Finance: What It Is, Why You Need It, and How It Works in Real Life

Let's get straight to the point.

You earn money. You spend money. You save money. You sometimes borrow money. And occasionally, you invest money. All of those activities — every single one of them — fall under the umbrella of finance.

Finance is the field of practice that deals with the management of money, assets, investments, and liabilities. In simple language, anything you do that involves money in any meaningful way is connected to finance at some level. This includes budgeting, financial planning, investing, borrowing, risk management, and financial data analysis.

The core purpose of finance is to provide individuals, businesses, and governments with a structured framework — a set of tools and principles — that helps them make better decisions about where their money goes, how much risk they are taking on, how resources should be allocated, and what the long-term financial strategy should be.

Think of finance as a GPS for your financial life. Without it, you are driving blind — spending without knowing where the money goes, borrowing without understanding the real cost, and investing without understanding the risk. With it, you have a clear map, and every financial decision becomes more informed and more intentional.

In a business context, finance is involved in everything from managing cash flow and overhead costs to analyzing stock performance and making strategic investment decisions. For individuals, it is the foundation of building a secure financial future. And for governments, it is the backbone of everything from tax policy to national budget allocation.

Finance is not a modern invention. People have been managing money — or whatever served as money at the time — for thousands of years.

Long before paper currency or coins existed, people used animals, grain, shells, and stones as mediums of exchange. They gave loans, received loans, and made investments using whatever was considered valuable in their society. The fundamental activities of finance — saving, lending, borrowing, and investing — are as old as human civilization itself.

Evidence of financial activity has been found across many ancient civilizations simultaneously, which makes it difficult to pinpoint exactly where it all began. But if we trace the roots of modern financial transactions, they lead back to the Sumerians of ancient Babylon. The famous book "The Richest Man in Babylon" brings this civilization's financial wisdom to life — describing how the Babylonians practiced saving, investing, and lending thousands of years ago in ways that would feel surprisingly familiar to us today.

In terms of physical currency, the coins we use today have an interesting origin story. Coin money was first invented in China. Then in 564 BC, King Croesus of Lydia introduced the first gold coins — giving the world a standardized precious metal currency. Banking as an institution began during Roman times, where money changers known as argentarii operated early banks that handled loans and currency exchange.

The 18th and 19th centuries brought the Industrial Revolution, which gave birth to modern banking systems, stock exchanges, and financial markets as we know them today. The Federal Reserve was established in 1913, and the Bank of England's central banking role was formalized in 1964. After the 20th century, technology began transforming every sector of finance — making transactions faster, markets more accessible, and financial management tools available to ordinary people for the first time.

As a formal academic discipline, finance separated itself from economics in the 1940s and 1950s. The pioneers of this separation include names like Harry Markowitz, William F. Sharpe, Fischer Black, and Myron Scholes — whose groundbreaking work on portfolio theory, asset pricing, and options pricing laid the foundation for modern financial science.

At the broadest level, finance can be divided into three main categories. Everything else builds on top of these three foundations.

Personal Finance

This is finance as it applies to your own individual life — and it is the most immediately relevant for most people.

Imagine you earn 40,000 taka per month. Personal finance is the framework that helps you decide how much of that goes to rent, how much to food and daily expenses, how much to save, and how much to invest for the future. It covers budgeting, savings planning, insurance, retirement planning, and managing debt.

Most people never formally study personal finance — and that is exactly why so many people struggle with money despite earning decent incomes. The principles are not complicated, but without them, even a good salary can disappear without much to show for it.

Public Finance

Public finance deals with how governments manage money at every level — local, national, and international. It covers questions like how much tax to impose on different types of businesses and individuals, how the national budget should be allocated, and how government spending should be balanced against revenue.

Fiscal policy and monetary policy — the two main tools governments use to manage their economies — are both deeply rooted in public finance. When the Bangladesh government decides to increase development spending or adjust interest rates through Bangladesh Bank, those decisions are made using the principles of public finance.

Corporate Finance

Corporate finance is about how businesses — small, medium, and large — manage their money to achieve their goals. Every day, companies face financial decisions — should we invest in this new project? How do we finance our expansion? What is the expected return versus the risk of this investment? How do we manage our cash flow to keep operations running smoothly?

Corporate finance provides the tools and frameworks to answer all of these questions systematically. It covers capital structure decisions, investment analysis, dividend policy, and working capital management. For anyone running or working in a business, corporate finance knowledge is not optional — it is essential.

Beyond the three main categories, finance has several important specialized fields that focus on specific aspects of financial management.

Investment Finance

Investment finance focuses specifically on how money is deployed to generate returns. This includes stock market analysis, bond valuation, portfolio management, and venture capital — where investors fund early-stage startups in exchange for equity.

