20 Essential Finance Terms for English Learners
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Disclaimer: This blog is for educational purposes only to help you learn new vocabulary. It is NOT financial advice.
Table of Contents
Vocabulary:
Story
Essential Finance Terms
Income
Definition: Money received, typically on a regular basis, from work or investments.
Example: Your salary from your job is your income.
Story: Anna works as a nurse and receives her income every month. She also has a small investment that provides additional income.
Common Misconception: Income only comes from jobs. (In reality, income can also come from investments, rentals, and other sources.)
Expense
Definition: The cost required for something; the money spent on something.
Example: Buying groceries is an expense.
Story: Every month, Anna lists her expenses like rent, food, and transportation to keep track of her spending.
Common Misconception: Expenses are only big purchases. (Small daily costs are also expenses.)
Budget
Definition: A plan for managing income, expenses, and savings over a specific period of time.
Example: Creating a budget helps you control your money.
Story: Anna creates a monthly budget to save money for a new car.
Common Misconception: Only people with financial problems need a budget. (Everyone can benefit from budgeting.)
Savings
Definition: Money that is kept or saved, especially in a bank account, rather than spent.
Example: Putting money into a savings account helps it grow over time.
Story: Anna puts part of her income into savings each month for future plans.
Common Misconception: Savings are only for emergencies. (Savings can be for any future goals.)
Debt
Definition: Money that is owed or due to be paid back.
Example: Using a credit card can lead to debt if not paid off.
Story: Anna avoids debt by paying her credit card bills on time.
Common Misconception: All debt is bad. (Some debts, like a mortgage, can be good if managed wisely.)
Loan
Definition: A sum of money that is borrowed, typically expected to be paid back with interest.
Example: A bank loan can help you buy a house.
Story: Anna took a loan to pay for her education and is now paying it back monthly.
Common Misconception: Loans are free money. (Loans must be repaid with interest.)
Interest
Definition: The cost of borrowing money, or the money earned from investments.
Example: You pay interest on a loan but earn interest on savings.
Story: Anna earns interest on her savings account and pays interest on her student loan.
Common Misconception: Interest is always bad. (Interest can help your savings grow.)
Investment
Definition: Money put into something with the hope that it will increase in value or generate income.
Example: Buying stocks is a form of investment.
Story: Anna made an investment in a local business hoping it will grow.
Common Misconception: Only rich people can invest. (Anyone can start investing with small amounts.)
Asset
Definition: Anything valuable that is owned, such as property, stocks, or a business.
Example: Your car and house are assets.
Story: Anna's assets include her car and some jewelry inherited from her grandmother.
Common Misconception: Assets are always physical items. (Assets can also be financial like stocks.)
Liability
Definition: A debt or obligation that an individual or company owes, typically in the form of loans or credit.
Example: A student loan is a liability.
Story: Anna considers her student loan a liability she needs to pay off.
Common Misconception: Liabilities are only large debts. (Any obligation to pay money is a liability.)
Capital
Definition: Wealth in the form of money or assets, used to start or maintain a business.
Example: You need capital to start a business.
Story: Anna saved enough capital to open a small bakery.
Common Misconception: Capital is only cash. (Capital can include equipment, property, or other assets.)
Equity
Definition: The value of an asset, such as property, minus any debts owed on that asset.
Example: The equity in your home is its value minus the mortgage.
Story: As Anna pays off her mortgage, her home equity increases.
Common Misconception: Equity and total value are the same. (Equity is the value after debts are subtracted.)
Revenue
Definition: The total income generated by the sale of goods or services related to the company's main operations.
Example: A store's revenue comes from sales.
Story: Anna's bakery had high revenue during the holiday season.
Common Misconception: Revenue is the same as profit. (Expenses have not been subtracted from revenue.)
Profit
Definition: The financial gain made after subtracting all expenses from total revenue.
Example: Profit shows how much money a business actually makes.
Story: After calculating her expenses, Anna realized her bakery made a good profit this year.
Common Misconception: High revenue means high profit. (High expenses can reduce profit.)
Dividend
Definition: A sum of money paid regularly by a company to its shareholders out of its profits.
Example: Owning stocks can earn you dividends.
Story: Anna received a dividend from the stocks she owns in a tech company.
Common Misconception: All stocks pay dividends. (Some companies reinvest profits instead.)
Stocks
Definition: A share in the ownership of a company, representing a claim on the company's assets and earnings.
Example: Buying stock makes you a part-owner of a company.
Story: Anna bought stock in a startup she believes in.
Common Misconception: Stocks always increase in value. (Stock prices can go up or down.)
Bond
Definition: A form of loan in which the bond issuer agrees to pay back the borrowed money with interest at a future date.
Example: Governments issue bonds to raise money.
Story: Anna invested in government bonds for a stable return.
Common Misconception: Bonds are risk-free. (Bonds can carry risks like default or inflation.)
Credit
Definition: The ability to obtain goods or services before payment, based on the trust that payment will be made in the future.
Example: Using a credit card is using credit.
Story: Anna uses her credit card wisely to build a good credit score.
Common Misconception: Credit is free money. (Credit must be repaid, often with interest.)
Cash Flow
Definition: The movement of money in and out of a business or individual’s finances.
Example: Positive cash flow means more money is coming in than going out.
Story: Anna monitors her bakery's cash flow to ensure she can pay her employees.
Common Misconception: Cash flow and profit are the same. (A business can have profit but poor cash flow.)
Risk
Definition: The possibility of loss or other adverse outcomes in an investment or financial decision.
Example: Investing in stocks involves risk.
Story: Before investing, Anna considers the risk and decides how much she can afford to lose.
Common Misconception: Risk is always bad. (Some risk is necessary for potential gains.)
Short Story
From Nurse to Entrepreneur: Anna’s Financial Strategy for Success
Anna, a nurse by profession, receives her monthly income and decides to create a budget to manage her expenses and increase her savings. She aims to avoid unnecessary debt, so she uses her credit card carefully. Dreaming of opening a bakery, Anna realizes she needs additional capital. She considers taking a loan from the bank, fully aware of the interest she will have to pay. To minimize risk, she uses her car as an asset to secure the loan.
Anna invests in stocks and bonds to grow her money. Some of her stocks pay dividends, adding to her revenue. She keeps a close eye on her cash flow to ensure her liabilities, like her student loan, are managed. Over time, she builds enough equity in her home, which she uses as additional capital for her bakery. Her business generates profit, and she continues to invest, always mindful of the risk involved.
