Corporate Finance vs Personal Finance

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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acegolfer
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Joined: Tue Aug 25, 2009 9:40 am

Corporate Finance vs Personal Finance

Post by acegolfer »

What are the concepts/principles in corporate finance that should not be applied to personal finance?

If it has been too long since you took corporate finance, here are some topics (but not limited to):

1. Time value of money
2. Risk, Portfolio theory
3. Capital budgeting
4. Financing decisions
wfrobinette
Posts: 1452
Joined: Fri Feb 20, 2015 3:14 pm

Re: Corporate Finance vs Personal Finance

Post by wfrobinette »

acegolfer wrote:What are the concepts/principles in corporate finance that should not be applied to personal finance?

If it has been too long since you took corporate finance, here are some topics (but not limited to):

1. Time value of money
2. Risk, Portfolio theory
3. Capital budgeting
4. Financing decisions

I have a BBA with a concentration in Finance. I can't think of any principles that I don't use to some extent in my personal finance life.
Bill M
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Joined: Sun Dec 30, 2012 10:10 pm

Re: Corporate Finance vs Personal Finance

Post by Bill M »

Depreciation is the one big one that comes to mind. Personal finance tends to value the home at market value, not at a depreciated purchase price.

But there are aspects of personal finance that don't seem to apply to corporate finance. How would a corporation value a pension benefit (that it is receiving, not that it is paying) on its books? How about a lifetime annuity?
bigred77
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Joined: Sat Jun 11, 2011 4:53 pm

Re: Corporate Finance vs Personal Finance

Post by bigred77 »

You can try to transfer over everything if you want. There's a logical argument to be made for most any aspect of running your personal finances like a business. I like to think of my own finances as that of bigred77 inc.

Some key considerations however are that:

- Emotions. personal finance is just that, personal. emotions come into play here while we like to think business decisions are almost completely cold and calculated.

- debt. most corporations will borrow money to invest in projects they believe will return more than the borrowing costs. I don't think amny individuals would (or should) leverage up this way to invest more money.

- bankruptcy. personal bankrupcty can be life ruining. corporate bankruptcy can be a negotiating ploy.

- time frame. people will eventually die. a 70 year old retiree should not plan his finances with a 50 year outlook. Exxon probably should.
Harold
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Location: San Francisco

Re: Corporate Finance vs Personal Finance

Post by Harold »

A big one is that many people try to use a personal balance sheet to justify having debt, as if Modigliani-Miller says it doesn't matter how they structure their personal finance. The reality is that maintaining unnecessary debt is generally a suboptimal financial strategy for individuals. (I know people love their debt and will resist that. I don't care to argue about it -- do what you want.)
Bill M wrote:But there are aspects of personal finance that don't seem to apply to corporate finance. How would a corporation value a pension benefit (that it is receiving, not that it is paying) on its books? How about a lifetime annuity?
This example is one where it would be the same. There's a clear actuarial approach for determining the value. Corporations use such an approach, and individuals should do more of it. (There are many many examples, on this forum and elsewhere, where individuals face a decision involving the value of their pensions -- and they invent their own incorrect calculations.)
NoVa Lurker
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Joined: Tue Jan 18, 2011 11:14 am

Re: Corporate Finance vs Personal Finance

Post by NoVa Lurker »

OP - Why are you asking?

In addition to the factors mentioned above, one difference is that, with personal finance, the principal is doing the labor. In other words, in your personal life, you can frequently save money by spending more time and effort. You can pay someone to take care of your yard, or you can do it yourself for "free." You can walk for "free," take the bus for a small expense, or take a cab that will cost more but save the most time. Those trade-offs are not really a factor in corporate finance. Corporate finance principles do not help much in making those decisions - you can try to put a dollar value on your own time, but that's an exercise apart from corporate finance principles.
Twins Fan
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Joined: Fri Mar 08, 2013 1:02 pm

Re: Corporate Finance vs Personal Finance

Post by Twins Fan »

I am in no way smart enough or educated enough to run myself like a corporation. :happy

I imagine in some ways I unknowingly make some choices that may be along the lines of corporate finance. But, I think most folks should stick to the personal and individual side of things. Now, if one has more money and assets than many small businesses that may be a different story. But, even in Bogleheads I bet most aren't big time enough to be thinking like a corporation. Just my simple take on it...
Grt2bOutdoors
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Location: New York

Re: Corporate Finance vs Personal Finance

Post by Grt2bOutdoors »

Cost of capital. A corporation that is listed, can issue scrip most of the time at some price. An individual can not sell equity in themselves.
A corporation can deduct financing interest costs, an individual can only deduct certain interest costs such as that of a primary mortgage on their personal residence and even that is capped at $1 million, corporations are capped only by the amount or lack of demand by debt investors.

Capital expenditures - corporations have various tax and depreciation incentives to invest in their business. Individuals have very limited tax and depreciation incentives, there is a low dollar ceiling that once crossed can prevent individuals from realizing those incentives.

Zero based budgeting - a corporation can utilize this method, I don't recommend individuals try wiping the spending budget slate clean each year, it could get quite messy.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Valuethinker
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Re: Corporate Finance vs Personal Finance

Post by Valuethinker »

Asymmetric information. This drives all kinds of corporate financial decisions.

It governs your relationship with financial intermediaries. But, generally, trading on information you have and others don't is the crime of insider trading.
wfrobinette
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Re: Corporate Finance vs Personal Finance

Post by wfrobinette »

Grt2bOutdoors wrote:Cost of capital. A corporation that is listed, can issue scrip most of the time at some price. An individual can not sell equity in themselves.
A corporation can deduct financing interest costs, an individual can only deduct certain interest costs such as that of a primary mortgage on their personal residence and even that is capped at $1 million, corporations are capped only by the amount or lack of demand by debt investors.

Capital expenditures - corporations have various tax and depreciation incentives to invest in their business. Individuals have very limited tax and depreciation incentives, there is a low dollar ceiling that once crossed can prevent individuals from realizing those incentives.

Zero based budgeting - a corporation can utilize this method, I don't recommend individuals try wiping the spending budget slate clean each year, it could get quite messy.
I look at a a car as a quasi capital expenditure and use depreciation and maintenance of the asset to get total cost of ownership. Housing works much the same with amortization, maintenance and cost of financing.
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