Explain It To Me FAST!

15 Feb, 2026

If you’ve ever listened to a money podcast, read a personal finance blog (mine included) or chatted with that one friend who’s suddenly “really into investing”, you’ve probably heard a whole bunch of money words thrown around. 

People nod. No one wants to look dumb. And quietly, many think:
I should probably understand what that means…

So this post is for you.

Below are plain-English explanations of the money words that come up again and again, using New Zealand examples and my common sense logic. When I first started learning about money, a lot of it seemed like made-up guff to make the person sound convincing. But I’ve since learned that many terms are needed. 

Before you read on:

There are 27 commonly used terms below, but this is nowhere near an exhaustive list.

What did I miss? Are there any financial terms that you hear and don’t understand? Let me know in the comments below, and I’ll do my best to explain it to you. 

Or, my suggestion is that any time you think, “Hmmm, what on earth is that speaker or writer talking about?” head to Google or AI and don’t stop asking questions until you understand.

Happy Saving
Ruth

Click on a link below to jump to that term, or scroll through the list.

1. Pay Yourself First 2. Lifestyle Creep 3. Sinking Funds 4. Opportunity Cost 4a. The Opportunity Cost of Property 5. Debt Snowball vs Debt Avalanche 6. Liquidity 7. Portfolio 8. All Your Eggs in One Basket 9. Diversification 10. Volatility 11. Index Funds and Exchange Traded Funds (ETFs) 12. Dividends or Distributions 13. Market Index 14. Home Country Bias 15. Active vs Passive Investing 16. Dollar Cost Averaging 17. Lump Sum Investing 18. Time in the Market vs Timing the Market 19. Compounding 20. Fees and Fee Drag 21. Hedged vs Unhedged 22. House Rich, Cash Poor 23. Equity 24. The 4% Rule has been upgraded 25. Accumulation and Decumulation 26. Sequence of Returns Risk 27. FIRE, Coast FI, Lean FI, Fat FI

1. Pay Yourself First

This simply means investing before you spend money on anything else. Instead of hoping there’s something left over at the end of the month to invest, you flip the order. Invest first.

In practice, this typically takes the form of an automatic transfer to KiwiSaver or investments on payday. Or, for me, on the 20th of every month, without fail, I invest. Then we live on what’s left. Paying yourself first doesn’t include moving money to savings - because that is likely money that you will still spend, just a little later on.

Why does it matter? Because willpower is unreliable. Automating your investing works. In my experience, this one habit alone is often the difference between people who earn good money but never get ahead, and people whose net worth quietly grows year after year.

2. Lifestyle Creep

Lifestyle creep is when your spending quietly increases as your income increases. It’s sneaky.

You earn more, so the car gets upgraded. Groceries get fancier. Subscriptions multiply. Holidays get bigger. And somehow, there’s still no money left.

The problem isn’t earning. It’s that your lifestyle expands to absorb every extra dollar.

Lifestyle creep is about spending automatically instead of intentionally. Left unchecked, it can keep you stuck no matter how much you earn. To stop this from happening, when you know you have a payrise coming, you decide where to allocate that new income before it arrives.

3. Sinking Funds

My favourite thing. A sinking fund is a separate pot of money you regularly add to for expenses you know are coming. It grows over time and is constantly replenished.

Car repairs. Annual insurance. Christmas. School costs. Holidays. Pets. These aren’t emergencies. They’re predictable expenses heading your way.

Sinking funds turn big, stressful bills into small, manageable weekly or monthly amounts. When the bill arrives, the funds are already available. No panic. No credit cards. No extending the mortgage. No scrambling. This is grown-up money behaviour, and it massively reduces stress. 

To set one up, calculate the total expenditure for the prior year for a particular thing (e.g. your dog), divide it by 52 weeks, and that is the amount you move into its own bank account. e.g. $1,800/52 weeks = $35 per week. It’s not perfect, but a solid plan nonetheless.

4. Opportunity Cost

Opportunity cost is the value of the next best alternative you forgo when you choose one option over another.

I can use each dollar only once. Spend it here, and I can’t spend it there.

Put extra money into a nicer car (that drops in value), and the opportunity cost might be not investing that money (in an asset that grows in value). Smash the mortgage, and the opportunity cost might be delaying adding to investments that produce income later.

There’s no right or wrong choice. The problem is making decisions without realising there is a trade-off. Become aware of all of the outcomes of your financial decisions. For example, I choose to buy second-hand clothing when possible because it's less expensive, allowing me to “pay myself first” and invest more. Future me can then buy as many clothes as I want, new or used.

4a. The Opportunity Cost of Property 

In New Zealand, this is most evident in housing ownership.

We pour everything into deposits, bigger houses, and renovations, often without thinking about what that money could have been doing elsewhere.

Property can be a great choice. But it’s not a free one.

