I find it very strange, when people do not know how do commercial and retail banks work. They seem to think, that banks just "make" money, literally. That's why i decided to explain the main concepts of banking and present them really simply.
When people have more money than they need to spend, they may choose to save it. They deposit it in a bank account, at a commercial or retail bank, and the bank generally pays interest to the depositors. The bank then uses the money that has been deposited to grant loans - lend money to borrowers who need more money than they have available. Banks make a profit by charging a higher rate of interest to borrowers than they pay to depositors. (Now that's business!)
Commercial banks can also move or transfer money from one customer's bank account to another one, at the same or another bank, when the customer asks them to. Well, this is basically how a bank works. It gets money from some people and then lends it to other people. Could not be any more simple, but the best thing about it - IT WORKS!
Banks also create credit - make money available for someone to borrow - because the money they lend, from their deposits, is usually spent and so transferred to another bank account. (They sure think ahead of it.)
The capital a bank has and the loans it has made are its assets. The customers' deposits are liabilities because the money is owed to someone else. Banks have to keep a certain percentage of their assets as reserves for borrowers who want to withdraw their money. This is known as the reserve requirement. For example, if the reserve requirement is 10%, a bank that receives a $100 deposit can lend $90 of it. If the borrower spends this money and writes a cheque to someone who deposits the $90, the bank receiving that deposit can lend another $81! As the process continues, the banking system can expand the first deposit of $100 into nearly $1000!!! In this way, it creates credit of almost $900! Wow!
Before lending money, a bank has to assess or calculate the risk involved. Generally, the greater the risk for the bank of not being repaid, the higher the interest rate they charge. Most retail banks have standardized products for personal customers, such as personal loans. This means that all customers who have been granted a loan have the same terms and conditions - they have the same rules for paying back the money. (We're all equal before God, aren't we?)
Banks have more complicated risk assessment methods for corporate customers - business clients - but large companies these days prefer to raise their own finance rather than borrow from banks.
Banks have to find a balance between liquidity - having cash available when depositors want it - and different maturities - dates when loans will be repaid. They also have to balance yield - how much money a loan pays - and risk.
Well, there you have it. I hope i pointed out the main points and have most of the questions answered.. If there is anything else you wanted to know, feel free to ask anything.
Saturday, 8 March 2008
Friday, 7 March 2008
Royal Metal as a future guarantee
Gold, also known as the Royal Metal has been a huge influence to the world's economy for over 2500 years! Since 560 - 500 B.C. when gold began to be used as a currency for trade, and still up now it symbolizes wealth, hence all the jewelry that people love to wear to show off or just feel rich. Those who had a lot of gold had always been thought as rich and serious and it should not be any different nowadays! Investing in gold can be a really safe and profitable investment!
Gold price have been rising for a number of past years and they don't seem like stopping. And it shouldn't! Why in the world it should? Gold is a precious material and there is a limited supply of it, that's why it's price is just rising and not looking back! Gold has been used by traders, it has been used to fund crusades, it has been used as backing for currency, the list is endless!
What is more, gold has always been thought as a safe investment and it is even more important during any political or economical uncertainty (i know you're watching news and oftentimes think what is going to happen next). Empires fell, currencies collapsed, but people who had gold always felt safe and could live through any kind of problems!
And think about it, gold is very desirable as it is, but there is some sort of economy problems? (The Great Depression, Inflation) When investors feel that their money is losing value due to inflation they tend to invest more money in gold as gold price reacts to inflation and rises accordingly. Money can lose it's value to such level than a log of wood is worth more than a pile of cash! (1923-24 in Germany money was absolutely worthless)
What if a war strikes? And there are more and more wars going on today around the globe. During these times money can't buy everything, however gold has a much greater value due to it's psychological effects and it can always buy you food, shelter, etc.
Furthermore, gold is a valuable diversification tool and by no means should be included in portfolio! It has no correlation to stocks, bonds or real estate! Having a little gold somewhere can definitely help you sleep a little better at night. It always had it's magical sparkling warmth.
There are number of ways to invest in gold, it can be gold futures, coins, mutual funds, jewelry or even gold mining companies (swing that pickaxe for a better life!).
Another good way to look at gold's value is knowing that countries have huge amounts of gold in their reserves. Why? Simple. It's value is rising and they know it! The more gold they have, the safer they can feel, and you should be no different!
Summing it all up, gold can be valuable investment due to it's diversification uses, it's effect on economy and it's tendency to grow in value! Don't sleep, get some gold and let it's warmth lessen your headaches!
Thursday, 6 March 2008
Forming your portfolio
Your portfolio is considered Good as long as it is Well structured, Diversified and it's risk does not exceed your risk-tolerance level.
Now, what do i mean by well structured? You see, investing is not walking in the park, it's full of dangers and it's always ready to take all your money and run! (Of course walking in park in the middle of the night is not too pleasant either, but at least a mugger can only take the money you have with yourself at that moment.) Now, don't cry, if you follow my advice, you won't need to worry about losing all your money. There are quite a few portfolio risk management tools that you must use.
