What Is Personal Finance and Why Is It Necessary?

Amidst the economic slowdown we are experiencing, personal income and salary continue to provide us with financial power to purchase basic goods and services. In lieu of the fact that the national economy is actually not doing well, the need to apply principles of finance in managing our monetary resources has tremendously increased. Personal financing pertains to the strategic planning and management of earning, saving, spending, and budgeting the financial aspect of a person or a family taking into consideration the aggregate expenses deducted from the income and the needed savings to adequately address future events that require spending. Inflation, jobs, and the entire economy are still unstable resulting to unpredictability of increases in the prices of basic commodities, available jobs, and household income. With these in mind, it is a matter of great necessity that every person strategically plans and manages one’s financial gain and expenditure in providing a better lifestyle and in preparing for future risks and spending.

Market fluctuations seem to be a trend in the world economy nowadays. No one can really have a guarantee that his or her present earnings will still be enough in the future. In a country under financial distress, one is not guaranteed that he or she remains employed in the next days or months. Worst is, if some unfortunate event happens and it would require huge spending to see it through, it would probably deplete everything the person or family has. To be secured financially, personal finance must be had to address current monetary obligations such as debts and prepare the future. Personal finance involves long term planning. Other than ensuring that the current bills are paid and that the present lifestyle is maintained, personal finance also prepares for the future such as when one has to retire from work. Upon retirement, the person’s monthly income will be reduced unless he or she has made financial planning prior to the retirement age and ensured that there is enough to spend according to the chosen lifestyle after retirement. It is never an easy task to make sure that whatever aggregate income the household obtains in a month remains sufficient to cover for the expenses necessary to live decently at present and in the future without threat of sinking in deep debts and losing properties due to foreclosures. Personal finance helps people acquire necessary information, tools, and strategies to use and apply to ensure that his or her income remains enough to cover the payment of debts, bills, and other vital purchases based on one’s overall present financial condition.

To live through the day is never enough. One has to consider the future in living the present without sacrificing the current necessities. Personal finance combines principles and tools in finance that assists the person or household pay off debts and bills while at the same time ensures that the future is financially prepared such as through savings. The best personal finance provides the person a decent and happy living with sufficient financial security for the future. Best and quality personal finance plans and guides are available and accessible from credit and financial companies to help their clients make good use of their money.

Efficient Markets and Behavioural Finance

As a first step, let me explain how efficient markets behave. Think of supply and demand. The prices of assets adjust quickly as new information arises. New information could be quarterly earnings, the CFO leaving the company or a patent approval. Anything that is linked to a company and makes economic sense. As new information comes to market, investors trade on that information and the price of the security is adjusted upwards or downwards. For every willing seller there is a willing and informed buyer and the market clears at the market price. In other words superior risk-adjusted returns cannot be achieved in an efficient market because the price of securities reflects all past and present information about the fundamentals of those companies.

However, though evidence suggests that markets are efficient, researchers have shown that sometimes securities can be mispriced for a longer period of time which translates into a market anomaly that can be exploited by informed traders and investment managers. Take for instance the internet bubble in the late 90s where everybody bought stocks in the tech sector because ‘it is a no brainer to do so’ or the more recent housing bubble where again ‘you had to own a house’ under those ridiculous conditions.

Now you must be confused. If we are living in a world where markets are efficient and investors make decisions after a thorough analysis, why do we still have mispriced assets and financial bubbles?

The answer is very simple: because we are all humans! And as humans we exhibit biases. Some of them are cognitive, being the response of faulty reasoning and some of them are emotional, stemming from past experiences, feelings and intuition.

For example you are an investor who would like to trade in the stock of Apple. Based on the information you gathered and your own assessment you conclude Apple is a good company to own. The current price at which one share of Apple trades should reflect all available information about the future upside potential and as a rational investor you think you are paying the correct price. As new information comes to market you should update your forecast about Apple in a diligent and disciplined manner. You should incorporate new information according to Bayes formula and assign a probability for that event to happen. Thomas Bayes has developed this model to determine conditional probability. It relates current to prior probability of an event.

Think of it from this perspective: the stock price will rise if interest rates fall. It means the stock will change in value if interest rates fall. Think what is the probability that the interest rates will change? You are trying to find out what is the probability the stock price will change in value and you are basing it on the probability that interest rates are going to fall. You got that probability. All of a sudden something happens at the macroeconomic level and you need to update your probability that interest rates will fall and you will also need to update the probability the stock price will change in value. This process or reassessment is done with Bayes formula. It is a way of conditioning your prior probability if new info comes out. It is simpler to use it with a decision tree.

With that in mind you should make decisions that maximise your utility function in the aforementioned case, buying more, holding it or selling the stock. Did you follow the above process precisely? If not don’t worry. It doesn’t mean you are less disciplined or less skilled than professional money managers. You have to know it is really infeasible to analyse all possible relevant data and assign a probability to each event.

Behavioural finance assumes investors employ a combination of traditional finance and psychological biases when making investment decisions.

This is the thing, the assumptions of traditional finance doesn’t always hold true. Investors don’t make decisions according to their utility function and don’t update their expectations according to Bayes formula.

