I suspect that one of the reasons why women shy away from money and finance is that it’s full of jargon. But jargon is really just a way that people talk to each other in shortcuts.
Consider how many expressions are obvious to a fierce girl who hangs out on Instagram, but impenetrable to others. Thirsty. Slay. Bae. Lit. Squadgoals. Go read these words to your dad and he won’t know what they (really) mean.
But I bet he can sure AF tell you what compound interest is. And that is why you are poor and he is rich. (Well, richer than you. Probably).
So, anyway, my point is, you too can crack the finance jargon code, with a little coaching. Here are some words that I wish someone had explained to me earlier in life.
Compound interest. This is when you earn interest on top of interest – or as I like to say, free money on top of free money. If I start with $100 and get 10% interest (haha not in this economy, but the maths is easier this way), then I have $110. But the next time I get interest, it’s 10% of a greater amount ($110). So now I have $121. So I got $11 of free money, instead of $10.
Over time, the free money builds on top of more free money. This is where time is really on your side, and why you should start saving as early as possible. Check it out with this easy, free calculator.
Capital growth. This is when the value of something you own increases over time, without you having to do much at all. We see it most often when you buy a house for say, $500K, then in ten years, it’s worth $750K. And all you have done is sit back and live in it. Maybe install some new blinds, or whatever.
If you lived in it, that house didn’t give you any income. It just increased in value, so all it gave you was capital growth. If you bought it and rented it out, you would also get rental income, which boosts the return on your investment.
When you buy shares, you expect them to increase in value too. If you’d bought Commonwealth Bank shares ten years ago, they were about $45 a pop; now they are worth $75. And this isn’t the only money you made on them – you also got income (aka dividends). Read on for that one.
Income / Returns / Dividends / Yield – These are all similar words to describe the money you get from an investment beyond its capital growth. If it’s money in the bank, you get interest. If it’s shares, you get dividends (hopefully – they aren’t obliged to pay them). If it’s a property, you get rental payments. If it’s bonds, you get coupon payments. The list goes on.
The basic thing about income is that it’s a thank you.
- ‘Thanks for depositing your money with us so that we can lend it to other people’.
- ‘Thanks for buying our shares, here’s some money we made this year, since you’re an owner of the company’.
- ‘Thanks for letting us live in your sweet crib, here’s some money for it’.
Total Return – I know, you guessed it, that’s when you add capital growth and income together. Any successful investment will have either capital growth, or income, or both. And it will have a level of risk – the less risk, the less money you make (in general). And within that basic equation is a myriad of investment options.
Below are some examples of how this works, but bear in mind they are illustrative only. Like choosing the perfect pair of shoes, it all depends on the quality of your research, knowledge, experience – and luck.
- Money in the bank – No capital growth, some income, low risk: The dollar you put in today is still one dollar in five years. The bank has paid you interest, but unless you added more, the underlying amount is the same. But you know you will get that dollar back.
- Investment property – Good capital growth, some income, lowish risk – a well-chosen place will increase in value, your tenants will pay rent, and if you end up needing to get out, you can probably sell it and make your money back (big ‘if’ there – depends on timing, location etc).
- Shares – Good capital growth, maybe good income, higher risk – Now there are hundreds of shares on the Australian Stock Exchange, and like men, there are fucking losers and total keepers. Also like men, it’s really hard to tell which one’s which at times. Some are bets on the future (I can change him!) and some are boring and reliable – they never lose you money but they never really grow either.
Diversification – We all do this, every day, in our most beloved investment portfolio: our wardrobes. Just like you wouldn’t have a whole cupboard full of work clothes then have nothing comfy to wear, you ideally shouldn’t put all of your money into one type of investment.
Overall, you want some exposure to different investments, because as we saw above, they all behave differently at different times. Shares go up and down more than property, but you can sell them at any time if you need the cash. An investment property is much less ‘liquid’ (i.e. harder to turn into cash) but it doesn’t have the crazy ups and downs of the sharemarket. So you balance it out with a bit of each one.
Asset allocation – Sounds fancy right? It just means how much money you put into each type of investment. Sometimes you go ‘overweight’ in one type of investment (for me, that’s activewear) or underweight (ballet flats – God they’re dull).
Your super fund has probably allocated about 70% of your money to ‘growth’ assets like shares and property, and 30% to ‘defensive’ assets like bonds and cash. Ultimately, it all balances out depending on what’s going on in the markets and the economy.
Have more questions? Google it! Haha. You can also ask me. I’ll either know or ask someone who does (because I hang out with some of this country’s nerdiest/richest financey people). And I can assure you that if I told any of them I had #squadgoals, they would have no fucking idea.