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Becky: Hello and welcome back to EnglishClass101.com. This is Culture Class, Season 3, Lesson 16 - The Top 5 Most Important Things to Understand about Finance. I’m Becky.
Eric: And I’m Eric. It's great to be with you this lesson. Becky, what are we going to look at in this lesson?
Becky: As we go through this mini-series about finance, we’re going to look at it from two angles. First we’ll look from the business angle and see how the business of finance works.
Eric: Second we’re going to look at it from the individual’s point of view. So, how does this aspect of finance apply to me? Well, let’s get to it!
Becky: Number 5 in our Top 5 Most Important Things to Understand about Finance is that debt isn’t always a bad thing.
Eric: That’s right. Now, in principle, owing money to someone else isn’t really a good thing. However, in modern finance, having a little bit of debt and consistently paying it back can be a good thing.
Becky: It can be a good thing because paying the debt shows that first, you have money and second, you will pay your debts. This shows up in your credit report.
Eric: So, when you’re someone who can pay off debt, banks can trust you more. For example, if you want to buy a house but you’ve never paid off any small debts like credit card debt, the bank will be reluctant to finance your house.
Becky: However, if you’ve had credit card debt and paid it off, as well as a car loan and paid that off, then the bank has proof that you know how to pay off your debts. That means they can trust you and will probably finance your house.
Eric: There are many other reasons and ways in which debt can be useful in modern finance. However, it must be kept small. And when we say small, we mean small relative to your income.
Becky: So if you make $50,000 a year but you have $50,000 in credit card debt, that would be too much and would make the bank reluctant to finance you. But if you make $50,000 a year and have $200 of credit card debt that you pay off every month, that will make the bank trust you and they’ll probably finance your house.
Eric: Now our next topic is important, especially since most of us are second language learners. What is our next topic?
Becky: Number 4 of our top 5 most important things to understand about finance is that it has its own vocabulary.
Eric: Also, that vocabulary is very, very large and very, very complex. For example, when you finance your house, you make an agreement with the bank to “mortgage” your house. The word “mortgage” is almost never used in any other context other than a bank financing your house.
Becky: There are also very complex phrases used in very specific ways within finance. For example, the phrase “debt financing” is a very specific type of financing that large corporations can use to finance large multibillion dollar projects.
Eric: That financing is not something that normal people can do. However, it is something that businesses can do and is part of the global framework of modern finance.
Becky: Now beyond just having complex words, the actual industry of finance is also very, very complex. Not only do you have a global financial system that interconnects every major bank in every single country all across the planet simultaneously, you also have that branching down into every single credit and debit card in the world.
Eric: In fact, the modern financial system is so complex that it could not exist without the aid of computer systems. Every major stock exchange, every major bank, every major corporation, and every major credit agency depends on computers and information technology just to function.
Becky: Which brings us to our next topic.
Eric: Number 3 of our top 5 most important things to understand about finance is that it’s competitive.
Becky: And it is very competitive. Since banks and the entire financial system are interconnected via the Internet and various information technologies, much of the communication that happens between banks is almost instantaneous.
Eric: That makes banks very competitive because they can quickly move large amounts of money almost anywhere in the world. Large corporations will use banks that can do that the fastest, easiest, and the cheapest way.
Becky: All of this competition isn’t just among the banks. Corporations will also compete amongst themselves about which banks they’re going to use, how they’re going to use them, and – in the large multibillion-dollar corporations – how much the banks are going to get paid.
Eric: That’s an important thing to remember about finance. It isn’t just about the bank. Finance also happens within individual corporations, companies, and governments.
Becky: That’s right. Corporate finance is very different from banking finance, which is also even more different than government finance. Each type of finance has different laws to obey and different rules on how to function.
Eric: One of the biggest topics recently was the 2008-2009 financial crisis. This is a very complex issue, but it’s completely a finance issue. The entire recession that happened during that time period was caused by errors in the banking system.
Becky: Maybe the word “error” isn’t completely accurate, but the problems that have occurred are directly related to how the global financial system functions.
Eric: It’s also important to recognize how complex the financial system is. I was speaking to a friend once who works in finance, and he made the comment that when you look at finance from the outside, it looks very orderly and organized. However, when you work in finance and accounting you realize that often, things are much more like a bowl of spaghetti than a grid.
Becky: That is a very interesting comparison and it kind of makes sense. Especially since the global financial system is not static. In other words, it’s constantly changing; the things that were acceptable a week ago are now no longer acceptable because of a hundred thousand different possibilities.
Eric: That’s right. For example, in 2007 it was very easy to get a home and just about anyone could purchase a new home with almost no down payment. After the 2008-2009 financial crisis, it’s difficult to find a bank that will accept anything less than a 10% down payment. Many banks even ask for as high as a 20% down payment.
Becky: And just to make things even more interesting, the global financial system is not actually based on any kind of tangible object. For example, through most of history, most money was either gold or silver or precious stones, or at least some representation of those things.
Eric: Today’s modern financial system doesn’t have any kind of gold standard or silver standard. Now, the details of how this financial system can function at all without some kind of foundation in reality is way beyond the scope of this lesson. However, so far, it does seem to be working pretty well.
Becky: With the occasional hiccup.
Eric: That’s right. No system is perfect. Which brings us to our last topic.
Becky: Number 1 of our top 5 most important things to understand about finance is that its main focus is to increase revenue and profit.
Eric: Now, that may seem pretty obvious since we're talking about finance. But how money is used or even the consequences of using or not using money in particular ways is not part of finance.
Becky: This is one of its greatest strengths, as well as one of its greatest weaknesses.
Eric: Even when you talk about corporate finance, things are always focused on the company making more money than it did last year. No one asks how they're going to make more money than they did last year or what the consequences will be. The only focus is that the company makes more money than it did last year.
Becky: This can often have negative repercussions. For example, the 2008-2009 financial recession was caused by banks, insurance companies, and many others being focused only on short-term profits.
Eric: Because of their focus, the long-term risk of what they were doing was ignored until it was too late and the entire world was pushed into a recession.
Becky: On the other hand, finance specialists around the world worked for months and focused only on the money in order to stop the recession and recuperate from it.
Eric: For those of you who enjoy working with money and numbers, working in finance could be a great option. Okay, that’s all for this lesson.
Becky: Thanks for listening, and we’ll see you next time!
Eric: Bye!