Mutual funds operate within this space — collecting money from many individual investors and deploying it across a diversified portfolio of companies and securities. Chartered Financial Analysts (CFAs) are the professionals who typically specialize in this area, using sophisticated financial models to identify the best investment opportunities.

International Finance

When businesses operate across national borders, an entirely new layer of financial complexity appears. International finance deals with cross-border transactions, foreign exchange rates, and the financial management of multinational companies.

Every country's currency fluctuates against others every single day. Managing these exchange rate risks — and understanding how global capital flows affect a company's financial position — is what international finance is all about. For Bangladesh, with its significant export sector and large remittance inflows, international finance is particularly relevant.

Behavioral Finance

This is one of the most fascinating areas of modern finance — and probably the most underappreciated.

Behavioral finance sits at the intersection of finance and psychology. It studies how psychological biases and emotional factors influence the financial decisions people make — often leading them to act irrationally even when they know better. Understanding why people panic-sell stocks during a market crash, why they hold onto losing investments too long, or why they are overconfident about their own financial abilities — all of this falls under behavioral finance. The goal is to identify these biases and make better, more rational financial decisions as a result.

Real Estate Finance

Real estate transactions involve a unique set of financial concepts — property valuation, mortgage analysis, depreciation, rental yield calculations, and market price trends. Real estate finance provides the tools to analyze whether a property investment makes financial sense, how to structure a mortgage efficiently, and how to assess the long-term value of a real estate asset.

Green Finance

Green finance is a relatively new but increasingly important field. As global warming and climate change have become urgent concerns, the financial world has started creating incentives for environmentally responsible behavior.

The core idea is simple — companies that adopt environmentally friendly practices receive tax benefits and preferential financial terms. Setting and managing these incentive structures requires specialized financial expertise. As climate concerns continue to grow in importance globally, green finance is becoming one of the most in-demand specializations in the field.

Islamic Finance

Islamic finance operates according to the principles of Shariah law. The most fundamental distinction is that interest — known as riba — is strictly prohibited in Islamic law. Since conventional banking is built around interest-based lending, Islamic finance developed an alternative system that achieves similar financial outcomes through permissible structures like profit-sharing arrangements, lease-based financing, and partnership models.

Islamic banking is particularly relevant in Bangladesh, where a significant portion of the population prefers financial products that align with their religious values.

Microfinance

Microfinance was developed specifically to serve people who are excluded from the formal banking system — typically rural communities and low-income individuals who want to start small businesses but cannot access conventional bank loans.

Bangladesh actually has a particularly proud connection to microfinance. The Grameen Bank model, pioneered by Nobel Laureate Muhammad Yunus in Bangladesh, became the blueprint for microfinance institutions around the world. The concept is straightforward — provide small loans at reasonable interest rates to people who want to create their own livelihoods, along with business guidance and support. The impact on poverty reduction has been significant and measurable.

Why does finance matter so much? Here is the clearest way to think about it.

Wealth Maximization

Wealth Maximization is one of the primary goals. For stock investors, this means understanding how to analyze and value stocks to maximize the return on their investment. Finance provides the analytical tools — stock valuation models, financial ratio analysis, and market trend analysis — that make smarter investment decisions possible.

Risk Minimization

Risk Minimization is equally important. Every investment and every business decision carries some level of risk. Finance provides methods like Net Present Value (NPV), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR) calculations that help quantify exactly how risky a project is before you commit your money to it.

Capital Allocation

Capital Allocation is about deploying money in the most efficient way possible. Whether you are deciding between different investment options or a company is deciding which projects to fund, finance provides the framework for making the allocation decision rationally rather than emotionally.

Cost Minimization

Cost Minimization matters because in any business, there are really only two ways to increase profit — generate more revenue or reduce costs. Finance helps identify where costs can be cut without damaging the business, making it a direct driver of profitability.

Sustainable Growth

Sustainable Growth is perhaps the most important long-term goal. A business that grows too fast without proper financial management can collapse just as quickly. Finance — through proper fund management, cost control, and financial strategy — is what makes growth sustainable over the long term rather than a short-term spike followed by a crash.

Finance is not a subject reserved for bankers, accountants, or business school graduates. It is a practical life skill that affects every person — from how you manage your monthly salary to how you plan for retirement, from how a small business owner decides to expand to how a government allocates national resources.

The more you understand finance, the better your decisions become. You spend more intentionally, save more effectively, invest more wisely, and take risks more calculated. At every level — personal, corporate, and national — better financial knowledge leads to better outcomes.

In Bangladesh, where financial literacy is still developing and enormous economic opportunities are opening up every year, understanding finance is one of the most valuable investments you can make in yourself. The tools are available. The knowledge is accessible. The only thing standing between you and better financial decisions is the decision to start learning.