What is Finance? Part One of an Ongoing Series about Finance

For many, finance is about money. However, to think of that way is missing a key ingredient: time.

Finance is about moving money across time. Usually, the money is moving from either the future to the present, or from present to the future. Because people prefer to have things today rather than tomorrow, this means that if the money is moving from the present to the future, then the person receiving the money (in the future) will (almost always) pay for the privilege, and the person giving the money (in the present) must be compensated. This compensation is where a lot of the money in finance comes from. It’s like a toll for moving money across time. Banks and many large institutions connect people who want to provide/receive money in the present, with those want to receive/provide money in the future. By connecting (or intermediating) these people, banks serve as a tollbooth.

Here is a simple example that everyone is familiar with: lending money. If a bank lends you money, it will charge you an interest rate. That interest rate is compensation that you receive by moving your money from the present to the future. Conversely, the bank is receiving money today that it is (on average, given many bank depositors) returning in the future. Because the bank is moving money from an undesirable time (the future) to a more desirable time (the present), it must pay a price. That price is the interest rate.

In practice, we rarely hear about time in finance: everything is standardized to a month or a year, and the focus is on compensation for moving time across these intervals. That, again, is the interest rate. The interest rate – or, more generally, the “rate of return” – is cost/compensation of moving money across time. More often than not, finance often boils down to understanding this rate and seeking out the best one for yourself. In other words, moving money across time at the best rate possible.

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