First of all, it is structuring your portfolio. A well structured portfolio can save you a lot of trouble by itself. Structuring means, assigning a particular percentage of your money to one or another investment instrument. That would be stocks, bonds, real estate, precious metals, artwork, cash etc. The simplest way to structure your portfolio is buying only stocks and bonds. And usually that is more than enough. We'll talk about alternative investment methods later on. Now, bonds have much lower risk (almost risk-free) than stocks, also because the rate of return is fixed, you know precisely what your return will be, that's why bonds should make up a large portion of your portfolio. And then depending on your risk-tolerance, you can decide, how much stocks do you want. Even though stocks are sometimes volatile over the short term, they have proven to be the best investment for long-term growth. In fact, no other investment instrument has provided a higher return over the long term than stocks! That's why stocks should be combined with bonds. Bonds help to stabilise the volatility of stocks, cover short term stock losses and gives a tasty little profit when the times are good.
The second tool, and also one of the most essential is stock Diversification. Diversification is spreading stock investments into different stocks. You would not want to spend all your money on some company's stocks only to see it go bankrupt and lose everything you had. That's why diversifying your stocks is of key importance. Let's say you decide that 30 % of your portfolio would be bonds and 70% would be stocks. Now, you should diversify that 70% of your stocks. IT should consist of at least 5 different stocks in 5 different industry branches and possibly countries. Also it would be wise to choose investment with varying risk levels, as this would ensure that losses are covered by other areas of your diversified portfolio. Diversifying reduces the risk dramatically, which is exactly what we want.
Now, what do i mean by well structured? You see, investing is not walking in the park, it's full of dangers and it's always ready to take all your money and run! (Of course walking in park in the middle of the night is not too pleasant either, but at least a mugger can only take the money you have with yourself at that moment.) Now, don't cry, if you follow my advice, you won't need to worry about losing all your money. There are quite a few portfolio risk management tools that you must use.
First of all, it is structuring your portfolio. A well structured portfolio can save you a lot of trouble by itself. Structuring means, assigning a particular percentage of your money to one or another investment instrument. That would be stocks, bonds, real estate, precious metals, artwork, cash etc. The simplest way to structure your portfolio is buying only stocks and bonds. And usually that is more than enough. We'll talk about alternative investment methods later on. Now, bonds have much lower risk (almost risk-free) than stocks, also because the rate of return is fixed, you know precisely what your return will be, that's why bonds should make up a large portion of your portfolio. And then depending on your risk-tolerance, you can decide, how much stocks do you want. Even though stocks are sometimes volatile over the short term, they have proven to be the best investment for long-term growth. In fact, no other investment instrument has provided a higher return over the long term than stocks! That's why stocks should be combined with bonds. Bonds help to stabilise the volatility of stocks, cover short term stock losses and gives a tasty little profit when the times are good.
The second tool, and also one of the most essential is stock Diversification. Diversification is spreading stock investments into different stocks. You would not want to spend all your money on some company's stocks only to see it go bankrupt and lose everything you had. That's why diversifying your stocks is of key importance. Let's say you decide that 30 % of your portfolio would be bonds and 70% would be stocks. Now, you should diversify that 70% of your stocks. IT should consist of at least 5 different stocks in 5 different industry branches and possibly countries. Also it would be wise to choose investment with varying risk levels, as this would ensure that losses are covered by other areas of your diversified portfolio. Diversifying reduces the risk dramatically, which is exactly what we want.
Wednesday, 5 March 2008
Protect your money!
Calculating your net worth helps you see the realistic image on where your finances stand, however, in order for the image not to become worse, you must Protect your money!
Now, what do i mean by that? If you thought that you should grab your cash, stick in a sock and keep it all nice, warm and safe, resting in your armpit, while you drink juice, then there is nothing left to do but for you to slap yourself and order yourself to WAKE UP! Honestly. Do not, and i stresst that DO NOT keep your money at home! Avoid keeping large sums of money in your house at all costs! Now you may wonder: "Why all this fuzz, why keeping money in my house is bad? Should i put my money in bank? I live in a 21st century, of course i keep money in a bank, that's so obvious!" But, i would have to dissapoint you again.. Yes, keeping your money in a bank is a better idea, but it's not the Best idea! You see, while keeping your money in a bank, you gain interest, that's fine, but that is not enough. On the most cases, the interest rate that bank offers is not high enough to cover the worst nightmare for money -> INFLATION !
Yes, inflation majority of time is bigger than interest rates and this leads to your money losing it's worth. For those of you that don't know what inflation means:
"Inflation is a rise in the general level of prices of goods and services in a given economy over a period of time. It may also refer to the rise in the prices of some more specific set of goods or services. In either case, it is measured as the percentage rate."
Now, the bigger the inflation, the faster your money lose their value. Let's take an example, you have $10.000 and inflation rate is 10%, then in 5 years your $10.000 will only be worth 50% of it's value Today. Yes, banks help to reduce this creeping death, but it's still not enough.
The next logical question you should ask: "So what do i do now? Will i lose all my money? There should be a way!". And yes, there is a way. It is called - INVESTING !
