Financial Planning

deeptrancenow_create_money2.jpgIf you ask children to choose between eating one ice cream immediately or two ice creams a day later, they’ll invariably choose to have just one right away. But if you give the child a choice between one ice cream the next day or two ice creams the day after that, almost all children will choose to wait the extra day and get two ice creams instead of one. I think all parents know this. I too figured this out almost as soon as my daughter was old enough to ask for things. Of course, children are pretty clever and often manage to outmaneuver parents. But whether it works or not, parents know that the trick is to try and avoid situations where a choice has to make between immediate gratification and some future pleasure.

Unlike parents, economists took a long time to figure this out and when they finally did, it was thought to be a great discovery. But then, applied to economic behavior, it probably is. What is true about the way our children make ice cream decisions is also true about the way we make decisions about savings, investments, and expenditures and probably about many non-financial matters like health and work too. Most of us, children or adults, are not good at making decisions that involve comparing the seductive present (and the immediate short-term) with the distant future.

Of course, this is not equally true of everyone. Some people, especially at a young age, have a severe form of this problem of not being able to think past the immediate gratification. These are the people who supply much of the profits of credit card issuers. At the other extreme are the kind of people who spend their lives accused of being misers- the ones who are unable to live the present without obsessively planning for the future. For a long time, the difference between the two kinds was considered to be a sort of moral gap with the former being the thrifty and careless no-goods and the latter being sensible and prudent.

But perhaps this is not the right way of looking at things. Over the last three decades or so, there has been a lot of research that suggests that some of these behavior patterns are fundamental to the way the human brain has evolved. For most of the period during which human beings were evolving, the immediate present really was very important – much more so than the distant future.

The problem is that this instinctive preference produces financial behavior that is detrimental to our economic well being. Conventionally, the solution to this would be education and self-awareness. If more people learn about patterns of risky economic actions then they wouldn’t take those actions, right? Well, actually, it doesn’t look like it. Only a small proportion of people will have the self-awareness to modify their economic behavior and pay more attention to the long-term than the immediate short-term. The only way that people can change their behavior is if they somehow get committed into a good choice.

I’ve always said that it was important for investments to be liquid so that one could withdraw from them when the need arises. However, it is a fact that for a large mass of people, the main investments tend to be the ones like long term retirement funds where they are forced to make and stick to for a long period of time. Perhaps there’s a lesson there.

3958-0med1.jpgDon’t fall behind. Finance charges, interest payments, getting discouraged about your finances… all problems that can occur if you let yourself fall behind. Whether it’s bills, credit cards, or student loan payments, falling behind can be a very difficult problem to come back from. The more you have to pay out in charges, the less you will have to invest in your future.

Set goals. If you don’t know where you are headed, how do you get there? In order to accumulate wealth you need a plan. Write out your goals, a way to achieve them, and you’ll be on your way to an early retirement.

Invest early. The greatest thing you can do to build wealth is start early. Even if you can’t invest much, start with what you can and let your money grow over time. As Albert Einstein said, “compound interest is the greatest mathematical discovery of all time.”

Invest in what you know. Whether you are looking to invest in real estate, stocks, or anything else, make sure you know how the investment works. The great Warren Buffett was often criticized for not investing in technology during the dot-com boom. His answer was simple. If you don’t know the business model, what the company does on a day to day basis, or how it generates revenue now, and in the future, then stay away from it. This principle can be applied to all types of investing.

Don’t do what the crowd is doing. When everyone is starting to get into an investment, that is generally when the smart investors are getting out. If everybody knows a stock is hot, or that their real estate market is booming, it generally indicates a bubble and that it’s time to cash out. Investors make money buying low and selling high. If an investment is hot and lots of money is flowing into it, you can’t buy low.

Don’t try get rich quick schemes. Don’t get greedy. This is easier said then done, but don’t try to gain too much too fast. Building wealth takes time and hard work… there is no easy way to get rich.

Save more. This is another one that sounds pretty basic, but can be difficult to achieve. Often times people want the instant gratification and go out and treat themselves. If you have some money burning a hole in your pocket at the end of the month, save it. Think about how nice it will be when that money is working for you rather than heading out shopping.

user.jpgIn years of answering people’s questions about investing, I’ve come to classify two major sources of problems: One, investing without thinking enough, and two, thinking too much about investments. We all know at least a few hypochondriacs who continuously suspect themselves to be suffering from dangerous illnesses and require frequent visits to specialists and get exotic medical tests done to allay their fears.

Similarly, there are a vast number of investment hypochondriacs who suspect their asset portfolios to be suffering from some dangerous disease. Generally, they believe that this disease can only be diagnosed by having a specialist examine the portfolio and test it by applying exotic formulae that will perform some magical analysis. Somewhat like its medical version, investment hypochondria, too, is encouraged by these specialists who claim to detect and cure exotic diseases suffered by investment portfolios.

