Personal finance is defined as "the mindful planning of monetary spending and saving, while also considering the possibility of future risk"..... Personal finance may involve paying for education, financing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement. Personal finance may also involve paying for a loan, or debt obligations. The main areas of personal finance are considered to be income, spending, saving, investing, and protection. The following steps, as outlined by the Financial Planning Standards Board, suggest that an individual will understand a potentially secure personal finance plan after:
- Purchasing insurance to ensure protection against unforeseen personal events
- Understanding the effects of tax policies (tax subsidies or penalties) management of personal finances
- Understanding the effects of credit on individual financial standing
- Developing of a savings plan or financing for large purchases (auto, education, home)
- Planning a secure financial future in an environment of economic instability
- Pursuing a checking and/or a savings account
- Preparing for retirement/ long term expenses
Corporate finance
Corporate finance deals with the sources of funding and the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. Short term financial management is often termed "working capital management", and relates to cash-, inventory- and debtors management. In the longer term, corporate finance generally involves balancing risk and profitability, while attempting to maximize an entity's assets, net incoming cash flow and the value of its stock, and generically entails three primary areas of capital resource allocation:
(i) "capital budgeting", selecting which projects to invest in;
(ii) dividend policy, the use of "excess" capital; and
(iii) "sources of capital", i.e. which funding is to be used. The latter creates the link with investment banking and securities trading, in that the capital raised will (generically) comprise debt, i.e. corporate bonds, and equity, often listed shares.
Although "corporate finance" is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. Further, although financial management overlaps with the financial function of the accounting profession, financial accounting is the reporting of historical financial information, whereas as discussed, financial management is concerned with increasing the firm's Shareholder value and increasing their rate of return on the investment. Financial risk management, in this context, is about protecting the firm's economic value using financial instruments to manage exposure to risk, particularly credit risk and market risk, often arising from the firm's funding structures.
Public finance
Public finance describes finance as related to sovereign states and sub-national entities (states/provinces, counties, municipalities, etc.) and related public entities (e.g. school districts) or agencies. It usually encompasses a long-term strategic perspective regarding investment decisions that affect public entities. These long-term strategic periods usually encompass five or more years. Public finance is primarily concerned with:
- Identification of required expenditure of a public sector entity
- Source(s) of that entity's revenue
- The budgeting process
- Debt issuance (municipal bonds) for public works projects
Central banks, such as the Federal Reserve System banks in the United States and Bank of England in the United Kingdom, are strong players in public finance, acting as lenders of last resort as well as strong influences on monetary and credit conditions in the economy.
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