Thursday, April 17, 2008

Money saving: Keep your money safe

Savings are an important part of every ones financial life. However, the beast of inflation is attempting to take even them from you. If your money is held at home in cash or in your current account and does not accumulate any kind of interest, it is losing its value over time. Inflation cuts down your money's purchasing power and you must use at least some of these savings instruments to protect your money from inflation. And protecting your money from inflation is the primary objective in order for your savings to grow in time, instead of perish in the labyrinths of time.

Simple savings account

Since you already know about the importance of the emergency fund, you already have a savings account, and maybe even made an agreement with a bank so it transfer portions of money from your current account into this one. In this case, a savings account is probably the easiest way to store your savings in. However, savings account does not make make your money work for you.
It is essential to know the interest rate, when your are using a savings account.
You could earn somewhere from around 0.5% to 5% or more, it all depends on your bank and kind of your savings account. However, banks tend to offer higher interest rates to accounts with bigger amounts of money in them. It might even be so, that the interest rate does not cover inflation and you lose some of the purchasing power your money has.
Probably the best thing savings accounts has, is their liquidity. Liquidity is quite an important factor when it comes to savings, as you can get back your money from the bank almost instantly. It does not require for you to wait days to lay your fingers on your money, you can just access your savings account online and transfer your money from savings to current account at grab them at cash dispensers, or just visit a local branch.

Certificates of Deposit

There are various other places to put your savings in to earn a little something, one of them is a certificate of deposit. It is a good place to save your money in. Certificates of deposit are insured, just like your savings account and are generally risk-free. The difference from savings accounts is that the certificates of deposit has a fixed amount of time or term (from three months for up to five years), and, usually, an interest rate that is also already fixed. After that fixed amount of time is over and certificate of deposit reaches its maturity, the money you invested can be withdrawn with the interest it has accumulated. Usually, the longer the term you have agreed to invest your money the higher the interest you will get paid by the bank.
Certificates of deposit tend to be far less liquid than savings accounts, since your money is required to stay invested for the fixed amount of time, so this means that your money is less accessible than in the savings account. If an emergency occurred and you need the money, however you can take back your money before the maturity of the certificate, but you will have to pay a penalty which can easily remove all the money you earned from the interest so far.

Money markets and money market funds

An alternative to a simple savings account are money markets and money market mutual funds. You can choose using money market bank accounts or money market mutual funds. Even though they have quite a similar name, they are not the same. A money market fund is some type of mutual fund (an investment company), where as money market bank accounts are
issued by banks. Money market accounts work very similarly to your normal account, however there are more restrictions, such as having a higher balance or having a number of money withdrawals limited per month.
Investment companies offer money market mutual funds. You need to create a new account in the company to become a part of a money market mutual fund. To have a quite good interest rate These funds invest in a wide range of short-term investments. The downside of money market mutual funds is that, your money does not have insurance, unlike in money market bank account. Money market accounts usually net higher interests than savings accounts, but their liquidity tends to suffer quite a bit, due to restrictions they have.

Treasury securities

There are other choices for your savings such as treasury securities. Treasury securities are bills, notes and bonds issued by the Government of the U.S. Similar to certificates of deposit, treasury securities have a fixed maturity term. The maturities differ from 1 to a whopping 30 years, depending if it is a bill, a note or a bond.
Like with certificates of deposit, liquidity is an issue with treasury securities. But this problem can be effectively solved, as there are highly active and liquid secondary markets where you can easily sell your treasury securities.

What should i do?

As regards savings, there is pretty much no difference on which savings method to choose, as long as they cover inflation, and does not let your money lose value. Everything after that depends on your own needs. If your savings are just those in an emergency fund, then probably a simple savings account would be the most convenient. However if your savings are larger and you intend to save for something big, and it would take months or years to save, your best bet would probably be at looking for better interest rates in certificates of deposit, money markets or treasury securities.
Usually these savings instruments are just a part of investors portfolio. There might be some stocks for some higher yield, maybe some precious metals or other investment instruments. However, the bottom line is that you do not let your money sit in your sock and lose its value due to inflation. Inflation can easily kill your money and you definitely don't want that, do you?

Sunday, April 13, 2008

Money saving: Emergency Fund

The key point of building wealth is saving your money. You need to spend less than all your earnings, in order to save any money. But oftentimes this is one of the hardest things to do, however there are plenty of ways to help you to save your money on even the tightest budget. As you probably already know - the money earned is the money saved.

