Foundational equations or concepts of Finance [closed]

Question

For the other sciences it´s easy to point to the most important equations, inequalities, propositions or concepts that ground the discipline. If I want to explain Finance to a physicist say, what are considered to be the most fundamental, foundational or important equations, inequalities, principles, propositions (theorems, lemmas, etc) or concepts that underly the subject which I should introduce and attempt to explain?

Above paraphrased from: Fundamental equations in economics

My guess would be the fundamental theorem of asset pricing or some Pricing Principle, but that's coming from a mathematical finance background. Would people coming from a corporate finance (or whatever else finance is out there) background say something similar?

And if this off-topic for general finance but on-topic for personal finance then just pretend I asked for personal finance specifically since there is no finance se technically.

Answer 1

For personal finance (even though this question is tagged for stocks):

1. How about the fundamental accounting equation?

   Assets = Liabilities + Equity

   or (equivalently)

   Equity = Assets - Liabilities

   In a personal finance context, "equity" is better known as "net worth"

2. The concept of net present value

   The actual equation is a little complicated, but it allows you to convert between streams of income and lump sums according to the prevailing interest rate. How much should you pay for a house so that you don't have to pay rent ever again?

   For a regular recurring payment, this is basically compound interest with a negative interest rate.

3. Compound interest

   Not because you're going to receive compound interest in your bank account - not these days - but because if you buy things on your credit card you will be on the wrong side of this equation, and that's really bad.

4. The debt avalanche and debt snowball methods to get out of debt.

   Debt avalanche: If you're trying to get out of a debt spiral, pay the minimums on all your debt, then pay the absolute maximum possible to your highest-interest-rate debt, regardless of the amount of debt. This is the optimal way to spend less money in total.

   Debt snowball: If you're trying to free up cashflow, pay the minimums on all your debt, then pay the absolute maximum possible to the smallest debt, regardless of interest rate. This isn't optimal, but the good feeling when you delete each debt may motivate you to keep going.

5. If someone asks you to receive money and then send it somewhere else, it's a scam.

6. DO NOT BUY EXPENSIVE LUXURY ITEMS THAT YOU CAN'T AFFORD. ESPECIALLY IF YOU HAVE TO TAKE OUT A LOAN TO GET ONE.

Answer 2

For personal finance, the Micawber Principle, from Charles Dickens' David Copperfield:

Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.