What is Finance? Definition, Types & Importance in Daily Life

Finance simply means doing business with money. It involves saving, spending, hopefully, as well as, investing to realise future needs.

Let’s take Nitin’s example:
 

• Nitin earns ₹30,000 per month but spends ₹28,000 on rent, food, and other expenses.
   
• He saves ₹2,000 every month in his bank account.
   
• After a year, he uses his savings to buy a bike for ₹24,000 instead of taking a loan.

Here’s a simple table showing Nitin’s monthly finance plan:

Planning helps Nitin avoid spending his money on debt interest or spending on what he does not need. Finance helps all individuals, such as Nitin, in making intelligent decisions relating to money.

Definition of Finance
 

Finance refers to the art of dealing with money, or how we earn, use, save and invest it. It enables individuals to make intelligent choices in order to get a hold of their future and prevent financial difficulties.

Example: 

Nitin is a 25-year-old office-based employee earning  ₹25,000 per month. He also desires to save for emergencies and future goals. This is the way he does his money management:

• Income: ₹25,000 (salary)
   
• Expenses:
  • Rent: ₹8,000
  • Food: ₹5,000
  • Transport: ₹2,000
  • Other bills: ₹3,000
     
• Total Expenses: ₹18,000
   
• Savings (Income - Expenses): ₹7,000

Nitin divides his savings wisely:
 

• Emergency Fund: ₹3,000 (for unexpected expenses)
   
• Investments: ₹2,000 (mutual funds for long-term growth)
   
• Personal Goals: ₹2,000 (saving for a new laptop)

Nitin’s Monthly Finance Plan (Table)
 

Here, you see Nitin's monthly finance plan, which helps him save money.
 

Due to his money tracking, Nitin does not go into debt, plans against emergencies and works towards his dreams. Finance is all about utilising what you get in the best way possible.

Types of Finance

There are three fundamental branches of finance, namely personal, corporate and public finance. There are two types, which handle money management differently.

Example:

Nitin deals with finance in his personal life and at work. Here’s how:

1. Personal Finance (Managing his own money)
   • Income: ₹25,000 (salary)
   • Expenses: Rent, food, bills (₹18,000)
   • Savings: ₹7,000 (emergency fund, investments, goals)

2. Corporate Finance (Finance at his company)
   • Nitin’s company uses money to grow the business.
   • Example: The company takes a loan (₹10,00,000) to buy new machines.
   • Goal: Earn more profit by producing more goods.

3. Public Finance (Government’s money management)
   • Nitin pays taxes (₹2,500/month) to the government.
   • The government uses this money for roads, schools, and hospitals.

Types of Finance (Table)

Three different types of finance are described in this table, along with how they affected Nitin’s life.
 

Learning the kinds would enable Nitin to make better decisions about money in every aspect of life.

Importance of Finance in Daily Life

Finance deals with the wise management of money to take care of today and the future. It assists individuals in making better decisions regarding earnings, spending, saving and investing.

Example: How Finance Helps Nitin in Daily Life

Nitin is a 28-year-old who earns ₹30,000 per month. Here’s how finance plays a key role in his life:

• Budgeting: Nitin tracks his income and expenses to avoid overspending.
  • Income: ₹30,000
  • Expenses: ₹22,000 (rent, food, bills, etc.)
  • Savings: ₹8,000

• Emergency Preparedness:
  • Saves ₹3,000/month for emergencies (medical bills, sudden repairs).
  • Example: When his bike broke down, he used his emergency fund instead of borrowing money.

• Future Goals:
  • Saves ₹2,500/month for a future home.
  • Invests ₹2,500/month in mutual funds for long-term growth.

• Avoiding Debt:
  • By planning, Nitin avoids loans for small expenses.
  • Example: He saved for a new phone instead of buying it on EMI.

Finance in Nitin’s Life (Table)

This table shows you how important daily finances are in Life. An example shows how you can overcome daily financial problems:
 

Finance can enable Nitin to control his money, de-stress and gain a secure future. In maintaining a good level of finances, he is certain and free of money worries.

Key Financial Concepts Everyone Should Know

Finance involves the art of using money to reach its target and to avoid inconveniences. In learning the basic financial concepts, one can make better decisions when spending their money.

Example:

Nitin earns ₹30,000 per month and wants to manage his money better. Here are the key concepts he follows:

1. Budgeting (Planning income and expenses)
   • Nitin’s Strategy:
     • Tracks every rupee spent
     • Uses the 50-30-20 rule:
       • 50% needs (rent, food)
       • 30% want (entertainment)
       • 20% savings

2. Saving vs Investing
   • Saving: Keeps ₹5,000/month in the bank for emergencies
   • Investing: Puts ₹3,000/month in mutual funds for growth

3. Compound Interest (Money grows over time)
   • Invests ₹1,000/month at 10% return
   • In 10 years: ₹2,10,000 (₹1,20,000 invested + ₹90,000 interest)

4. Good Debt vs Bad Debt
   • Good: Education loan (increases earning power)
   • Bad: Credit card debt for shopping (high interest)

Nitin’s Financial Strategy (Table)

In this table, Nitin applies a Strategy for saving, investing and future planning. This table gives you an idea of the financial strategy.

Simple Strategy:
 

1. Track every rupee
    
2. Pay yourself first (save before spending)
    
3. Start investing early
    
4. Avoid unnecessary debt

With these ideas, Nitin does not allow money to manage him, but he manages his money. He is creating security, and he is still enjoying life today.

Conclusion 

Money does not have to be so complex, and the story of Nitin indicates that one does not need to be deep into finances. Keeping an eye on his ₹30,000 salary, implementing the 50-30-20 rule on budget allocation, and keeping a strict distinction between savings and investments, Nitin has developed financial stability without having to worry about it. 

This emergency fund took care of sudden bike expenses, his mutual funds are getting ready to be spent in the future, and by adopting non-bad debt, he can get a good sleep at night. 

As Nitin, many others can take charge of their finances through sound spending habits, frequent savings and investment at a young age. The true power of financial awareness brings small, consistent actions with cash today, and results in a safer and happier day tomorrow.

FAQs

1. How can I save money every month?

Spend less than you earn, cut unnecessary expenses, and set aside a small amount first before spending.

2. Why is saving important?

Saving helps in emergencies (like Nitin’s bike repair) and future goals (buying a house). Without savings, you might borrow and pay extra interest.

3. How much should I save monthly?

Start with 20% of income. Nitin saves ₹6,000 from ₹30,000. Even ₹500/month matters – small amounts grow over time.

4. What’s the difference between saving and investing?

Saving keeps money safe (in banks), while investing grows money (in mutual funds). Nitin saves ₹5,000 and invests ₹3,000 monthly.

5. What is a budget?

A budget is a plan for your money. Nitin uses 50% (needs), 30% (wants), and 20% (savings) from his salary to avoid overspending.

6. How can I avoid debt?

Spend less than you earn. Nitin avoids credit cards for shopping and saves for purchases instead of taking loans.

7. What is compound interest?

It’s "interest on interest." If Nitin invests ₹1,000/month at 10% interest, his money grows much bigger in 10 years.

8. Should I invest even with a small income?

Yes! Start small. Nitin invests just ₹3,000/month. Over time, even small amounts grow into big money.

9. What’s an emergency fund?

It’s savings for surprises (medical bills, job loss). Nitin keeps ₹5,000/month aside so he never needs loans urgently.

10. How do I start financial planning?

Track income/expenses, save first, avoid debt, and invest early. Like Nitin, begin with simple steps and stay consistent.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?