The first thing you need: Emergency Fund

The unexpected always happens in your life when you are the least expecting it, and this is exactly why you must have an emergency fund. It is the best solution to be prepared for those unexpected emergencies that require additional money. Whether it be a job loss, health issues and medical care, car or house repairs, the death of your loved ones or anything that might require quite a portion of our money. And the very last thing you want to do is taking a loan or rely on any other kind of credit. It might even worsen the situation.

The size of the emergency fund

It is commonly known that there should be such an amount of money in your emergency fund, that you could live normally for at least three to six months without worrying. The amount of money in your emergency fund could be modified considering your current situation. It might be changed due to whether or not you have children, have any kind of debt, insurance, other liabilities or even current economic situation. (i.e. Unemployment rate is rising due to hard economic times and your job loss chance is increased.)
In fact, the reason you might want to have emergency fund set up is that the most common reason of family money problems is due to a sudden loss of income. So, if you or your husband/wife loses a job you still have bills to pay and food to buy, and it could take months to find a new job that you would be satisfied with. That's why it is best to plan ahead for the worst-case scenario. In this case less critical emergencies will be easily dealt with.

Start with small deposits

Most people don't have an emergency fund, because they find it difficult to save money. But the key to doing so is to start saving with small deposits. You must realize that saving enough money for one month will take quite some time. If you set your goals to be realistic, small to affordable, you will have a much better chance in reaching them faster. Bank would probably be the best way to get started saving. You could open up a new savings account (if you don’t have one already) and start saving there first. Making regular deposits into this savings account would be the next step. Make it a habit. Creating a schedule could help. Make deposits weekly or monthly and try to never skip it. You could also agree with a bank that it would transfer that money from your current account into that newly created savings account and you wouldn't even need to think about it.
Start with a very small amount, if you feel that it is difficult to begin saving. You could try making deposits as small as $10 a week at the very start. The amount is not impressive and it will not build up quickly, but the important thing is make it a habit to put some cash away. After a while the amount you save and don't spend will not even be noticeable, so you can raise it to a larger sum. With this done, you will have your emergency fund all saved up in no time.

A place for an emergency fund

You should remember that starting with a savings account is the best, simply because it is so easy to use and does not cost you anything. It doesn't care how much you put away every week/month, just do it. After a while when your emergency fund is bigger, you could find a place to keep it where it can gather some nice interest. It is essential, however, to keep it in a fairly liquid place then, such as money markets, so you could get the money out quickly, if any emergency occurs. It is not advised to have this money invested into stocks or mutual funds, because you could lose money in the short-term period, due to the volatility of the markets.

Wednesday, April 9, 2008

Personal Banking

I thought i would go ahead and write this article just as a little introduction to Personal Banking. Some of the main functions mentioned only. This should give some basic information you need to know about Personal Banking.

Current accounts

A current account is an account which allows customers to take out or withdraw money, with no restrictions. Money in the account does not usually earn a high rate of interest: the bank does not pay much for 'borrowing' your money. However, many people also have a savings account or deposit account which pays more interest but has restrictions on when you can withdraw your money. Banks usually send monthly statements listing recent sums of money going out, called debits, and sums of money coming in, called credits.
Nearly all customers have a debit card allowing them to make withdrawals and do other transactions at cash dispensers. Most customers have a credit card which can be used for buying goods and services as well as for borrowing money. In some countries, people pay bills with cheques. In other countries, banks don't issue chequebooks and people pay bills by bank transfer. These include standing orders, which are used to pay regular fixed sums of money, and direct debits, which are used when the amount and payment date varies.

Banking products and services

Commercial banks offer loans - fixed sums of money that are lent for a fixed period (e.g. two years). They also offer overdrafts, which allow customers to overdraw an account - they can have a debt, up to an agreed limit, on which interest is calculated daily. This is cheaper than a loan if, for example, you only need to overdraw for a short period. Banks also offer mortgages to people who want to buy a place to live. These are long-term loans on which the property acts as collateral or a guarantee for the bank. If the borrower doesn't repay the mortgage, the bank can repossess the house or flat - the bank takes it back form the buyer, and sells it.
Banks exchange foreign currency for people going abroad, and sell traveller's cheques which are protected against loss or theft. They also offer advice about investments and private pensions plans - saving money for when you retire from work. Increasingly, banks also try to sell insurance products to their customers.


In the 1990s, many commercial banks thought the future would be in telephone banking and Internet banking or e-banking. But they discovered that most of their customers preferred to go to branches - local offices of the bank - especially ones that had longer opening hours, and which were conveniently situated in shopping centres. However E-banking is still getting increasingly popular for it's convenience, especially after making it more user-friendly. Currently Internet banking allows customers to, for example, transfer funds, pay bills, view checking and savings account balances, pay mortgages,purchasing financial instruments and certificates of deposit, etc. This has lead to millions of people using E-banking daily.

