Finance is a broad and crucial topic of discussion. While most people often use accounting and finance together or interchangeably, there is a notable difference between the two. This article will cover what finance is all about along with ten interesting facts about finance.
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What is Finance?
Finance is the allotment of liabilities, funds, and liabilities over a certain period, mediums, and processes to make the most out of it. To put it differently, it is the management and multiplication of funds to get the best interest while minimizing risks and losses. Generally, finance is divided into three parts; Personal Finance, Public Finance, and Corporate Finance.
What is Personal Finance?
Personal Finance is the management of a person’s funds and helping them realize their desired goals concerning investments and savings. Personal Finance is tailored to individuals. The plans depend on the earning potential, goals, time frame, requirements, etc. Personal finance includes investments in real estate, life insurance, education, medical insurance, savings, expense management, etc.
Some examples include:
- Safeguarding your finances from unforeseen circumstances as well as uncertain personal incidents.
- Transfer of funds across several family generations.
- Management of taxes and obeying tax policies.
- Preparation for retirement.
- Preparation for loans or debts.
- Investments and wealth accumulation.
What is Corporate Finance?
Corporate Finance deals with funding company expenses and building the capital structure of companies. It comprises sourcing funds and channeling them, such as fund allotment for resources and enhancing the value of the company by improving its financial position. Corporate finance centers on establishing a balance between risks and opportunities and improving the value of assets.
Examples of Corporate Finance include:
- Capital budgeting
- Making use of standard business valuation techniques.
- Identification of source funds in the form of creditors, equity, shareholders’ funds, etc.
- Acquiring and investing in stocks or other assets
- Risk management as well as tax considerations
- Identifying relevant constraints, objectives, and opportunities
What is Public Finance?
Public Finance relates to states, provinces, municipalities, and all other government-based finances. It comprises long-term investments associated with public entities. This finance type considers several factors, such as income distribution, resource allocation, economic stability, etc. These funds are majorly gotten from taxes, bank loans, and insurance companies.
Examples of Public Finance include:
- Identification of expenditure needed by the public
- Revenue sourcing for the public
- Budget process estimation and fund sourcing
- Debt issuance for public tasks
- Tax Management
Now that we’ve covered the definition and types of finance, we’ll go on to discuss two terms that regularly come up in Finance: Microfinance and Trade Finance.
What is Microfinance?
Another term for microfinance is microcredit. This finance type is for persons that don’t have ease of access to financial services. This group of people includes low-income earning persons, unemployed individuals, etc. Some banks also provide additional services such as training, savings accounts, and microinsurance.
The purpose of microfinance is the provision of opportunities for these persons to become self-dependent. Many times, lenders grant loans after combining borrowers to make sure that there is a better chance of repayment. Repaying such microloans usually costs more than traditional financing as a result of the risk that is involved.
Micro Financing includes:
- Bank checking as well as savings accounts
- Formal education on investment principles
- Training on simple money management
- Accounting and Bookkeeping skill management
- Learning sessions on financial terms such as interest rate, capital gains, stock options, budget, etc
What is Trade Finance?
Trade finance refers to financial instruments as well as services that allow and enhance trade internationally. This finance type is perfect for importers and exporters to have smooth foreign transactions by decreasing global trade risks. Trade finance can reduce the risks associated with international trading by harmonizing the different needs of importers and exporters.
Unlike traditional finance, this type of finance protects both parties from the numerous risks associated with global trade and retains their liquidity. Some of the risks involved in foreign trading include currency fluctuations, lack of payment by a party, the creditworthiness of either party and political instability, etc.
Trade finance deals with an external party to conduct transactions, thus removing the risk of supply and settlement. In this type of finance, the exporter receives the payment according to the agreement, and the importer avails a credit line to accomplish the trade order.
