There are not a lot of words that are used in basic money situations.  As you investigate other topics and pages on the site, you will be introduced to more words of money, specific to certain areas.  Things like Bid and Ask, Options, Puts and Calls, all have to do with stock trading.

There are only a few that you really do need to understand at this point.  ASSETS, EXPENSES, INCOME, LIABILITIES, EQUITY, CASH FLOW  both POSITIVE and NEGATIVE, NET WORTH, and STUFF.  These terms are the most common, and sometimes the most misused and misapplied.  Some of them will even have two different meanings when viewed from two different perspectives.

Since our whole Financial situation is based on our CASH FLOW, I’m going to start there.

My whole philosophy is that you have to “think simple”.  So I use simple terms like Money In and Money Out.  Money In, is any money that comes into your pocket.  That could be a pay cheque, babysitting money, money from selling something, to dividends, rent, interest, etc.  Money Out is any money that you spend.  Like groceries, car payments credit card payments, rent, ice cream.  If it comes out of your pocket, it is Money Out.  That is what Cash Flow is all about.  If you have more money flowing in than you have flowing out, then you have Positive Cash Flow.  Honestly, if you have Positive Cash Flow, most people don’t give Financial matters a second thought.

However, when you have Negative Cash Flow, you are suddenly deeply concerned about Financial matters. This happens when we Spend (Money Out) more money than we have Money Coming In.  We use our credit cards and payday loans to finance our lifestyle.  This is the point when most people suddenly get really interested in their money.

The next word we will deal with is ASSET.  If you get nothing from this site except a clear understanding of the true meaning of this word; it will be enough to change your Financial future.  ASSET is the one word that has two meanings.  One of these makes the banks rich, and the other will make you rich. Let’s look at the bank definition of an ASSET.

Banks have conditioned us to think of ASSETS as anything of Value that we own.  I am sure many of you have gone into a bank and had to fill out the NET Worth Statement.  On this statement the bank listed all your ASSETS.  Your house, your car, investments, bank accounts, artwork, etc.  Basically, ALL THE THINGS YOU HAVE, THAT THE BANK COULD SELL IF YOU DEFAULT.  (Don’t make the payments)  Because the bank lists all this STUFF as an ASSET, we have been lead to believe they are also OUR ASSETS.  This is great for the bank, not so good for you.  The common definition wants us to view Stuff we own as ASSETS.

Now let’s take a look at the Wealth Accumulation definition of an ASSET.  The definition that will make YOU rich.  An Asset is only something that put more money in your pocket than it takes out, on a monthly or yearly basis.  Now that is a different way of looking at things.  ASSETS are only things that put money in MY pocket.  So how much money do you make off your house, car, your artwork, or your furniture. every month???  If the answer is nothing, then are those things YOUR ASSET??  I am willing to bet the bank makes money (Loan Payments) every month off your house, and your car.  So to the Bank, that stuff is an ASSET.

You have heard the expression; “Your house is your biggest Asset”.  Well if that was true, your house would be putting money into your pocket every month.  Does it??  Or does it take money out?  Mortgage Payments, Taxes, Insurance, Maintenance, Utility costs, etc.  Who really has money coming into their pocket every month from a house, the Mortgage holder. (probably the Bank).  Using the Wealth Accumulation definition of an ASSET, there are not a lot of REAL ASSETS out there.

EXPENSES AND LIABILITIES are both associated with Money Out.  Many people think that they are the same.  There is a subtle difference between the two.  Liabilities are usually a fixed amount for a predetermined amount of time.  Like a car payment, a mortgage, and a loan.  They come at a regular time and are the same each time.  Liabilities are normally covered by a contact. Expenses are normally not associated with time nor with a contract.  They may come up regularly, but they can often vary.  Things like groceries, eating out, gas, utilities, etc.  EXPENSES are where we would look first when we need to change our CASH FLOW.

Example of Multiple Streams of Income
INCOME is really any money that flows or comes into your pocket.  It is this amount of money that we have to divide up to meet our needs and finance our wants.  It is important to understand that there are 3 types of income, Earned, Passive, and Portfolio.  It’s important because the government has different rules and taxes for each different kind of income.  Most people understand Earned Income, but it is the other two that we really need to develop for Financial Independence.  There are also only four methods of income generation.  They are from the Employee method, the Self Employed method, the Business Owner method, and the Investor method.

NET WORTH AND EQUITY are similar.  They are used in different circumstances.  Net Worth is the evaluation of your total financial picture.  This is what the bank looks at when you want to borrow money.  They do this by finding out what you are really worth.  How much money would be left over if they sold all your ASSETS, and paid off all your Liabilities.  That tells them your “Net Worth”  A Net Worth statement does not deal with your EXPENSES.  It just looks at Bank Assets, and your Liabilities.

Equity is usually associated more with an individual ASSET.  For example; your house has an estimated market value of $300,000.00.  You still owe $200,000.00 on the mortgage, your EQUITY is $100,000.00.

The last word is actually mine. STUFF.  It is a general term for the STUFF we spend our money on that we think we really NEED.