Financial Glossary

Active investing

Trying to beat the market by picking individual stocks or timing trades, rather than just tracking an index. Costs more in fees and time, and most active funds underperform a simple index fund over the long run.

Adjusted taxable income

Your taxable income plus things added back for certain government tests, like reportable fringe benefits, reportable super contributions and net investment losses. Used for things like the Child Care Subsidy income test.

Age Pension

A fortnightly government payment for eligible Australians over Age Pension age, means-tested against your income and assets.

Assessable assets

What Centrelink counts toward the Age Pension assets test, your super, savings, shares and investment property. Your home doesn't count.

Assets test

One of two tests (alongside the income test) Centrelink uses to work out your Age Pension entitlement, based on the value of assets you own outside your home.

Balance transfer

Moving a credit card debt to a new card, usually to take advantage of a low or 0% introductory interest rate for a set period.

Barista FIRE

A version of financial independence where your investments cover most, but not all, of your living costs, so you keep doing light part-time work rather than fully retiring.

Benefit period

How long an income protection policy will keep paying out once a claim starts, common options are 2 years, 5 years, or through to a set age like 65.

Borrowing power

The maximum a lender is willing to lend you for a home loan, based on your income, expenses, debts and the interest rate they assess you at.

Bridging loan

A short-term loan that covers the gap when you buy a new property before your existing one has sold.

Capital gain

The profit you make when you sell an asset (shares, property, crypto) for more than you paid for it, including costs.

Capital gains tax (CGT)

Tax on the profit from selling an asset, added to your other income and taxed at your marginal rate, not a separate flat rate.

Capital loss

When you sell an asset for less than its cost base. Can be used to offset capital gains in the same year or carried forward to offset future gains, but not used against ordinary income.

Cash rate

The interest rate the RBA sets for overnight loans between banks, the key input banks use when pricing variable home loan rates.

Coast FIRE

Having enough already invested that, left alone to grow, it will reach full financial independence by a normal retirement age, without adding another dollar.

Comparison rate

A rate that bundles a loan's interest rate with most of its fees into a single percentage, meant to make comparing loans easier. Doesn't capture every fee, like discharge fees.

Compound interest

Interest earned on both your original amount and the interest it's already earned, the effect that makes investments grow faster the longer they're left alone.

Concessional contributions

Before-tax super contributions, including your employer's Super Guarantee and any salary sacrifice, taxed at 15% going into your fund rather than your marginal rate.

Cost base

What you paid for an asset plus eligible costs (like brokerage or stamp duty), used to work out your capital gain or loss when you sell it.

Credit score

A number lenders use to estimate how risky you are to lend to, based on your credit history, existing debts and repayment record.

De facto relationship

A couple living together on a genuine domestic basis without being married. Under Australian law, de facto couples generally have the same property and super-splitting rights as married couples in most states.

Deeming rate

A set rate Centrelink assumes your financial assets earn, regardless of what they actually return, used to calculate the income test for the Age Pension.

Depreciation

A tax deduction for a building and its fittings wearing out over time. A non-cash deduction, no money actually leaves your pocket for it each year.

Dividend

A share of a company's profit paid out to shareholders, usually in cash, sometimes with franking credits attached.

Dividend reinvestment plan (DRP)

A facility that automatically buys you more shares with your dividend instead of paying it out as cash.

Dollar-cost averaging

Investing a fixed amount at regular intervals regardless of the price, which smooths out the effect of market ups and downs over time.

Emergency fund

Cash set aside to cover unexpected costs or a loss of income, kept accessible rather than invested.

Employee Contribution Method (ECM)

The after-tax contribution an employee makes on a novated lease, structured to bring the employer's Fringe Benefits Tax liability on the car to nil.

Fat FIRE

Reaching financial independence with a bigger investment pool than you strictly need, funding a more comfortable lifestyle than lean or standard FIRE.

FIRE

Financial Independence, Retire Early, the strategy of aggressively saving and investing to reach a point where work becomes optional.

First Home Super Saver Scheme (FHSSS)

A scheme letting first home buyers make voluntary super contributions and later withdraw them (plus deemed earnings) to help fund a home deposit.

Fixed rate

A loan interest rate locked in for a set period, your repayment stays the same even if market rates move.

Franking credit

A tax credit attached to a dividend, representing company tax already paid on that profit, which reduces or eliminates the tax you owe on it personally.

Fringe Benefits Tax (FBT)

Tax paid by an employer on non-cash benefits provided to an employee, like a car through a novated lease, at a flat 47% rate on a taxable value.

Gross income

Your income before any tax or deductions are taken out.

GST

Goods and Services Tax, a 10% tax added to most goods and services sold in Australia.

HECS-HELP

The loan scheme covering university tuition for Commonwealth-supported students. Interest-free, but indexed annually, and repaid automatically through the tax system once your income crosses a threshold.