One of the most popular type of diseases in this field is a faulty asset allocation. Many people are worried sick about whether their investment portfolios have the correct amount of money allocated to debt and equity. Periodically, I get asked about what the formula for calculating asset allocation is and sometimes I’m actually asked this not by a patient but by a budding specialist.

The problem, of course, is that there is no formula, nor can there ever be. Asset allocation is just a fancy term for investing according to your needs. Try to get anyone like this to plan your investments and they’ll start by putting up a charade whose purpose is to convince you that finding out correct asset allocation is a complex process that requires proprietary formulae being churned up in complex looking spreadsheets invented by teams of MBAs.

By this process, deciding on an asset allocation starts by figuring out how risk-averse you are and how much risk you are willing to take to get the returns you want. This sounds so logical and systematic but is actually completely useless. Professional investors who are investing other people’s money may be able to find out their location on a risk-vs-return continuum, but at the back of their mind, everyone else wants zero risk. And guess what, zero risk is effectively possible if you do asset allocation the right way.

The key to really figuring out asset allocation is simply to make a rough time table of the future, one where you try and lay down when you will need how much money. Now, what you need to understand is that over some time horizon, most asset types turn zero risk, or as least as close to it as humanly possible. What you need to do is to match your investment time horizon (and not some theoretical risk level) to the asset type. Assets like bank Fixed Deposits and cash mutual funds are always zero risk, short-term income funds are zero risk after six months, and a good stock portfolio like a well-chosen set of diversified equity funds are close to zero risk after maybe seven years.

I‘ll admit this is a slightly simplified view but what I’m trying to do here is to demonstrate the principal on which individuals should base their asset allocation. There is no formula for asset allocation. The right way to do this is to figure out what you plan to do with your money in the future.

money-invest.jpgIn simple economics, there is little distinction between savings and investments. One saves by reducing present consumption, while he invests in the hope of increasing future consumption.Therefore, a fisherman who spares a fish for the next catch reduces his present consumption in the hope of increasing it in the future.

Most of the people probably have savings accounts with ATMs to access their hard-earned cash and be able to store away any extra cash in a place a little safer than a mattress. A few of you may even have some stocks or bonds.

Let me explain why while a savings account in the bank may seem like a safer place than the mattress to store your money, in the long-term it is a losing proposition! If you open a savings account at the bank, they will pay you interest on your savings. So you think that your savings are guaranteed to grow and that makes you feel extremely good! But wait until you see what inflation will do to your investment in the long-term!

The bank may pay you 5 percent interest a year on your money, if inflation is at 4 percent though; your investment is only growing at a mere 1 percent annually.

Saving and investing are often used interchangeably, but they are quite different! Saving is storing money safely, such as in a bank or money market account, for short-term needs such as upcoming expenses or emergencies.

Typically, you earn a low, fixed rate of return and can withdraw your money easily.
Investing is taking a risk with a portion of your savings such as by buying stocks or bonds, in hopes of realizing higher long-term returns.

Unlike bank savings, stocks and bonds over the long term have returned enough to outpace inflation, but they also decline in value from time to time.The rate of returns and risk for savings are often lower than for other forms of investment.

Return is the income from an investment. Risk is the uncertainty that you will receive an expected return and preservation of capital. Savings are also usually more liquid. That is, you may quickly and easily convert your investment to cash.

The decision about which investment to choose is influenced by factors such as yield, risk, and liquidity. Investments may produce current income while you own the investment through the payment of interest, dividends or rent payments.

When you sell an investment for more than its purchase price, the profit is known as a capital gain, also called growth or capital appreciation.

ist2_2665797_stairs.jpgToo much money in the Stock Market.

When there is too much money in the stock market, it can be a warning sign that things are about to change.

New money coming into the market could means investors who have been holding cash investments (CDs, bonds, and so on) are jumping into equities.

Individually, this may be a good decision, depending on where investors place their money.
Better Stock Return Unfortunately, what often happens is inexperienced investors watch a bull market run and want to get in on the better returns the stock market offers.

They may not choose their investments wisely and push the prices of hot stocks even higher. Because they are inexperienced, they buy stocks they hear about on television or from friends.

Rather than do their own research, money pours into the market and pushes up certain stocks beyond reasonable expectations.

If you have been a stock investor for at least 10 years, this scenario may sound like the tech bubble of the late 1990s.Stock Market Bubble. Huge amounts of cash poured into the market creating a demand for something to buy. During that period, it was any stock that had to do with the Internet.

Like any market where there are more buyers than sellers, prices shot up until professional investors began pulling their money out of the market and values crashed.

