Key Financial Concepts Explained (Income, Expenses, Assets, Liabilities, Debt)
Income
Income is the money you earn by working, selling goods or services, or investing. Income comes in two types:
- Active income is money you earn by working. For example, if you have a job, you earn a salary or wages. If you run a business, you earn a profit.
- Passive income is money you earn by investing. For example, if you invest in stocks or bonds, you earn income.
Expenses
Expenses are the money you spend on buying, doing, or getting services. Expenses come in two types:
- Fixed expenses are expenses that stay the same every month. For example, if you have a mortgage or car payment, those expenses are fixed.
- Variable expenses are expenses that depend on the amount of goods or services you buy. For example, the money you spend on food, clothes, or gas are variable expenses.
Assets
Assets are valuable things that you own. Assets come in two types:
- Tangible assets are assets that have a physical form. For example, if you own your home, car, or gold, those are tangible assets.
- Liquid assets are assets that can be easily converted into cash. For example, if you have money in a bank account, that is a liquid asset.
Liabilities
Liabilities are debts that you owe. Liabilities come in two types:
- Current liabilities are debts that must be paid within one year. For example, if you have a credit card bill that is due in a month, that is a current liability.
- Long-term liabilities are debts that do not need to be paid within one year. For example, if you have a mortgage, that is a long-term liability.
Debt
Debt is money that you owe to someone else. Debt can be either good or bad. Good debt is debt that helps you to improve your financial situation, such as a mortgage or student loan. Bad debt is debt that does not help you to improve your financial situation, such as credit card debt or payday loans.