Sunday, April 6, 2008

Two commonly misunderstood financial statements

There are two commonly misunderstood financial statements which tend to generate loads of questions for people. So i decided to write a little article about them and clarify what they mean. I hope this will be helpful.

The profit and loss account

P&L Account

Sales Revenue

Cost of Sales

Gross Profit

Selling, General and Administrative Expenses
Earnings before Interest, Tax, Depreciation and Amortization 5,257
Depreciation and Amortization

Earnings before Interest and Tax

Interest expenses

Income Tax

Net Profit


Companies' annual reports contain a profit and loss account (commonly referred as P&L). This is a financial statement which shows the difference between the revenues and expenses of a period. Non-profit ( or not-for-profit) organizations such as charities, public universities and museums generally produce an income and expenditure account. If they have more income than expenditure this is called a surplus rather than profit.
At the top of these statements is total sales revenue or turnover: the total amount of money received during a specific period. Next is the cost of sales, also known as cost of goods sold (COGS): the costs associated with making the products that have been sold, such as raw materials, labour, and factory expenses. The difference between the sales revenue and the cost of sales is gross profit. There are many other costs of expenses that have to be deducted from gross profit, such as rent, electricity and office salaries. There are often grouped together as selling, general and administrative expenses (SG&A).
The statement also usually shows EBITDA (earnings before interest, tax, depreciation and amortization) and EBIT (earnings before interest and tax). The first figure is more objective because depreciation and amortization expenses can vary depending on which system a company uses.
After all the expenses and deductions in the net profit, often called the bottom line. This profit can be distributed as dividends (unless the company has to cover past losses), or transferred to reserves.

The cash flow statement

British and American companies also produce a cash flow statement. This gives details of cash flows - money coming into and leaving the business, relating to:
  • operations - day-to-day activities
  • investing - buying or selling property, plant and equipment
  • financing - issuing or repaying debt, or issuing shares.
The cash flow statement shows how effectively a company generates and manages cash. Other names are sometimes used for it, including funds flow statement and source and application of funds statement.
British companies also have to produce a statement of total recognized gains and losses (STRGL), showing any gains and losses that are not included in the profit and loss account, such as the revaluation of fixed assets.

Friday, April 4, 2008

The balance sheet, part III

This is the last part of the balance sheet series. I'm hoping to get into more detail about liabilities in this part. Hopefully this can be helpful. Read the previous part here.


Liabilities are amounts of money that a company owes, and are generally divided into two types - long-term and current. Long-term liabilities or non-current liabilities include bonds.
Current liabilities are expected to be paid within a year of the date of the balance sheet. They include:

  • creditors - largely suppliers of goods or services to the business who are not paid at the time of purchase.
  • planned dividends
  • deferred taxes - money that will have to be paid as tax in the future, although the payment does not have to be made now.
Current liabilities
Short-term debt 1,555
Accounts payable 5,049
Accrued expenses 8,593
Total current liabilities
Non-current liabilities

Deferred income taxes 950
Long-term debt
Total non-current liabilities
Total liabilities
Shareholders' equity
Common stock
Retained earnings
Total shareholders' equity

Total liabilities and stockholders' equity $34,959

Accrued expenses

Because of the matching principle, under which transactions and other events are reported in the periods to which they relate and not when cash is received or paid, balance sheets usually include accrued expenses. These are expenses that have accumulated or built up during the accounting year but will not be paid until the following year, after the date of the balance sheet. So accrued expenses are charged against income - that is, deducted from profits - even though the bills have not yet been received or the cash paid. Accrued expenses could include taxes and utility bills, for example electricity and water.

Shareholders' equity on the balance sheet

Shareholders' equity is recorded on the same part of the balance sheet as liabilities, because it is money belonging to the shareholders and not the company.
Shareholder's equity includes:
  • the original share capital (money from stocks or shares issued by the company
  • share premium: money made f the company sells shares at above their face value - the value written on them
  • retained earnings: profits from previous years that have not been distributed to shareholders
  • reserves: funds set aside from share capital and earnings, retained for emergencies or other future needs.

Friday, March 28, 2008

The balance sheet, part II

This is the second part of the balance sheet series. I'm hoping to get into more detail about assets in this part. Hopefully this can be helpful. Read the previous part here.