This doesn’t mean you should stay out of a market where there is lots of enthusiasm. However, be careful about what stocks you buy and even more careful about what you pay for them.

Don’t rely on the market to keep its enthusiasm forever.

stress1.jpgOn Tuesday, February 27 this year, the Dow Jones Industrial Average dropped 416 points—the markets sharpest drop in three years. Two emotions—fear and greed—can lead to bad investment decisions.

Investing can be dangerous yet profitable endeavor. Many people have been burnt and decide not to ever invest again. This is the primary fear for investing in anything. They may give you excuse such as ‘I don’t have enough money’ or ‘I don’t know where to invest’. But the number one fear is always the fear of losing money. If a novice investor knows that he won’t lose money, he must have used all means necessary (such as loan) to buy as much investment opportunity possible.

Investing here can mean a lot of things from buying gold coin to real estate. There are several ways of how to reduce your fear of investing in common stock.

Get Educated. When you know more about something, you are more certain of your outcome. When you know how to calculate the fair value of a common stock, you will know your expected return of investment. Remember that the less uncertainty you have, the less risk you undertake. You will also know more about the downside risk of your investment. If a common stock has $ 3 per share of positive net cash, is profitable and is currently trading at $ 5 per share, then you know that it won’t trade at below $ 3 per share for a long period of time. Your maximum possible risk here is 40% of your original investment.

Start Small. When you begin your investing journey, you have a lot of unknowns. Less education means more unknown which means greater risk. How small should you start? As much money that you can afford to lose. If you still have no idea, then how about $ 1 a day? One dollar a day will give you $ 500,000 after fifty years of investing with 10.5 % return. Even if you have $ 500,000 right now, it is better for you to start small if you are a novice investor.

Pay Yourself First: means that you find investment that can pay you first as investors. What investment can pay you first? One thing that comes to mind is buying a common stock that historically has steady or increasing dividends. There is one more way to pay yourself first by selling covered call options. For novice investors, however, I suggest we put this subject of selling covered call options off until you get really really comfortable with investing in common stock.

Learn From Your Mistake. Once you begin investing, the fear of losing money is always there. The best ways to learn is from your own mistake, but do not to hasten your learning curve.

Will you be fear-free after reading this column? The answer is no. Fear is always there because of uncertainty. Successful investing is about predicting the future which is uncertain. Even investing in your money-market account is uncertain. It involves some small risk. The risk might be inflation being higher than the interest rate offered. There is also uncertainty regarding the direction of interest rate. Interest rate used to be in the high single digits during the 1980s. Look where it is now.

We live in uncertain world. Instead of hiding behind the wall, we need to embrace it and educate ourselves to reduce the uncertainty. Doing this will in effect increase our investment return beyond the rate of inflation.

bankrupt.jpgWe have all heard the old saying ‘health is wealth’ this I think is perhaps only about half right. If we think wealth is the key to health, then you know you’ve found good wealth to afford the comforts of life, and your worries would take a backseat. Much the opposite would happen if your finances are out of control.

I believe that the ultimate success is defined as staying alive. And the more I think about this, the more I believe it. After all, what do money, power, and good looks matter if you’re dead? For starters, smarter people are likely to have more money.

The first step towards a secure financial position starts with budgeting. You must have a budget to gauge your future positioning. A budget is nothing but an overview on how much you earn, spend, and save. This can be short-term as in case of daily or weekly budgets. It helps you to have an idea about where your money is or will be. Budgeting also helps in achieving long-term goals. For instance, if you fancy owning a Lexus after five years, you should plan to save some bucks from your pay every month and budget accordingly. If you stick to this practice, your desires won’t fail you.

Another must-do en route to financial health is to save. They say if you look after your pennies, the pounds will follow soon. So be penny-wise and start saving early in your career, but save to save future troubles/emergencies. However, this is not to say that you say good bye to fun-factors in life. Indulge in luxuries or occasional extravagances, but save consciously.Don’t remain tied in debt. The sooner you become debt-free, the healthier it is for you. And remember to start paying off the highest-interest loans first. Loan interests are known to break lives, so be aware of the dangers.

Yet another obstacle to a financially healthy future is your credit card. These are such items in your wallet that can drive you to bite off more than you can chew. If you cannot pay your card bills in full, say ‘no’ to credit cards and save yourself a perennial debt-trap.

Of course, we all like to pamper ourselves with a new dress, an expensive watch or a handsome car; but be sure to think before you spend. Do you really need it? If the answer is ‘no’, forget it.

Having said all that, it’s true at the same time, that no matter how much you organize or plan your finances, life throws up unexpected surprises and you’re caught unaware. Maybe you’ve forgotten to consider your emergency house paint or missed an important bill. It’s then that you’d need payday loan online to get the clog out of the wheel.

