A high level of financial literacy is an important asset for anyone to have as they make their way through the world. Understanding common financial terms helps you navigate what can be very complicated issues, and assist you as you plan for the future. Being well versed in financial lingo can also help you avoid common pitfalls that trip so many people up. Indeed, lacking a solid grasp of important financial terms can actually be quite dangerous from a financial perspective.
For example, if you are getting a loan, there is a gargantuan difference between a fixed and variable rate. Not being aware of that can cost you dearly over the long run. It is a fair bet to say that many of those unfortunate souls caught up in the 2009 financial crisis and related housing crash didn’t understand the definition of the term “subprime” loan.”
Understanding what “subprime” really meant (hint: subprime is another word for garbage, or terrible) might have helped millions of people save themselves from the impending catastrophe. Instead, predatory lending and banking institutions preyed upon the financial illiteracy of many consumers and jacked up interest rates after the crash – completely legally, mind you – which resulted in millions of people losing their homes.
So with that in mind, let’s talk about another couple of common financial terms that are often misunderstood: gross income and net Income.
It’s Not That Complicated
Unlike some of the more difficult terms you might find in the financial world, both “gross” and “net” are fairly easy to understand. It may be helpful to think about the subject in the context of your regular paycheck.
Gross income is the larger number on your paycheck. It is the amount of money you’ve earned before taxes are removed. In other words, if you are not a salaried employee, your gross income should equal your hourly rate multiplied by the number of hours you worked. If you are a salaried full-time employee, your gross income will typically be the same amount every week, equalling approximately 40 hours worth of work before taxes.
On the other hand, net income is what you are left with after taxes are taken off of your paycheck. So whether you are working as a salaried employee or an hourly worker, net income will always be a smaller number after any deductions are removed. Sometimes people refer to net income as “take-home pay.”
Pretty simple, huh?
The same is true in business as it is for your own personal finances. Businesses don’t receive a salary, they produce profit. In that sense, businesses have both gross profit and net profit. As it is with an individual’s salary, gross profit will always be the larger number.
Gross profit is the same as a company’s total revenue. Net profit, on the other hand, is equal to the company’s total revenue minus their costs. So, for example, if a business sells 1 product for $100, but it cost them $30 to produce the product, then their net profit after selling it to a customer would be $70, or $100 (revenue) minus $30 (costs).
So if you apply for a new job, and the company that hires you agrees to pay you a salary of $50,000 per year, what would your gross income be? You guessed it: $50,000!
Always Consult an Expert
If you ever have any questions about the definition of financial terms, always be sure to ask a professional before moving forward. And while the financial pros at Lend for All can do much more for you than explaining the meaning of financial terms, no job is too small for us, and we will be happy to spend time explaining even the most common financial terms.
Contact Lend for All today. Whether you’re in the market for a personal loan, help with debt consolidation, financing, or just need some advice, Lend for All is here for you!