Rands and Sense with Hymne Landman

DON’T LET FINANCIAL JARGON HOLD YOU BACK

South Africans need to do more than simply save their money; they need to know how to make it grow by investing it. When it comes to investments, all the options available together with all the financial jargon can make decision-making quite overwhelming. Luckily, knowing just the fundamentals can take you a long way.

This is the first stepping stone to financial freedom. The first thing you should do when you start saving is to get to know the terminology and jargon that is commonly used in this space.

Everything about investing looks intimidating when you don’t know what people are talking about. By understanding at least the basics of financial language, you will empower yourself to make better decisions when you are presented with options.

It is surprisingly easy. And as soon as you know the most important terms and know what they mean for your hard-earned finances, you will start to know what questions you should be asking your financial adviser and which opportunities to look for. You’ll know which investment vehicles may be the best fit for you, and get a better idea of what you can do with your savings.

These are the top five most important and basic financial terms that everyone should familiarise themselves with:

1. Investment return.

This is how much you earn from an investment over and above the amount you have invested. It is usually expressed as a percentage of the investment amount per year. For example, if you invested R1 000 in an investment that gives you a 10% return per year, you will have R1 100 at the end of the year.

2. Investment risk.

That 10% return does not necessarily come without taking a risk of some sort. Investment risk refers to the uncertainty linked to your investment – will it grow at all? What is the likelihood of achieving that return? Some risks are bigger and more uncertain than others, so make sure you know the odds before you invest. And always keep in mind that investment is a long-term commitment and that your money should work for you over a longterm time horizon.

3. Assets.

An asset is something that has economic value – in other words, it can be sold or traded. Assets are things like houses, cars and investments. Some assets (like investments) are better than others (like cars) since investments gain value over time, whereas cars depreciate (lose value) over time.

4. Investment products.

These are products that are available for you to save and invest, such as your bank savings account, your pension fund or a flexible investment account (there are many out there). Investment products are usually defined by regulation, as they are taxed in different ways and have different rules around the flexibility you have with the investment. A financial adviser can help you identify the investment product that would best suit your specific needs and investment goals.

5. Diversification.

Imagine you had a basket of eggs and the basket falls and all the eggs break. You are now left with no eggs. Diversification is putting your eggs (money) in different baskets (investments). It is an approach to manage the risk of your investments. This may mean investing your money in different assets and asset classes, such as shares, bonds and property.

Hymne Landman

Hymne Landman is Head of Momentum Wealth at Momentum Investments.