Wise men would say: keep this as your last option. To sustain your financial health, choose not to go for these high-interest loans.

nri.jpgPlanning your financial future may not sound like the most glamorous of things, but it can make a huge difference. The key is to understanding the value of time.

They say death and taxes are the two things you can’t avoid. Well, they are wrong. There is a third thing – time. Time passes us by no matter how we try to fight it with exercise, diet and, in some cases, plastic surgery! From this description, it may sound as though time is a bad thing. It all depends on how you use it.

You can turn the passage of time to your financial benefit if you understand it. In truth, we live in a “now” world. Give me convenience or give me death! So many of us are used to getting things now, that the idea of doing something for a positive effect in ten or twenty years sounds ludicrous. Heck, most of us find it difficult to do such things even if we are talking about a benefit five years down the road. This is where you can make a major mistake in planning your financial future.

At its core, financial planning is really about time. The goal is to use dollars today in such a way as to maximize their future effect. Let’s look at a simple example.

The dream for many people is to own their own home. Millions of us clamor forth to find our first home and come up with the money for a down payment. We then apply for a loan, go through the application process and wait/pray for an answer. Most of us never even think about the term of the loan – the number of years it will be paid back over. We are just praying we get the financing and will worry about the detail later. This is a big mistake because it discounts time.

The traditional mortgage has a term of 30 years. This means you will be making that mortgage payment for 30 years or 360 months assuming you don’t sell it before then. Think about that for a minute. If you are 30 years old when you borrow the money, you will be making your final payment when you are 60! And they say people are unwilling to commit to things!

For a person that understands the importance of time in financial planning, a different approach is usually taken with a mortgage. Instead of a 30 year term, they go with a 15 year term. Since there is less time involved in the payback, each dollar of their monthly payment is converted into a greater percentage of principal, to wit, they pay much less interest over the length of the loan. Ah, but the monthly payment is more? Yes, but you can buy a lower price home, build up equity for five to seven years and then trade up for something nicer. You effectively have more money and a better home in five to seven years instead of the financial anchor of a 30 year mortgage. This is why understanding time is so important!

As hard as it may be, you should take into account time as a factor in your investing. If you can come to grips with the future benefits of action taken today, you will really be happy when those future benefits come around.

hsc1550l1.jpgFuture Stock Prices Depend on Earnings. As an investor in stocks, you should always be asking what the company will do for me tomorrow.

By that, I mean investors are particularly concerned with future growth in earnings and, ultimately, the stock’s price and dividend if it pays one.

A company can have a great year and the stock can reflect that performance, but if there is no brighter tomorrow, how is future stock price growth going to be justified?

This concern with short-term growth is often criticized as a problem that penalizes companies that make decisions good for the long term, but detrimental in the near term to earnings.

That’s not always the case if management is trusted by investors to make good decisions, however in many cases companies’ stock is hammered in the market if there is not a clear pattern of year-to-year growth.This is especially true of companies tagged as growth investments and in sectors such as technology that are marked by high growth rates.

While this may seem unfair to some, it is a perfectly logical way for the market to allocate investment assets to those stocks that will produce the highest returns in the near future.Individual investors are rightly cautioned to invest for the long term and many successful investors do just that, however they only do so when they find a company that has a good chance of providing a sustained growth over a long period.

Investing in company for the long term that does not grow is a pointless exercise (unless you are investing in a utility, for example, for a nice fat dividend and don’t care much about the share price).

The message is stock investors should always looking forward and should not be concerned with past performance other than in providing a reference point for judging performance.

bbudget1.jpgDoes it sometimes seem as though you cannot afford to do things because your financial obligations are holding you back? If you find that you are asking yourself these sorts of questions, perhaps you should take a look at your financial situation and assess whether you are practicing good personal finance management or not. Good personal finance management spends within their income, plan for the future and solve financial problems as they arise. Poor personal finance management pay more, do without and fall behind. If you find yourself in the second category, you can do something about it. You can learn to take charge of your finances by planning your personal finances.

Planning your personal finances doesn’t always come naturally, and even if you’re just beginning to take your financial matters seriously, then you likely need a few personal finance tips.

Evaluate your current financial situation. One of the most important goals for most people is financial independence. Collect accurate information about your personal financial situation. Calculate your net worth which includes the real estate, saving and retirement accounts, and all other assets. This will help you decide how much money you can set aside for meeting future needs and goals.

A basic personal finance tip is to make a budget. A personal finance budget is information made up of your income and expenses and the more accurate this information is, the more likely you are be able to meet your goals and realize your dreams. A personal finance budget should be made for at most one year at a time and include a list of your monthly expenses.

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