Popularly noted as art of money management, finance involves investments, budgeting, saving, borrowing, lending of assets, and liabilities over time. Often finance allocations occur under the conditions of risks and uncertainty. To elaborate, participants in the finance exchange market strive to price their assets depending on certain factors. For instance, the assets fundamental value, risk level, and its expected rate of return.
Some of the everyday examples where finance plays a significant role include borrowing money from financial institutes like banks. Investing in stocks, guaranteed investment certificates, or bonds is yet another example of finance. Thus, instances are many involving finances, right from lending money via a mortgage to building budget and financial models, etc. Choosing the bank offering the highest rate of interest on savings account is also a finance strategy.
Finance is further categorized as public finance, corporate finance, and personal finance. Paying for education, financing real estate, cars or, buying insurance and planning for retirement are examples of personal finance. Paying for debt obligations like the personal loan is also an instance where personal finance is involved.
The six key areas of personal finance
Personal financial planning has six key aspects as follows. Financial protection concerning the available personal resources which is determined by household cash flows and net worth. While household cash flows concern the household liabilities, net worth is an individual’s balance sheet adding up the individual’s assets. Also, net worth is minus the household cash flow.
Adequate protection is the second aspect that is an analysis of protecting a household from uncertain and unanticipated risks. Adequate protection protects from risks like liability, death, disability, health, property, long-term care, to name a few. While few of these risks are self-insurable, purchasing insurance for the others is wise.
Tax planning is the third key to personal finance which typically entails a person’s income tax. Managing one’s tax is a very crucial aspect of personal finance. It requires understanding as to when to pay the tax and the amount to be paid.
Financial planning to accumulate assets is yet another key to personal finance. Investment and accumulation goals are for accumulating enough money for making big purchases, starting a business, saving for retirement and for incurred education expenses, etc.
Often underrated but the most crucial aspect of personal finance is planning for your retirement. It consists of determining the cost of living post your retirement and opting for a retirement plan that will cover your expenses and uncertain risks and liabilities. The last aspect is estate planning involving the disposition of one’s assets after death. Here, they can leave their assets to their family, friends, charitable trusts, etc.
The in and out of corporate finance
Corporate finance as the name suggests deals with funding, money management, and building the organizational structure of corporations. It basically revolves around all the actions the managers or the higher stakeholders of a company take to increase the net worth of the company.
Often, many feel that corporate finance is similar to managerial finance which is not the case. The latter considerable differs as it is limited to the managerial capabilities. While corporate finance is dedicated to a multitude of firms and organizations, managerial finance revolves only around the manager’s actions. It means corporate finance is not just the financial management of firms. It deals and handles the economic issues of various kinds of corporations.
Typically, corporate finance is mostly about balancing risks and profitability. The end motive is achieved by maximizing the corporation’s net cash flow, value of their stocks, and lastly increasing their assets. Corporate finance involves three areas of capital allocation while balancing between these elements forms the firm’s capital structure. They are capital budgeting, sources of capital, and the dividend policy.
Capital budgeting involves the kind of projects to choose that would contribute towards the growth of the firm. In most cases, it also involves employing standard procedures like business evaluation techniques or real options valuation.
Sources of capital deals with the funding of the investments or handling the investment capital acquired via numerous sources. For instance, the source of capital by shareholders via equity or bonds. Some of the other sources include creditors, firm’s cash flow, working capital funded by banks, etc.
The dividend policy is about determining the fate of any unappropriated profit. That is, whether to retain the excess cash for operational requirements, future investment, or to distribute it among the shareholders. This decision has to be made by the firm’s management.
Scope business valuation, stock investing also known as investment management are part of corporate finance. In a nutshell, it entails everything that increases the company’s assets and cash flow and is detrimental to the management’s decision.
What is public finance?
Any finance related to sovereign states, sub-national entities like provinces, municipalities, etc. and public entities like schools are Public Finance. Typically, it involves long-term strategic perspectives concerning any investment decisions affecting public entities. The strategic plans are most often implemented for over five years and sometimes more. Public finance also impacts a country’s economy.
Some of the aspects entailed in public finance are as follows. Identifying the required budget or expenses applicable to a government sector entity. Determining the various revenue sources of that particular entity. Lastly, allocating a fixed budget and issuing of municipal bonds for government-backed projects.
Generally, the word finance is a broader term that revolves around personal, corporate, and public finance. Thus, it is imperative to understand finance and its essential elements, even for those without a background in finance. For employees, following the finance flow of your company will help you contribute to the growth of the company. On a personal level, having basic knowledge about finance will help you manage your finances better.
Understanding personal finance will help you make confident decisions on your investments, retirement plans, and insurance policies. Often, individuals find finance to be a daunting subject, thus, forcing them to seek the services of financial advisors. However, when they truly understand their finances, investing in the right bonds and policies becomes more comfortable and straightforward. Thus, having basic knowledge about everything finance will help you in the long haul.