The Basics to Financial Literacy
Mohammad Rayhaan | June 10th, 2022
Source: Wealth of Geeks
Literacy is a pretty straightforward concept. It means being able to read and write. Similarly, Financial Literacy refers to being able to understand the basic terms and processes and being able to make effective use of one’s financial resources.
In today’s world, money is everything. We live for money, and we need money to live. So, it without mentioning that the way we manage our financial resources i.e., money, plays a pivotal role in sustaining our lives.
However, financial activity lies more than just handing out cash or your debit card to cashier to pay for whatever you buy. There is a certain level of financial information one must require understanding the basic concepts of cash and credit. And it’s not that easy. As a matter of fact, the ability to completely interpret and analyze a financial statement is one of the rarest skills of human beings, with only a small proportion of people being able to do so, not to mention the absolute ton of knowledge that is required.
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Source: Yellow Card Academy
However, it is quite simple for one to learn and apply basic and very low level of financial knowledge. Something, that all people can learn alike and is not reserved for accountants and advisors sitting in $5000 suits. And that is exactly the purpose of this article. Here we are going to discuss the basic level of Financial Knowledge everyone must have.
This article is going to discuss what might be the financial equivalent of alphabets in English. The very basic. And the cherry on the cake is, it’s only five terms. These 5 terms are the most used words in finance and are something, the wealthy and the not-so-wealthy will be able to relate to. And these five are:
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Income
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Expenditure
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Assets
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Liabilities and,
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Cash Flow
Source: Marbella International University Center
Income and Expenditure
From the subheading, you might have guessed that we are discussing the first 2 terms i.e., Income and Expenditure in pairs. We will be following the same for the next 2 too. But the reason why we are discussing it in pairs is that these 2 terms are almost opposites of each other and learning them together will help in better understanding.
So, this is the pattern we will be following, for each of the terms, we will first be reading the dictionary definition, exactly how it is in financial terms. Then, we will explain it in such a way that a person who knows nothing about Finance will be able to understand, and then finally give an example.
So, Income [in-kuhm] (noun) is the revenue received for good or services, or from other sources, like rents or investments.
To explain simply, income is the money you earn, either by sale of goods, or rendering your services. For Example, if you own a Book and decide to sell it for $1.50, this $1.50 is the income you earn for selling the book. If you work for a firm or a company, say InVed, and you get an annual income of $65K, then the $65K is your income for your service in the company. If you own 100 shares of a stock, say InVed, at $1 a share, and the price is $2 a share currently and you close your position, your income is 100*(2-1) = $100.
Now, Expenditure [ik-spen-di-cher] (noun) are payments made in exchange for goods and services
This term too is quite simple to understand. It refers to spending of money. If you spend money to buy goods or services, that is called expenditure. If you, say, buy a pen for $2, then your expenditure is $2. It is as simple as that.
Obviously, these are a very small scale of examples. Income and Expenditure is usually used with a decently large time frame like a month. Like the Income and Expenditure in a month refers to the money earned, and money spent in a month. Difference between Income and Expenditure indicates profit and loss. If the value is positive, it’s profit, or vice-versa.
Source: iStock
Assets and Liabilities
Now we get into the slightly more complicated terms, assets, and liabilities. Much like the terms discussed supra, these 2 too are quite opposites of each other and can be better understood when learned together.
Assets [ass-ets] (noun) are a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
It is basically something you own, like land, gold, stocks or even cash, and the main reason behind owning and holding it is that it will provide you monetary benefit in the future. For Example, today you buy an ounce of Gold for $1843. Gold, like most other commodities, has a value that keeps changes, and is something that is bound to increase in the future due to inflation (will be discussed in a future article), and other factors. So, the gold you bought today for $1843, tomorrow, or in the future will have a value higher. That means that in the future, this ounce of gold that you own has provided you with monetary benefit. Therefore, this Gold can be classified as an asset.
Liabilities [lahy-uh-bil-i-tees] (noun) is a legally binding obligation to pay another entity
It is money that someone or something owes to someone else. For example, if you take out a loan from the bank, you technically owe the bank the money you took. So, you are liable to repay the loan to the bank. Similarly, if you own a company, and buy certain goods on credit (pay in a future date), you are liable to pay for those goods, to whomever you bought them from. So, these unpaid goods are a liability. In short, assets move money into your pocket, and liabilities move it out!
Cash Flow
Finally, we discuss about Cash Flow. Cash Flow [kash-floh] (noun) is the amount of cash or cash-equivalent which the company receives or gives out by the way of payment(s) to creditors
For easier understanding, let us break it down into two words. Cash and Flow. Cash is something we all know, money, and flow is movement. So, Cash Flow is the movement, both moving into (inflow) and moving out of (outflow) of money to and from your account. As a trader, if you buy a variety of goods and sell them as per needs and demands, this movement of money on both ways is termed as Cash Flow.
Conclusion
And that is about it. These five basic terms are the least one must know about Finance in their day-to-day life. These are terms that apply to various things we do every day. With this information, one can now understand and manage their money with a little bit more ease and comfort, and make decisions that are efficient and effective, making the most of what you have.