Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Finance Meaning

Finance is a broad term that essentially refers to money management or channeling money for various purposes. It applies to people, businesses, governments, organizations, or other entities. Finance includes banking, debt, capital markets, investments, credit, assets and liabilities, financial systems, and the governance and study of money. 

In a personal context, personal finance is managing, saving, and investing one’s money. In a business setting, it handles acquiring funds for the business, managing existing funds, and planning how to spend funds in the future. Finally, for the public, finance refers to managing the government’s activities related to budgeting, spending, deficits, and taxation. 

Finance and its classification

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Key Takeaways

  • Finance is the process of managing every money-related activity of businesses, people, and governments
  • Proper financing is necessary for an economy to function, deal with crises and grow.
  • There are three main types of finances: personal, corporate, and public.
  • Some key financial terms worth remembering include assets, liabilities, expenses, balance sheet, cash flow, net profit, etc.
  • Top careers in finance can include an investment banker, hedge fund manager, financial planner, accountant, chief financial officer, commercial banker, etc.

Types of Finance 

Finance can be divided into three main categories, and all three play a huge role in our personal lives. Personal finance is unique to us as individuals, corporate finance affects our job and the companies we consume from, and public finance changes the expenditure of our taxpayer Taxpayer A taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax moredollars. We feel the effects of all three every single day.

Let’s take a look at the three types in detail. 

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#1 – Personal Finance

Personal financePersonal FinancePersonal Financing is a way of saving, investing, and growing an individual's money. It can be for an individual or a family as a whole and requires some level of financial literacy such as tax laws, investment opportunities, more relates to all activities for budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that more, saving, investing, and strategizing given a person’s current financial constraints and abilities. Personal finance is very specific to each individual’s unique financial setting. But typically it depends on their annual earnings or salaries, living requirements and expenses, goals, and lifestyle preferences.

Individuals typically save for retirement, which makes saving and investing during their work-life a crucial component to have funds for retirement. Personal finance also includes any financial products a person elects for, such as banking, loans, credit cards, buying insurance, getting a mortgage, or opening a mutual fundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more.

#2 – Corporate Finance

Corporate finance is all financial activities for a business. It is typically its department but can occasionally be rolled up into accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial more, investments, or general management. 

Financial activities for a business would include budgeting current capital, capital for future years, funding and refinancing projects, and assets to ensure that the company has the best deal possible in the current market. Corporate finance also includes finding ways to raise additional funds, which could be through bond Bond Bonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain moreissues, finance offerings, or new investors.

#3 – Public Finance

Public financePublic FinancePublic finance is the management of the country's public funds through revenue, expenditure, and reserves, and it generally includes the management of tax collection, expenditures, the annual national budget, deficits, and more is all government activity related to money and money management. This includes taxation, government spending, budgeting, and any debt Debt Debt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or moreissuance (both to the government and from the government). 

Another huge component of public finance is money management and strategy to ensure the economy continues to stay afloat. In the U.S., the Federal Reserve System ( called “the Fed”) creates all monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, more to help the U.S. economy. It does this by managing inflation, reducing unemployment rates, and stabilizing interest rates in a changing economy and market. In addition, the Fed works to stabilize the economy and the financial system by supervising the largest private banks. They also provide various financial services to the U.S. government. 

Purpose of Finance 

The purpose of finance is to help individuals, businesses, and the government save, manage, raise, and efficiently use the money to the best of its ability. Without the proper management and utilization of monetary resources, the foundation of any entity or organization is doomed to unhinge. Therefore, a dedicated finance system is mandatory for any organization to optimize its goals. 

Take the example of a typical business organization. They may have various departments like finance, H.R., accounting, sales, marketing, development or investments, and maybe a few other fields like administrative and customer service. Of all these different departments, finance may be the most important in that it works to ensure money is used efficiently and the best financial products are a part of the business plan. For example, suppose the sales team is working tirelessly to increase revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any more. But the finance department does not make sure that the company is sticking to its budget or is investing the money into the proper departments or assets. The whole venture, therefore, has effectively become for nothing. And this will soon lead to chaos in the business functioning.

On a national level, the lack of proper financial insight can lead an economy to a crisis, thus affecting the livelihood of its citizens. The awareness of overseeing and protecting public finance has, therefore, increased in the last decade among countries.

Examples of Finance

 Financial activities take place every single day. This includes buying and selling, taking out a loan, maintaining accounts, investing, moving money from one account to another, refinancing and asset, going publicGoing PublicGoing public is a corporate practice in which an unlisted, private company allows the public to purchase its old or new stock for the first time. read more with an IPO IPO An initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock moreoffering, levying taxes, forgiving student debt, selling shares, repaying debt, creating budgets and forecasting budgets. 

Key Finance Terms

Here are some key financial terms one should know:

Top Finance Careers

 Here are a few top-earning finance career opportunities:

Frequently Asked Questions (FAQs)

Why is finance important?

Finance is important for the proper functioning and growth of any entity, including an individual, business, or nation. Finance helps an entity meet its goals with the optimal use of its resources and wise decisions. Conversely, a disregard for financial planning or money management can lead an entity to unpredictable difficulties that can cause severe negative impacts.

Is finance and accounting the same?

Accounting deals with the day-to-day financial activities of an entity or a system. Finance is the term used to refer to the entity’s overall plan or scheme to utilize its resources productively. Accounting gives one a glimpse about the entity’s short-term cash flow, while the other covers the broader aspects of budgeting, setting goals, and long-term plans.

What finance jobs are there?

There are plenty of careers related to finance that require skilled employees. Some top-paying professions are banking, financial advising, accounting, hedge fund managing, etc.

This has been a guide to what is Finance and its meaning. Here we explain types of Finance, their examples, and why is it important. You may also have a look at the following articles to learn more –