Understanding Basic Finance: Personal Financial Terms
A basic understanding of Finance is very much essential in everyone’s life. Finance does not always mean to save money or invest it, but a basic understanding helps to lead a financially secure life. Finance is nothing but a way to manage funds. So, if you love to administer things at home or take control of any activity, you have the skills required for management. And when you are ready to administer funds, it becomes finance management.
After understanding the basics of finance management, you can use the available funds systematically to get all the required things properly done. Knowledge of finance is not only required by Financial Managers or working professionals, but is a required and most basic learning for any individual. It does not matter whether you own a business, a working professional, a work-from-home lady or a housewife, knowledge of finance will always help you both in your work as well as in personal life.
Understanding Personal Finance
To better understand the personal finance, you must figure out your daily expenses and earnings. First rule of thumb is - “your expenses must always be less than earnings”. If they are not, put down all your daily or monthly expenses and figure which expense can be reduced in order to balance them against earnings.
Administration of funds is the most necessary stuff to ensure a safe financial future for the individuals. Many people misunderstand the term ‘balancing out expenses’ and feels they need to give up all pleasures and should not go for any vacation. It is wise to save money but not at the cost of your pleasures. Best thing is to save a little and spend a little. Follow this important rule while spending money – “Spend on what you need and not on what you want”.
Personal Financial Terms
To understand the basics of personal finance, check out some of the commonly used financial terms and definitions.
Asset: Asset is anything that has some future value or something that can provide appreciation of money. Home or Land is widely considered as a valuable asset.
Budget: Budgeting is a processto determine the expected amount of money required for a specific task. The amount of money allocated is called as ‘Budget’.
Debt / Loan: Debt or Loan is a form of liability; when you borrow some money either from personal contacts or banks. Having different types of Loans are common liabilities among most people.
Depreciation: It is a term used for things whose financial value decreases over time. Cars, Notebooks are some examples of depreciating assets.
Expenditures / Expenses: The amount of money you spend to purchase daily goods and services.
Income: The amount of money you receive from your business or by doing any similar task.
Insurance: An instrument to protect you and your savings in case of unfortunate events.
Investment: Investment is a term which means to grow your money by investing. You can invest in Certificate of Deposits, Mutual Funds or you may invest in some company also. Investment is required to meet the future needs and for retirement.
Liabilities: Liabilities are something that you owe and need to pay back. Liability also comes when you have to pay for something which will not give you any returns in the future. For e.g. Car, Electronic gadgets, Mobile and other such items are kind of liabilities which do not have any appreciation in future.
Liquidity: Liquidity is an important term to understand even in personal finance. It is the money that is available with you at present or the amount of money that you can easily generate given some time, e.g. to withdraw money from bank or from any other source. Having some liquid money is important to meet sudden expenses.
Mortgage: Mortgage is a long-term debt instrument used to purchase the property by which the borrower uses the property itself for collateral.
Payroll / Salary: Generally, a fixed sum of money you get paid to serve a business.
Savings: Amount of money you save from your income/salary after meeting your monthly expenses. Saving money is required for the liquidity of money.
Taxes: The amount of money you may need to pay to government to avail several services and for the betterment of the country’s economy.
These are some of the basic terms used in personal finance which will help you to understand and manage your finances effectively.
Play this quiz on personal finance to find out if you have understood these terms properly.
- How to create a solid financial plan
To create a strong financial plan, you must first analyze your expenses and know your future requirements and needs.
- Checklist for managing Financial Documents
It is very important to let your family know the details of all financial documents otherwise there is no purpose of your investments and insurance policies.
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