Current assets
Cash and equivalents 3,415
Accounts receivable
Inventory 5,699
Other current assets
Total current assets $23,244
Non-current assets
Property and plant
Total non-current assets
Total assets $34,959

Fixed and current assets

In accounting, assets are generally divided into fixed and current assets. Fixed assets (or non-current assets) and investments, such as buildings and equipment, will continue to be used by the business for a long time. Current assets are things that will probably be used by the business in the near future. They include cash -money available to spend immediately, debtors - companies or people who owe money they will have to pay in the near future, and stock.
If a company thinks a debt will not be paid, it has to anticipate the loss - take action in preparation for the loss happening, according to the conservatism principle. It will write off, or abandon, the sum as a bad debt, and make provisions by charging a corresponding amount against profits: that is, deducting the amount of the debt from the year's profits.


Manufacturing companies generally have a stock of raw materials, work-in-progress - partially manufactured products - and products ready for sale. There are various ways of valuing stock or inventory, but generally they are valued at the lower of cost or market, which means whichever figure is lower: their cost - the purchase price plus the value of any work done on the items - or the current market price. This is another example of conservatism: even if the stock is expected to be sold at a profit, you should not anticipate profits.

Tangible and intangible assets

Assets can also be classified as tangible and intangible. Tangible assets are assets with a physical existence - things you can touch - such as property, plant and equipment. Tangible assets are generally recorded at their historical cost less accumulated depreciation charges - the amount of their cost that has already been deducted from profits. This gives their net book value.
Intangible assets include brand names - legally protected names for a company's products, patents - exclusive rights to produce a particular new product for a fixed period, and trade marks - names or symbols that are put on products and cannot be used by other companies. Networks of contacts, loyal customers, reputation, trained staff or 'human capital', and skilled management can also be considered as intangible assets. Because it is difficult to give an accurate value for any of these things, companies normally only record tangible assets. For this reason, a going concern should be worth more on the stock exchange than simply its net worth or net assets: assets minus liabilities. If a company buys another one at above its net worth - because of its intangible assets - the difference in price is recorded under assets in the balance sheet as goodwill.

You can find the next part here.

Thursday, March 27, 2008

The balance sheet, part I

This is the first of three articles about the balance sheet. I intend to give some core information about the balance sheet. Since the balance sheet is one of key parts of bookkeeping, i decided to start this series of articles to make it easier to catch the information.

Here's an example how a balance sheet looks like:

Assets Liabilities and Owners' Equity
Cash $ 27,600 Liabilities
Accounts Receivable 11,200 Notes Payable $ 64,000
Land 76,000 Accounts Payable $ 27,000
Buildings 89,000 Total liabilities $ 91,000
Tools and equipment 36,200 Owners' equity

Capital Stock

Retained Earnings

Total owners' equity $149,000
Total $240,000 Total $240,000

Assets, liabilities and capital

Company law in Britain, and the Securities and Exchange Commission in the US, require companies to publish annual balance sheets: statements for shareholders and creditors. The balance sheet is a document which has two halves. The totals of both halves are always the same, so they balance. One half shows a business's assets, which are things owned by the company, such as factories and machines, etc., that will bring future economic benefits. The other half shows the company's liabilities, and it's capital or shareholders' equity. Liabilities are obligations to pay other organizations or people: money that the company owes, or will owe at a future date. These often include loans, taxes that will soon have to be paid, future pensions payments to employees, and bills from suppliers: companies which provide raw materials or parts. If the suppliers have given the buyer a period of time before they have to pay for the goods, this is known as granting credit. Since assets are shown as debits (as the cash or capital account was debited to purchase them), and the total must correspond with the total sum of the credits - that is the liabilities and capital - assets equal liabilities plus capital ( or A = L + C).
American and continental European companies usually put assets on the left and capital and liabilities on the right. In Britain, this was traditionally the other way round, but now most British companies use a vertical format, with assets at the top, and liabilities and capital below.

Shareholders' equity

Shareholders' equity consists of all the money belonging to shareholders. Part of this is share capital - the money the company raised by selling its shares. But shareholders' equity also include retained earnings: profits from previous years that have not been distributed - paid out to shareholders - as dividends. Shareholders' equity is the same as the company's net assets, or assets minus liabilities
A balance sheet does not show much money a company has spent or received during a year. This information is given in other financial statements: the profit and loss account and the cash flow statement.

You can find the next part here.

