NATURE OF FINANCE
FINANCE- the management of money which
includes investing, borrowing, lending,
budgeting, saving, and forecasting
-broad term that describes activities associated
with banking, leverage or debt, credit, capital
markets, money, and investments
FINANCIAL MANAGEMENT- business
function that deals with investing the available
financial resources in a way that greater business
success and return-on-investment
OBJECTIVES OF FINANCIAL
MANAGEMENT
LIQUIDITY- deciding what amount of liquid
resources will be needed
PROFITABILITY- setting an objective of a
level of profitability high enough
EFFICIENCY- to increase output from a given
set of inputs
GROWTH- increasing the value of business
growth through expansion
ROC- when a business makes decision to invest
in capital
TWO PILLARS OF FINANCE
ECONOMICS- branch of knowledge
concerned with production
ACCOUNTING- work of keeping financial
accounts and language of communication
TYPES OF FINANCE
PERSONAL FINANCE- specific to an
individual’s situation and activity
CORPORATE FINANCE- financial activities
related to running a business
PUBLIC FINANCE- includes taxing, spending,
budgeting, and debt-issuance policies that affect
how a government pays for the services it
provides to the public
FINANCE FUNCTIONS
Liquidity Decision, Investment Decision,
Finance Decision, Dividend Decision
AREAS OF PERSONAL FINANCE
INCOME- the entire amount of cash inflow that
you receive and can allocate to expenses,
savings, investments, and protection
SPENDING- an outflow of cash and typically
where the bulk of income goes. Spending is
whatever an individual uses their income to buy
SAVING- income left over after spending
INVESTING- involves purchasing assets,
usually stocks and bonds, to earn a return on the
money invested
PROTECTION- methods people take to protect
themselves from unexpected events, such as
illnesses or accidents, and as a means to
preserve wealth
LOANS- money borrowed by companies or
persons
FINANCIAL INSTITUTIONS- called
banking institutions, are business entities that
provide services as intermediaries for different
types of financial monetary transactions
OBJECTIVES OF FINANCIAL
INSTITUTION
SATISFY FINANCIAL NEEDS- Satisfying
the needs of the customers and clients is an
important objective for every financial
institution
ASSIST CUSTOMERS- helps their clients to
choose the investment based on their interest
and risk tolerance and also teaches them how to
maintain investments
DIFFERENT FINANCIAL INSTITUTIONS
CENTRAL BANK- responsible for the
oversight and management of all other banks
RETAIL AND COMMERCIAL BANKS-
retail banks offered products to individual
consumers while commercial banks worked
directly with businesses. Currently, the majority
of large banks offer deposit accounts, lending,
and limited financial advice to both
demographics
INTERNET FINANCIAL INSTITUTION-
same products and services as conventional
banks
CREDIT UNIONS- providing traditional
banking services and is created
INSURANCE COMPANIES- assist
individuals in transferring the risk of
experiencing a financial loss
BROKERAGE COMPANIES- acts as a
middleman between purchasers and sellers
FINANCIAL INSTRUMENT- contracts for
monetary assets that can be purchased, traded,
created, modified, or settled for
FINANCIAL INSTRUMENTS
CASH INSTRUMENTS- real or virtual
document representing a legal agreement
involving any kind of monetary value
DERIVATIVES INSTRUMENTS- derives its
performance from the performance of an
underlying asset.
FOREIGN EXCHANGE INSTRUMENTS-
exchanging the currency of one country for
another at prevailing exchange rates
PERSONAL FINANCE
FIVE AREAS OF PERSONAL FINANCE
Income, Spending, Savings, Investing,
Protection
PRINCIPLES OF PERSONAL FINANCE
Pay yourself first, Start saving now, Create a
budget
THE SEEDLY MONEY FRAMEWORK
Income, Spending, Savings, Insurance, Investing
WHY IS PERSONAL FINANCE IS
IMPORTANT?
