Though proper money management is essential for building wealth, money management isn’t an easy field for many to enter and feel comfortable within. Controlling one’s saving and spending in the pursuit of specific financial goals doesn’t come naturally to most people — especially considering that personal finance tends to utilize its own jargon which outsiders tend to struggle to parse.
While there are plenty of comprehensive glossaries for all sorts of personal finance words and phrases, this post will help beginners understand the most fundamental terms of money management, which should put them on the path to financial success.
What Is Money Management?
The terms “money management” and “personal finance” are often used interchangeably, but the truth is that personal finance is merely a field of knowledge regarding individual rather than corporate finances whereas money management is the practice of budgeting, saving, spending, investing, etc. Businesses can participate in money management — but they more often refer to the practice as finance or accounting. Similarly, it is possible to manage someone else’s money, perhaps on a professional basis, as a financial advisor or some other financial professional. Readers can learn more about the nuances of money management (and find excellent money management tools) here: https://www.quicken.com/what-money-management
Net Income vs. Gross Income
Managing money requires having an income, understanding it and leveraging it properly. However, not all incomes are equal — in particular, net income differs substantially from gross income. Gross income is what most people imagine when they think of income: the total amount of money earned. If one were to add up all their paychecks, they would calculate their gross income. In contrast, net income is another term for “profit,” or the remaining income after one subtracts expenses. Both net and gross income are useful for calculating and managing budgets, which readers can better understand through this blog: https://www.home-budget-help.com/creating-a-household-budget.html
Different Types of Interest
Most adults take out loans — to buy cars and houses, to pay for college, to use a credit card etc. — so understanding interest rates is key to being financially literate. There are a few different interest-related terms to be aware of:
- Simple interest: a fixed percentage of the principle amount borrowed
- Compound interest: a percentage of the principle amount borrowed and any interest already accrued
- Fixed interest: a stable interest rate that remains for the duration of the loan
- Variable interest: a fluctuating interest rate, often tied to the performance of the market
For more information about the formulas used to calculate simple and compound interest, follow this link: https://www.investopedia.com/ask/answers/042315/what-difference-between-compounding-interest-and-simple-interest.asp
Credit and Credit Scores
A person’s credit is their ability to borrow money or gain access to goods and services before paying. A person demonstrates their creditworthiness and gains good credit when they have a high income and a history of paying their debts on time and in full. In contrast, a person can develop bad credit if they miss payments, have a poor debt-to-income ratio and have too many debt accounts. To make it easier to understand a person’s creditworthiness, credit bureaus track a person’s financial behavior — especially as they pertain to debt — and offer a simple number, a credit score. The most important credit score is the FICO score; a higher FICO number is better than a lower one.
In general, adults need good credit to use credit cards, buy and rent homes and cars and perform a number of other activities that provide financial stability and good social standing. Those who suffer from bad credit can reverse their fate and develop good credit by using these tips: https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/how-to-fix-a-bad-credit-score/
There are so many financial terms to learn on the road to successful personal finance, but these basic terms will lay the foundation for all the financial literacy to come. Those interested in becoming more proficient at money management should consider following blogs relevant to their lifestyle and financial situation. It is also beneficial to make use of a budget tool and to engage with a likeminded community. Over time, the foreign jargon associated with personal finance will become more familiar, and the person with meager financial knowledge to start will become a wealthy and wise in the ways of money management.