remains unchanged for a specified period, regardless of movements in the broader interest rate environment. This provides certainty about repayment amounts during the fixed period. A variable interest rate can change over time, typically in response to changes in the Reserve Bank of Australia's official cash rate or other market factors. Variable rates may go up or down, meaning repayment amounts can fluctuate. Some borrowers opt for a split arrangement where part of their loan is at a fixed rate and part is at a variable rate. Understanding the trade-offs between certainty and flexibility is an important part of financial literacy when it comes to debt.
Gross income is the total income earned before any deductions, taxes, or withholdings are applied. For an employee, gross income is the salary or wage amount stated in their employment contract before tax, superannuation contributions, and other payroll deductions. For a business or self-employed individual, gross income typically refers to total revenue minus the cost of goods sold, before operating expenses and taxes. Understanding the difference between gross and net income is fundamental to budgeting accurately, as the amount available for spending and saving is always less than the gross figure.
The Goods and Services Tax (GST) is a broad-based consumption tax of 10% applied to most goods, services, and other items sold or consumed in Australia. It was introduced on 1 July 2000 and is administered by the Australian Taxation Office (ATO). Certain items are GST-free, including most basic food items, some health services, and some educational courses. Businesses registered for GST include the tax in the price of their goods and services and remit it to the ATO, while claiming credits for GST paid on their own business purchases. For consumers, GST is typically built into the retail price displayed, meaning the price on the shelf already includes the 10% tax.
HECS-HELP is an Australian Government loan scheme that helps eligible students pay their tuition fees for higher education courses at approved institutions. The loan covers the student contribution amount and does not need to be repaid until the borrower's income exceeds a certain threshold, which is adjusted annually by the government. Repayments are made through the tax system as a percentage of income. The outstanding balance is indexed annually to account for changes in the cost of living, using a measure linked to the Consumer Price Index. HECS-HELP debt does not attract interest in the traditional sense, but the indexation means the balance can increase over time in nominal terms. Understanding how HECS-HELP works is relevant for many Australians planning their budgets after university.
Inflation is the rate at which the general level of prices for goods and services rises over time, resulting in a decrease in the purchasing power of money. When inflation is positive, each unit of currency buys fewer goods and services than it did previously. In Australia, inflation is primarily measured through the Consumer Price Index (CPI), published quarterly by the Australian Bureau of Statistics. The Reserve Bank of Australia (RBA) targets an inflation rate of 2% to 3% over time as part of its monetary policy mandate. Understanding inflation helps explain why saving alone may not preserve purchasing power over long periods and why the real return on savings or investments differs from the nominal return.
Example
If a loaf of bread costs $4.00 today and inflation averages 3% per year, that same loaf would cost approximately $5.38 in ten years. If your savings earned only 1% per year over that period, you would effectively be losing purchasing power.
An interest rate is the percentage charged on borrowed money or earned on deposited funds over a given period, typically expressed as an annual percentage. For borrowers, the interest rate represents the cost of using someone else's money. For savers and depositors, it represents the return earned on funds held in an account. Interest rates in Australia are influenced by the Reserve Bank of Australia's official cash rate, which serves as the benchmark for the entire economy. When the RBA raises the cash rate, borrowing costs generally increase and deposit rates may also rise. When it lowers the cash rate, the opposite tends to occur. Interest rates can be nominal (the stated rate) or real (adjusted for inflation).
A market index is a statistical measure that tracks the performance of a group of assets representing a particular market or segment. In Australia, the S&P/ASX 200 is the most widely referenced share market index, representing the 200 largest companies listed on the Australian Securities Exchange by market capitalisation. An index fund is a type of managed fund or exchange-traded fund that aims to replicate the performance of a specific index by holding the same or similar assets in the same proportions. Index funds are studied in financial education because they illustrate concepts like passive investing, diversification, and the debate between active and passive management approaches. This glossary entry is educational and does not constitute a recommendation of any index fund or product.
A liability is a financial obligation or debt that an individual or entity owes to another party. Common personal liabilities include home loans (mortgages), car loans, credit card balances, personal loans, and HECS-HELP debt. Liabilities are categorised as either current (due within 12 months) or non-current (due after 12 months). Understanding your total liabilities is essential for calculating net worth and assessing your overall financial position. Reducing liabilities over time through consistent repayments is a key component of responsible debt management. The balance between assets and liabilities gives a clearer picture of financial health than looking at either figure in isolation.
Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its value. Cash is the most liquid asset. A savings account is highly liquid because funds can typically be withdrawn at short notice. Property, on the other hand, is considered illiquid because selling a house usually takes weeks or months and involves substantial transaction costs. Understanding liquidity is important for financial planning because it affects how accessible funds are in times of need. Maintaining some portion of savings in liquid form is generally discussed in the context of emergency fund planning and short-term financial resilience.