When most of your wealth is tied up in a house, it’s hard to access, it doesn’t pay an income, and it can limit flexibility. The key is awareness. Property gives you some things, but it also quietly prevents others.

5. Debt Snowball vs Debt Avalanche

These are two ways to pay off debt. I’m a massive cheerleader for becoming 100% debt free.

The debt snowball method involves paying off the smallest debt first while making minimum payments on the rest of your debts. Quick wins. Motivation. Momentum. You then pay off the second smallest debt, and so on.

The debt avalanche method targets the highest-interest debt first, regardless of balance: potentially better math, but slower emotional payoff and harder to maintain momentum.

In my experience, the “best” method is the one you’ll actually stick to till the very end. Still, I lean heavily towards using the debt snowball because you are most likely to pay debts off fast, and feel motivated (psychologically rewarded) to attack your bigger debts next. Getting out of debt is often more about behaviour than numbers.

6. Liquidity

Liquidity is how quickly you can turn something into cash.

Cash in the bank is highly liquid (immediate access). Shares and ETFs are fairly liquid (2-5 days to access). Property is very illiquid (months, sometimes years to access).

Liquidity matters because life doesn’t wait. People you owe money to generally don’t want to wait either. People often look wealthy on paper but feel stressed because their money is tied up in places they can’t easily access.

Having some accessible (liquid) cash gives you flexibility and helps you avoid turning to debt to pay your bills.

7. Portfolio

A portfolio is just a collection of financial assets (or debts).

If you collect salt-and-pepper shakers, that’s a collection. If you collect investments, that’s a portfolio.

My portfolio is straightforward. KiwiSaver and an ETF. But inside those sit thousands of global companies.

Portfolios sound fancy, but don’t need to be complicated to be effective.

8. All Your Eggs in One Basket

This phrase is really about risk.

A local example: Santana Minerals. A proposed gold mine. Plenty of excitement and hype. No digging yet, so no gold either.

If someone has put a big chunk of their money into only that company, they’ve made a very concentrated bet. One company. One sector. One country. All eggs in one basket.

The same applies to owning a single rental property. One house. One street. One town.

Suppose it goes well, awesome! If it doesn’t, you feel it fully. Be like the Easter Bunny and scatter your eggs around in a massive global ETF (which will no doubt include some gold investments).

9. Diversification

Diversification means spreading your money around so one bad outcome doesn’t derail everything. All your eggs are not in one basket. 

Instead of needing Santana Minerals to succeed and grow wealth, when you diversify, you own a slice of thousands of companies worldwide. While some might go bankrupt, others will become globally dominant. The wins outweigh the losses. 

Diversification means you don’t need to be right about any one company, sector, or country. In my experience, diversification is what lets people sleep at night.

10. Volatility

Volatility is simply the normal up and down movement of the share market. Prices don’t move in a straight line. They wobble, dip, spike, and sometimes fall sharply before recovering again. The share market is a rollercoaster. As an ETF investor who buys one Total World Fund, volatility is easier to cope with because you are not relying on the success of one company. You own thousands of businesses across different sectors and countries, so bad news in one area doesn’t sink the whole ship. 

If there were no ups and downs, there would be no higher long-term returns. In my experience, volatility only becomes a problem when people panic, sell, or stop investing. When you understand that volatility is expected, not a failure, it’s much easier to stay invested, keep dollar cost averaging (see below), and let time in the market do its job.

11. Index Funds and Exchange Traded Funds (ETFs)

Index funds simply follow a market index. They don’t try to beat it. An index fund gives you the average return of all the companies in that index, and don’t let anyone tell you that average isn’t good enough. Over the long term, the average performs very well, thank you very much!

ETFs are just a way of buying those funds on the share market. Think ‘traded on the stock exchange’. Think of the ETF as the wrapper, and the index fund as what’s inside. What matters most isn’t the name. It’s what the fund invests in and how much it costs in fees. 

An ETF or an Index Fund can be very narrow, like a healthcare sector fund, or extremely broad, such as a global fund that invests across many countries and industries.

12. Dividends or Distributions

In New Zealand, many of us have heard stories about people “living off their dividends”, but that’s essentially not today’s reality. Dividends are payments some companies make to shareholders from profits. In diversified ETFs, dividends are often very low, typically around 1-2%. You would need many millions invested for dividends alone to provide enough income to live off.

During the accumulation stage, I reinvest all dividends.

Although a ‘nice to have’, I don’t invest just for dividends. I invest for capital gains. In New Zealand, capital gains on long-term share investments are tax-free, which makes growth incredibly powerful. I want my investments to grow in value over time, and when I need income later, I can sell a small portion. In my experience, focusing on total return matters far more than chasing dividends.

Fun fact: You pay income tax on dividends, but because dividend yields are low, the tax you pay is usually low, too.

