Financial literacy is the key to empowering your financial future! Here are ten terms and their definitions to help you start your finance crash course and why they’re essential to know.
Assets
An asset is anything you own that can provide future benefits. This could be anything from cash to real estate and usually falls into two categories:
- Current assets, which you can convert into cash within a year
- Fixed assets, or anything you can’t immediately turn into cash but you can leverage for long-term income
You probably have more assets than you think: furniture, land, vehicles, and investments all count!
Compound Interest
Compound interest is when your interest accrues even more interest. For example, if you save or invest, compound interest would be anything you earn on the cash you deposit plus whatever you gain over time. Reviewing accounts or opportunities to grow compound interest is one of the easiest ways to passively gain more income, even if it’s only a tiny amount.
Cash Flow
Cash flow is the cash moving in and out of your accounts. This could be literal cash or a checking account that you treat similarly to cash.
Equity
Equity is the amount of money you’re worth once all assets and liabilities are tallied. You can determine this by subtracting any liabilities from your total assets.
Liquidity
Liquidity is how quickly one of your assets can be “liquidated” or turned into cash for general use. Cash is the most liquid. However, other assets like real estate or businesses aren’t readily available. They could take many weeks or even months to liquidate.
Net Worth
Net worth is a more common way to describe an individual’s equity. You’d determine it the same way: subtract your liabilities from your assets to get your net worth. If you own more than you owe, you’ll have a positive net worth, but it’s possible to have a negative one if you aren’t careful with money.
Return on Investment (ROI)
There’s no way you’ve gotten this far without hearing about how important return on investment is! People use it to determine just how worthwhile it is for them to invest in something. This could be a literal investment or something more abstract, like building a swimming pool.
Valuation
An asset’s or liability’s monetary worth is determined through valuation. You can do this in several ways, but it’s typical to have a professional provide this if you’re curious to see what something is worth, like your home or a vehicle.
Liabilities
Liabilities are the opposite of assets. This would include any credit card debt or other bank debt from loans. It can also mean deferred taxes and mortgages that could potentially take more than a year to pay off.
Depreciation
Depreciation refers to how much an asset’s value will or has decreased. Many assets depreciate surprisingly fast. Cars, for example, are often said to depreciate the moment you drive them off the lot.