The marginal tax rate is the rate of income tax applied to the last dollar of taxable income earned within a specific tax bracket. Australia uses a progressive tax system, which means that as taxable income increases, higher portions of income are taxed at higher rates. However, a common misconception is that moving into a higher tax bracket means all income is taxed at the higher rate. In reality, only the income that falls within each bracket is taxed at that bracket's rate. Understanding marginal tax rates helps clarify the actual tax impact of earning additional income, which is relevant for employment decisions, salary negotiations, and general budgeting awareness. Tax rates and brackets are set by the Australian Government and are subject to change through legislation.
Example
If the tax-free threshold is $18,200 and the next bracket taxes income at 19% up to $45,000, a person earning $50,000 does not pay 19% on all $50,000. They pay 0% on the first $18,200, 19% on the amount between $18,201 and $45,000, and a higher rate on the remaining $5,000.
A mortgage is a loan used to purchase property, where the property itself serves as security (collateral) for the loan. If the borrower fails to meet the repayment obligations, the lender has the legal right to take possession of the property through a process called foreclosure or mortgagee sale. Mortgages in Australia typically have terms of 25 to 30 years and can feature fixed, variable, or split interest rates. The total amount repaid over the life of a mortgage depends on the loan amount, the interest rate, the loan term, and the repayment frequency. Even small differences in interest rates can result in substantial differences in total interest paid over the loan's duration.
Net income, often called take-home pay, is the amount of money remaining after all deductions have been subtracted from gross income. For Australian employees, common deductions include income tax withheld under the Pay As You Go (PAYG) system, compulsory superannuation contributions (paid by the employer but related to the gross salary package), and any salary sacrifice arrangements. Some employees may also have union fees, health insurance, or other voluntary deductions taken from their pay. Net income is the most relevant figure for budgeting purposes because it represents the actual amount deposited into a person's bank account and available for spending, saving, and debt repayment.
Net worth is calculated by subtracting total liabilities from total assets. It provides a snapshot of an individual's or household's overall financial position at a specific point in time. A positive net worth means assets exceed liabilities, while a negative net worth means debts are greater than the combined value of what is owned. Tracking net worth over time can be a useful way to measure financial progress, as it accounts for both asset accumulation and debt reduction. It is worth noting that net worth fluctuates as property values change, superannuation balances shift, and debts are paid down or accumulated.
Example
A person with a home worth $550,000, super worth $80,000, savings of $20,000, and a car worth $15,000 has total assets of $665,000. If their mortgage is $380,000 and they owe $5,000 on a credit card, total liabilities are $385,000. Their net worth is $280,000.
In the context of a loan, the principal is the original amount of money borrowed, excluding any interest or fees. As repayments are made over the life of a loan, a portion of each payment goes toward reducing the principal, while the remainder covers interest charges. The outstanding principal balance decreases over time as payments are made, which in turn reduces the amount of interest charged in subsequent periods (since interest is typically calculated on the remaining balance). In the context of savings and investments, the principal refers to the initial amount deposited or invested, before any returns or interest are earned.
Purchasing power refers to the quantity of goods and services that a unit of currency can buy. As prices rise through inflation, purchasing power decreases, meaning the same amount of money buys less than it did before. Conversely, in a deflationary environment (which is relatively rare), purchasing power increases. Understanding purchasing power is central to evaluating the real value of savings over time. If a savings account earns 2% per year but inflation is 3%, the saver's purchasing power is actually declining by approximately 1% per year in real terms, even though the nominal balance is growing.
Risk tolerance describes the degree of variability in investment returns that an individual is willing and able to withstand. It is influenced by a combination of factors including age, income stability, financial goals, time horizon, and personal temperament. Someone with a high risk tolerance may be more comfortable with investments that fluctuate significantly in value, while someone with a low risk tolerance may prefer more stable, predictable returns even if they are lower. Understanding your own risk tolerance is considered an important step before making any investment decisions, and it is one of the key areas that licensed financial advisers assess when providing personalised guidance.
The nominal return is the percentage gain or loss on an investment before adjusting for inflation. The real return is the nominal return minus the inflation rate, representing the actual increase in purchasing power. This distinction is critical for evaluating the true performance of savings and investments over time. A savings account earning 4% nominal interest in an environment with 3% inflation delivers a real return of approximately 1%. This concept helps explain why simply looking at the stated interest rate on a savings account or the percentage return on an investment can be misleading without also considering the current rate of inflation.
Example
If an investment grows by 7% in a year (nominal return) and inflation for that year was 2.5%, the real return is approximately 4.5%. The investor's purchasing power increased by 4.5%, not 7%.