Wednesday, March 12, 2008

Bookkeeping in your life and business

Bookkeeping is a big part of any business as it keeps the track of all transactions being made daily. Individual or family bookkeeping keeps a track of income and expenses in a cash account, checking account, or savings account. Individuals who borrow or lend money also track how much they owe to others or are owed from others. Bookkeeping can be done with only a sheet of paper and a pencil, which is usually done by families and individuals, but businesses usually use bookkeeping software, because the number of daily transactions is much bigger and more complex. There are to systems of bookkeeping: single-entry and double-entry. Single-entry bookkeeping system is not widely used in business as it is too simple, so such practice is left to family bookkeeping. Although it is sometimes used in small businesses for it's simplicity. But usually double-entry bookkeeping is being used, which i will shortly present. Even though double-entry bookkeeping should be done by a trained professional, know a thing or two might never hurt. Always remember - Education is the key to a financial success.

Double-entry bookkeeping

Bookkeepers record the company's daily transactions: sales, purchases, debts, expenses, and so on. Each type of transaction is recorded in a separate account - the cash account, the liabilities account, and so on. Double-entry bookkeeping is a system that records two aspects of every transaction. Every transaction is both a debit - a deduction - in one account and a corresponding credit - an addition - in another. For example, if a company buys some raw materials - the substances and components used to make products - that it will pay for a month later, it debits its purchases account and credits the supplier's account. If the company sells an item on credit, it credits the sales account, and debits the customer's account. As this means the level of the company's stock - goods ready for sale - is reduced, it debits the stock account. There is a corresponding increase in its debtors - customers who owe money for for goods or services purchased - and the debtors or accounts payable account is credited. Each account records debits on the left and credits on the right. If the bookkeepers do their work correctly, the total debits always equal the total credits.

Day books and ledgers

For accounts with a large number of transactions, like purchases and sales, companies often record the transactions in day books or journals, and then put a daily or weekly summary in the main double-entry records.
In Britain, they call the main books of account nominal ledgers. Creditors - suppliers to whom the company owes money for purchases made on credit - are recorded in a bought ledger. They still use these names, even though these days all the information is on a computer.
Balancing the books

At the end of an accounting period, for example a year, bookkeepers prepare a trial balance which transfers the debit and credit balances of different accounts onto one page. As always, the total debits should equal the total credits. The accountants can then use these balances to prepare the organization's financial statements, which tend to be especially important to a shareholders and an executive board at the end of financial year.

Tuesday, March 11, 2008

Accounting and auditing

Accounting and auditing is one of the most important aspects of business. And even though you are a big fish in the business world and you have all the accounting done by your own accountant, fine, but you have to know basic things. The same goes for auditing. Just like I've said before, education is the key to financial success. The more you know, the more you earn. Simple as that. I will not go in-depth, just very basic things, just what you really need to know.


  • Accounting involves recording and summarizing an organization's transactions or business deals, such as purchases and sales, and reporting them in the form of financial statements. In many countries, the accounting or accountancy profession has professional organizations which operate their own training and examination systems, and make technical and ethical rules: these relate to accepted ways of doing things.
  • Bookkeeping is the day-to-day recording of transactions.
  • Financial accounting includes bookkeeping, and preparing financial statements for shareholders and creditors (people or organizations who have lent money to a company).
  • Management accounting involves the use of accounting data by managers, for making plans and decisions.

Auditing means examining a company's systems of control and the accuracy or exactness of its records, looking for errors or possible fraud: where the company may have deliberately given false information.
  • An internal audit is carried out by a company's own accountants or internal auditors.
  • An external audit is done by independent auditors: auditors who are not employees of the company.
The external audit examines the truth and fairness of financial statements. It tries to prevent what is called 'creative accounting', which means recording transactions and values in a way that produces a false result - usually an artificially high profit.
There is always more than one way of presenting accounts. The accounts of British companies have to give a true and fair view of their financial situation. This means that the financial statements must give a correct and reasonable picture of the company's current condition.

Laws, rules and standards

In most continental European countries, and in Japan, there are laws relating to accounting, established by the government. In the US, companies whose stocks are traded on public stock exchanges have to follow rules set by the Securities and Exchange Commission (SEC), a government agency. In Britain, the rules, which are called standards, have been established by independent organizations such as the Accounting Standards Board (ASB), and by the accountancy profession itself. Companies are expected to apply or use these standards in their annual accounts in order to give a true and fair view.
Companies in most English-speaking countries are largely funded by shareholders, both individuals and financial institutions. In these countries, the financial statements, are prepared for shareholders. However, in many continental European countries business are largely funded by banks, so accounting and financial statements are prepared for creditors and the tax authorities.

Monday, March 10, 2008

Islamic banking introduced

I thought i would write about this topic, because some people do not know what Islamic banking is or haven't even heard of it at all. Education is the key to financial success and knowing about Islamic banking might only help you in your chosen path, that's why this topic must not be omitted. I will not write too in depth about it, but i just thought everyone should know, what Islamic banking really is and what is the difference between Islamic and Conventional banks.

