Finance vs. Economics

In my previous post, I touched on the fact that I now work in finance after graduating with a degree in Economics. This led to a question from a good friend of mine — “What is the difference?”

Finance

Finance broadly means the management of money/monetary resources (things that make you money), so when you think finance, the words that probably come to mind are “money”, “investment”, “raising capital”, “stock market” and that would be absolutely correct. Working in finance can mean different things but at the core is the management of funds.

For the sake of simplifying things, I’ll divide Finance into two broad categories. Personal finance and Corporate finance.

Personal finance

Remember when you were little, during Eid or Christmas, your family member gifts you money to buy whatever you want and the next thing you hear is a voice from behind you - “Junior, bring it, let me keep it for you” and 99.8% of the time, it’s your mum’s voice.

Everyone knows that’s the origin of 419 but then, in very few cases, the parent actually keeps the money till a later time because they know that child has no concept of personal finance. They could gladly give someone the N500 they were gifted in exchange for Caprisonne and Coaster biscuit.

Personal finance is knowing how to split your disposable income (spending money) into major divisions, for example: 50% needs, 30% wants, 20% savings.

A major aspect of personal finance is budgeting. Budgeting requires a lot of discipline and there are many apps on the internet dedicated to helping with their budget planning.

Fintech apps like Cowrywise and PiggyVest also encourage saving based on your needs and investing some of your income. The PiggyVest app had a tracking feature to keep an eye on how you spend and when you are exceeding your income limits (the feature was removed and I still can’t find a good expense tracking app, kindly recommend any in the comments).

Personal finance also covers your saving habits, investing some of your savings for future cash-out (you can even invest ahead of Detty December), and most importantly, spending within the limits of what you can afford. Having debt or buying on credit is not necessarily a bad thing (In countries abroad they have things like the credit card system, mortgaging, etc.). However, piling up debt because of irresponsible spending habits like keeping up with trends is the absolute ghetto. Don’t do it.

Corporate finance

Corporate finance is a career field in finance just like Stockbroking, Investment Banking, etc. but for the sake of this article, I will be talking about it from the angle of how businesses manage their finance.

Personal finance is to individuals as Corporate finance is to businesses. It’s way more complex because more money is involved and people’s livelihoods are at stake.

Corporate finance deals with:

1. How businesses raise funds: Companies finance their activities in two major ways — Debt & Equity. Debt, as we all know, is borrowing money, usually from banks but there are things called corporate bonds also used to raise capital (topic for another day). Equity is when people like you and me invest/buy shares of a company (usually companies listed on the stock exchange) by giving them money to finance their activities for future returns.

Debt is regarded as cheap but it adds the burden of paying interests to the company. While equity means as an investor, you own part of the company and are entitled to some of the profit the company makes in the form of dividends.

2. How businesses manage funds: After raising funds, the business needs to put it to good use by picking the most profitable projects that promise the highest returns. I did a course in 300 level — Operation Research — where we were shown different methods used in picking the most viable projects and maximizing returns. Some institutions like banks that hold money make more by investing funds in different instruments like government bonds, treasury bills, etc. That is one of the ways they manage funds to remain profitable. Be rest assured though, banks always have backup cash and your funds are insured by NDIC.

Like I earlier mentioned, Corporate Finance is a career field with job roles such as Chief Financial Officer (CFO), Deal Advisory, Financial Analyst etc under it. These roles are very interwoven with others in finance such as Investment Research (where I work), Investment Banking, Stockbroking, Asset Management, Portfolio Management and much more.

In summary, in finance, you are raising funds as a firm, giving firms your money as an individual investor or institutional investor (like private companies, banks, etc), lending the government money through bonds, or simply ownership of an asset for future gains like real estate.

Economics

Economics, on the other hand, is a big blanket that encompasses finance, the manufacturing sector, oil market, international trade, and any other sector that makes money for the country. Finance deals with managing money as an individual or a business and Economics is concerned with that and more.

Economics is divided into two: Microeconomics and Macroeconomics

Microeconomics is how individuals and firms manage their scarce and limited resources such as their income (just like in finance), their needs (housing, clothing, food), their tastes/wants (in Yoruba, this translates to how you manage your ‘ojukokoro’), their jobs, their utility (big English for the satisfaction you get from consuming a good/service) and much much more.

Macroeconomics, on the other hand, is looking at how to manage the resources of all the individuals, all the firms + the government in a country. Macroeconomics is an aggregate of all the resources in an economy — education, jobs available, minimum wage, natural resources, production and very importantly,

PRICE

Most times, when I tell people I studied Economics, I always get this reaction of “You people don’t like spending.” First of all, liesss. However, I do get where the sentiment stems from — Economists are very very sensitive to prices. When prices of goods are getting higher, then it tells us something is not exactly right somewhere. Prices don’t always rise for a bad reason (a discussion for another day) but the negative effect of rising prices could ripple through the whole economy.

If the price of bread goes from N700 today to N800 next week, to an Economist, the issue is not that we don’t want to pay extra N100 for bread, it is more of “Why are we paying an extra N100 for bread? What is going on?”.

Just as there are different fields in finance, Economic roles range from Economics research, Economics consultant, Central banking, and a lot of other crossover roles in banking/finance. We are everywhere you want us to be.

Finance vs. Economics

So, while a finance professional thinks of how to diversify their investment portfolio to maximize their investment income, an economics professional is thinking of how to maximize their income by buying things that give them the highest utility (satisfaction).

While a finance professional analyses how the fluctuation in oil prices affects companies and the prices of their stocks, an economics professional is concerned with how the increase in oil prices will affect government income/spending as well as the welfare of the people who cannot afford electricity anymore.

The economy very much impacts whatever goes on in the finance industry and the financial sector can also contribute positively or harm the entire economy.

With these few points of mine, I hope you have a clearer view of what I mean when I say “finance” or “economics”.

Thank you for reading! Till next time xx