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.