The language used in finance can seem like a barrier to those just starting to struggle with managing money. However, it should only take a little time to grasp some basic concepts. This guide will help demystify some crucial financial terms you should know.
Fundamental Financial Concepts
Let’s break down some fundamental financial concepts you should be aware of:
Asset: An item of value owned by a person or business. This could be something physical like property or stock or less tangible like trademarks or copyrights.
Liability: Any money or service a person or business owes to others. Liabilities can be due immediately, like bills, or over time, like loan payments or bonds.
Equity: This is what’s left when you subtract liabilities from assets, often called net worth.
Income: The money received by a person or business over time. This could be through work (salaries), sales, investments, etc.
Expenses: What a person or business spends money on, which can either be constant, like loan payments or change over time, like food or utilities.
Understanding Investment Terms
Now, let’s look at some key investment-related terms:
Stock: Owning a piece of a business. Buying stock means you own a share of that company.
Bond: Lending money to an entity (like a corporation or government) in exchange for periodic interest payments and the return of the bond’s value at a future date.
Mutual fund: A pooled investment managed by professionals that collects money from many investors to purchase a range of stocks, bonds, or other securities.
An exchange-traded fund (ETF): Similar to a mutual fund, it is traded on stock exchanges, much like individual stocks.
Risk: The chance that an investment may lose value. Investments with higher risk can potentially deliver better returns but also come with a greater chance of loss.
Return: The gain or loss an investment makes over time, usually shown as a percentage.
Additional Financial Concepts to Know
Here are some other financial concepts that are good to know:
Inflation: The rate at which the cost of goods and services increases. This can reduce the buying power of money over time.
Interest: What you pay to borrow money or what you earn when you lend money or deposit it in a savings account, usually represented as a percentage.
Credit: The ability to borrow money, promising to pay it back later with interest. Your credit score helps lenders make a decision on how much credit you’re eligible for.
Debt: Money owed by one party to another. Debt can be a positive tool, like a mortgage for a home, or problematic, like high-interest credit card debt.
Budget: A plan that compares and manages income against expenses. A budget helps monitor your spending habits and ensures you live within your financial means.
Familiarizing yourself with these financial terms can dramatically increase your confidence and competence in managing your personal finances and investments. Knowledge in this area empowers you to make decisions that can positively affect your financial future.
Further Learning Resources
To delve deeper into financial language, consider these resources:
- The Financial Industry Regulatory Authority (FINRA) provides a dictionary of financial terms.
- The Securities and Exchange Commission (SEC) provides an investor education portal with various learning tools, including a financial terms glossary.
- Many banks and financial services companies also provide helpful online resources and term glossaries.
Many people have learned about the power of using the Safe Money approach to reduce volatility. Our Safe Money Guide is in its 20th edition and is available for free.
It is an Instant Download. Here is a link to download our guide: