Money is always not enough for me!

Again it have been sometime i have not write, anyway have you always wonder why, no matter how much you earn its never enough. Read the list below and you might find an answer for it.

1 Financial Ignorance

It seems almost fashionable for some to plead ignorance over finances with the result that we either make the wrong choices or abdicate responsibility to some kind of adviser who may or may not act in (or even fully understand) your best interests. You don’t have to be Warren Buffett, but acquaintance with the basics is within most people’s grasp. Spend a few hours with a book such as Personal Finance For Dummies by Eric Tyson.

2 Inertia

Though money is pretty important to most people we don’t always act like it. By taking a little time and trouble to find the best deal you can save a small fortune on insurance renewals, savings rates,  credit cards, mortgage etc etc. And with the Internet, and the many comparison sites, it’s never been easier to find the bargains.

3 Failing to Follow the Fundamental Financial Formula (FFF)

ie Money Gained (Lost) = Income – Expenditure

Dickens’ Mr Micawber expressed it thus: “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Yet burgeoning credit card debts show many of us continue to spend beyond our means with the inevitable problems tomorrow. A simple but effective exercise is to calculate your total income and expenditure  for just one week or month, and if the FFF’s in the red you know you’d better make some changes.

4 Lack of Planning

You wouldn’t start a journey without knowing where you’re going and having a (vague idea of a) route. But many people’s financial `goal’ is just to have plenty of money some unspecified time in the future. You need to set specific goals, eg a vacation, car, house deposit, school fees, an amount you’d like to retire on…

Once you’ve done this, you can work out how much you need to save/invest, at what rates, in order to realize your dream. of course, when you do the math you might find some of the goals need scaling back (or you need to raise the amount you save) at the level of risk you’re willing to assume. But at least you’ll end up with a specific and realistic plan.

5 Mental Accounting

This describes the tendency to treat some money differently than the rest. You might, for example, be over-cautious with an inheritance from a loved one, over-reckless with an unexpected lottery win, or maybe you hold large balances on low rate savings while keeping expensive debts on a credit card… Mental accounting can be a good thing if it encourages you to budget better, but beware you don’t lose sight of the big picture.

6 The Sunk Cost Fallacy

Or throwing good money after bad. For example, you’ve spent a small fortune fixing up your old car, yet it still keeps breaking. Though logic tells you to buy another one you’re reluctant to do so because of the amount you’ve spent on repairs. The same tendency can make us reluctant to get out of a bad stock. Remember, what’s gone is gone, and shouldn’t sway your analysis in the present.

7 Paying Too Much in Fees

Time and again research has shown the average managed mutual fund underperforms the market (index) after fees. Sure, some do come out on top, trouble is you can’t identify them in advance. Low cost index trackers or ETFs are a much wiser choice for most investors.

8 Impatience

This manifests itself in frequent buying and selling of stocks, dumping those that don’t provide instant gratification in the ceaseless quest for those elusive winners. The only person this is likely to benefit is your broker as counts your commission fees. Impatience is evident in our spending habits. The desire to have everything now means we often pay twice as much by getting it on credit. You can save a bundle by doing without while you save up to buy cash. Also by spending less on “things” today and instead investing in quality assets we can have a lot more “things” tomorrow.

9 Failure to Diversify

Markets fluctuate – fact! We need to protect ourselves from this roller coaster by not putting all our eggs in one basket. Something to particularly guard against is investing too much in your employer’s stock. This is good for employers as stock-holding workers are likely to be more motivated, but could be very bad for you. If your employer goes bust you lose your savings and your livelihood. Other ways to diversify are through different asset classes (cash, stocks, bonds, real estate) and geographically, most people hold most assets in their own country, but these days it’s easy to invest elsewhere (most easily through an appropriate index tracker).

10 Not Understanding Your Risk Tolerance

Risk and reward go hand in hand. The higher the returns, the greater the risk. There’s no right answer to the amount of risk you should assume, it’s an individual thing. Generally though, the younger you are the more risk you can take. You can allocate different portions of your funds to different levels of risk, eg keeping most of your money in a broad index tracker with, say, 10% in penny stocks. The choice is yours, just be sure you make it consciously.

Mon

How Compounding Effect of Money works?

The compounding effect of money is extremely important when making any financial decision. The compounding effect of money is often overlooked or underestimated by people when making decisions. When applied to all of your financial decisions, this effect is the KEY to  long-term success! To illustrate the compounding effect of money, let me use some financial examples:

Suppose you had invested $1,000 today in a 5% savings account. In one year, that account would be worth $1,050 [$1,000 + ($1,000 x 5%)], yielding a $50 gain. However, in year two, that same initial  investment would be worth $1,102.50 [$1,000 + ($1,000 x 5%) + ($1,050 x 5%)], yielding a $52.50 gain. And in year three, the same $1,000 would be worth $1,157.63, yielding a $55.13 gain. By year ten, the  initial $1,000 investment would be worth $1,629 and by year 25 it would be worth $3,386.

From looking at this example, you can see that investing $1,000 today is much more valuable than investing $1,000 even a couple of years from now. To accumulate wealth, you MUST use the time value of money and the compounding effect of money to your advantage. Click here to  see how long it will take to save a million dollars.

