Personal Finance and Financial Literacy

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(upbeat music) Welcome to Personal Finance and Financial Literacy. In these lessons, you'll learn about the fundamentals of finance and some key financial concepts. These concepts include the effects of inflation, time value of money, and the risk versus reward relationship. You'll also learn about passive and active income, as well as personal net worth. By the end of these lessons you will understand the importance of financial literacy. The definition of finance can be quite broad. Usually people think of finance in terms of money but it also involves the many ways in which most societies operate such as economics and accounting. Generally, there are two types of finance, personal and corporate. Personal finance involves individuals making financial decisions and transactions such as saving and spending money, taking out loans, and investing. It also encompasses personal budgeting and financial security. Corporate finance involves businesses making major financial decisions. This usually involves capital investments and operational expenses needed to run a business as cost efficiently as possible. There are various professionals known as money managers who operate in a financial area known as investment management. For example, this might be someone with a mutual fund who invests on behalf of their clients or a financial advisor who advises individuals on how to allocate their earnings and resources. There are also banks and other financial institutions that allow people to deposit, borrow, and withdraw money, or make payments to third-parties. To gain a better understanding of finance, there are a few concepts and factors to discuss. First, there's inflation, which is the gradual increase in the pricing of goods and services. This gradual increase in pricing affects the value of money. Inflation also affects the actual value of your investments. For instance, imagine you earned a 10% gain on an investment. Let's say you had to pay taxes on your gain and your gain is now reduced to 8%. If inflation led to a 5% decrease in value during the time of your investment, your actual return would only be 3%. Taking inflation into account is particularly important when it comes to your finances and investments. Another essential factor to consider is time. Due to inflation, the money you spend today may be worth more than the money you spend tomorrow. However, if you choose not to spend your money and instead you invest your money in places that aren't as easily affected by inflation such as the stock market, you could actually allow your money to build value through interest earned, dividends or capital gains. You will also need to consider that some aspects of finance such as certain financial transactions or investments involve risk. As an investor, you'll wanna ensure you're compensated for the level of the risk. Typically the higher the risk, the higher the return you should expect. If there's a low return, then this often means your investment is considered low risk. And the chances of losing money are lower. When investing, if you don't want to take high risks, then you probably shouldn't expect higher returns. While finance is a broad term and encompasses many categories, it is important to have a general knowledge and understanding of finance. So you can be successful both as an individual and in a business setting.