Like every first Monday in October, the Financial Education Day is celebrated , an activity that seeks to create financial culture in Spanish society so that citizens can make their economic decisions with responsibility and knowledge.
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Finance isn't just reserved for CFOs, stock traders, or bankers. All of us, throughout our lives, make financial decisions that can condition our future. Take, for example, buying a house or asking for a loan to buy a car ... Or maybe renting or leasing is a better option ? If we have money saved in the bank, we may choose to acquire a financial asset that offers us profitability.
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Given the usefulness of finances in our daily life, we will try to clarify some basic concepts.
First of all, it is important to understand the concept of the time value of money . Imagine that you win a significant amount in “Pasapalabra” and the organizers of the contest give you two options: receive the money immediately or within a year.
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Obviously we will prefer to receive the money as soon as possible. If we think about it a little more, we will realize that given inflation (a generalized and sustained increase in the prices of goods and services over a period of time) we would buy less things within a year than now. Also, you could invest that money for a year and get more money. And we cannot forget the risk factor (who knows how the situation will be after a year).
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How to know how much money is worth
This reflection is related to the concept of interest rate, which is nothing more than the price of money. We are all clear that if we ask a bank for a loan we will have to return an additional amount to the amount obtained (the interest rate). Here it is interesting to know the difference between the TIN (Nominal Interest Rate) and the APR (Annual Equivalent Rate).
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The TIN is the percentage that the bank receives for assigning the money, it reflects only the cost of the financial product and can be calculated in different periods (weekly, monthly, quarterly, annually, etc.). In addition, it does not take into account any expenses associated with the operation (commissions, management costs, etc.).
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To know exactly how much that credit is going to cost us, it will be more interesting to know the APR , which takes into account the value of the TIN, the frequency of payments (we will change everything to annual frequency), the bank fees for cancellation and amortization and the expenses of the operation. Therefore, to compare the different loans offered by banks and see which one is more interesting, you have to look at the APR and not the TIN.
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Many markets
Another thing that we find every day in the news and in the company is the evolution of the markets. There are actually many types of markets, from the neighborhood market where fruits, vegetables or meat are sold to equity markets or virtual markets.
What are markets ? Basically the place where supply and demand meet (a store, a hypermarket, a virtual store on the internet, the stock market ...) and the operation takes place; that is, where products or services are bought and sold. The most named in the news are the financial markets where financial assets are bought and sold.
Financial assets, investment and savings
The financial assets are nothing more than a document issued by a company, private or public institution or bank that gives its buyer the right to receive future income by whom it is issued. For the issuer it means a financial liability, an obligation or debt that must be paid.
Examples of assets (for the buyer) or liabilities (for the issuer) are government bonds and obligations, or corporate debt bonds, corporate stocks, promissory notes, and so on. Financial assets are a way of directing savings toward investment.
More or less risk
If we have savings and we want to invest them, we can choose between fixed income financial assets and variable income ones . With fixed income you know the amount of payments and when you are going to receive them. Let us think, for example, in the public sphere, in Treasury Bills, Bonds and State Obligations. In the private sphere, there are promissory notes, bonds, and debentures.
There is also the variable income , where neither the profitability nor the return on the invested capital is assured nor (in fact) they are known when the investment is made. Here would be, for example, the shares of publicly traded companies. They are the parts in which the property of the company is divided. The shareholder will have the right to receive a part of the profits generated if the company decides to distribute them. The shares can also give voting rights in the decision-making of the company.
The choice between fixed or variable income will depend on the risk that the investor wants to assume. The risk understood as the possibility of losses or that the result is not as expected. It must be understood that the higher the risk, the higher the expected return on a product. Therefore, you should always be wary of financial products that offer high returns with little risk.
Maximize profit
The profitability relates the benefit of the investment with the investment made. It seeks to achieve maximum profitability. In other words, obtain the maximum benefit with the minimum possible investment.
The liquidity refers to the ability of the company to get cash immediately without suffering losses. If we talk about an investment, we mean the ability to immediately convert it into cash.
When investing, both the company and investors must seek the balance between profitability, risk and liquidity .
Accounting is not the same as financing
Another important issue is understanding the difference between accounting and finance . While accounting focuses on obtaining internal and external economic information of the company, finance includes management decisions on investments and financing.
From the analysis of the information provided by accounting, the financial planning of the company is carried out. In smaller companies, accounting and finance may be handled by the same person, but in medium-sized and large companies, the accountant usually reports and reports to the CFO.
We see, therefore, that finances are an issue that affects us all and that it is important to know them in order to make good decisions in this area.
