Question

write 5 paragraphs on why principles of finance is important in life?

Answer 1

Financing is the process of collecting funds to invest to ensures proper utilization.finance is the management of funds. Financial managers take operating, investment and financing decisions, some of this related to the short term and some long term. Principles are simply sets of internal rules

Iam describing here various point through which you can understand that why principles of finance is important :-

1. You should spend less than what you have earned in a period of time :-

You should be striving for this over any period of time as long as or longer than a single pay period. It should be true over a pay period, a month, a quarter, a year, a decade – no matter how you slice it, you should be spending less than you’re earning.

2. You should pay your debt means you are not making any mistake by paying your debts :-

It is never a mistake to pay off debt. If you are unsure as to your next financial move, paying off debt is always at least a good move. Yes, there are situations where you have a debt with very low interest and you might earn more interest by putting that money in an investment or a savings account, but there aretwo advantages to paying off debt.

First, when you pay off debt, you’re reducing the future interest you’ll have to pay on that debt. You do not have to pay taxes on that reduction. On the other hand, you do have to pay taxes on any gains you make on that investment.

Second, when debt is eliminated, it directly improves your monthly cash flow by eliminating a required monthly bill.

3. Principles of diversity :-

This principle helps to minimize the risk by building an optimum portfolio. The idea of a portfolio is, never put all your asset in the same basket because if it falls then all of your asset will be in loss, so put asset by separating in a different basket so that your risk can be minimized. To ensure this principle investors have to invest in risk-free investment and some risky investment so that ultimately risk can be lower. Diversification of investment ensures minimization of risk.

4. If you see an expense coming in the future, even if it’s far off, start preparing for it now. :-

It’s easy. Just find out how much you need to set aside each month to make sure that you can cover each of those expenses. Total it up and then start transferring that amount to your savings account each and every month. Then, when the expense comes around, take the money you’ve already put aside out of your savings account and just pay for it directly. Not only does that policy avoid a lot of stress, it avoids a lot of debt, too. It also helps ensure that you’re always spending less than you earn

5. The Hedging Principle of Finance :-

Hedging principle indicates us that we have to take a loan from appropriate sources, for short-term fund requirement we have to finance from short-term sources and for long-term fun requirement we have to manage fund from long-term sources. For fixed asset financing is to be done from long-term sources and likewise.

Finally, if you have a basic understanding of finance and its principles then you will be able to take financial decisions effectively.