I founded BetterSaver to make it easy for Kiwis to access clear and simple information when it comes to their finances, particularly KiwiSaver. One thing I have noticed is how financial jargon puts people off - when financial institutions use needlessly bloated language and make simple concepts more confusing than they actually are.
Here is my handy go-to guide to clarify some of the terms we find people are commonly confused by.
KiwiSaver jargon made simple
KiwiSaver is nothing to be afraid of. With a few clear definitions, you’ll sound like a pro.
KiwiSaver
A voluntary savings scheme that invests your money into various assets (e.g. cash, shares) to incentivise Kiwis to save for their first home or retirement. Any NZ citizen or permanent resident can join.
KiwiSaver fees
What your provider charges you for managing your KiwiSaver fund. Low fees don’t necessarily mean a better fund. Also some KiwiSaver providers talk a lot of BS when it comes to fees, so it pays to pay attention (or trust BetterSaver to research it for you).
KiwiSaver provider
The institutions that manage KiwiSaver funds are called KiwiSaver providers. Each provider manages funds of varying risk levels. You choose your provider and fund.
Managed fund
An investment fund where money from several people is pooled together and managed by a professional fund manager. Pooling money creates a larger fund with more buying power. It also diversifies risk across a range of assets.
Returns
The money you make (or lose) on an investment over time. KiwiSaver providers often advertise a “rate of return” but you have to be cautious of how it is reported.
Use it in a sentence (or two) for practice: KiwiSaver is a managed fund that is invested on your behalf. KiwiSaver fees vary between KiwiSaver providers.
Now for KiwiSaver fund types:
Aggressive fund
The KiwiSaver fund type that carries the highest investment risk, mainly invested in shares and property.
Growth Fund
A medium-to-high-risk KiwiSaver fund, invested in a mix of shares, property, bonds, and cash.
Balanced fund
A medium-risk KiwiSaver fund type, split between growth assets (like shares and property) and lower-risk investments (such as cash and bonds).
Conservative fund
A KiwiSaver fund type with lower risk than a Balanced fund (meaning less of the fund is invested in shares and property, and relatively more is invested in lower-risk assets).
Defensive fund
The lowest risk KiwiSaver fund type, mostly invested in cash and bonds.
Default fund
When you join KiwiSaver, the fund you are automatically placed in is called a default fund. The idea is that you start saving and earning right away while you figure out which fund type is actually best for your preferences and situation. Currently, default funds are balanced funds.
Still scratching your head? No worries - BetterSaver easily guides you to the best fund type for you with our five-minute Fund Finder quiz.
Investment jargon made easy
Now that we have covered the basic terminology around KiwiSaver, let’s branch out into the general world of investing.
Some types of investments:
Bonds
Fixed-interest debt investments that can be bought or sold. Basically a company borrows money from investors by issuing bonds that will be repaid over a certain amount of time.
Shares
Units of ownership in a company or asset.
Index Fund
A managed fund that tracks a market index like NZX or S&P 500. They try to match the market (rather than beat it) and can only be traded at the end of the day.
ETF (Exchange Traded Fund)
A form of index fund that can be traded throughout the day - so it is more liquid than other index funds.
Other investment jargon:
Capital
The money you initially put into an investment.
Capital Gain
The profit from the sale of an investment or property.
Compound Interest
The interest earned on an investment is reinvested and earns more interest - so your money makes more money for you. This also works against you if you have credit card debt with high interest rates - your interest compounds making it harder to pay your debt off in full.
Diversifying
Putting your money into different types of investment to reduce risk. AKA, the opposite of putting all your eggs in one basket. If one type of investment fails or underperforms, not all of your money invested is affected.
Dividend
Payments made to shareholders from profits.
Let’s break for a couple more practice sentences:
You are paid dividends on your shares, and can make a capital gain by selling your shares at a higher price than you paid for them.
Thanks to compound interest, your KiwiSaver returns can grow exponentially over your working years - the earlier you start saving, the better off you will be.
Interest
Money paid by a borrower for the privilege of borrowing money, usually a percentage of the loan. If you keep money in a savings account, you are paid interest by the bank.
Fixed-Interest
A specified rate of interest that does not change. It can apply to a specific time period or for the life of the loan or investment.
Investment risk
The likelihood or possibility of losing money.
Liquidity
How easily your assets can be converted into cash.
Market
Financial markets are places where investors buy and sell assets. Prices are set in the market by supply and demand but can be disrupted by a number of factors.
Market volatility
How much the market fluctuates. Affected by things like war, natural disasters, trade regulations, and a lot of other things outside of anyone’s control. In a highly volatile market, there is a more rapid fluctuation in price. (Read more at KiwiSaver and market volatility: what you need to know)
Your comfortable level of risk correlates with how much volatility you can tolerate - the BetterSaver team takes this all into account when we recommend a KiwiSaver fund for you.
Financial Acronyms
Here are a few shortcut terms that are casually thrown around like everyone is supposed to know what they mean.
FMA
Financial Markets Authority. They regulate all financial markets in NZ.
FSC
Financial Services Council. They are a non-profit organisation representing life insurance and investment companies in NZ, with a vision to grow the financial well-being of Kiwis.
IRD
Inland Revenue Department. They collect tax, disburse payments for social support programs, and advise the government on tax policy.
NZ Super
Refers to NZ Superannuation. This is the government pension paid to New Zealanders aged 65 and over. It is paid out regardless of financial status or how much you have in other funds for retirement (like what is in your KiwiSaver).
Clearing the confusion
BetterSaver was started with the goal of making financial information accessible to all Kiwis. I hope this article has cleared up some of the financial jargon for you. Our team is here to answer your questions - email us any time.