What is Finance? Start From Zero (Part 1)

Learn finance from scratch in simple, clear terms. No jargon, just practical ideas to manage money, grow your wealth, and improve your business. Follow along to develop smarter financial habits and take control of your financial future today.

The Misconception

The word “Finance” is seen as a specialized term by society, mainly for those studying accountancy. We intentionally avoid learning, understanding, or teaching this subject. Many believe that learning Finance has no real benefit. What they overlook is the true essence of what Finance truly is. We often assume Finance involves complex mathematical models, analyzing many spreadsheets, and understanding technical terms and formulas. Finance conjures up images of bean-counting.

They are all wrong: Finance is the most basic and all-important subject that every individual should strive to learn and understand. It is quite easy to understand if you focus on what is most important. I know, I made a solid assertion… But let me prove it.

Breaking Down the Definition of Finance

First things first, clear your basic assumption of treating Finance as a complex subject. Then we can move on.

“Finance is the art and science of watching money flowing into and out of a system. Then deciding how to allocate it and determining whether or not what you are doing is producing the results you want.”

Let’s dissect these lines to understand what Finance really is. If I ask you to explain “art and science,” “money,” or “system” — are you able to do so without any technical words? Out of 10, only 1–2 can truly explain this, because we are programmed to understand things not from scratch, but from the surface. However, today, we are going to force ourselves to think from scratch — aka First Principles.

1. Art

Art can be defined as the systematic body of knowledge that requires skill, creativity, and practice to achieve perfection. Unlike other fields, art requires intuition. Where knowledge fails, art fills the gap.

• Systematic body of knowledge → Art is not random; it has structured rules and theories, which means it can be learned and practiced.
• Skill → Skill refers to the control over the medium, which reduces randomness in expression. For instance, you imagine a straight line, and you draw it exactly as you imagined. This is a skill because you have control over the channel that expresses your imagination. So, skill reduces the uncertainty of output.
• Creativity → Creativity is about coming up with hitherto unexplored patterns or combinations. It is about combining existing things to create a brand new thing. Like, Uber combined Cars + Drivers + Google Maps + Internet + Mobile Phones + Passengers. Uber didn’t invent the car or the internet; they just combined existing things in such a way that solves the actual problem. This is creativity — playing with combinations.
• Practice → Practice is the repetition of refining control or skill. By practice, the output gets better because practice improves control. When you have better control, the output stays the same as what you imagined.
• Intuition → Refers to the ability to make judgments when numbers fail. It is not just a random guess, but a guess built on experience. Most chess players rely on intuition; they can’t always define their moves, though those moves are brilliant. They don’t calculate every possibility; they simply play the move. Not everyone can do this — only experienced individuals possess this ability.

In art, theoretical knowledge is not enough. Every artist must have personal skills, creativity, and intuition to apply that knowledge. For example, every musician learns the same notes, but they apply these notes according to their own personal skills, which makes them different.

2. Science

Science, on the other hand, is a systematic and organized body of knowledge based on logically finding observations and facts. It comprises principles that can be verified and can establish cause-and-effect relations.

• Systematic and organized body of knowledge → Science is also not random; it is a structured body of knowledge having proper theories and models, which means it can be learned and taught.
• Logically finding observations and facts → Science starts by observing real-world events, uses logic to connect them, and identifies consistent patterns (facts). For example, water boiling at 100°C is an observation. Logic helps turn raw observations into meaningful connections, like: heat increases temperature and temperature causes boiling. When an observation shows consistent results, it becomes a fact — a reliable, proven observation.
• Principles → Fundamental rules that explain how something consistently works. They are basic, general, and reusable. Reality has patterns (a predictable relationship between 2 things), and when a pattern repeats and holds true in every situation, it is compressed into a principle. So, a principle is a compressed truth from repeated observation. The difference between a fact and a principle: a fact is a single piece of viable information (water boils at 100°C), while a principle is a general rule that explains the pattern behind facts (heating increases molecular motion). Facts answer: “What is true?” Principles answer: “Why is it true?” Things fall is a fact; Gravitation is the principle behind that fact.
• Cause-and-effect relations → Cause-and-effect simply means that one event produces another. Cause is the trigger; effect is the result. Science exists to understand and predict reality reliably. Until we know the cause, we can’t predict reality. So, cause-and-effect relations help science predict consistently.

