10 Common Financial Terms You Need to Know

10 Common Financial Terms You Need to Know

The first step to better financial health is understanding these terms.

So you’ve decided to take control of your finances, but you’re also confused by all the finance jargon? Fret not! Here are 10 basic terms you should understand before managing your finances.

Here are 10 Basic Terms You Should Understand Before Managing Your Finances.

1. Income

Simply put, income is any amount of money that you receive. This typically comes from your monthly salary at your job.

There are two types of income: active and recurring income. Active income is the money received when you complete a task, such as working at a job and receiving a salary every month. Meanwhile, recurring income is the money you receive from a source that you are not actively contributing to. This could be rental fees you charge for a house you are renting out, or from investments that bring money to you even though you are not actively earning it.

2. Expenditure

When there is money coming in, there is also money going out. That is what we call “expenditure”— any amount of money that you spend.

There are two types of expenditure as well: fixed and variable. Fixed expenditure refers to regular spending that does not change in the long-term. This includes mortgage, rent payments or utility bills that you must pay every month. 

On the other hand, variable expenditure refers to expenses that you can control. You can decide how much you want to spend, or even if you want to spend it at all. This may be one-off purchases such as a massage chair, or expenses such as dining out, watching a movie, or general shopping.

3. Cash Flow

Now that we know about income and expenditure, we can put them together to form your cash flow. A cash flow is essentially the amount of money coming in and going out of your wallet or your bank account. 

If you have a positive (+) cash flow, that means your income is more than your expenditure for that period of time. Similarly if you have a negative (-) cash flow, it means you are spending more than you are earning. 

4. Assets

Anything you own that has financial value is considered an asset. This includes your house, your car, plots of land, any gold or jewellery. Any money you have in your bank account is also considered your asset. 

5. Liabilities

Liabilities refer to debts that you have to pay off. You could owe the money to a bank or even a friend who has lent you a sum of money. Some forms of debts can come in the form of credit card bills, money you borrow from the bank, and taxes you have to pay. 

6. Net Worth

When we talk about someone’s net worth, we are basically asking how much wealth they have. Ever wondered how much you are worth financially? Just add up the value of all your assets, and minus all your liabilities. That’s your net worth.

7. Loans

A loan is a sum of money that you borrow from banks or financial institutions. You can take up a loan for any reason, as long as the bank deems that you are capable of paying it back. Some reasons that people take up loans include to pay for school fees, to buy their house or pay for renovations, or to get enough money to start a business.

8. Interest

Every loan has an interest rate, which is the cost of borrowing that sum of money. When you take up a loan, you will have to pay back the amount borrowed plus the interest accumulated. 
However interest rates are not just for loans. You can earn interest from banks and financial institutions as well. There are some savings accounts that pay you interest when you put money in. The interest amount also increases the longer you put your money in. 

It’s also very important to know that there are two types of interest rates: simple and compound. Before you venture into anything that involves interest rates, you should be aware of the differences between these two types of interests.

9. Investment

When you invest, you are putting your money in an asset or item to let it increase value over time. These investments can potentially grow to give you more income at the end. Some examples include investing in real estate, stocks, or bonds. 

10. Portfolio

After learning all these common financial terms, you now have a financial portfolio. Your portfolio shows how much financial assets you have, including your investments, cash, and all alternative assets.

Now that you are equipped with these 10 common financial terms, you are ready to start saving, investing, protecting your finances, and growing your wealth!