Financial terms can make or break your way. They can shape entire economies. They can empower or weaken a person’s ability to believe in a different future for themselves.
Words are that important.
I frankly have an issue with finance gurus who use financial terminology as a weapon. They’re everywhere — Bloomberg, CNBC, the expert opinions printed in newspapers. They tend to mention lots of financial terms they don’t teach you in school, not because they want to include and honor you, but quite the opposite.
Too many (although not all) seem to try to exclude and weaken their audience for personal gain, whether financial (they want you to hire them as an expert) or psychological. They see the trade-off as this: for every point you feel dumber, they seem smarter. I really hate it. However, the following is also true:
The power is in your court, whether you want to close the gap, or stay financially dis-empowered.
When you don’t know what any financial terms mean, and simply ignore them or look away, it’s impossible to even begin to ask the right questions to help you determine your own legitimate financial path. You can’t create an amazing financial strategy by remaining ignorant to financial terminology. You can’t even outsource the job to anyone else without great risk, because you need to know at least enough to determine if the person in front of you is full of crap, or knows their stuff.
Your first day of change happens when you stop pretending that you’re alright exactly as you are.
Here are a few definitions to help get your mind in a no-bullshit place. I list the technical meanings first, then the less literal, more truthful meanings second.
1. Credit line: The maximum loan limit that a lender permits a borrower to access or maintain.
What it really means: An arrangement with the potential for you to get way in over your head.
2. Budget: An estimate of income and expenses for a set period of time.
What it really means: How much your emotional need to buy stuff is costing you, relative to your ability to produce every month.
3. Cash flow: The amount of money being transferred in and out of an account.
What it really means: How well you control the activity of your money, so that it supports what you care about most, and does not monetize the rest.
4. Salary: A fixed regular payment made by an employer to an employee.
What it really means: What you get for giving up real risk. It’s totally okay; it may not be your time yet.
5. Interest rate: The extra money a borrower needs to pay a lender for being able to access money today, usually expressed as a percentage of the principal amount.
What it really means: How much you pay someone else to own you, in percentage terms.
6. Capital expenditure (or, “capex” for short): The amount one spends to buy or improve a long-term asset.
What it really means: What you invest in your long-term future and in your people, as opposed to moving money from your left hand to your right hand. For example, when you invest in skill-building, it’s capex. Paying for software that directly increases your productivity at work is capex. Going to school at night so that you boost your earnings potential in doing what you love is capex. Capex is the opposite of financial engineering; it’s creative in nature.
7. Net worth: A measure of wealth, calculated as total assets minus total liabilities.
What it really means: How much you own yourself, financially-speaking. If you owe others a lot of money, your net worth will be a low number, no matter how many shiny things you surround yourself with.
Put simply, you get richer when you find ways to:
- Get paid interest (as an investor), not pay interest (get rid of your debt!)
- Invest in your greatest asset — yourself — with capex to increase your longer term cash flow, but thoughtfully, please
- Simplify the way you meet your needs (do you really need another pair of fabulous boots?)
- Establish large credit lines that you then proceed to never use (that’s real power)
Think of your wealth differently. It’s measured by what you need to make your big dreams happen. If you’ve done the work to create the financial resources you need, you’re in good shape. If you know what you want most in life (and are willing to let the rest go), you’re well on your way.
What’s stopping you? Get on your way.
Jane Hwangbo is a former investment analyst and portfolio manager who founded Mission Over Money, a personal coaching program designed to change the way individuals see and interact with money. Visit her website or find her on Twitter.
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