This second example shows how the compounding effect can work against you:

Suppose you borrowed $20,000 to purchase a car and your auto loan was at a 10% interest rate (for 5 years). Your monthly payments would be $424.94. Because the $20,000 loan continues to compound over the life of the loan, you actually pay $25,496.45 over the five-year period, meaning that you’ve in essence paid$5,496.45 because you spent the money before you had it. In fact, in your initial payments, the interest alone will account for almost 40% of your monthly payments. In this case, the bank or lender that gave you the loan uses the time value of money to their advantage.

Now look at this scenario, where instead of making the $424.94 car payment, you invest that payment at the same rate as what your car loan was (granted it’s a little high for a savings rate, but not unreasonable for other investments) . Now, instead of paying the bank, you are actually earning interest and compounding the benefit yourself. After one year you will have saved $5,340 and have earned $240 in interest. After two years, you will have saved $11,239 and have earned $1,039 in interest. By the third year, your investments will be worth almost $18,000 and you will have earned $2,457 in interest. By month 40, you will have enough money to purchase a $20,000 car in cash!

So let’s weigh the differences between the two scenarios above. In the first case you paid the bank $5,496 to borrow the money and in the second case you earned $2,457 and could buy the car in cash after just 40 months (just over 3 years)! The opportunity cost of the first alternative versus the second alternative results in a net difference of $7,953 (a $2,457 gain versus a $5,496 loss). That means that by making a simple deferral decision (buying the car in 3 years versus today), you can get ahead by almost $8,000!

Mon

Forex vs. Equities

Forex Advantages
Investors and speculators using the Internet as an investment tool will find that the Forex market offers several advantages over equities trading.

*200:1 is the entry leverage value. Brokerages will have margin calls set at different levels, exact leverage may vary. **The traders cost of doing business is called the Spread. It is the difference between the bid and the ask price on your chosen currency pair.

24-Hour Trading
Forex is a true 24 hour market, 5.5 days a week, which offers a major advantage over equities trading. Investors are able to trade at odd hours, thus allowing more flexibility for personal, business and social activities. Whether trading at 8am, 2pm, or even 2am, there will always be buyers and sellers actively trading foreign currencies. Such flexibility allows traders to immediately respond to breaking news and other political factors driving the market.

After hours trading in the equities market has several limitations. In the US, for example, equities traders have access to ECNs (Electronic Communications Networks), also known as “matching systems”. These networks are established to provide a method for equities traders to buy and sell amongst each other. Such networks are usually not able to offer as tight of spreads as would be offered during normal market hours, thus most trades are not executed at a fair market price, subsequently there is no guarantee that every trade will be executed.

Unmatched Liquidity
An investment market with lacking liquidity, or a lack of buyers and sellers at certain times, is often the demise of traders who need in or out of the market without delay. The global network of governments, banks, corporations, hedge funds, and individual traders that collectively drive the Forex market, are in essence, also driving the world’s largest network of liquidity. Such high trade volume works to ensure trade execution and the stability of prices, regardless of the time of day.

Equities traders, on the other hand, are more susceptive to liquidity risk and are subject to potentially wider dealing spreads and larger price movements. Liquidity in the equities market really does pale in comparison to that of the Forex market.

High Leverage
Leverage is the key to understanding the risk associated with trading the Forex Market, and of course, the potential for gain. Many Forex brokers offer leverage as high as 200 – 1, meaning that $50 of margin would control a $10,000 position in the market (this is an example of a mini lot). ( view figure 3 ) Forex trading is often attractive to investors coming from the equities market because Forex trading offers such high leverage. It is important to understand why Forex brokers offer higher leverage, and of course… the dangers associated with such.

To some extent, higher leverage is a necessary evil in the Forex market. It can offer advantages over equities trading, but only if it is properly understood and utilized. Though currency values on a global stage are constantly in a state of flux, high liquidity and market stability translate to relatively small daily price movements. In fact, average daily movement is around 1% on most major pairs. Compare that to the equities market, where average daily movements are closer to 10% and it is not hard to understand why large contracts are needed in order to yield profits on intraday price movements.

Without high leverage most retail investors would not be able to afford trading in the Forex market. However, with increased buying power comes increased risk. Traders who are new to the market often make the mistake of over-trading their account. Because relatively small margin is required to open large positions beginning traders often make the mistake of opening too many positions at one time. A quick market move can then result in substantial losses. IBFX would advise any trader new to the Forex market to trade only a very small percentage of their account at any one time.

Profit Potential in Both Rising and Falling Markets
Like any market, there is always a buyer and a seller the world of currencies. The potential for profit will of course rally between the buyers and sellers, the longs and the shorts. Trading currencies in pairs offers the advantage of speculation from either side, but it is the volatility in combination with excellent liquidity that offers currency investors a true advantage over any other market. Regardless of the time of day, traders in the Forex market can long or short any currency pair of their choice.

Many brokers also offer hedging, meaning that traders can take a long and short position on the same currency pair. The market’s volatility provides the constant potential for gain, and of course, the constant potential for loss as well. Forex trading can be risky, but execution in or out of trades should not be a problem when trading through a reputable broker. Equities traders, on the other hand, may have a much more difficult time liquidating stocks when the market is moving against them.

Higher Risk
The off-exchange retail foreign currency market (or Forex market) has many differences, as outlined above. However, one of the most significant factors is the element of risk. The Forex market is the riskiest of all investment vehicles and is suitable only for experienced traders. The higher leverage and volatility found in this market increase the traders risk of loss. There is the potential to lose, all or more, of your original investment.

This information is taken from IBFXTM.

Mon