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Financial Literacy Glossary H-O

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 terms 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.

P.S. If you have a financial term you would like to be explained, send us an email by visiting our contact page with your question 🙂

Home-Equity Loan

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.

Please note, in practice, it might not be that simple. Home loan terms usually state that a portion of the home may not be utilized to borrow against. This part of the value of the home acts like a deposit (or also referred to as a down payment). It stops the home loan value from exceeding the total value of the home when there is a decrease in the home’s value due to market conditions.

Identity Theft

A form of fraud that entails the illegal usage of an unsuspecting victim’s personal details. People who commit identity theft usually try to steal money and/or keep information for ransom.

Don’t ever give your banking and/or personal details to people you don’t know. Scammers usually pose as employees of your bank or other similar institutions to try and harvest (gain) your personal information.

Income

Sales or proceeds made in the order of business. A person’s income usually comes in the form of a salary or wage. Business income can also be called revenue.

Income increases the amount of cash in your business. People and businesses pay tax on their income.

Inflation

The constant rise in the general price of goods in a specific area. It’s usually measured in a yearly percentage. An annual inflation rate of 3% means things got more expensive during the last year by 3%.

Insolvent

Someone or a business becomes insolvent when their required debt repayments become more than their income (their ability to repay it).

Let’s say a business makes R10,000 profit per month and it has zero cash reserves to help settle expenses. Let’s also pretend it must pay its creditors from the profit it generates. This business is technically insolvent if it is required to make R15,000 worth of payments towards settling the debt. It can’t repay the outstanding R5,000 of its monthly debt unless it takes out a loan.

Johannesburg Stock Exchange (JSE)

A financial market that facilitates the sales of stocks, securities and bonds. The biggest one of its kind in Africa.

The JSE was established on 8 November 1887. It trades over 300 listings based in various industries. Open an account with a registered broker and start selling and buying stocks on the JSE. You can also trade currencies on the JSE. Dr Leila Fourie is the Chief Executive Officer (CEO). 

Liquidation

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.

A business that goes bankrupt can have a liquidation sale. It happens in many formats. From discounted sales to live auctions. The business effectively tries to get as much cash as possible by selling all assets. The revenue generated in liquidation sales help to repay their creditors. Liquidation sales generally don’t raise enough money to settle the outstanding debts. The remaining debt is canceled by courts as part of the liquidation process.

Liquidity

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.

Liquidity can be measured in a way to reflect the time it takes for the unit to convert to a different form. Cash can be traded for goods immediately. But it takes a bit more time to sell a car for cash (a few days, even more).

Minimum Wage

The lowest rate of pay allowed by South African labour laws. The current minimum wage is R20 per hour. An employment contract must state the rate of pay owed to an employee for hours worked. The rate may not be less than R20 per hour. Someone who works 10 hours per week for R20 per hour, earns R200 per week. 

Mutual Fund

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.

Perhaps you want to invest in property, but don’t have enough money to buy one. You can still invest money in a mutual fund that is only exposed to property-based investments. You and hundreds of other people invest your money into this fund. The money is then invested collectively in properties owned by the fund.

Net Asset Value (NAV)

The NAV of an entity is determined by the total value of its assets minus the total value of its liabilities (debts and creditors). A positive NAV is good. A negative NAV is bad.

A business with R100,000 in assets and R40,000 of debt has a NAV of R60,000.

Net Income

This is the income that remains after all deductions, expenses, and taxes.

Overdraft

A credit facility added to your current (day-to-day) bank account. An overdraft facility has a maximum limit. You can only use so much of it. An overdraft only kicks in once you spend more money than which are available in your account. 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. Overdrafts usually charge a monthly administration fee.

Let’s say Mpho has an overdraft facility with an APR of 17% and a maximum limit of R10,000. She currently has R2,000 in her account and spends R3,000. She used R1,000 of her overdraft in the process. The R1,000 will accumulate interest at 17% per year. She either needs to repay it or else the overdraft will accrue interest and increase in value. Any money paid into her account will automatically settle the balance.

Read more Glossary terms here:

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