Interest-free banking

Some financial institutions do not charge interest on loans or pay interest on savings, because it is against certain ethical or religious beliefs. For example, in Islamic countries and major financial centres there are Islamic banks banks that offer interest-free banking.
Islamic banks do not pay interest to depositors or charge interest to borrowers. Instead they invest in companies and share the profits with their depositors. Investment financing and trade financing are done on a profit and loss sharing (PLS) basis. Consequently the banks, their depositors, and their borrowers also share the risks of the business. This form of financing is similar to that of venture capitalists or risk capitalists who buy the share of new companies.

Types of accounts

Current accounts in Islamic banks give no return - pay no interest - to depositors. They are a safekeeping arrangement between the depositors and the bank, which allows the depositors to withdraw their money at any time, and permits the bank to use this money. Islamic banks do not usually grant overdrafts on current accounts. Savings accounts can pay a return to depositors, depending on the bank's profitability: that is, its ability to earn a profit. Therefore the amount of return depends on how much profit the bank makes in a given period. However, these payments are not guaranteed. There is no fixed rate of return: the amount of money the investment pays, expressed as a percentage of the amount invested, is not fixed. Banks are careful to invest money from savings accounts in relatively risk free, short-term projects. Investment accounts are fixed-term deposits which cannot be withdrawn before maturity. They receive a share of the bank's profits. In theory, the rate of return could be negative, if the bank makes a loss. In other words, the capital is not guaranteed. However, this rarely happens, especially in well established banks, due to their good management.

Leasing and short-term loans

To finance the purchase of expensive consumer goods for personal consumption, Islamic banks can buy an item for a customer, and the customer repays the bank at a higher price later on. Or the bank can buy an item for a customer with a leasing or hire purchase arrangement. Another possibility is for the bank to lend money without interest but to cover its expenses with a service charge.
If a business suddenly needs very short-term capital or working capital for unexpected purchases and expenses, it can be difficult to get it under the PLS system. On the other hand, PLS means that bank-customer relations are very close, and that banks have to be very careful in evaluating projects, as they are buying shares in the company.


Conventional banks:

  • Pay interest to depositors
  • Charge interest to borrowers
  • Lend money to finance personal consumption goods
Islamic banks:
  • Give no return on current accounts; share profits with holders of savings and investment accounts
  • Share borrowers' profits (or losses)
  • Buy items for personal consumers with a leasing or hire-purchase arrangement
Well, these would be the main differences between conventional and Islamic banks. The question which one is better cannot be answered one sided, as they both have their pros and cons.

Sunday, March 9, 2008

Top 10 Financial/Self-improvement Tips for College Students

This article was written mainly for students, but everyone can read it, you might find some good tips for yourself, too. Let us begin.

Starting studies is a crucial step in our lives. You finish high school, fill out application forms to colleges and universities, think of it as happy times, etc. All that drama and anticipation makes you forget how hard it will be and how uneasy the changes are. There will be no more tasty moms meals always ready and waiting for you to devour, no, there will be no more warm bed, clean house and delicious grandma's cookies sprinkled with poppy seeds. (Well unless she's so kind and sends you some, yummy!) College is time for you to become more self-dependant and that is not too easy. You won't have enough cash for anything and you'll spend every buck you lay your hands on. Don't worry i do not want to startle you, just follow these steps and it'll be much easier to become a richest kid in dorm!

