Money and banks come to mind when we think about finance, but there is more to it than that. The earning, saving, investing, and growth of money are all aspects of finance. Understanding finance is vital and is a life skill for students and professionals alike.
Breaking down this blog we have:
- Finance definition simplified
- Types of finance illustrated
- Functions of finance
- Basics of personal finance
- Basics of financial management.
We have explained all of this step by step, as if we were in a classroom.
What is Finance? (Definition of Finance)
Simplest Definition of Finance- Finance is the practice of managing money.
This practice entails:
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Earning money
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Saving money
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Investing money
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Spending money
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Protecting money.
In short:
Finance is an art of determining what you can do with money today and be financially secure for the future.
Why is Finance Important
Knowing the basics of finance can help you:
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Avoid money mistakes
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Control on spending
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Accumulate wealth over time
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Be prepared for sudden emergencies
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Accomplish your goals for life
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In case you do not know the basics of finance,
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Money earned will only increase
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Money saved will not increase
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Money owed will only increase.
Main Areas in Finance
Finance is a practice that includes:
1. Earning
2. Spending
3. Saving
4. Investing
5. Managing Risk
These five facets together make the foundation of finance.
Types of Finance
Finance is a wide subject. In broader terms, it can be categorised into three types.
1. Personal Finance
Definition
Personal finance is the branch that concerns the money management of an individual.
Basic Personal Finance Components:
- Salary or income
- Budgeting
- Savings
- Investments
- Insurance
- Retirement planning.
Example:
Suppose your salary is 30,000 per month.
- 15,000 spent on expenses.
- 10,000 is your savings or investment.
- 5,000 is for an emergency, plus some fun.
This is the basic personal finance.
Personal Finance Pyramid (Very Important)
Order is Important:
1. Income
2. Emergency Fund
3. Insurance
4. Investments
5. Creating Wealth
You should never invest before getting an emergency fund and insurance.
2. Corporate Finance
Meaning:
Corporate finance is about how companies handle money.
Corporate Finance Includes:
- Raising capital (through shares, loans)
- Managing cash flow
- Expansion of the business
- Dividend decision-making
- Risk control
Example:
A company can raise funds by:
- IPO
- Taking loans from a bank
- Selling bonds
This money is used for expanding the business.
3. Public Finance
Meaning:
Public finance is about the income and expenditure of the government.
What Public Finance Covers:
- Taxes (Income tax, Goods and Services tax)
- Government expenditure
- Budget deficit
- Public welfare schemes
- National Debt
Example:
Government collects tax → builds roads → runs schools → provides defence.
Types of Finance Summary
|
Type |
Who Uses It |
Example |
|
Personal Finance |
Individuals |
Salary, SIP, FD |
|
Corporate Finance |
Companies |
IPO, loans |
|
Public Finance |
Government |
Budget, taxes |
Core Functions Of Finance
The Core Function of Finance explains what finance does.
Type of Financial Decision
1. Investment Decision
This answers:
Where to invest money?
Examples:
Shares
Real estate
Mutual Funds
Machines
A wrong investment decision leads to loss, and a right choice leads to growth.
2. Financing Decision
This answers:
Where should money come from?
Sources:
Own Capital
Loans
Shares
Bonds
Then companies need to decide:
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Debt or Equity
-
Short-term or long-term funds.
3. Dividend Decision
This answers:
How much of the profit should be distributed?
Options:
Pay a dividend to shareholders
Reinvest the profits into the business
Trust of the investors can be developed with a good dividend policy.
4. Liquidity Management
This answers:
Is there enough cash available for all daily needs?
Too much cash → It's just sitting there idle.
Too little cash → Your business will fail.
There needs to be a balance.
Some Basic Knowledge on The Management of Finance Students
Financial Management includes all the activities leading to the planning, organising, controlling, and monitoring of the financial resources.
A. Financial Management Cycle
It consists of the following steps:
1. Planning
2. Budgeting
3. Implementation
4. Monitoring
5. Control
The Objectives of Financial Management
The main objectives of financial management are:
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Maximising profit.
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Maximising wealth.
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Controlling costs.
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Reducing risks.
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Ensuring stability for the long-term.
Some Basics of Personal Finance Every Student Should Know
Budgeting
Budget is defined as,
Income - Expenses
Always track:
Fixed expenses
Variable expenses
Savings.
There is a simple rule:
Spend, but save first. At least save 20% of your income.
Emergency Fund
The emergency fund needs to be equal to 6 months of expenses.
It protects you from:
Losing your job.
Sudden medical debts.
Basic Investment
You can start with:
SIP
PPF
FD
You can move on to advanced:
Stocks
Mutual funds.
Risk Protection
Remember, insurance is not an investment. Insurance means protection, and not investments.
Types:
- Health Insurance
- Life Insurance
Note: Calculate your finance problems
Relationship Between Finance and Daily Life
Savings also help in multiple decision-making, like
- Paying the mobile bill
- Choosing EMI or cash
- Saving for education
- Planning retirement
Then, if you ignore finance,
- Stress increases
- Debt increases
- Wealth decreases
Common Mistakes Students Make in Finance
- No budgeting
- Credit card misuse
- No savings
- Blind investment tips
- Ignoring insurance
Learning finance early avoids these mistakes.
Finance explained in one simple line: Finance is the art of making money work for you, not against you.
Summary: Basics of Finance (Quick Recap)
- Finance is the art of managing money wisely
- Types of finance: Personal, Corporate, Public
- Functions of finance: Investment, Financing, Dividend, Liquidity
- Personal finance basics: Budget, Save, Invest, Protect
- Financial management basics: Planning + Control
Conclusion
It is not optional anymore. It is crucial to comprehend the fundamentals of finance. Financial literacy is essential if you want a stress-free life, a prosperous profession, or financial independence. This guide on finance definition, types of finance, functions of finance, personal finance basics and financial management basics provides a strong starting point for you.