The expenses never end, Financial Security,
Manage your income
PERSONAL FINANCIAL PLAN
Assessment, Goal Setting, Creating a plan,
Execution, Monitoring
HIERARCHY OF FINANCIAL NEEDS
Legacy- estate planning
Financial Freedom- long-term care
Accumulating wealth- saving for retirement
Financial Safety- emergency fund
Cash flow and Basic Needs- food, housing,
daily expenses
CONCEPT OF MONEY
MONEY- commodity accepted by general
consent as a medium of economic exchange
TYPES OF MONEY
FIAT MONEY- type of money issued by the
government that guarantees as a legal tender.
COMMODITY MONEY- whose value comes
from a commodity of which it is made
FIDUCIARY MONEY- the Latin word fiducia,
to trust, fiduciary money works on the promise
and trust that it will be exchanged for fiat or
commodity money by the issuer
COMMERCIAL BANK MONEY- claim
against a bank for the purchase of goods and
services
E-MONEY- broadly defined as an electronic
store of monetary value on a technical device
that may be widely used for making payments to
entities other than the e-money issuer
EVOLUTION OF MONEY
Barter, Gold, Metal, Paper Money, Plastic Card,
Electronic Money, Crypto Currency
FUNCTIONS OF MONEY
PRIMARY-a medium of exchange, a measure
of value
SECONDARY- a store of value, transfer of
value
CONTINGENT- basis of credit creation
VALUE- monetary, material, or assessed worth
of an asset, good, or service
LEGAL TENDER- as pieces of stamped metal
or printed paper customarily and legally used as
medium of exchange
PURCHASING POWER- currency expressed
in terms of number of goods or services
FACTORS THAT IMPACT PURCHASING
POWER
MARKET EQUILIBRIUM – supply and
demand of goods and financial resources.
SOURCE OF INCOME – every person
requires source of income to earn money.
INFLATION AND DEFLATION – unstable
price activity.
TAX – this is the money we pay to the
government.
INFLATION- can be translated as the decline
of purchasing power over time
FACTORS THAT CAN IMPACT
INFLATION INCLUDE:
Cost of production, Prices of goods, Demand for
goods, New Technology
HOW TO EARN MONEY
Business, Work, Savings, Donation, Financial
Assistance, Investments, Loans, Commissions
INCOME
INCOME- money that a person or entity
receives in exchange for their labor or products.
PERSONAL INCOME-all income collectively
received by all individuals or households in a
country
GROSS INCOME- individual’s income before
taxes and adjustments
NET INCOME- individual earnings after taxes
3 TYPES OF INCOME
ACTIVE INCOME- generated from trading
your time for money (salaries, bonus,
commissions)
PASSIVE INCOME- from your assets without
working for it actively (business, rental,
royalties)
PORTFOLIO INCOME- selling an investment
a higher price than you paid for it (shares,
stocks, collectibles)
SOURCE OF INCOME
SALARY INCOME- fixed regular payment,
typically paid on a monthly or biweekly basis
PROFIT INCOME- basically how business
works. You sell products for a higher rate than
they originally cost you
INTEREST INCOME- money that you earn by
loaning your wealth and charging interest or it
could be from a time deposit or savings account
DIVIDEND INCOME- returns distributed to
shareholders from the company earnings or
profits
RENTAL INCOME- you earn by renting out a
property or asset
WAGE INCOME- consists of basic wage,
bonus, subsidies and other labor-related income
from regular jobs
ROYALTY INCOME- making money from
utilizing a product, idea, or concept that you
own
FACTORS AFFECTING INCOME
Years of experience, Education, Lifestyle
DIVERSE SOURCES OF INCOME-
Defining what constitutes income and what does
not can be complex, as some forms of income
may be less tangible or regular than others
CULTURAL AND LEGAL DIFFERENCES-
Different cultures and legal systems may have
varying norms and definitions of income, which
can create challenges when comparing income
data globally.
CHANGING ECONOMIC LANDSCAPE-
nature of income is evolving with the gig
economy, freelancing, and new forms of work
arrangements
INTERNATIONAL COMPARISONS-
Comparing income across different countries
can be problematic due to variations in currency
exchange rates, cost of living, and economic
structures
INCOME INEQUALITY- Measuring and
comparing income across individuals or groups
can be difficult due to income inequality
TAX IMPLICATIONS- Different tax
jurisdictions may have varying definitions of
income for tax purposes