HEM (Household Expenditure Measure)

A benchmark lenders use to estimate a household's minimum living expenses when assessing borrowing power, based on income, location and family size.

Income protection insurance

Insurance that replaces a portion of your income if you can't work due to illness or injury.

Income test

One of two tests (alongside the assets test) Centrelink uses to work out your Age Pension entitlement, based on your assessable income.

Index fund

A fund that tracks a market index (like the ASX 200) rather than trying to beat it, offering broad diversification at low cost.

Indexation

A yearly adjustment applied to a balance or threshold, usually in line with inflation or wage growth, most commonly discussed with HECS-HELP debt.

Interest-only loan

A loan where your repayments only cover the interest for a set period, the balance itself doesn't reduce, and repayments jump once that period ends.

Lean FIRE

Reaching financial independence on a lean, minimal budget, requiring a smaller investment pool than standard or fat FIRE.

LITO (Low Income Tax Offset)

A tax offset that reduces the tax payable by lower-income earners, phasing out as income rises.

LMI (Lenders Mortgage Insurance)

Insurance that protects the lender, not you, if you default and the sale of the property doesn't cover what's owed. Generally required when your deposit is under 20%.

Loan-to-value ratio (LVR)

Your loan amount as a percentage of the property's value. A higher LVR (smaller deposit) usually means a higher interest rate and can trigger LMI.

Managed fund

A pooled investment where a fund manager buys and sells assets on investors' behalf, can be actively or passively managed.

Marginal tax rate

The tax rate that applies to your next dollar of income, based on which tax bracket that dollar falls into. Australia uses a progressive system, so different slices of your income are taxed at different rates.

Medicare levy

A tax of 2% of taxable income (with a low-income phase-in) that helps fund Australia's public health system.

Medicare levy surcharge (MLS)

An extra tax, on top of the standard Medicare levy, charged to higher-income earners who don't hold private hospital cover.

Negative gearing

When the costs of holding an investment (mainly loan interest) exceed the income it earns, creating a loss that can be deducted against your other taxable income.

Net worth

What you own minus what you owe, your assets minus your liabilities.

Novated lease

A three-way agreement between an employee, employer and finance company that lets you pay for a car, including running costs, from your pre-tax (and some after-tax) salary.

Offset account

An everyday account linked to your home loan. The balance in it reduces the amount of your loan that gets charged interest, without reducing the loan balance itself.

PAYG (Pay As You Go)

The system where tax is withheld from your pay each cycle and sent to the ATO on your behalf, rather than you paying a lump sum at tax time.

Positive gearing

When an investment's income exceeds the costs of holding it, creating a taxable profit rather than a deductible loss. The opposite of negative gearing.

Principal

The original amount borrowed or invested, before interest or returns are added.

Principal and interest (P&I) loan

A loan where each repayment reduces both the interest owed and the principal balance, the standard structure for most home loans.

Product Disclosure Statement (PDS)

A legally required document that sets out a financial product's fees, features, risks and terms, worth reading before you buy insurance or an investment product.

Redraw facility

Lets you access extra repayments you've made on your home loan, on top of the minimum required. Similar effect to an offset account, but the money reduces your loan balance directly rather than sitting in a separate account.

Rentvesting

Renting where you want to live while buying an investment property somewhere more affordable, rather than buying your own home to live in.

Reportable fringe benefits

The grossed-up value of fringe benefits (like a novated lease) shown on your income statement, added back to your income for tests like HECS-HELP repayments, the Medicare levy surcharge and some family payments, even though it isn't taxed as ordinary income.

Salary packaging

Arranging with your employer to pay for certain items (like a car or extra super) from your pre-tax salary, reducing your taxable income.

Salary sacrifice

Voluntarily directing part of your before-tax salary into super, on top of your employer's compulsory contributions.

SMSF (Self-Managed Super Fund)

A super fund you run yourself rather than through a retail or industry fund, giving full control over investments but with significant compliance responsibility.

Stamp duty

A state government tax on property purchases, calculated as a percentage of the property's value, varying by state and buyer circumstances.

Statutory formula method

The flat 20% rate used to calculate the taxable value of a car fringe benefit for FBT purposes, the method almost all novated leases use.

Super Guarantee (SG)

The compulsory percentage of your ordinary earnings your employer must pay into your super fund.

Superannuation

Australia's compulsory retirement savings system, where a percentage of your income is invested on your behalf until you reach preservation age.

Taxable income

Your income after allowable deductions are subtracted, the figure your income tax is actually calculated on.

Term deposit

A fixed-term investment with a bank that pays a set interest rate, with a penalty for withdrawing early.

TPD (Total and Permanent Disability) insurance

Insurance that pays a lump sum if you become permanently unable to work due to illness or injury.

Transition to Retirement (TTR)

A strategy letting people who've reached preservation age but are still working access some of their super as an income stream, often combined with extra salary sacrifice.

Waiting period

The time you must wait after making an insurance claim before benefit payments start, common on income protection policies.