FINANCE
David Dubofsky PhD, CFA & Lyle Sussman PhD
Well, what exactly is finance? We define it as a set of concepts, rules and theories concerning how to best raise, manage, and use money.
By “raising money,” we mean the judicious borrowing of money, by consumers like you, to fund consumption; the taxation and borrowing by governments to pay for their expenditures; and the raising of capital by businesses, often by borrowing from banks or issuing bonds, and selling ownership shares (stock, or equity).
By “using money,” we mean planning expenditures, like buying an affordable home or insurance policy, or making savings and investment decisions concerning stocks, bonds, etc.
An investment requires the commitment of your money with the hope that you will be repaid with more money in the future. Investments can be riskless (insured bank CDs or U.S. government treasury securities) or risky (meaning you can lose money; stocks are quite risky because stock prices can decline). Often, buying short-term, riskless investments such as FDIC-insured bank savings accounts is called “saving” rather than “investing.”
Governments spending money on infrastructure, education or services for people in need is another form of investment.
Businesses deciding what products to make, services to provide and property or equipment to buy also are making investments, also known as capital expenditures.
For individuals, it’s called “personal finance”; for governments, “public finance”; for businesses, “business finance,” “corporate finance” or “financial management.”
THE LESSON
“A fool and his money are soon parted.” Pay attention to the basic financial knowledge we are providing in this folder. If you must borrow (e.g. mortgage), borrow wisely. When you do spend, spend wisely. Don’t over-spend. Save an appropriate amount for your retirement. Be aware of the risks you are taking. Read books on finance. Visit reputable finance websites (e.g., https://napkinfinance.com ) to learn more. Pay attention to what is happening in the economy and in financial markets. Above all, focus on the big picture: How best to raise and use your money to achieve total wealth.
Want to learn more about the basics of finance and investing? Here are two influential books about Finance, and you don’t need a business or math degree to enjoy and learn from them:
A Random Walk Down Wall Street, 13th edition, by Burton G. Malkiel. W.W. Norton & Company publishers, 2023.
Stocks for the Long Run, 6th edition, by Jeremy J. Siegel. McGraw-Hill Education, 2022.
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Whether you use checks, a debit card or credit card, you receive a monthly statement of everything you purchased during that period, excluding cash purchases. That statement is a time-bound “snapshot” of how you used money.
But suppose at the end of your life you had the magical power to look at thousands of your snapshots? What is the “big picture” and what would it reveal?
The big picture would reveal the relative percentage of money you spent on immediate consumption instead of investment for the future. Were you focused on here and now, or were you planning for all your future tomorrows?
The big picture would reveal the relative percentage of money you spent to maintain body and soul. Did you contribute to any religious or charitable causes? Did you spend money to maintain your physical health? Were you your brother’s keeper?
The big picture would reveal whether you were always catching up with your creditors or whether you were taking a debt-free journey through life. Were creditors chasing you or were you chasing a dream?
Finally, it would reveal your dreams, aspirations, values and beliefs. Those thousands of monthly statements would say less about what you say about how you want to live your life than how you actually lived your life.
That big picture would tell the world what wealth really meant to you.
You are creating those monthly statements right now – as you live and breathe. You have the power to turn those statements into the big picture that will make you and your loved ones proud.
We wish you heart, soul, and wisdom in creating that picture.
