FF.5 Identify and define basic financial terms
Borrower
A borrower is a person or business that receives money from someone else and agrees to pay it back. The borrower must follow the repayment agreement, which explains how much money must be returned and when payments are due.
Maya borrows $20 from her aunt to buy a book. Maya agrees to return the $20 next week. Maya is the borrower because she received the money and agreed to pay it back.
The borrower receives the money and agrees to repay it. Borrowing does not make the money a gift. If interest is part of the agreement, the borrower may have to repay more than the amount originally borrowed.
Lender
A lender is a person or organization that gives money to a borrower under an agreement that it will be repaid. Banks and credit unions can be lenders. A person who lends money to a friend or family member can also be a lender.
Maya's aunt lends her $20 and agrees that Maya can repay it next week. Maya's aunt is the lender because she provides the money under a repayment agreement.
A lender provides money, while a borrower receives it. Some lenders charge interest, but not every loan has interest. The loan agreement explains the terms.
Loan
A loan is money that a person or organization lends to someone under an agreement that the money will be repaid. The agreement may explain the amount borrowed, the payment schedule, the interest, and the total amount that must be repaid.
A family borrows $1,000 from a bank to help pay for a necessary expense. The family agrees to repay the money in regular payments. The $1,000 provided under this agreement is the original amount of the loan.
A loan is not free money. The borrower must follow the agreement and repay the amount owed. If the loan charges interest, the total repayment will usually be greater than the original amount borrowed.
Interest
Interest is money paid for borrowing money or money earned for keeping money in certain savings accounts or investments. When someone borrows money, interest can increase the total amount that must be repaid. When someone earns interest on savings, the account may grow.
Alex borrows $100 and agrees to pay $5 in interest. If there are no other fees or charges, Alex must repay $105 in total: $100 + $5 = $105.
Interest is different from the original amount borrowed. In this example, $100 is the principal and $5 is the interest. The amount of interest depends on the agreement. Some savings accounts also pay interest to account holders.
Debt
Debt is money that a person or business owes and is expected to repay. Debt can come from a loan, a credit card balance, or another agreement to pay money later. The amount of debt may change as payments are made or additional charges are added.
Jordan borrows $30 from a family member and has not repaid any of it yet. Jordan owes $30. That $30 is Jordan's debt.
Debt means money owed, not money saved. Paying back the amount owed reduces the debt. If interest or fees apply, the borrower may owe more than the original amount borrowed.
Credit
Credit is an arrangement that allows a person or business to receive money, goods, or services now and pay later. Credit may be offered through a credit card, a loan, or a store payment agreement. The person using credit must follow the agreement and make the required payments.
A store allows a customer to take home a bicycle and pay for it in six monthly payments under an approved agreement. The customer is using credit because the store allows payment at a later time.
Credit does not mean that something is free. The customer still has to pay the agreed amount. Depending on the agreement, interest or fees may make the total cost higher than the price paid immediately.
Repayment
Repayment is the act of returning money that was borrowed. A repayment agreement may require one payment or several payments over time. Each payment reduces the amount owed according to the terms of the agreement.
Riley borrows $40 and agrees to repay $10 each week for four weeks. After the first $10 payment, Riley has $30 of the original amount left to repay, assuming the payment goes entirely toward the principal and there are no interest charges or fees.
Repayment is the process of paying money back. Read the question carefully to determine whether each payment reduces the original amount borrowed or also covers interest and fees.
Principal
Principal is the original amount of money borrowed in a loan or the original amount of money placed into an investment. For a loan, the principal does not include interest. As a borrower pays down the principal, the amount of principal still owed decreases.
Casey borrows $200 from a bank. The original principal is $200. If Casey makes a payment and $50 of that payment goes toward the principal, the remaining principal is $150: $200 − $50 = $150.
Principal and interest are different. Principal is the original amount borrowed, while interest is the cost of borrowing. A loan payment may cover both principal and interest, so the entire payment does not always reduce the principal.
Bank account
A bank account is an account at a bank or another financial institution that allows a person to keep and manage money. Depending on the type of account, people may deposit money, withdraw money, make payments, and check how much money they have. Some accounts pay interest, while others do not.
