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One thing I’ve discovered in that the finance sector has it’s own terminology – so here are some of
the more common ones for personal finance and what they mean – in simple terms!
Asset
Anything you own that has a monetary value – your house (if you own/ mortgage it), car and personal belongings.
Budget
A plan on how you will spend the money you earn. It includes how much money you earn
(and where from) and how you want to spend your money, including savings.
Cash
Money not
tied up in assets. It includes the money in your wallet and the available funds in your bank account.
Cashflow
The movement of cash in and out of your possession (ie your wallet and bank accounts) from day-to-day, reflecting income
in and expenses out. A Positive Cashflow (good thing) means you are earning more money than you are spending,
a Negative Cashflow (bad thing) means you are spending more money than you are earning and is not sustainable
in the long term.
Credit Card
The means to make purchases without cash. The amount of credit
provided needs to be repaid, and attracts interest charges if not paid in full on a monthly basis.
Debit
Card The means to make purchases without cash, but requires a positive balance in your bank account to do so.
Depreciation
The apportionment of cost of an asset over an agreed period, based on the life
expectancy of the asset. For example, a $20,000 car may be depreciated over 5 years. Hence the depreciation is $4,000 per
year. This is how much money you need to set aside to replace the car after 5 years.
Dividend
Payment made per share, to a company's shareholders by a company, based on the profits of the year.
Financial Goal
Something you are saving your money for. Could be a short term goal such as a holiday (with
a 1-5 year planning horizon) or a long term goal (house) with a 5-30 year planning horizon.
Insurance
Method of protecting aspects of your finance from loss. You pay an insurance company a premium in return for their guarantee
to pay you in the even of an accidental loss.
Interest
Money the Bank pays you for your
business. The more money you put in the Bank and the longer you leave it there for, the more interest you’ll get. Interest
is also the money YOU pay the bank when you borrow money from them. The longer you owe them money and the more money you owe,
the more interest you will pay.
Investment
Something that you put your money into that
promises a return in addition to the money you put in (invested).
Liabilities
General term
for what you owe – ie debt.
Loan
Borrowed money from a bank or financial institution
to make a purchase or pay for services. The money you owe attracts interest that you must pay the bank – this is the
cost to you of borrowing the money.
Mortgage
A loan for a house. Can also include a line
of credit against the house – in other words, you can borrow up to a percentage of the value of your house.
Net Asset, Net Income
Total assets less current liabilities. Total income less tax.
Retirement
When you cease to be employed and receive a salary. You will need to survive from your own savings and investments for
the rest of your life, so you need to plan how you are going to fund your retirement form an early age.
Return on Investment
Profit made on an investment.
Tax
Portion of your
income paid to the taxation department to fund public infrastructure and services. Tax can be minimised through frugal management,
but not avoided.
Transaction
Something you do that changes the balance of your account.
This can be either a deposit (put money into your account) or withdrawal (take money out). The account balance is the amount
of money in your account after your transaction.
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