Understanding basic financial terms

With so much information available on websites, blogs, newspapers, television programs, magazines, and books, why aren't more people "getting" personal finance? What makes it so hard for people to understand personal finance? I realized why after a chat with a friend over the weekend. The reason many people find finance hard because "financial nerds", like me, made it so by using too many financial jargons.

In any discipline, jargons inevitably develop to help people communicate concisely. Instead of saying "valuable items you own", we say "assets". But if I want to help the "uninitiated" learn about and manage their personal finance, I must use simple everyday language... and I haven't done as well as I should. I hope this post will help you understand some basic financial terms I use.

Income statement (noun): A statement to show how much you earned, spent, and saved over a period of time.

Income (noun): The amount of money that you earn over a period of time. Income is money that comes into your life. Income may be categorized into:

• Employment income: Money from your job/career.
• Business income: Money from your business (if you are a business owner).
• Investment income: Money from your investments (in bonds, stocks, real estate, etc.). Sometimes referred to as "passive income", income that you don't need to actively work for (as opposed to income from job or business that you actively work in).

Expense (noun): The amount of money that you spend over a period of time. Expense is money that goes out of your life. Expenses may be categorized into:

• Discretionary expenses: "Wants." Expenses on what you want or desire, but are not necessary for day-to-day survival. Examples: Cable TV, cosmetics, magazines, snacks.
• Non-discretionary expenses: "Needs." Expenses on what you need for day-to-day survival, even if you don't want them. Example: Food, rent, taxes.

Net income (noun): The amount of money that you save over a period of time, calculated by deducting expenses from income [Income - expenses = net income]. Net income is money that you keep in your life.

Balance sheet (net worth statement) (noun): A statement to show how much you own and owe at a specific point in time.

Assets (noun): Valuable "items" you own at a specific point in time.

Liabilities (noun): Debts and obligations that you owe at a specific point in time.

Equity (net worth) (noun): The excess value of what you own over what you owe, calculated by deducting liabilities from assets [assets - liabilities = equity or net worth].

Financial statements (noun): The set of statements that describe your financial situation, including your income statement and balance sheet.

Principal (noun): The original amount of debt borrowed or the original amount of money invested in assets.

Interest (noun): The amount paid for borrowing money, usually calculated as a percentage of the debt liability.

Capital (noun): The amount of assets available for use at this moment, including those with claims (liabilities) against them.

Return (noun): The income or profit made from an investment, usually calculated as a percentage of principal (capital invested).

Annualized (adjective): The rate for a period of time expressed in term of a one-year period.

Liquidate (verb): To liquidate an asset is to sell the asset. Liquidation (noun).

Thrifty, frugal (adjective): Economical. Careful and diligent in the use of resources

Tax-advantaged (adjective): Receiving favorable tax treatment. For example, tax-free 401(k) contribution and earnings, but taxed 401(k) withdrawal. Or, after-tax Roth IRA contributions and earnings, but tax-free Roth IRA withdrawal. Or, tax-free interest from municipal bonds.

References:

• The principles of personal finance.
• Inflation, compounding, and the time value of money.