Olivia receives $25 for helping with a family project. With help from a parent or guardian, she deposits the money into a savings account. She can check the account balance to see how much money is recorded there.
Different accounts have different rules, services, and possible fees. An account is not the same as a wallet holding cash. Ask a trusted adult or financial institution how an account works and what protections apply to it.
Deposit
A deposit is money added to a bank account. Deposits can include cash, checks, or electronic transfers. When money is deposited and recorded in an account, the account balance usually increases by that amount, unless other transactions or adjustments occur at the same time.
Ben has $35 in his bank account. He deposits another $15. If there are no other transactions, his new balance is $50: $35 + $15 = $50.
A deposit adds money to an account. It is different from a withdrawal, which takes money out. Depending on the type of deposit, the money may not be available to spend immediately.
Withdrawal
A withdrawal is money taken out of a bank account. A person may withdraw money as cash or transfer it out of the account. When a withdrawal is recorded, the account balance usually decreases by the amount withdrawn, unless other transactions or adjustments occur at the same time.
Ben has $50 in his bank account. He withdraws $12 to buy a book. If there are no other transactions, his new balance is $38: $50 − $12 = $38.
A withdrawal removes money from an account. Before withdrawing money, it is helpful to check the balance and consider upcoming expenses. Some accounts may have withdrawal limits or fees.
Balance
A balance is the amount of money recorded in an account at a particular time. The balance can increase when money is deposited or earned and decrease when money is withdrawn or spent. In other situations, such as a loan or credit account, a balance may mean the amount still owed.
Sofia has $60 in her savings account. She deposits $10 and then withdraws $8. Her new account balance is $62: $60 + $10 − $8 = $62.
Always look at the type of account. A savings account balance usually tells you how much money is in the account, while a loan balance tells you how much money remains owed. The word balance can describe either amount.
Savings
Savings is money set aside for future use instead of spending it right away. People keep savings in a safe place, such as a bank account, so the money is available when it is needed later. Savings can be used for goals, emergencies, or planned purchases.
Ava receives $500 as a gift. She decides to put the money into a savings account so it can grow over time. She does not plan to spend it soon. The $500 she sets aside for future use is her savings.
Savings is money kept for later, not money that is owed. It is different from debt, which is money a person must pay back. Some savings accounts earn interest, which can help savings grow over time.
Investor
An investor is a person or organization that puts money into a business, asset, or financial product with the goal of receiving a future benefit or return. Depending on the investment, the investor may receive part ownership, payments, or an increase in value. The result is not guaranteed.
An investor gives money to a small company in exchange for part ownership of the business. The investor hopes the company will become more successful and valuable. The person providing the money is an investor, not necessarily a lender.
An investor and a lender have different roles. A lender provides money under an agreement that it will be repaid. An investor puts money into something hoping for a return, but the investment may lose value.
Investment
An investment is money or another asset put into something with the hope of gaining value or earning a return in the future. People and businesses may invest in equipment, a business, or financial products. An investment involves uncertainty because the result may be better or worse than expected.
A person puts money into a business in exchange for part ownership. The person hopes the business will grow, but the business might not succeed. The money placed into the business is an investment.
An investment is different from savings kept in a bank account. Investments can rise or fall in value, and the original money is not guaranteed to be returned. The possible benefits and risks depend on the type of investment.
Entrepreneur
An entrepreneur is a person who starts or organizes a business and takes responsibility for its activities. Entrepreneurs identify something people may want or need, plan how to provide it, and make decisions about costs, prices, and sales. A business may earn money, break even, or lose money.
Marcus notices that people at a community fair want handmade bookmarks. He plans the designs, buys materials, sets prices, and sells the bookmarks. Marcus is an entrepreneur because he organizes and runs the small business activity.
An entrepreneur does more than sell a product. The entrepreneur also plans and makes decisions about running the business. Starting a business involves financial risk because sales and costs may be different from what the owner expects.
Revenue
Revenue is the money a business receives from selling goods or providing services before its expenses are subtracted. Revenue tells how much money came in from business activities. It does not tell how much the business earned as profit.
