Finance 101: Let’s Get This Bread

I was about 70 pages into an economics and finance text, whilst multitasking on the submission of my finance piece - “You plan and then Pandemic” for a magazine this Eid holiday and decided to peep Instagram for a bit as per short break. As a fire girl, I saw a post I saw on Fire-boy's Instagram and made a non-style finance adaptation to it. “Every day we are upping finance levels. Raising the bar. I am talking about investments. I cannot lavish on certain things that I used to because I am a different caliber. If I have what I say, I am then I must prove it by net worth. By finance.” I readjusted the words to suit how I see financial growth improve and change people’s mindset, network, self-care, and preparedness for adulthood, impact, independence and a long list of other comforts.

A major shift in personal finance (to a better and stable level) can be a result of how much you actually know about it and the economies that govern finance and related fields such as economics, psychology, sociology, philosophy, geography, business administration and even some science courses. This reminds me of my undergraduate days in OAU when we were made to take all these listed courses before getting into Accounting proper in my sophomore year. Now I understand better. There is an inter-connectivity between anything we study/studied in school and finance; we just have to look beyond the surface and intricacies.

Due to my most popular post on setting finance firewalls, I was asked to take personal finance tutoring, join a finance club, feature on other blogs and send in finance content for a hardcover magazine last week! Whoop! Whoop! Super excited about these opportunities. In addition, you can reach out to me for personal financial advice, it is what I do. LoL, self-plug, biko let us get this bread! These opportunities came because of my understanding of key finance terminologies, processes, principles and applicability to our everyday life.

But joking aside, in the process of talking to people I noticed there were some basic terms people misconstrue or don’t understand about finance such as money worth, net worth, financial planning, assets, liabilities, income, expenses, savings, investments, return on investments, economics, economies of scale, debt, equity, liquidity, accounts receivables, cash flow and others.

In addition, I will put the finance terminologies across using scenarios we are familiar with, as in, a recent story that was popular on social media – the Jeff Bezos gist. Making rounds in the early times of the pandemic was the fact that “billionaires” were making donations and Twitter people were calculating the percentage of their donations to their “total” wealth. Apart from people, feeling entitled to a billionaire’s wealth; an issue on money worth and net worth was debated. I will also be explaining all aforementioned finance keywords in light of the Bezos’ gist as these were my takeaways from the saga so far:

• Money Worth – this is equivalent to the purchasing power of money a.k.a you get something, which is worth the money that it costs, or the effort you have put into it. For Jeff Bezos, his money worth can be translated to > $200bn - $250bn as he can leverage off his Amazon shares amongst other investments, friendships and networks in terms of increasing his purchasing power;
• Net Worth – this is the value of all the non-financial and financial assets owned by a person, an institutional unit or sector minus the value of all its outstanding liabilities. Jeff Bezos’ net worth as at today is $145.2bn;
• Financial Planning - this refers to a comprehensive evaluation of an individual's current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. For Bezos, a recent study asserted that most of his wealth advisers manage his funds by wealth creation (smart risk taking, investment in new businesses, expansion of existing business), wealth preservation, legacy, transfer (by selling pieces of his businesses through an IPO, setting up wealth for his children, delegating investments to a personal financial advisor) and philanthropy (supporting causes dear to him such as, education, health and humanitarian causes);

Other finance terms worthy of note are:

•  Credit – this refers to an accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the transaction. When using the double entry accounting method there will be two recorded entries for every transaction: A credit and a debit;
• Debit – this refers to an accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet;
• Assets – this is anything the individual or company owns that has monetary value. These are listed in order of liquidity, from cash (the most liquid) to land (least liquid) in the balance sheet/statement of financial position;
• Liabilities – this refers to debts that a company is yet to pay being financial obligations incurred during business operations either personally or business-wise;
• Income - this refers to money received, especially on a regular basis, for work or through investments. It is the consumption and saving opportunity gained by an individual/company within a specified time frame, which is generally expressed in monetary terms;
• Expenses – these are day-to-day costs that a business may incur through its operations. Expenses could be fixed, variable, accrued or operating;
• Balance sheet – this financial statement reports on all of a company’s assets, liabilities, and equity. As suggested by its name, a balance sheet abides by the equation (Assets = Liabilities + Equity);
• Savings – this refers to income not spent, or deferred consumption;
• Investments – this refers to an asset or item acquired with the goal of generating income or appreciating in the future. It always concerns the outlay of some asset today (time, money, effort, etc.) in hopes of a greater payoff in the future than what was originally put in;
• Return on Investment – ROI is a measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage;
• Economics - this refers to the social science that studies the production, distribution, and consumption of goods and services and how society and people use their limited resources. Economics focuses on the behavior and interactions of economic agents and how economies work;
• Economies of scale – this refers are the cost advantages that enterprises obtain due to their scale of operation a.k.a the larger you purchase or invest the higher your discount and ROI respectively;
• Debt – this is the sum of money that is owed or due. Please note that this is different from debit. It refers to an obligation that requires one party, the debtor, to pay money owed back to the lender or creditor based on per agreed terms;
• Equity – this, in terms of the percentage refers to the stock a person that has ownership interest in the company. In general, equity is assets minus liabilities. Equity denotes the value left over after liabilities have been removed;
• Liquidity – this refers to the ability to convert an asset to cash without causing a change to the asset’s value a.k.a you can sharply sell and get you money ASAP. E.g. redemption of mutual funds;
• Loss  - when a service or product sells for less than what it cost to supply or manufacture it, or when expenses have exceeded revenues of a particular asset, it's called a loss;
• Profit – this is the opposite of a loss. It is when a financial gain or margin is earned on a production unit;
• Accounts receivables - The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used a.k.a debtors; and
• Cash flow - this refers to the inflow and outflow of cash in a business. Cash flow is the revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time a.k.a projected inflows or revenue streams from work.

In conclusion, understanding finance or accounting begins with being familiar with some basic concepts and its applications. An easy hack to understanding ANYTHING is to always ask yourself “How does this apply to me?” 

Please state other finance terms you want to know more about in the comment section especially terms not listed and I would respond in relatable terms for our understanding.

Stay Safe

Aramide 🤟