Understanding Important Financial Jargon

Share

9e344e349634408da3b4707eefdd5480A study of 3000 UK adults showed that not understanding financial jargon could cost an average of £428 per year. This has led to some fear-mongerers claiming it costs UK citizens a total of 21 billion nationally, which is nothing short of a perversion of the data. Still, it is true that you risk losing money in the long-term if you do not understand the jargon you are reading and/or agreeing to. This is especially true if you are agreeing to a long-term investment scheme such as a pension or life insurance. Here is some of the more commonly used financial jargon you may hear on the TV and when buying financial products.

Cashflow

This is the movement of cash in and out of your account or in and out of a business.

Gross profit or gross pay 

This is the total amount given before any deductions. For example, your gross pay would be the amount you are paid before taxes, national insurance, pension payments and other deductions.

Net profit or net pay

The net is the amount received after all deductions have been made. Most people see some form of wage slip or wage report that tells how much they received after deductions and pension payments.

Net assets or total net assets

These are your total fixed and current assets minus your long-term and current liabilities. In simple terms, this is how much you are worth after your bills and debts have been taken off.

Liabilities 

This is a term used generally to represent what you or your business owes or will owe in the future.

Current liabilities 

Most consider a current liability to be a bill or due payment that is due within 12 months. Things such as your outstanding credit card bills may be considered current liabilities.

Fixed liabilities

This refers to bills or due payments that are due over 12 months away. For example, your mortgage may be considered a fixed liability because even though you make monthly payments the entire amount is not due to be fully repaid for years.

Assets

This refers to anything that you own that may have monetary value. It may also be something that has value via service. For example, your knowledge may be considered an asset. In a strictly accounting sense, it does not have monetary value, though in terms of insurance it may have a monetary value. It is what is known as an intangible asset.

Current assets

These are assets you may convert into liquid capital (cash) within a set period of time (usually 12 months).

Fixed assets

These are assets you or a business owns that are used but not for sale. These are things such as your buildings, equipment, fixtures and fittings.

Profit and loss account

A business reporting and monitoring tool. You use it to report and monitor your profit and loss as you operate.

Overhead

This is an expense that you cannot categorize into a single element of your company’s activities.

Depreciation

This is the projected value a certain item/thing is going to lose over time. For example, a new car depreciates sharply in value once it is driven off a car lot and then more slowly over time. The depreciation may increase if the car is used heavily or not taken care of very well.

Reserves

This is the retained difference between profits and losses that has accumulated since the company formed.

Return on investment

In simplest terms, this is what you expect to get out of your investment. The return is not always monetary. For example, the ROI of new machines may result in increased productivity.

Working capital

These are your current assets less your liabilities that represent the money you need to invest to keep operating.

Join our newsletter

Screen_shot_2017-04-25_at_1.05.57_pm

Subscribe to get the latest "Engineer Your Finances" content via email.

Powered by ConvertKit
About the author

Join our newsletter

Subscribe to get the latest "Engineer Your Finances" content via email.

Powered by ConvertKit

ModestMoney.com Top Finance Blogs

Archives