A school fair stall sells 20 bookmarks for $3 each. Its revenue from those sales is $60: 20 × $3 = $60. This is the money received from the sales before the cost of making the bookmarks is subtracted.
Revenue is not the same as profit. If the bookmarks cost $25 to make, the stall has $35 remaining after subtracting that cost: $60 − $25 = $35. Other expenses, if any, must also be considered when calculating profit.
Net profit
Net profit is the amount a business has left from its revenue after subtracting all the expenses included in the calculation. Expenses may include supplies, rent, wages, and applicable taxes. If expenses are greater than revenue, the business has a loss instead of a profit.
A bakery receives $500 in revenue from cake sales. Its total expenses, including the costs and taxes counted in this example, are $350. The bakery's net profit is $150: $500 − $350 = $150.
To calculate net profit, subtract the relevant total expenses from revenue. Be sure to include each expense once and do not subtract an expense twice. If the expenses total more than the revenue, the difference is a loss.
Net income
Net income is the amount of income remaining after the relevant expenses and deductions have been subtracted. For a person, it often refers to income after deductions such as taxes. For a business, it generally refers to the amount remaining after the applicable expenses and taxes are accounted for. The exact calculation depends on the situation.
A worker earns $400 before deductions. The worker has $60 in deductions. The worker's net income for this example is $340: $400 − $60 = $340.
Gross income is the amount before the specified deductions; net income is the amount after them. Always check which deductions a word problem includes. In everyday language, net income and take-home pay may be used similarly for workers, but their precise meanings depend on the context.
Expense
An expense is money spent to buy goods or services needed to run a business or household. Expenses can include supplies, rent, wages, and other costs. Businesses subtract their expenses from revenue to find out how much money they have left.
A small bakery buys flour, sugar, eggs, and butter to make cakes. The money the bakery spends on these ingredients is an expense because it is money spent to run the business.
An expense is money that is spent, while revenue is money that is received. Expenses reduce the amount of money a business has left. If expenses are greater than revenue, the business has a loss instead of a profit.
Gross income
Gross income is the total amount of money a person earns before any deductions are taken out. Deductions may include taxes and other required payments. Gross income shows the full amount earned, not the amount a person actually takes home.
Olivia earns $1,200 per month at her job. Before taxes and other deductions are taken out, her total pay is $1,200. The $1,200 is her gross income because it is the full amount earned before any deductions.
Gross income and net income are different. Gross income is the amount before deductions, while net income is the amount remaining after deductions. Always check whether a word problem is asking about pay before or after deductions.
Venture capital
Venture capital is money that investors provide to certain new or growing businesses in exchange for part ownership or another agreed return. It can help a business pay for development, equipment, hiring, or expansion. Venture capital is a type of business investment, not simply another name for a loan.
An entrepreneur creates a new company that makes reusable lunch bags. Investors provide money to help the company grow and receive part ownership in return. This funding may be called venture capital.
Venture capital investors hope the business will grow, but it may fail or lose value. Unlike a standard loan, this type of funding usually involves an ownership stake rather than a promise to repay a fixed loan amount under ordinary loan terms.
Financial risk
Financial risk is the possibility that a money decision will lead to a loss or a result different from what was expected. Financial risk can occur when someone starts a business, makes an investment, borrows money, or spends money on something that may not provide the expected benefit.
A student spends $12 on materials to make bookmarks for a fair. The student sells the bookmarks for a total of $8. The student receives $4 less than the amount spent on materials: $12 − $8 = $4. This is a loss on the materials in this simple example.
Financial risk means that the result is uncertain; it does not mean that a loss will definitely happen. People can think about possible costs and outcomes before making money decisions. Children should ask a trusted adult for help with decisions involving borrowing, investing, or significant amounts of money.
Common Core alignment: CCSS.MATH.CONTENT.4.MD.A.2 – Use the four operations to solve word problems involving money and other measurements. This resource provides supplementary financial-literacy vocabulary. To address this standard directly, students should also solve money word problems using addition, subtraction, multiplication, and division.
Notes for teachers
This resource is designed to provide clear explanations, examples, and practice for learners of different needs and levels of support. It may be used for whole-class instruction, guided practice, independent learning, review, homework, or additional reinforcement at home.