In the world of managing money, whether it’s for personal use or business, it’s quite important to understand key financial terms. These terms can help you make better decisions about your finances, investments, and more.
Understanding Money Basics
Money Terms:
Money Borrowed – When you get money from someone and have to pay it back.
Owe Money – Being in debt or having to repay borrowed funds.
Net Income
- The money you have left after paying expenses and taxes.
- Example: If you earn £3,000 a month and your expenses, including rent, bills, and groceries, amount to £2,000, your net income is £1,000.
Income Tax – The federal income tax is based on the earnings of individuals and businesses.
Credit Limit
- The maximum amount you can borrow on a credit account.
- Example: Your credit card company may set a credit limit of £5,000, that means you can spend up to that amount on credit before reaching your limit.
Interest Rate – The extra money you pay when borrowing or earn when investing.
Liquidity – How quickly your assets can be converted into cash.
Financial Institutions:
Financial Institution – Places like banks or credit unions where you can do financial activities.
Bank or Credit Union – Where you can save money, get loans, and handle your finances.
Credit History – A record of how you’ve borrowed and repaid money.
Central Bank
- A key institution that manages a country’s money supply, interest rates, and banking system to keep the economy stable.
- Example: The central bank in the UK is the Bank of England. It adjusts interest rates to help control inflation and encourage borrowing and spending in the economy.
Insurance Company
- A business that offers protection against financial losses due to unexpected events in exchange for regular payments.
- Example: When you buy car insurance from a company, you’re ensuring that if your car gets damaged in an accident, the insurance company will help cover the repair costs.
Investing and Managing Finances
Investment Terms:
Capital Gain
- The profit you make when selling something for more than you paid.
- Example: You buy a stock for £50 and sell it later for £70, so you make a capital gain of £20 per share.
Mutual Fund – A way to invest with others in different assets.
Compound Interest – Earning interest on both your money and the interest it earns.
Inflation – Occurs when the prices of goods and services increase over time.
Capital Market
- A financial market where people buy and sell long-term investments like stocks and bonds.
- Example: When you invest in a company’s stock through a brokerage account, you’re participating in the capital market by owning a piece of that company.
Financial Statements:
Financial Statement – Papers showing how well or poorly a business is doing financially.
Net Profit – The money a business makes after paying all expenses and taxes.
Balance Sheet – A balance sheet is an important financial statement that includes an organization’s assets, liabilities, and shareholders’ equity.
Cash Flow – A cash flow statement shows how a business generated and spent its cash during a given period of time.
Banking and Credit Basics
Banking Terms:
Bank Account – A place where you keep your money in a bank.
Savings Account
- An account for saving money and earning interest.
- Example: You deposit £500 into a savings account that offers a 2% interest rate. After a year, you would have earned £10 in interest.
Credit Account – An agreement to borrow money up to a certain limit.
Credit and Loans:
Loan Payments – Regular payments to repay a loan.
Interest Payments – Money paid for borrowing funds.
Loan Interest Rate
- The cost of borrowing money.
- Example: If you borrow £1,000 with a 5% interest rate, you would pay £50 in interest over a year.
Credit Rating
- A grade assigned to an individual or a company based on their creditworthiness. It shows their ability to repay debts and the risk of default.
- Example: Imagine you want to apply for a loan at a bank. The bank will check your credit rating to determine how likely you are to repay the loan. If you have a high credit rating – a history of timely repayments, the bank may offer you a loan at a lower interest rate. On the other hand, a low credit rating suggests a higher risk of default; the bank may deny the loan or offer it at a higher interest rate to offset the risk.
Managing Debts and Finances
Debt and Financial Health:
Debt Obligation
- The legal responsibility to pay back borrowed money.
- Example: If you take out a student loan, you have a debt obligation to repay the borrowed amount, typically with interest, as per the terms of the loan agreement.
Outstanding Debt – Money you still owe and haven’t paid back.
Equity – The equity represents the amount of money that belongs to the owners of a business after all assets and liabilities have been accounted for.
Personal Finance:
Personal Expenses
- Money spent on your daily needs.
- Example: Your personal expenses may include rent, utilities, groceries, transportation costs, entertainment, and other day-to-day expenditures.
Financial Health – How well you’re doing financially.
Investments and Financial Instruments
Financial Assets:
Financial Assets
- Things that have value, whether physical or not.
- Example: Financial assets can include stocks, bonds, mutual funds, retirement accounts, savings accounts, and real estate properties.
Asset Allocation
- Spreading your money across different types of investments.
- Example: If you want to use a balanced asset allocation strategy, you can invest 60% of your portfolio in stocks and 40% in bonds to manage risk and potential returns.
Securities and Investments:
Sell Securities – Getting cash by selling investments.
Hedge Funds
- Investment funds that use various strategies to make money.
- Example: Hedge funds are investment funds that might use strategies like short selling, derivatives, and leverage to aim for high returns, often with higher risk.