13. Market Index

A simple example of a market index is the S&P 500 (Standard and Poor’s 500). It tracks the 500 largest publicly listed companies in the United States, like Apple, Microsoft, Amazon, and Coca-Cola. When people say “the US market went up today”, they’re often referring to how this index performed. If you invest in an index fund or ETF that follows the S&P 500, you’re not picking individual companies. You’re buying a tiny slice of all 500 at once and going along for the ride as a group.

14. Home Country Bias

Home bias is the tendency to invest disproportionately in one's home country because it feels familiar and safe. In New Zealand, our share market is very small. That means if you invest mostly in NZ shares, you’re missing out on vast parts of the global economy like big tech, healthcare, manufacturing, and consumer brands. 

Many New Zealanders already have significant exposure to NZ through their jobs, homes, and the local economy, so adding NZ shares on top increases risk rather than reducing it. In my experience, global ETFs help counter home bias by spreading your money across thousands of companies worldwide, rather than tying your future to a single market or country.

15. Active vs Passive Investing

Active investing tries to beat the market index. For example, if the S&P 500 is the average of those 500 companies, an active investment manager tries to do better than that. Most share investors and fund managers perform worse than the average over time. Passive investing accepts that markets are hard to beat consistently, so they don’t even try to.

Active investing usually entails higher fees and greater complexity because it employs people and technology to try to outperform the market average. Passive investing offers low fees and simplicity because fewer people are paid to predict market movements.

While active investment products and companies may outperform the market average in the short term, they do a poor job of it over time. Most investors have time; they invest for decades, which is why I lean passive. A passive investment strategy works quietly in the background while I get on with my life.

16. Dollar Cost Averaging

This is investing a set amount regularly, regardless of what the share market is doing. Whether it's up or down, you buy, which means that one month you might buy fewer shares than the next month, despite investing the same dollar amount. It averages out over time.

Most people invest this way simply because they receive a regular pay cheque and have a fixed amount of money to invest each time.

It smooths the ride, removes pressure, and fits real life. It works not because it’s clever, but because it’s realistic.

17. Lump Sum Investing

This is investing a large amount all at once, often from an inheritance, bonus, or house sale.

The upside is getting money into the share market sooner. The downside is emotional. If markets fall, it feels uncomfortable. If markets rise, you feel like an investing genius.

There’s no perfect timing. But a lot of luck. Many people use a mix of lump-sum investing and regular investing to stay calm and consistent, but from what I understand, the math leans toward investing a lump sum if you have it.

18. Time in the Market vs Timing the Market

Trying to time the market means guessing when to enter and when to exit. You want to buy when the share market is low, and sell when it is high. Good luck with that!

Time in the market means investing and staying invested. The longer your shares are invested, the higher the probability that they will rise, pay dividends, and have capital gains over time.

In reality, very few people time it well. Many miss the ‘best’ days entirely. Only with hindsight do we realise that those were the best days!

The people who do best tend to be consistent, patient investors who keep their money invested over the long term. The personal finance community are extremely good at understanding this simple concept.

19. Compounding

Compounding occurs when your money earns returns, and those returns start earning returns as well. At the beginning, most of your progress comes from your own contributions, which is why it can feel slow and underwhelming. But over time, the growth starts doing more of the work than you do. 

For example, if you invest $10,000 and it grows at an average of 7% a year, after the first year, you’ve earned $700. In the second year, you’re not just earning 7% on your original $10,000, you’re earning it on $10,700. Fast forward 10 years, and that original $10,000 becomes about $19,700 without you adding another cent. If you add more to it every week or month, you speed it up even more. 

The longer you leave it invested, the more dramatic the effect becomes, because growth stacks on top of growth. In my experience, this is why time matters more than talent. Compounding doesn’t reward clever moves (e.g., market timing) or constant tinkering. It rewards starting, staying invested, and having the patience to let time do the heavy lifting.

20. Fees and Fee Drag

Fees are what you pay to invest. The lower the fee, the better. Because fee drag is the long-term damage those fees do to your wealth.

Imagine someone starts a KiwiSaver account with $0 and contributes $200 per month ($2,400 per year) for 30 years. Over that period, they personally contributed $72,000. Assume the investments earn an average of 7% a year before fees.

• With a low-fee fund charging 0.30%, the net return might be roughly 6.7%. After 30 years, the balance could grow to around $225,000.

• With a 1.0% fee, the net return drops to about 6.0%. After 30 years, the balance might be closer to $195,000.

• With a 1.2% fee, the net return declines to approximately 5.8%. After 30 years, the balance could be closer to $185,000.

Compared with the low-fee option, that 1.2% fund could leave you roughly $40,000 poorer, just from fees! Same contributions. Same markets. Same behaviour. The only difference is the fee. Many providers in New Zealand charge these shockingly high fees. Does paying a higher fee mean you get a higher return? No. 

Fees compound quietly in the background, compounding in the wrong direction, making your fund manager wealthy, not you. They’re one of the few things you can control.

People should look for fees below 0.50%.

21. Hedged vs Unhedged

This is about currency.

Hedged investments smooth out NZ dollar movements. Unhedged ones don’t.

This is about how overseas investments interact with the NZ dollar. Hedged investments reduce the impact of currency movements, so returns mostly reflect how the companies perform. Unhedged investments don’t smooth this out, meaning changes in the NZ dollar can boost or reduce returns in the short term. Over the long term, currency movements tend to even out, particularly if you are dollar-cost averaging into the share market, as most KiwiSaver and ETF investors do. 

In my experience, hedging is about short-term comfort. Unhedged suits long-term thinkers who can ride the ups and downs.

22. House Rich, Cash Poor

Being house-rich, cash-poor means having most of your wealth tied up in your home, with very little cash or income-producing investments. You feel wealthy on paper, but money is tight. It’s common in New Zealand because we’ve been taught that owning a house is the ultimate goal, so people often prioritise property over everything else. In particular, we don’t invest enough for retirement.

The problem usually shows up later in life, especially in retirement. A house can be worth a lot on paper, but it doesn’t pay the power bill, buy groceries, or fund day-to-day living unless you sell it, downsize, or borrow against it. Many retirees are asset-rich but still feel financially tight month to month. 

Absolute financial security comes from balance. A home provides stability, but having money and investments outside of property gives flexibility, income, and options when life changes.

23. Equity

Equity is what you truly own.

If your house is worth $800,000 and you owe $500,000, your equity is $300,000.

Equity gives options, but it’s often locked away in housing, which is why I’m an advocate of investing in an ETF or index fund, because you can build an asset that has usable equity.

24. The 4% Rule has been upgraded

A simple rule of thumb for thinking about how much you can safely withdraw (sell) from your investments each year. If you have a well-diversified investment portfolio (such as a Total World ETF), you could sell 4% of the balance each year to live on and continue doing so for up to 30 years. 

For example, if you had $1 million invested, selling 4% of the portfolio would yield about $40,000 a year in income. There is no additional tax to pay on this. It is a helpful guide because it turns a large, intimidating lump sum into income and provides a rough target to aim for when planning for retirement.

The good news is that this ‘rule’ has been upgraded to closer to 5%. Meaning that a ‘safe withdrawal rate’ of 5% will allow you a higher annual income, while still lasting for decades.  

25. Accumulation and Decumulation

Accumulation is the building phase. You’re earning, investing, and growing.

Decumulation is when you start using that money to live.

Both matter. Many people plan the first and forget the second, making it hard to flip the switch from saving to spending. The trick I have learned is to enjoy your money during the accumulation phase while still ‘paying yourself first’ as you grow your investments.

26. Sequence of Returns Risk

When you’re retired and taking money out of your investments, the timing of market ups and downs really matters. If markets fall in the early years of your retirement and you’re still withdrawing money to live on, you can permanently damage your nest egg because you’re forced to sell investments when prices are low. Even if markets recover later, you may not have enough left invested to fully benefit from that recovery. The 4% (5%) rule accounts for this sequence-of-returns risk. 

This is why having some cash set aside, being flexible with spending, and not relying on selling investments each month are so important in retirement. It gives your investments time to recover and helps your money last longer.

27. FIRE, Coast FI, Lean FI, Fat FI

We used to mostly talk about just one thing: FIRE, which stands for Financial Independence, Retire Early. At its core, FIRE is about having enough savings and investments that work becomes optional. Over time, people realised there isn’t just one way to reach that point, and different versions of FIRE emerged to reflect different lifestyles, personalities, and spending levels.

Coast FI is often the first major milestone. I’m currently Coast FI. It means you’ve already invested enough that, if you stopped adding money today, your investments should still grow on their own and fund your retirement by 65. From that point on, you don’t need to keep investing for retirement. You just need to earn enough to cover your day-to-day living costs. People might reduce hours, change careers, or do work they enjoy more, knowing their future is already largely secured.

Lean FI is financial independence achieved through lower spending. It usually means living simply, keeping costs tight, and being very intentional about how you spend. There’s less margin for error and fewer luxuries, but a lot of freedom. Lean FI suits people who are genuinely happy with a modest lifestyle, not people who feel like they’re constantly depriving themselves.

Fat FI is financial independence with more comfort and flexibility. It usually includes travel, eating out, hobbies, and a bigger buffer for surprises. Because spending is higher, Fat FI requires more invested money and often takes longer to reach. 

In reality, most people don’t fit neatly into one category. They land somewhere in between. The key idea across all of them is the same: build enough financial security to have choices. Money supports you, rather than controls you.