Basic Financial Terms for Beginners

Knowing the basics of financial terms is key to make good decisions whether you’re managing your personal budget, investing or running a business. This financial terms for beginners guide will help you take control of your money and make informed financial decisions.

Let’s get started with the most important financial terms you should know.

Income

Income is the money an individual or business receives in exchange for your time, skills or investments. There are three types of income:

Earned Income: Money earned from working including salaries, wages and tips.

Passive Income: Money from investments and other sources where there’s minimal active involvement, such as rental properties or dividends from investments.

Portfolio Income: This type of income comes from your investments in stocks, bonds, mutual funds and other financial instruments.

Expenses

Expenses are the outgoing money that individuals or businesses spend to run and grow. Understanding expenses is key to budgeting and making financial decisions. Examples of expenses:

Fixed Expenses: Regular, ongoing costs such as rent, mortgages and insurance premiums.

Variable Expenses: Costs that vary from month to month, such as utility bills, groceries and entertainment.

Keeping track of expenses allows for better budgeting, helps you identify where to cut costs and makes sure you use your resources wisely.

Assets

Assets are resources with economic value that an individual, corporation or country owns with the expectation they will provide future benefits. They are categorized into:

Current Assets: Cash or other assets that can be converted to cash within a year, such as inventory and accounts receivable.

Fixed Assets: Long-term assets such as buildings, machinery and land.

Intangible Assets: Non-physical assets like patents, trademarks and goodwill.

Liabilities

Liabilities are financial obligations a company or individual owes to others.

Current Liabilities: Debts or obligations due within a year, such as accounts payable and short term loans.

Long term Liabilities: Obligations due more than a year, like mortgages and bonds payable.

By keeping liabilities under control individuals and businesses can navigate financial challenges and build a secure future.

Net Worth

Net worth is the difference between an individual’s or company’s total assets and total liabilities. It’s a key indicator of financial health. It’s the difference between what you own and what you owe.

Net Worth = Total Assets (cash, investments, property, etc.)−Total Liabilities (loans, debts, etc.)

A positive net worth means your assets are greater than your liabilities, which means you’re financially wealthy. A negative net worth means you owe more than you own, you need to pay attention.

Equity

Equity is the value in an asset or business after you subtract all the liabilities. In the business world, shareholders equity is the owners claim on the company’s assets after all debts are paid.

Building equity is key to achieving long term goals, so you can use your assets to invest further, borrow or retire in comfort. Knowing equity lets you make informed decisions, optimise your portfolio and build wealth for life.

Revenue

Revenue is the total amount of money from the sale of goods or services from the company’s main operations. Revenue is the fuel for the entire business, allowing companies to cover costs, invest in new opportunities and expand their market footprint.

By maximising revenue through marketing, product innovation and operational efficiency, companies can achieve long term success, competitive advantage and financial stability.

Profit

Profit, also known as net income, is the amount of money left after all expenses, taxes and costs are subtracted from revenue. There are different types of profit:

Gross Profit: Revenue minus cost of goods sold (COGS).

Operating Profit: Gross profit minus operating expenses.

Net Profit: Total revenue minus all expenses, taxes and costs.

Budget

A budget is a financial plan that estimates income and expenses over a certain period. Budgets are important for managing finances and not to spend more than you earn. They can be for personal finances, business operations or government expenditures.

Interest

Interest is the cost of borrowing money, expressed as a percentage of the principal. There are two types of interest:

Simple Interest: Calculated only on the principal.

Compound Interest: Calculated on the principal and also on the accumulated interest of previous periods.

Investment

An investment is an asset or item bought to generate income or appreciation. There are many types of investments:

Stocks: Shares of a company.

Bonds: Loans to a company or government that pays back a fixed interest over time.

Mutual Funds: Pools of money collected from many investors to invest in securities like stocks, bonds and other assets.

Real Estate: Land or buildings.

Saving

Saving is the intentional and disciplined act of putting money or resources aside for later use rather than spending them now. Saving means sacrificing short term pleasure for long term goals that’s for emergencies, investments, education or retirement. Saving can be in cash, bank accounts or investment instruments.

Credit Score

A credit score is a number that represents how creditworthy you are based on your credit history. It ranges from 300 to 850, the higher the better. Factors that affect credit scores are payment history, amounts owed, length of credit history, new credit, and types of credit used.

Debt

Debt is money borrowed by one from another. Many companies and individuals use it to buy big things they can’t afford normally. Debt can be categorized as:

Secured Debt: Backed by collateral, such as a mortgage.

Unsecured Debt: Not backed by collateral, such as credit card debt.

Diversification

Diversification is a risk management strategy that involves spreading investments across different financial instruments, industries and other categories to reduce exposure to one single asset or risk.

Bottom Line

When you learn these basic financial terms, you’ll be able to make better financial decisions, set realistic goals and manage your money. Further, you’ll be more confident when talking about money.