Not all aspects of finance will ever apply to you but personal finance is something you have to deal with everyday–whether you think you are or not. It’s important that you know some personal finance basics so you understand what’s going on with your money. Here are seven very basic terms that everyone should know:
Net Worth
Your personal net worth is the difference between your assets and debt. A positive net worth means you have more cash flow from your resources than liabilities. A negative net worth means you owe more than you bring in.
Asset
An asset is a resource that has economic value. Assets increase your net worth by generating cash flow. Your business is an asset because it brings in cash.
Liability
A liability is a debt or monetary obligation you have. While owning property is an asset, a mortgage is a liability because you must pay it every month.
Five C’s of Credit
The Five C’s of Credit is an evaluation method lenders use to determine whether to extend you credit. They are as follows:
1. character: your reputation
2. capacity: your ability to repay the debt in a timely manner
3. capital: any financial resources you may have, such as income
4. collateral: any large assets (property for example) that you’re willing to put as a guarantee in case you default on the loan
5. conditions: the terms of the loan, such as interest rate
Inflation
Inflation is the rate at which the cost of goods and services is increasing in inverse relation to the purchasing power of each dollar.
Interest
Interest is the charge paid for borrowing money. If you were to take out a line of credit, you would pay a certain percentage of it as interest. When you put your money in the bank, it would pay you an interest percentage on your money for borrowing it.
Debt to Income Ratio
Debt to income ratio (sometimes just called “debt ratio) is a comparison of the amount of debt you carry in relation to the amount of income you receive. Divide your total debt by your total income to determine your debt to income ratio.
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