Understanding key financial terms is essential for managing personal finances effectively. In this guide, we will explore and explain five important financial terms in simple language: assets, liabilities, financial statements, capital, and compound interest.
1. Assets are things you own that have value, such as cash, property, investments, or vehicles.
2. They contribute to your overall wealth and financial resources.
Examples: savings accounts, stocks, real estate, education, or skills.
1. Liabilities are debts or obligations you owe to others, like loans, credit card balances, or mortgages.
2. They can affect your financial health and represent what you owe.
Examples: student loans, car loans, credit card debt, or outstanding bills.
1. Financial statements give an overview of your financial position.
2. They include the balance sheet, income statement, and cash flow statement.
3. These statements help track income, expenses, assets, liabilities, and net worth.
1. Capital refers to financial resources or funds available to individuals or businesses.
2. It can be used for investing, starting a business, or financing projects.
3. Sources include personal savings, investments, loans, or investments from others.
1. Compound interest is calculated on the initial amount and any accumulated interest.
2. It helps savings or investments grow faster over time.
3. Works for you when saving/investing, but against you when borrowing money.
Understanding these financial terms provides insight into your financial situation, enabling informed decision-making. Assets and liabilities reflect your financial position, financial statements provide an overview, capital represents available funds, and compound interest impacts savings and borrowing.