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Finances play such an important role in our lives. They affect us both positively and negatively. This article gives you a brief overview of basic types of finances and their differences.
Understanding the Role Of Finance.
There is no doubt that finance plays a major role in our everyday life. It affects us both positively and negatively, as it directly influences all aspects of our lives. Hence, we need to understand how different types of finance work.
Are Money and Finances the same thing?
In short, yes! Money is simply the medium through which finance works. However, it’s not the only type of finance. Other types include capital finance, debt finance and equity finance. Each of these has its unique features. Here are some definitions:
– Capital Finance:
An investment into a financial asset to earn income from future profits. It can be used to purchase any kind of asset including real estate, stocks or bonds.
– Debt finance:
A loan or credit from a creditor must be paid back in installments.
– Equity finance:
The ownership share that comes along with an investment into a business. The owner usually receives dividends on his/her shares whenever there is a profit being made by the company.
Different Types Of Finance
1. Personal Finances
Personal finances are the money that is used for your personal needs. These include things like food, clothing, mortgage or rent, car payments, utilities and other bills etc. If there is no money left to pay these bills then it can lead to financial problems.
2. Business Finances
Business finances refer to the financial aspects of a business. It includes all the money spent on buying materials, equipment, hiring employees and paying taxes etc. It also refers to how much profit or loss the company makes when running its business. There are two main types of businesses – Sole Proprietor (SP) companies, which are owned by one person, and Partnership (P) Companies where two or more people own them together. The latter is usually called Limited Liability Companies (LLCs).
3. Investment Finances
Investment finance is any type of finance that involves investing in something else than what you already have. For example, if I put my money into stocks, bonds or property; this would be investment finance. Also, if someone invests in shares in a company they get paid dividends from the profits made by that company. In short, it is a benefit given either by the government or a private company to encourage certain economic activity. An example could be tax reliefs such as R&D Tax Credits, Enterprise Finance Guarantee Schemes, Venture Capital trusts, and Government Bond Investments.
4. Insurance Finances
Insurance finance is similar to investment finance but instead of using money that you have, insurance uses your or someone else money. Examples of insurance finance could be Life Assurance, Pension Plans, Mortgage Protection and others.
5. Debt Finances
Debt finances are anything related to borrowing money. This may involve borrowing money from a bank, credit card, loan, hire purchase agreement, etc.
6. Risk Finances
Risk finances are any form of finance that relates to risks. A risk can be defined as “the possibility of some undesirable event occurring”. Some examples of risks could be weather extremes, health issues, natural disasters, war, or terrorist attacks.
7. Long-Term / Over Time Finances.
Long-term/overtime finances are different from short-term finances because they are planned for longer periods. Long-term/overtime finances look at things like retirement, savings, investments, and retirement plans.
8. Capital Finance.
As mentioned before, capital finance involves the use of funds to acquire an asset. For example, if a person wants to buy a house, he/she will first borrow money to pay for it. After this, the lender gets a claim against the house. He/she can sell the house at any time without paying anything else. If the interest rate charged on the loan is higher than the return on investments, then the bank makes more money. On the other hand, if the rates are lower than the return on investments then the lender loses money. Therefore, capital finance is riskier than other forms of finance. Since most people do not want to lose what they owe, they tend to choose loans with low-interest rates.
9. Equity Finance.
One of the best ways to make money is by investing in businesses. However, one needs to have enough funds to invest. To get the required amount, one may take out a loan or ask friends and relatives for help. Some people prefer to raise money by selling off their property. Since the seller does not receive any cash until the sale takes place, this is called equity finance.
The Bottom Line.
Knowing these things will prepare you for the world of finance. It will also help you decide where to put your hard-earned money like playing game online casino at any Australian casino. So, keep learning and stay safe!