Getting financial freedom depends heavily on your ability to understand financial concepts. You do not need to have a Ph.D. in Finance; you just need the basics.

I read Wallace D. Wattles's book The Science of Getting Rich, and it taught me something interesting.

The books said that getting rich is a product of doing things a certain way. It is about how you do things and not what you have. I highly recommend that you read this book.

If you understand how finances work, you can improve how you handle them.

As we pointed out in our previous article, "Prudent expenditure for financial growth," many people do not die poor because they do not make money but because they cannot handle what they earn.

These key financial definitions will become the basics of your financial success. I will try to simplify them as much as I possibly can.

1.   Income

This is the money that comes into your pocket. It can be from a job, a business, or any other kind of investment.

Income can be earned, portfolio, or passive. Read our article on The three classifications of income to understand more.

There are various sources of income that you also need to understand. Read our article on The seven Types of Incomes everyone should have.

You should always endeavor to increase your income.

2.   Expenses

Expenses deduct money from your pocket. Everything that takes money away from you without a promise to recover it is an expense.

These can be your rent, food, holiday, car maintenance, clothes, etc. For a business, expenses can be in the form of employees’ salaries, office rent, taxes, etc.

You should always endeavor to reduce your expenses. Read our article on prudent expenditure for financial growth to get more.

3.   Asset

An asset, according to Robert Kiyosaki, is something that brings money into your pocket. It is the investment that brings income.

Something becomes an asset depending on how you use it. If you build some house to rent, you have built an income. If you start living in it with your family, it ceases being an asset.

The objective is to accumulate income-generating assets. Always use your income to get more and more assets. If you don’t, even a high income will be useless in the long run.

4.   Liability

A liability increases your expenses. In short, it takes money from your pocket. A liability reduces your ability to accumulate assets.

An expensive rental house is a liability because it increases your expenses. A big car is a liability because it increases fuel consumption and this is an expense.

Just like for the asset, a liability is defined by how you use it. You can easily turn a liability into an asset by using it to make money.

5.  Appreciation/ depreciation

Appreciation is an increase in the value of a commodity. On the other hand, depreciation is a decrease in the value of a commodity.

Some of the investments that usually appreciate include real and estate, precious metals, and businesses. It is not a guarantee but they mostly do.

Some of the commodities that depreciate include cars, plants, and equipment, furniture, electronics, etc. This is a guarantee.

Some investments like stocks can appreciate or depreciate.

Buy assets that depreciate after very careful consideration. You have to deduct the depreciation expense when calculating the returns.

Always endeavor to accumulate assets that have the potential of appreciating exponentially. This is why investment in a business, real estate, and precious metals remain the best investments anywhere in the world.

6.   Asset life

An asset life is determined by how long an asset can serve you. If a car can bring money for 5 years and it cannot anymore, its asset life is 5 years.

Asset life should be a priority consideration when making any investment. It determines how long you can earn from the investment.

Assets with a perpetual life are most of the time the best investment. Perpetual life means that the asset can bring income for a lifetime. You can then leave it to your children as an inheritance.

Real estate and precious metals are the best examples in this category. A business can also have perpetual life.

To be continued...