Basic Money Terms and What They Mean

When talking about money, there are some terms that get thrown around that many people assume everyone knows.  The thing is, unless you work in a financial industry (and even if you do), how do you learn these terms and what they really mean?

There are no “money basics” classes in our schools.  If anything, the first thing we learn about money is how to set up a bank account, and then how to spend money.  Next comes a credit card, then other debt – personal loans, home loans, etc.  I don’t call this a particularly well rounded money education.

Here are some often used terms and what they mean for you.

Cash flow or Net Income
Money in and money out.  It’s what you earn less what you spend.  What’s left is your cash flow.  It can be positive (as in, you have money left over to save or invest) or negative (which means you’re likely living off a credit card).

Asset
A personal financial asset is something you own, and includes cash, savings accounts, and some personal property.  I prefer to look at an asset as something I could relatively easily sell and get money from, or while I own it I can earn income from it.  If you’ve bought the home you live in, this is generally considered an asset, however, unless it’s earning you money, it isn’t really – it’s a liability.

Liability
Any amount you owe (hence why your home loan is a liability).

Net Worth
Take your Assets and subtract your Liabilities – this is your Net Worth

Compound Interest
This is the way to get rich slowly to start with (and it picks up speed over time!) – it is the interest that is earned on interest you earned from a prior period.  For example, you start with $100 and earn 10% interest ($10) – you now earn 10% interest on $110 ($11) – now you earn 10% interest on $121, and so on.

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Other valuable terms relate to insurance policies and superannuation.

Binding (Death Benefit) Nomination
This is something everyone should have in place, and it needs to be updated every three (3) years, unless your super fund offers a non-lapsing option.  This means that in the event of your death, the proceeds of your superannuation fund will be distributed based on your wishes.  If you do not make a nomination, the trustee of the superannuation fund, will distribute the funds.

Defined Events
If any of your insurance policies outline this, it means these are the specific events that you are covered for.  Anything that is not listed will not be covered under your policy.

Not wanting to potentially overwhelm you, these are just a few terms to become familiar with.  If you encounter any others that you’d like explained, please ask me in the comments below!