Superannuation is Australia's compulsory retirement savings system. Employers are legally required to contribute a minimum percentage of an eligible employee's ordinary time earnings into a complying superannuation fund. This percentage, known as the Superannuation Guarantee (SG) rate, is set by the Australian Government and is periodically increased through legislation. The funds are generally preserved until the individual reaches their preservation age and meets a condition of release, such as retirement. Superannuation funds invest the contributions across various asset classes on behalf of members. The returns earned within super are taxed at concessional rates compared to investments held outside of super. Understanding the basics of how superannuation works is relevant for all working Australians, though individual superannuation decisions should be discussed with a qualified financial adviser.
Simple interest is calculated only on the original principal amount, without including any previously accumulated interest. The formula is straightforward: Interest = Principal x Rate x Time. Unlike compound interest, simple interest does not accelerate over time because the base on which interest is calculated remains constant throughout the period. While simple interest is less common in modern banking and lending products (most use some form of compounding), understanding it provides a useful baseline for comparing how compounding affects growth. The contrast between simple and compound interest is one of the most fundamental concepts in financial mathematics.
Example
$5,000 at 4% simple interest per year for 5 years: Interest = $5,000 x 0.04 x 5 = $1,000. Total after 5 years = $6,000. Under compound interest at the same rate, the total would be $6,083.26.
Shares represent units of ownership in a company. When someone buys shares in a publicly listed company, they become a part-owner (shareholder) of that company. Shareholders may benefit from capital appreciation (if the share price rises above the purchase price) and from dividends (if the company distributes profits). However, share prices can also fall, and dividends are not guaranteed. The value of shares is influenced by many factors including company performance, industry conditions, economic trends, investor sentiment, and global events. In Australia, shares are traded on the Australian Securities Exchange (ASX). Investing in shares carries risk, including the possibility of losing some or all of the invested capital. This definition is educational and does not constitute a recommendation to purchase any shares.
A tax deduction is an expense that can be subtracted from a taxpayer's assessable income, thereby reducing the amount of income on which tax is calculated. In Australia, individuals can claim deductions for expenses directly related to earning their income, such as work-related travel, uniforms, tools, and self-education expenses that are sufficiently connected to their current employment. The deduction reduces taxable income, not the tax itself. The actual tax saving from a deduction depends on the taxpayer's marginal tax rate. For example, a $1,000 deduction for someone in the 32.5% tax bracket would reduce their tax by $325. The Australian Taxation Office (ATO) provides detailed guidance on what can and cannot be claimed, and it is advisable to consult a registered tax agent for personalised tax matters.
A Tax File Number is a unique identifier issued by the Australian Taxation Office to individuals and organisations. It is used to manage tax and other government obligations. Providing a TFN to employers, banks, and superannuation funds is not legally mandatory, but failing to do so can result in higher rates of tax being withheld from wages, interest, and dividends. The TFN is confidential and should be protected carefully. Identity theft involving TFNs is a real concern, and Australians should only provide their TFN when required by law or when there is a legitimate need, such as starting a new job, opening a bank account, or lodging a tax return.
A time horizon is the expected length of time between the present and when a financial goal needs to be achieved. In investment education, time horizon is considered one of the most important factors influencing how a portfolio might be constructed. A longer time horizon (such as 20 to 30 years for retirement savings) may allow an individual to ride out short-term market fluctuations, while a shorter time horizon (such as saving for a home deposit within 3 years) typically calls for more conservative approaches. Time horizon is closely related to concepts of risk tolerance and asset allocation, and it is a key consideration that licensed financial advisers discuss with their clients.
Volatility is a statistical measure of the dispersion of returns for a given security or market index over a specific period. In simpler terms, it describes how much and how quickly the price of an asset moves up and down. High volatility means the price changes rapidly and by large amounts, while low volatility indicates more gradual and predictable movements. Volatility is often used as a proxy for risk in financial theory, though the two concepts are not identical. An asset can be volatile without necessarily being a poor long-term holding, and a low-volatility asset is not guaranteed to produce positive returns. Understanding volatility helps readers interpret market behaviour and financial news with greater context.
Yield refers to the income generated by an investment, expressed as a percentage of the investment's current value or cost. For shares, yield commonly refers to the dividend yield, which is calculated by dividing the annual dividend per share by the current share price. For bonds, yield can refer to the coupon yield (the annual interest payment divided by the face value) or the yield to maturity (the total anticipated return if the bond is held until it matures). For property, yield is often the rental income as a percentage of the property's value. Yield is one component of total return, which also includes any capital gain or loss. Comparing yields across different asset types requires careful consideration of the risks and characteristics unique to each.
Example
If a share is priced at $50 and pays an annual dividend of $2.50, the dividend yield is 5% ($2.50 / $50 = 0.05). If the share price rises to $60 while the dividend remains $2.50, the yield drops to approximately 4.2%.
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