Investing in BONDS is probably the safest and easiest way to protect your money from inflation! Bonds are absolutely great! Depending on your risk tolerance, bonds should make a large portion of your portfolio as they are one of the most important investing instrument there is.
Now, what do i mean by that? If you thought that you should grab your cash, stick in a sock and keep it all nice, warm and safe, resting in your armpit, while you drink juice, then there is nothing left to do but for you to slap yourself and order yourself to WAKE UP! Honestly. Do not, and i stresst that DO NOT keep your money at home! Avoid keeping large sums of money in your house at all costs! Now you may wonder: "Why all this fuzz, why keeping money in my house is bad? Should i put my money in bank? I live in a 21st century, of course i keep money in a bank, that's so obvious!" But, i would have to dissapoint you again.. Yes, keeping your money in a bank is a better idea, but it's not the Best idea! You see, while keeping your money in a bank, you gain interest, that's fine, but that is not enough. On the most cases, the interest rate that bank offers is not high enough to cover the worst nightmare for money -> INFLATION !
Yes, inflation majority of time is bigger than interest rates and this leads to your money losing it's worth. For those of you that don't know what inflation means:
"Inflation is a rise in the general level of prices of goods and services in a given economy over a period of time. It may also refer to the rise in the prices of some more specific set of goods or services. In either case, it is measured as the percentage rate."
Now, the bigger the inflation, the faster your money lose their value. Let's take an example, you have $10.000 and inflation rate is 10%, then in 5 years your $10.000 will only be worth 50% of it's value Today. Yes, banks help to reduce this creeping death, but it's still not enough.
The next logical question you should ask: "So what do i do now? Will i lose all my money? There should be a way!". And yes, there is a way. It is called - INVESTING !
Investing in BONDS is probably the safest and easiest way to protect your money from inflation! Bonds are absolutely great! Depending on your risk tolerance, bonds should make a large portion of your portfolio as they are one of the most important investing instrument there is.
Tuesday, 4 March 2008
Calculating Net Worth
Honestly, determining your financial status is a key step to financial life improvement.
Having your goals set and and all it planned is not enough. Having goals is a must, but in order to pursuit them, you need to clearly see your budget and then adjust your goals to them, to be more realistic, at least for the short term. So, in order to do that you must calculate your Net Worth, that's why you must follow these steps:
Having your goals set and and all it planned is not enough. Having goals is a must, but in order to pursuit them, you need to clearly see your budget and then adjust your goals to them, to be more realistic, at least for the short term. So, in order to do that you must calculate your Net Worth, that's why you must follow these steps:
- Write down your cash balance in the beginning of the year.
- Add your expected income for the year. Check your most recent income tax return so you are sure to include all sources of income.
- Subtract your estimated savings and investments
- Subtract your annual expenses. Consult your checkbook to make sure you include all expenses. The amount remaining is your cash balance at the end of the year. If it is negative, you'll have to go back and see if you can eliminate some unnecessary expenses.
- List all of your assets. These are the things you own, including your investments, home, life insurance, etc.
- Subtract your liabilities; that is, everything you owe. Liabilities include your mortgage, charge account balances, loans, taxes, overdrafts, etc. The difference between your assets and liabilities is your net worth. If you calculate your net worth annually, you can monitor the growth in your personal wealth.
Planning your Personal Finance
Planning your financial life is of key importance, when it comes to personal finance and wealth.
A well prepared plan might have all kinds of elements, some of which are: checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management. However, in general there are 5 main points one has to consider:
A well prepared plan might have all kinds of elements, some of which are: checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management. However, in general there are 5 main points one has to consider:
- Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
- Setting goals: Two examples are "retire at age 65 with a personal net worth of $200,000 American" and "buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning.
- Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one's employment income, or investing in the stock market.
- Execution: Execution of one's personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
- Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.
Typical goals most adults have are paying off credit card and or student loan debt, retirement, college costs for children, medical expenses, and estate planning.
Monday, 3 March 2008
What is Your Financial Status?
How many of you does not have ANY financial problems OR do not want to improve your financial life?
I suppose there are not too many, because no matter how much money one has, one wants to have more. And this is OK. Who in the world would want to be poor? Being rich or at least having enough money to live problem-free is absolutely normal.
Well, this is why I started this blog. Economics is a no-no to most of the people, but it should not be like that. You should not be scared of money, it should be your humble servant.
I will post information on this blog regarding personal finance management and reveal any secrets i know on how to save and invest your money. Make your life better by making your money working for You! By reading this blog You will learn how to effectively save money, invest it and gain a tasty return.
I suppose there are not too many, because no matter how much money one has, one wants to have more. And this is OK. Who in the world would want to be poor? Being rich or at least having enough money to live problem-free is absolutely normal.
Well, this is why I started this blog. Economics is a no-no to most of the people, but it should not be like that. You should not be scared of money, it should be your humble servant.
I will post information on this blog regarding personal finance management and reveal any secrets i know on how to save and invest your money. Make your life better by making your money working for You! By reading this blog You will learn how to effectively save money, invest it and gain a tasty return.
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