All put together, science is a body of knowledge based on observations, supported by principles, and used to predict outcomes through cause-and-effect relationships.

3. Money

Money is a store of value that maintains purchasing power over time. It is divisible, durable, portable, fungible, scarce, and widely accepted as a medium of exchange.

• Value → Value is the usefulness or importance of something to achieve a goal. Value only exists relative to a need or a goal — it is not absolute, it is subjective. That’s why the same bottle of water costs more in the middle of a desert. To be precise, value is the perceived usefulness of something.
• Maintains purchasing power over time → Purchasing power is the ability of money to buy goods and services. Maintaining purchasing power means that over time, the value stored should allow you to buy a similar level of goods and services, even if specific items change.
• Divisible → Divisibility is the flexibility to be broken into smaller parts without losing value. If money is not divisible, then buying a bubble gum is impossible.
• Durable → Durability refers to the ability to endure over time. Money must not decay, degrade, or lose its physical form easily.
• Portable → Portability refers to the ease of carrying and transferring money. It must be convenient to move across places and between people.
• Fungible → Fungibility means each unit of money is identical and interchangeable. One unit is equal in value to another unit of the same kind.
• Scarce → Money must not be easily created in unlimited quantities, or it will lose value.
• Widely accepted as a medium of exchange → Money must be accepted by people in exchange for goods and services, enabling smooth and efficient transactions.

Note: The definition above does not apply to Dollars, Rupees, or any other currency. These are currencies (exchange of value, not store of value), not money. They don’t represent any tangible asset after the Nixon Shock of 1971. These are just pieces of paper, working on mutual trust — though we use “money” and “currency” interchangeably in day-to-day life.

4. System

A system is a set of interconnected parts where inputs go in, processes occur, and outputs come out. A system in finance is any structure — person, business, or economy — where money flows in, is allocated, and produces outcomes.

For instance, every household involves the inflow and outflow of money. The head of the household decides how much to allocate for food, clothing, education, investments, etc. The same applies to businesses and national economies. Without money (currency), a system can’t survive in this world.

Connecting the Dots

We have grasped the foundation from scratch. I know it is time-consuming, but I could have wrapped up this blog in 300 words. But that is not the ideal approach. My belief is simple: if you spend time on something, spend it well. Don’t spend your time exploring shallow information. Dig deep till we expose the roots of the topic.

Now we will connect the prior understanding to understand what Finance is at its core.

At Last, What is Finance?

Finance is not a purely technical field; it is a combination of soft skills and technical skills. As already discussed, it is both an art and a science. Art requires soft skills, and science requires technical skills. Finance is a blend of both.

We already know that every system on this planet involves the inflow and outflow of money. Since money is limited for every system, it must be allocated effectively and efficiently. If this is not done, the system will collapse. After allocating the money, the next task is to determine whether what you are doing is producing the results you want.

How do you determine that? Is there any method? Is there any subject? The answer is: Finance.

We determine whether our actions produce benefits through Finance. Finance is made up of two things: Words and Numbers. These words and numbers help us determine the effectiveness of allocation and make future allocation more effective.

• A person who understands these words and numbers is known as Financially Literate.
• One who actually uses this knowledge to improve their system is known as Financially Intelligent.

What’s Next?

We have now understood the foundation of Finance. In upcoming blogs, we will dive into the world of words and numbers in Finance. By following this blog series, I guarantee that you will become capable of managing your finances and increasing your wealth or business performance, so you never have to worry about job security or money again.

Ahtisham Asif Tantray signing off!