Summary of financial terms.
For more information on some of the common financial terms we use, take a look at our summary below.
|Borrowing||When you don't have enough money for something, you could consider borrowing money or 'taking out a loan'. Once you have a loan, you’ll need to make repayments to pay back the amount you borrowed to the lender. Most loans have interest and fees added on, so you usually end up repaying more than the amount you initially borrowed.|
A budget is a plan of what money you expect to get and how you expect to spend it.
Usually, your budget will be made up of three parts:
It's a good idea to aim for a surplus so that you can have some money to save for your goals or pay off debt faster. If you have a deficit, or very little surplus, consider how you might be able to lower your spending costs e.g. cancelling subscriptions.
Credit is a type of borrowing and gives you the ability to obtain goods or services before making payment. Some examples of circumstances where you can make these types of arrangements are with a store, with a service provider, or with your credit card provider. The lender who gives you the credit will typically charge you interest on the money that is lent. You may also be charged fees as well as interest.
When you buy something using a credit card the bank pays for you, and then you repay the bank, ideally when your bill/statement arrives.
Foreign exchange is the system for exchanging one country’s currency for another. For example: exchanging your New Zealand Dollars to Australian Dollars.
The value of each currency is usually different and may change or fluctuate frequently.
To see an example of how currency is exchanged you can watch the news where they often show the current foreign exchange rates, or you can look on our website.
|Home loans and mortgages||
A home loan is an arrangement where you borrow money from a lender to buy a property and pay the money back over a number of years in regular amounts.
Generally this agreement is made between a bank (the lender) and a person (the borrower).
What the lender gains from this arrangement:
When the borrower has fully repaid the loan and any other terms and conditions are met then the lender may "discharge" the mortgage. This means that the lender will no longer have the right to claim against the property.
An income is money that you receive on a regular basis.
There are different ways you can earn an income, and we’ve highlighted some of these below:
Insurance is a type of protection that you can take out to cover yourself or your belongings in the event something unexpected happens (such as a car accident or being too sick to go to work).
There are four main types:
When you take out an insurance policy you pay a small amount on a regular basis known as your premium. In the event of something happening, you might be able to make a claim with your insurance company. They will assess your claim and decide if they will pay you. If accepted, payments can be made to you by lump sum payment or regular small payments depending on the type of claim and policy.
If you’ve borrowed money, part of the lending agreement is that you’ll need to pay interest to the lender. This is interest paid by you.
If you have money that you’re not using, you can earn interest by lending it to someone or to your bank. The most common way of doing this is to lend your money to a bank by putting it in a savings account. This is interest paid to you.
Interest amounts are generally determined by working out a percentage of the amount borrowed by you or lent by you. The amount you pay will be worked out on a per annum basis, which will then be divided up to work out how much you owe for a certain period.
Money is something we use most often as a way of exchanging goods and services. Without money people may barter, which involves physically exchanging something they have for something they don’t have.
Having a common form of exchange (e.g. money) allows people to trade goods or services they have to buy goods or services they want.
Money is also something we use to store our wealth, and to describe the value of a good or service, something we own (an asset), or something we owe (a liability).
|Needs vs wants||
A need is something that you cannot do without. These are things we need to survive, like food and water.
A want is something that you would like to have but could do without.
Understanding the difference between needs and wants is essential for good money management. There is always something we want but we must first take care of our needs. For example, you need clothes, but you may not need designer clothes.
Methods of payment can be broken down into two categories; those which use money you already have (debit), and those that use money that you will borrow and pay back (credit).
Those that involve using money you already have are:
Those that involve using money you don't already have:
This is what happens when you put money aside to use later. By saving regularly you’ll be able to build up enough money to buy larger items that you couldn’t afford before, or to pay for unexpected expenses.
You can save in different ways. Although ‘money boxes’ have been around for a long time, the most common way to save is by putting your money into a savings account at a bank. Banks offer you interest on your savings which will help them to increase faster. After time you’ll also earn interest on your interest, which is called compound interest.
Savings can be aligned to goals.
Example of savings goals:
Tax is a compulsory fee that we all pay to the government, and is collected by the Inland Revenue Department. Everyone who earns an income within New Zealand must pay their share of tax.
The government uses tax revenue to pay for public services such as healthcare, education and environmental protection. Tax comes in different forms, some of which are highlighted below.