Empower yourself with this essential guide to key financial terms. Understand fundamental concepts like budgeting, investing, and credit scores, and gain the confidence to take charge of your finances.

Basic But Essential Financial Terms Everyone Should Know

Financial literacy is understanding various financial skills, including personal finances and investing. This knowledge empowers individuals to make informed and confident decisions about money, from creating a budget and managing debt to investing for the future and building wealth. Understanding essential financial terms and concepts enables individuals to avoid financial pitfalls, maximise their earning potential, and achieve long-term financial stability.

Income 

Income is the money you earn from various sources, including work, investments, and business activities. It can be categorised into two main types: active income, which requires direct effort, such as wages, salaries, or freelance earnings, and passive income, which is earned with little to no ongoing effort, such as rental income, dividends, or royalties. 

Grasping this difference allows you to diversify your income, lower financial risk, and strive towards financial freedom by accumulating wealth that goes beyond your regular earnings. 

Expenses  

Expenses are the money you spend on both necessities and things you want. They can be divided into fixed expenses, which stay the same each month, like rent, mortgage payments, or subscriptions, and variable expenses, which change based on your usage or lifestyle choices, like groceries, entertainment, and utility bills. 

Understanding the difference between these expense types is key to managing your budget effectively and ensuring you're living within your means. 

Budgeting

Budgeting is the process of creating a financial plan to effectively manage your income and expenses. By allocating your money wisely, you can ensure that essential costs are covered while still having room for savings and discretionary spending. Tracking your expenses is crucial, as it helps you identify spending patterns, cut unnecessary costs, and stay on track with your financial goals. A well-planned budget gives you control over your finances and reduces financial stress, leading to a healthier relationship with money.

Savings

Savings are money you set aside for future expenses, both expected and unexpected. It's crucial to build an emergency fund to cover unexpected costs like medical emergencies or car repairs. Additionally, long-term savings will help you achieve major financial goals like buying a home, retiring comfortably, or investing. Prioritising saving money ensures financial stability and prepares you for both short-term and long-term needs.

Investments 

Investments are assets purchased to generate future income or profit. Individuals can grow their wealth over time by investing in investment vehicles. These vehicles include stocks, which represent ownership in a company; bonds, which are loans to governments or corporations that pay interest; and real estate, which can appreciate in value or provide rental income. 

Recognising these variations can help you spread out your investments, reduce potential financial risks, and select opportunities that align with your goals and your comfort with risk. By being well-informed, you empower yourself to take advantage of opportunities that can grow your wealth, generate passive income, and ultimately lead you toward financial independence.

Credit Score

Your credit score is a number that shows how trustworthy you are with money based on your past borrowing and repayment behavior. Lenders use this score to decide whether to lend you money and at what interest rate. A high credit score can get you better loan terms and lower interest rates, while a low score can mean higher costs or even loan rejections. Keeping your credit score healthy by paying bills on time and managing debt responsibly is crucial for your financial well-being.

Interest  

Interest is the cost of borrowing money or the earnings on savings and investments. Simple interest is calculated only on the initial principal amount. Compound interest, however, is calculated on both the principal and any accumulated interest, allowing money to grow exponentially over time. 

Knowing this difference empowers people to select the most suitable savings and investment options for their requirements. Furthermore, it raises awareness of how interest accumulates on loans and credit, which can lead to increased debt and expenses. 

Debt  

Debt, which is money borrowed and must be repaid, often with interest, can have positive or negative effects on your finances. Good debt, like student loans or a mortgage, can lead to wealth building or higher earning potential over time. On the other hand, bad debt, like high-interest credit card debt or payday loans, can cause financial problems if not managed responsibly. 

Suppose you know the distinction between good and bad debt. In that case, you will make informed borrowing decisions, prioritise debt that adds value to your life, and steer clear of financial obligations that could jeopardise your future. 

Net Worth

Your net worth is the total value of your assets minus your liabilities. It's a key indicator of your financial health, showing if you're building wealth or accumulating debt. To calculate your net worth, add up the value of all your assets (like cash, investments, and property) and subtract the total amount of your debts (including loans and credit card balances). 

Keeping track of your net worth over time can reveal your progress towards financial goals, like saving for retirement or paying off debt. Additionally, it can show you where you might need to reduce spending, invest more, or simply manage your money better.

Inflation  

Inflation refers to the rate at which prices for goods and services rise over time, which decreases the purchasing power of money. As inflation increases, the same amount of money buys fewer goods, impacting daily expenses, savings, and long-term financial planning. While moderate inflation is typical in a growing economy, high inflation can diminish savings and make affording necessities more challenging. 

Without this knowledge, it’s easy to lose financial ground, but with it, people can safeguard and grow their wealth even as costs rise.

Use A Cash Advance App When You Need Your Money Now

Knowing about the terms listed above is crucial to your financial literacy and success in today’s competitive economy. If you aim to achieve this, it is smart to familiarise yourself with the words that define the market.

Another thing you need to know about is a wage advance app, which gives users a quick, small loan with little or no interest, helping them cover expenses until they get paid. And with Wagetap, Australia’s leading wage advance app, you can cash out up to $2,000 of your paycheck early and repay the rest on your next payday. You can even take advantage of the bill split feature to split your bill into four equal payments. To check it out, you can visit the App Store or Google Play.

For additional help in improving your spending habits, you can always download Wagetap. It is a leading wage advance and bill split app that allows you to access your pay early. Emergencies can always happen and Wagetap can help you handle life's unexpected expenses.