Finance is a broad topic in economics that deals with the arrangement, management, and deployment of money in the most advantageous way. You will find two main branches in finance- private finance and public finance. All of them are discussed below.
What is Finance?
The definition of finance is pretty simple. It is generally known as the management of money. The finance process includes investment, borrowing, lending, budgeting, saving, and forecasting. Finance also involves using credit and debt, securities, and investing in financing current projects utilizing future income flows. Due to this reason, finance is closely related to the time value of money and interest rates.
Finance can be broadly divided into three categories: public, corporate, and personal finance.
- Social finance and Behavioural finance have been the recent subcategories of finance. Public finance usually includes tax systems, government expenditures, budget procedures, stabilization policy, debt issues, and the rest of the government’s concerns.
- Personal finance includes all decisions regarding the finances and activities of an individual or household. This includes budgeting, insurance, mortgage planning, savings, and planning related to retirement.
This article will discuss the differences between public and personal finance.
What is meant by Public Finance?
Public finance is the management of a country’s revenue, expenditures, and debt load through various government and quasi-government institutions. The country’s financial position can be calculated similarly to that of a business financial statement.
Some major components of public finance include activities that are related to collecting revenue, making expenditures to support society, and issuing government debt. The main components will be discussed below:
- Collection of taxes:
One of the main sources of revenue for the government is tax collection. The government collects various taxes, including sales tax, income tax, estate tax, and property tax. The rest of the types of revenues included in this category are duties and tariffs on imports and revenue from public services that are not free.
- Deficit/Surplus:
There is a deficit in the year if the government spends more than the revenue collected. If the government has fewer expenditures than the tax collected, it is a surplus.
- Budget:
A plan of what the government is willing to have as expenditures in a fiscal year is known as a budget.
What is meant by Personal (Private Finance) ?
The process that involves the planning and managing of personal financial activities like income generation, spending, saving, investing, and protection is known as personal finance. Hence, managing individual finance can be summarized in a budget or financial plan.
The main areas of personal finance include income, spending, saving, investing, and protection. Some of them are discussed below:
- Income:
The inflow of cash received by an individual from a source used by them to support themselves and their family members is known as income. Salaries, bonuses, pensions, and dividends are common income sources. All these sources generate cash that can be spent, saved, or invested by a person.
- Spending:
All expenses that an individual incurs related to buying anything consumable come underspending. Spending falls into two categories. They are- cash and credit. Most people’s income is allocated to spending—rent, mortgage payments, taxes, food, entertainment, and other common spending sources.
- Saving:
The access cash saved for future investment or spending is known as saving. Physical cash, saving bank accounts, checking bank accounts, and money market securities are some forms of savings. Hence most people keep some savings to manage their cash flow and the short-term differences.
Differences between Public finance and Personal Finance
Some of the key differences between Public finance and personal finance have been mentioned in points below:
- In public finance, the government is told to make the total expenditure on different sectors first. It then identifies the various sources from which the revenue is generated to meet those expenses. On the other hand, in private finance, any individual can decide the quantum of expenditure to be made depending on the individual’s income.
- The objective of public finance is maintaining the general welfare of the public. However, private finance focuses on managing finances in a way that will help earn the maximum profit.
- In public finance, the yearly budget of the government is fixed. On the other hand, private finance is related to an individual’s daily, weekly, or monthly budget.
- If discussed in nature, public finance is much more elastic than private finance since an individual cannot make a huge change in their income.
Hence in private finance, an individual or household can postpone specific expenses in case they are unnecessary. On the other hand, in public finance, the government cannot delay some expenditures like defense, agriculture, and many more.
