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Understanding Finance 101 - The Basics

Updated on July 27, 2012

Understanding Finance - The First Step

Understanding Finance 101 - The Basics is intended to provide you with the foundation that will help you understand and control your personal finances. Whether you are talking about business or investment finance, or even personal finance, the concept is the same. Finance concerns money and how it is used.

Caveat: Understanding and planning your personal finances involves many components, from the types of bank checking and savings accounts available to you, to goal-specific retirement investing plans and strategies tailored to your life-style and retirement goals. It also includes understanding your debts and how to control and manage them. Which means you will be managing day-to-day financial decisions as well as long-term decisions.

Understanding finance, common financial terms and concepts, and yes, the "fine print" of contracts and agreements you sign, are the foundation stones you will use to build your own personal finance plan.

Financial Literacy - Do You Understand Finance

Maybe you understand finance, and maybe you don't! Here is some data that illustrates you might not know what you think you know.

A 2005 International study, (“Improving Financial Literacy - Analysis of Issues and Policies” OECD 2005) found that:

  • 67% of Australians said they understood finance and compound interest, but only 28% could illustrate with a compound interest problem solution.
  • 40% of American workers are not saving for retirement
  • Many Canadian respondents consider choosing the right investments to be more stressful than going to the dentist.
  • Most British under-40 adults are less financially capable than their parents, and get most of their financial consumer information by accident, (like picking up bank pamphlets), rather then actively seeking financial advice.

A 10-year American study by Financial, (1999-2009), of employees of 300 American companies found:

  • 86% of surveyed workers do not know if they are on track to a comfortable retirement
  • 73% do not know if they retirement assets are correctly matched to their retirement goals
  • 53% admit they do not adequately understand stocks, bonds, and mutual fund investments.
  • 43% don't understand their cash flow and usually spend more than they make each month.
  • 62% do not have an emergency cash reserve
  • 23% are not able to pay their monthly bills on time

So.. do you really understand the concepts of finance enough to manage your personal finances in a way that will help you attain financial security on your way to retirement?

By the Book ...


Finance - According to Webster's

To paraphrase the dictionary, finance, as a noun, (you remember, a noun is the name of something), simply means a monetary transaction.

Your first exposure to finance was probably when you were a kid. Remember when mom or dad gave you money so you could buy some ice cream? Well, when you paid the man and received your ice cream, you were involved in finance - a monetary transaction - you traded your money for goods or services.

Finance –noun
1. the management of revenues; the conduct or transaction of money matters generally,

A more common early understanding of finance, again as a noun, but in the plural form - finances, refers to your money situation - how much you have and how you get it.

Finance -noun
2. finances, the monetary resources, as of a government, company, organization, or individual; revenue.

If you have a job and receive a paycheck, you have finances, a source of revenue. Your paycheck is also an example of the first definition of finance, a monetary transaction. You are transacting an exchange of your labor for money.

If you received an allowance you had finances, again, a source of monetary income, but this time, (in most cases, but not all), there is no transaction or exchange. You receive money, (your allowance), which is revenue to you, but unless it is tied to a list of chores or behavior, you did not have to do anything to get it.

Simply put, in its most basic understanding, finance or finances, means how much money you have, how you get it, and what you do with it.


Finance as a Verb

The term finance can also be used as a verb to mean a way of getting money to pay for something. This is probably the most common understanding of the word for young adults.

Finance –verb (used with object)
3. to supply with money or capital; obtain money or credit for.

In the real world of a young adult, the word finance means getting someone to loan you money so you could buy something - like your first car or home. Whether it is a bank, credit union or car dealership, or even a rich uncle, when you get someone to loan or give you the money to buy something they are financing your purchase. Of course in this context, finance also means you have to pay the money back because a loan is also a debt..

Remember - finance as an action works both ways, obtaining money or supplying money. You finance your new car purchase by obtaining a loan, (getting the money), your bank agrees to finance your new car by granting the loan, (giving money).

You see, no matter how many times it goes around, finance is still all about money.

It Is About How Money Works

So you know what finance means, but do you know what it's about?

  • Do you understand compound interest, and how to make it work for you?
  • Do you know how an APR interest rate will differ from a quoted interest rate?
  • Do you understand priority budgeting?
  • Can you speak the language of investing involved in your retirement planning?

You will - when you complete this series.

Got a minute for a poll?

What was your first understanding of finance?

See results

It's a Big World


Finance - It's a Big Term for a Big World

Understanding finance at the most basic level is the first step to understanding how finance affects your life. As you grow older and your life becomes more complex, so will the meaning of finance. The example of the ice cream was the most basic use of the word finance - a simple monetary exchange.

As a young adult preparing to buy your first car, finance became a little more complicated. Now it not only meant a monetary exchange, but also an additional step of securing a monetary source for the exchange.

Full adulthood will bring even more complexities to finance. You may become involved in business finance, or investment finance. Your world might be populated with terms like; financial planning, financial advisers or consultants, retirement plans, investment plans, 401k's, Keogh's, and on and on until it takes a licensed CPA to understand it all, but even then, it all started here - with your first understanding of what finance is.

Summary: At its most basic level, finance is all about money - how you get it and how you use it. But the most valuable thing to know about finance is how to control it!

From your early childhood allowance to your last will and testament, your life will be enmeshed in the world of finance. It will be your understanding and control of your finances that will determine whether you enjoy a prosperous and secure lifestyle, or a turbulent journey of constantly struggling just to meet your basic needs.

Personal Finance - The Next Step

Your first allowance, or first job was your introduction to the world of finance - your personal finance. Well before you ever become involved in other, more worldly concepts of finance, like the aforementioned business and investment finances, you have to understand your own personal finances.

Once more, a simple definition of personal finances means how you get, spend, and control the money in your personal life. How you manage the money you have, (income), to buy the things you need, (expenditures), and how you control these two aspects of your personal finances will be a very strong determining factor in your success in life.

The Next Step -

This Personal Finances guide is your next step in understanding finance, and your first step in taking control of your life. Understanding the principle concepts of your personal finances will be the next building block in your knowledge of how finance affects your life, and lifestyle. Learn how you can get the right start in life just by understanding your own personal finances.

Understanding Finance Defined

Understanding Finance starts with the dictionary definition
Understanding Finance starts with the dictionary definition | Source

Understanding Finance - Keywords and Tags

Keywords and Tags are important to Internet articles because they help readers and searchers find the information they are looking for. This hub about understanding finance focuses on the basic meaning of the term finance. It then describes the concept of finance as a monetary exchange that forms a transaction. Keywords that relate to this, like: personal finances, or financial management, or other words that describe the components of a financial transaction will all help search engines determine that this is a relevant article for anyone searching about understanding finance and personal finances.

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