Asides from risk protection, trade finance also enhances efficiency as well as revenue. It allows the company to receive cash payments based on account receivables since the buyer’s bank guarantees payment. It ensures on-time payments and guaranteed shipment of products. Several parties are involved in trade finance, and they include credit agencies, importers, exporters, insurers, banks, etc.
In finance, there are things we refer to as financial instruments. A discussion on finance would be grossly incomplete without discussing what they are.
What are financial instruments?
For any company or individual to avail of financial services, they need financial instruments. A financial instrument is defined as a contract between two people or parties that involves fiscal activities. The use of financial instruments ranges from investment purposes to lending or borrowing. Financial instruments can be either Cash or Derivative.
What is a Cash Instrument?
Market forces determine what the value of cash instruments will be. Cash instruments generally refer to instruments that all parties can quickly transfer. It could take different forms, such as loans, securities, deposits, etc. There are several kinds of cash instruments accessible in the market, like deposit certificates, bills of exchange, e-securities, repurchase agreements, interbank loans, and many others.
What is a Derivative Instrument?
Derivative instruments derive their value from the valuation of entities such as assets, indexes, or other factors. There are several kinds of derivative instruments accessible in the market, and they include swaps, futures, and options.
The classification of financial instruments also depends on their asset class. They can either be debt-based or equity-based. Debt-based instruments are in the form of loans that the lender collects from the investors. They include bond futures, treasury bills, interest rate swaps, and bonds. While an equity-based instrument reflects ownership according to the equity share that an investor holds. Forex Instruments is another asset class type that includes currency swaps, forex futures, and much more.
Now that we’ve covered the subject of finance generally, we’ll be moving on to list ten vital things you need to know about personal finance;
Money is a resource that we need to manage effectively in our daily lives. To accomplish this, we need to carry out proper personal finance. It comprises all of the decisions and steps that a person or family takes to keep track of and monitor their daily expenses. Activities like saving, mortgage planning, insurance, budgeting, retirement savings, and insurance characterize personal finance.
When carrying out personal financial planning, some of the things you need to do include are the following:
- Current financial position
- Prediction of long-term and short-term demands
- Plans to satisfy such demands
Identify your current financial position, predicting your short and long-Sorting out your finances in this manner is a task that any person or family should be able to perform.
Tips on How to Deal with Your Personal Finance
Here are 10 tips on how to be successful when dealing with your personal finance:
1. Always set aside twenty percent of your earnings.
There are some actions in our lives that have a significant priority. Some of them include emergency savings, repaying debts, retirement savings, etc. It is always vital to bear these activities in mind whenever you receive your income. You can achieve this by taking out twenty percent of your incoming and dedicating it to those things.
Aside from setting aside twenty percent, you can also take out thirty for leisure activities. You work hard, and so, you should get to enjoy yourself. Examples include going clubbing, eating out at fancy restaurants, going to the cinema to watch movies, etc. Doing this is a great way to enjoy yourself and still have a firm grip on your personal finance.
2. Make a Calendar to keep your finances on track.
When dealing with personal finance, some activities should take place on particular dates. For instance, you should usually file your taxes every four months and receive a credit report each year. These are crucial processes that considerably impact your financial state. Missing out or forgetting any of these dates or events can cause lots of issues for you.
You can make a personal calendar for you to mark each of these events so that you will remember when to make the payments. With the advent of modern technology, it’s much easier to do this. You can synchronize your calendar with all your devices so that you will get automatic reminders to do them.
3. You can exercise more control over your personal finances by using only cash.
Overspending becomes more of a possibility when you shop with your credit cards because you can easily convince yourself that you will pay it back by the month’s end. Another thing is that when you use credit cards, you don’t realize how much of your actual money you are spending. And that can lead to overspending. Should you find yourself with this very problem, the only solution is to start implementing a cash-only policy.
When you do this, you can see exactly how much you’re spending per time. It makes the concept of spending and personal finance more tangible to you. When you start seeing how much you spend, you can intentionally cut it down and become more thrifty.