  • Avoid credit cards at any cost! Seriously, they are evil. As a student you get only enough money to pay for your studies, dorm and food. But you're young and you need to have fun, you need some more cash. But usually this happens in spending frenzy and the beginning of all financial problems. Sad but true. You're an adult already so you think it's about time to get that credit card. What can go wrong, you think.. Well, you get the feeling of power and can buy things you need now and can give money back later, especially with all those nice offers banks offer for students. Well this is one of the biggest mistakes you could ever do. You already become dependant. You get credit card debt and it's growing! Think about it. No job, no job experience, no recommendations, nothing. Now, let me stress that again, DO NOT GET A CREDIT CARD!!! (Or a little fluffy monster will bite you!)
  • Avoid your parents! Sure that sounds like fun, but i do not mean avoid-avoid them, but avoid them as much as you can. A packet of goodies from mommy is not what you want. You have to separate yourself from them and start to get more self-dependant. You must learn to do your own laundry, ironing, making some food (at least simple recipes), etc. It will definitely help in your later life. You don't think of coming back home after finishing college or university, do you? Of course you don't. You want to live your own life and live it good. And frequent calls to and from your parents, frequent visiting, etc. does not help you do that. I mean do not separate from your family, by no means. Just see them less often, make that coming back home or a call a little precious. It'll be more important for both you and your parents.
  • Avoid eating out and partying! Don't judge me already, i just started. I don't mean cut the partying and eating out, no of course not. Just don't do it too often. It kills your cash faster than you think. The night out with friends can cost you a fortune. You're self handed and can make your own food. If you're too lazy to do even that, at least in cafeteria or canteen. They got reasonable prices for a student and their nutrition isn't that bad. Take an advantage of that. Or else... Yeah, I'm sure you've heard about such students that only party hard, drink beer all day long and there is only fun and games for them. Sure, that sounds fun, but there is other side of that. I'm even more sure you heard how students spend their month's cash in 2 weeks and then eat carrots, cabbages and bread just to stay alive. Now, that's nutrition! For the love of God, don't be one of them. They only spend their cash to be poor and miserable. Don't be like that, be a cool rich kid. You'll like it.
  • Find yourself a job connected with your studies! This really is a win-win situation. You learn in collage all that stuff, but you really have no idea how to use all that information. Getting a little of that practice is worth gold really. Many students go and work in local fast food restaurant or some other store, just to make a quick buck, but that is an awful mistake they do. Yes, you earn some cash, which can be used (see step below), but come on, you are just wasting your potential. Let's say you're studying programming, then why in the world would you go to work in some crap-hole? I say, you better look for a job as programmers assistant at least or the young programmer or something. That job experience you get is priceless. If you happen to find a job as student go ahead and stay there for at least a couple of years, because employers tend to look for people with at least 2 years of job experience. Stay at that work even if they pay you peanuts, that's extra cash and you need it! When you graduate you will already have a plus that will open more doors for you to find a perfect job. You'll be more attractive to employers than most of the students. You just can't lose.
  • Start saving and investing your money! Oh, there could be anything better than that! You already started working, you earn a little cash, don't waste it! Better save it and use it properly! Open a savings account and transfer a desired amount of your wage there on a monthly or even weekly basis. Don't put all of it there, no, you're young, you just need to have a little fun. Let yourself have a drink after a week of hard work and studying. Do not make a habit of having a beer or something every evening after work, no. That is a huge mistake and it leads to alcoholism. Avoid that. Let me get back to the point. Save some portion of your income in a savings account and after a semester you'll be surprised how much money you've got there. Saving is good, but yet there is a better idea than that. Start investing that money! You're young, you got a job, you can go ahead and invest that money! It can be very rewarding and teaches you the discipline early! Let your money work for you! You have to set up your portfolio in order to do this. There are alternative investment methods of course. Read those articles up for more detail. If you are scared of losing money, you should at least invest in bonds as they are safe and helps you beat inflation. The earlier you begin investing your money, the faster you can get to financial freedom, which should be one of your main goals in life.
  • Meet new people! Meeting new people is very beneficial. College is the place where there are so many young and beautiful minds. You should definitely take your time to find similar-minded people and make yourself some new friends. They may be your buddies to drink beer with in the weekends, but they might be your future business partners. You should build as many connection as you can, as they are very very important. Your friend can help you anytime. Two heads are always better than one, that's why you should make a good friend as soon as possible. You may share common interests, eat together, spend some free time, go to gym, etc. It'll really help you do all those new things you are not used to, like laundry or something.
  • Avoid fake people! This part is crucial! Yes, meeting new people is great, but there always are so many fakers, that pretend to be your friend or just be friendly with you, they always smile, but they only want to drain you like a sponge and run away. Don't be fooled by those people. This often happens especially when you already got a job, start saving your cash and such. Talks go fast. The gossip is always there. Try to ignore all the gossip and possibly test your friends. Nothing too crazy, just some little test to see what kind of people they really are. This helps you choose people you communicate with wisely. You do not want to start your own business or some kind of project with the wrong person. You might be left on ice. Try to avoid impostors and only be friends with real and sincere people.
  • Start doing some kind of sport! I can't stress this enough! You come to a new place. There are so many temptations to go out, eat unhealthy, drink alcohol, even do drugs. But you must learn to just say NO. It's easier to avoid such activities if you take up a sport of some kind. Really. Probably one of the best choices would be bodybuilding. I'm sure there is a gym in your college or at least somewhere around it. It's really good to go there, let off your steam, sweat a little, have a good shower, refresh and become more energetic and healthy than ever! Don't like bodybuilding, then go ahead and play basketball, football, tennis, whatever you like! Just do something active! It not only helps you look and feel better, it also helps your brain. It's always easier to think after a good workout. Sports leads to healthy eating, reducing bad habits such as smoking or drinking. What can be better? Your health is the most important thing there is. Do not mess with it inhaling some smoke or fumes. Help yourself to grow physically and therefor mentally. It's all connected.
  • Start reading books! This is probably one of a few most important tips there could be. Reading is essential! If you don't already do that, it should be about time you did. People usually underestimate the power of reading. Reading helps you improve your brain activity tremendously! It improves your social skills, as you learn quite a lot of new things and get ideas from books, it improves your writing skills, as you see everything written correctly and memorise the words. Books always makes you think, thus widening your imagination, which is one useful tool! Imagination and creativity helps you everywhere. In your job, in your social life, in creating a business plan worth million! You should find time every evening to read for at least an hour. If you are an average reader and read one hour a day, you'll approximately read 1 book a month. That's 10 - 12 books a year. Not that bad. When was the last time you read? Have you read that many books in your whole life? In 10 years you would have read approximately 50 books. After that many books you would be more well-read than most of the population! Literacy is one thing you can't go wrong with.
  • Keep studying! Well all these things may sound a little overwhelming. I tell you to get a job, do this and do that, but all this should be only done After Classes. Attend all the classes you've taken every day. Write everything you need to write, read everything you need to read, do anything you need to do for your classes and grades will come by themselves. Your key goal at right this moment is to get an education. And that you should follow! Getting a education is of key importance. Studies are for You, not for professors or employers. It is for your own personal growth and for you to find your path. Once you found that, don't stop there. After a few years after graduation go ahead and start studying again for a higher degree. It's beneficial. The educational system allows you to study your all life. Take advantage of that! The more your brain works, the smarter you become, the better you live, i might say! Extra degrees and diplomas from various courses and such help you increase your salary by quite a bit. Invest in your future. Don't be a fool, stay in school!
Well, there you have it. That is quite a read there. Hope these tips helped you at least a little. Thank you for reading and have a good day.

