Finance Help

Finance is the science of funds management. There are three main areas of finance: personal, business, and public (government). Finance includes both lending and saving money. However, most of the time finance means borrowing.

PERSONAL FINANCE

Personal finance is financial principals applied to the monetary decisions of an individual or family. How a person saves money, spends money, and borrows money are all aspects of personal finance. A person’s savings and checking accounts, personal loans, credit cards, mortgage, and investments all make up the total financial picture of the individual.

In general, there are five steps to personal financial planning:

  1. Assessment is the process of simplifying complicated financial matters into easy to understand personal balance sheets and income statements. The balance sheet lists the monetary value of personal assets (vehicles, property, stocks, etc.). The income statement lists personal income and expenses.
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  2. Goals are set by the individual. Goals may be short, medium, or long term in nature. An example of a short term goal might be to pay off a credit card by the end of the year. And example of a long term goal might be to retire before age 60. Numerous goals are common.
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  3. A plan is created. The individual uses the assessment and goals to create a financial plan. The plan is the means by which the goals are obtained. Oftentimes the plan includes budgeting decisions.
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  4. The plan is executed. This step is oftentimes the hardest part. If the plan is not adhered to the goals will not be reached. The individual must stick to the financial plan no matter how difficult it may be.
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  5. The individual, assessment, goals, and plan are routinely reassessed. If significant changes have occurred in one’s life it may be necessary to modify the assessment, goals, or financial plan.
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BUSINESS FINANCE

Business finance is the area of finance that deals with business and corporate financial decisions. This area includes the tools and analysis that are used to make business financial decisions. The main goal of business finance is to maximize corporate value while minimizing risk. Funds and capital for ongoing activities of the business are provided through business finance.

All firms have a fixed, or limited amount of capital. Decisions must be made on how to best utilize their capital. This is referred to as capital budgeting.

Risk management is a process that measures risk and thereby develops strategies to manage said risk. A firm’s exposure to risk is directly related to its investment decisions (past and present). Risk management helps preserve firm value.

PUBLIC FINANCE

Public finance is how government activities are funded and paid for. This field overlaps both economics and business. Ethical questions are commonly raised such as how should this program be paid for and should this program be undertaken.

Oftentimes government activity has a negative impact on capital markets. This in turn negatively impacts personal and business finance. There is a bureaucratic and monopolistic component to government, and as a result, government is almost always inefficient. These inefficiencies also contribute to the negative impacts on other areas of finance.