Personal Finance Vocabulary

Vocabulary according to wiki is "The the words that are known and used by a particular person". So our vocabulary defines what we know, how we can articulate them and how we can use them in our daily lives. In short, Our vocabulary defines us.

Good news is, We can improve or vocabulary and hence upgrade ourselves. So this post will help you understand the terms that are related to personal finance.

Assets:

Assets in accounting terms is defined as the resource with economic value that someone owns with an expectation that it will provide a future benefit.

We are here for personal finance, not for accounting class😉. So Let's have the modified definition that can benefit us. so here how the asset is defined.

An asset is a resource that generates a positive cashflow and provides you with cash for owning it.  

There are various types of asset classes. Click here to read more. 

Liability:

A liability is an Obligation between one party and another that owes, is not yet complete or paid for.

Liability are those that takes money away from your pocket.

Liabilities drag you down. They will make FIRE difficult to attain. A person declares bankruptcy when he/she can't able to repay the liabilities. 

Net worth:

Net worth is referred as individual's current financial situation .This is important term as it has inbuilt both assets and liabilities factored into it. 

A man is termed to have positive net worth when he hold assets which are greater than the value of the liabilities and same is true for vice versa.

Step 1:

List down all your assets and their value. This consists of  

• Money in bank,
•  Fixed deposits,
•  Bonds,
•  Stocks,
•  Real estate etc

Step2:

List down all your liabilities and their value. This consists of

• Loan of any form( Home loan, Car loan, Personal loan),
• Taxes,
• Credit card etc.,  

Step 3:

Subtract value of assets with value of your liabilities.

Income: 

The money inflow to bank account because of your effort directly or indirectly is known as income.

The detailed explanation of this topic can be seen here.

Expenses:

The money flow outside of your bank account is an expense. The money you spend on food, clothing, shelter, transportation, utilities comes under Expenses.

All income can't be saved. Expenses are required to spend on your daily necessities.

Budget:

We all hear finance minister of India is coming up with budget. The country's budget is no different to personal budget except for few zero added at the end. The plan to utilize your income to meet all your expenses over a fixed period of time is known as budget.

Failing to plan is planning to fail.

This is important as it takes into account the on what we might be spending on. Budgeting is so basic yet very few will implement. Even if they implement they might not stick with it. Because, it's just a plan and plans can be changed. Budgeting basics can be looked here.

There are two more terms related to budget.

Surplus:

If income exceeds expenses, it is a surplus. As FIRE, we must mostly target to be budget surplus.

Deficit:

 if expenses exceeds income it a deficit. If the deficit happens to buy an asset. It is positive. Else, we might need to reconsider our decision. 

Cashflow:

As the name suggests, flow of cash is known as Cashflow. The whole game of becoming FIRE and coming out of rat race lies on this term because this term tracks every transaction we make.

We will be looking in detail how cashflow determines our FIRE here.