Saturday, March 8, 2008

Money supply and control

Measuring money

What is money supply?
It's the stock of money and the supply of new money. The currency in circulation - coins and notes that people spend - makes up only a very small part of the money supply. The rest consists of bank deposits.

How do we measure it?
It depends on whether you include time deposits - bank deposits that can only be withdrawn after a certain period of time. The smallest measure is called narrow money. This only includes currency and sight deposits - bank deposits that customers can withdraw whenever they like. The other measures are of broad money. This includes savings, deposits and time deposits, as well as money market funds, certificates of deposit, commercial paper, repurchase agreements, etc.

What about spending?
To measure money you also have to know how often it is spent in a given period. This is money's velocity of circulation - how quickly it moves from one institution or bank account to another. In other words, the quantity of money spent is the money supply times its velocity of circulation.

Changing the money supply

The monetary authorities - sometimes the government, but usually the central bank - use monetary policy to try to control the amount of money in circulation, and it's growth. This is in order to prevent inflation - the continuous increase in prices, which reduces the amount of things that people can buy.
What can they do to control that?

  • They can change the discount rate at which the central bank lends short-term funds to commercial banks. The lower interest rates are, the more money people and businesses borrow, which increases the money supply.
  • They can change commercial banks' reserve-asset ratio. This sets the percentage of deposits a bank has to keep in the reserves (for depositors who wish to withdraw their money), which is generally around 10%. The more a bank has to keep, the less it can lend, thus decreasing the money supply.
  • The central bank can also buy or sell treasury bills in open-market operations with commercial banks. If the banks buy these bonds, they have less money (and so can lend less), and if the central bank buys them back, the commercial banks have more money to lend.

Monetarist economists are those who argue that if you control the money supply, you can control inflation. They believe the average levels of prices and wages depend on the quantity of money in circulation. and its velocity of circulation. They think that inflation is caused by too much monetary growth: too much new money being added to the money stock. Other economists disagree. They say the money supply can grow because of increased economic activity: more goods being sold and more services being performed.

Well, now that you know the basics of money supply and its control, can you tell me, which kind of economist, are YOU?

Commercial and retail banking revealed

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.

Friday, March 7, 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, March 6, 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.

Wednesday, March 5, 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.

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:

  1. Write down your cash balance in the beginning of the year.
  2. Add your expected income for the year. Check your most recent income tax return so you are sure to include all sources of income.
  3. Subtract your estimated savings and investments
  4. 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.
  5. List all of your assets. These are the things you own, including your investments, home, life insurance, etc.
  6. 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.
Having your net worth calculated helps you determine your current financial status, and coupled with financial goals helps determining the structure of your portfolio.

Tuesday, March 4, 2008

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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, March 3, 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.