4. Invest in Health Insurance
Every day when we wake up and leave home, we face a lot of risks. You are at risk of slipping on a banana peel, nicking yourself while preparing breakfast, or even electrocuting yourself while using your appliances. On your way to work, there are tons of risks as well. Health insurance is a sure way to safeguard yourself from these numerous risks and much more.
When you start to receive a regular and stable income, ensure to invest some of it in health insurance. You could do vigorous research and ask for quotes from different insurers. Always choose the one that has the lowest cost with the most comfortable coverage for you. Asides from getting health insurance, you can also further safeguard yourself from accidents by consuming healthy foods and driving safely and responsibly.
You should also regularly service your home’s electrical system as well as your car’s engine. These activities are also included in personal finance.
5. Create Specific Financial goals
When you are making your financial goals, it is crucial to be excruciatingly specific. It means that all your financial goals or targets should have specific dates and digits attached to them. For instance, you can create an objective that specifies the amount of something that you want to buy or that you need to pay for, along with the date that you intend to achieve it.
You can also create an objective that specifies how you want to go about it and how much work or investment you will need to get done. This type of detailed goal-setting will make sure that your personal finance works.
6. Have an Emergency Fund
An emergency fund is a very crucial financial resource to have. You can make one by removing a certain percentage whenever you receive your income. An emergency fund is a reason for you to pay yourself first.
Regardless of the amount of money that you make or the amount of debt you incur, you should regularly deposit a particular amount in your emergency fund to cover unforeseen financial undertakings that may come up. It is a non-negotiable fund, meaning that whatever happens, you should still deposit some money into the account.
Another thing is to make sure that you place these savings in a safe and fulfilling location that you can liquefy with ease. An example of said locations includes savings accounts with high interest, money markets accounts, etc.
7. Create a retirement savings account now!
While it may seem like it is still eons away, it is never too early to start. The primary reason why you should do this is that retirement savings accounts use compound interest.
Compound interest ensures that whatever small amount you start your retirement savings with will grow to become a significant amount of money at the time of your retirement. The company you work for can give you a retirement plan, or you can get it from a bank or credit union. Obtaining and keeping a retirement savings account is one of the steps to take in performing personal finance.
8. Evaluate the rates of your interest
Taking out bank or other loans is a part of personal financing. Loans entail getting money from a person or bank and returning it with a fixed or variable interest. When requesting a loan, make sure to find one with low interest rates.
Additionally, most credit cards operate using compound interest rates. So, it is in your best interest to limit your credit card use as their debts could be financially disastrous. Ensure to always keep an eye out for interest rates.
9. Know how to compute your net monthly income
A vital concept that you should understand before you even start working is how to compute your salary taxes. As soon as a company hints at or pays your income, you have to know how to calculate your taxes to separate your gross from net income.
These days, you don’t even need to do it manually. There are now various apps and websites to help you calculate it automatically. It is crucial to compute your net income so that you will know if it’ll be enough to fulfill your personal and or professional needs.
10. Safeguard your assets
As mentioned earlier, the importance of insurance cannot be overemphasized. Your insurance can cover damages or losses to your assets in the case of accidental fires or burglaries. For instance, you can get renters insurance to safeguard the things in your house. You could also get disability insurance to protect you in the case of unemployment.
It is also a good idea to employ the services of a financial planner. He/she will provide you with impartial financial counsel that works to your advantage. Furthermore, you can also do tax planning. Another helpful idea is to safeguard your finances from inflation through investment; invest in vehicles that are unaffected by inflation. All of these tips listed above are necessary for personal finance.
In conclusion
Planning one’s finances is a very crucial task that everyone should perform. It aids in understanding where your money goes regularly. Understand that it is never too soon to start personal finance, and it is also not too late; you can start now. You should begin immediately when you start earning your salary. The tips above can give a head start and save you a lot of stress in planning your personal finance.