People are not fully in control and rational when making decisions and this is because we lack the cognitive resources of looking at every possible situation and arriving at an optimal conclusion. Instead, we have a set of goals we would like to reach. Buying a car then a house followed by a vacation house. We take things step by step and take decisions that will help us reach objectives one after another. People’s goals are based on experiences and comparison with what other people have achieved: friends, neighbours, colleagues, public persons etc. If you succeed you will adjust your goals upwards and if you fail you will adjust them downwards. This is where behavioural biases play an important role. They shape your thought process which in turn alter your decisions. And just to give you an example, think of people who already own one car per family member and want to buy another one, just for fun. From an utility point of view do they really need another one? No, absolutely not. But what drives them to go to the dealer, test-drive it and buy it? It could be explained by a lack of self-control which is a bias. The tendency to overspend current income and forgo long-term plans. Or it could simply mean that they have a lot of money and can afford buying and keeping another car in the garage. Whichever the answer they will buy a new car. Behavioural bias attempts to explain why they make the decisions they make.

As a wealth manager and trusted advisor for high-net worth families I have an unique opportunity to work closely with them and observe their behaviours on how they run their businesses, investments, or how they perceive risks. I will guide you in the following articles on how behavioural biases influence our day-to-day lives and how we can moderate, reduce, or even eliminate them, depending on the root-cause of the bias. I am doing it because in my professional experience of more than 6 years as a wealth manager, I have not seen any advisor or portfolio manager working with his clients from a behavioural stand point and looking at understanding and shaping their relationship and strategy of investments taking this factor into account.

Forex Trading – Following World Events Makes Traders Wise

Forex trading is the hottest, most lucrative trading market worldwide. It has seen phenomenal growth in recent years since being opened up to smaller, individual traders. With online capabilities you now have access to a market that previously was the exclusive ground of major banking institutions and an elite group of extremely wealthy private investors. It is foreign currency exchange and it can enable you to accomplish your monetary goals and find financial security in an ever-changing world.

Forex is generally divided into two camps. One is the technical analysts. They base currency trading decisions on such factors as price fluctuations and recent patterns of a particular country’s currency changes. It is a numbers-based approach to finance.

On the other hand, there are fundamental analysts who focus on the current events, economic indicators, and political conditions of each nation in whose currency they think will provide a smart money-making opportunity. Both camps are valid and useful. Perhaps the wisest trader will take both attitudes into consideration, but most people tend to lean to one way over the other. Today my main focus is on the fundamentalist approach to Forex.

The World At Your Fingertips

With global news events at our fingertips, the world is much smaller than in previous generations. What happens in Beijing has a more marked effect on the average American or European businessperson than in the past. However, we need to carefully evaluate our news sources to find those most trustworthy. It is common knowledge that the media can report an event in the light of their particular bias or for their own agenda. Some things are distorted as a result. Analyze what you hear.

Think it through with logic and caution. Protect yourself from rash, regrettable decisions that result from fear and anxiety. Think for yourself; don’t just believe what is calculatedly laid out for you by the media. Personal analysis will help bring you success in Forex.

Most assuredly, current events can affect currency prices and should be taken seriously. But do not panic! Economic security is a concern these days and prices certainly seem to be escalating for the basic needs of life. This is all the more reason why you should develop a trading plan based on sound financial and business principles. There are many reputable, indispensable training programs available to prepare you for the decisions and risks associated with Forex. Use them to your advantage.

Plan Your Work – Work Your Plan

Develop a well-reasoned plan for making trading decisions and managing your money. Adhere to your plan with diligence, while staying abreast of events that actually do influence price oscillations. Filter out the media-driven exaggerations. Knowledge and preparation which produces a workable trading plan is your best defense against financial changes brought about by world events. The specific events are most likely outside the realm of your influence, but your reaction to these events is completely within your control. Use that control to protect yourself monetarily and increase your personal wealth.

The Opportunity Is Real

Forex did not become the largest global trading market by accident. It works and it can work for you! Be aware of the risks it brings. Invest your capital wisely. Seek accurate information about the conditions of the countries with which you are interested in trading. Develop your analysis as to whether this is a beneficial investment for you.

Stay centered on your goal and keep a check on potentially destructive emotions such as panic and fear. Realize that this market, as does any other, has periods of ups and downs. Ride it out and finish with greater financial security. Forex, handled prudently, is a venue that can enable you to see your financial dreams become a reality.

Commercial Finance – Hard Money

The Merriam – Webster Online Dictionary defines hard as:

1 a: not easily penetrated: not easily yielding to pressure b of cheese: not capable of being spread: very firm.

2 a: of liquor (1): having a harsh or acid taste (2): strongly alcoholic b: characterized by the presence of salts (as of calcium or magnesium) that prevents lathering with soap i.e.hard water.

3 a: of or relating to radiation of relatively high penetrating power: having high energy hard X rays b: having or producing relatively great photographic contrast i.e.a hard negative.

4 a: metallic as distinct from paper hard money b: of currency: convertible into gold: stable in value c: usable as currency i.e.paid in hard cash. d: of currency: readily acceptable in international trade e: being high and firm i.e. hard prices.

5 a: firmly and closely twisted i.e. hard yarns. b: having a smooth close napless finish i.e. a hard worsted.

6 a: physically fit i.e. in good hard condition. b: resistant to stress or disease c: free of weakness or defects.

7 a (1): firm definite i.e.reached a hard agreement. (2): not speculative or conjectural: factual hard evidence (3): important or informative rather than sensational or entertaining i.e. hard news. b: close searching i.e. gave a hard look. c: free from sentimentality or illusion: realistic i.e. good hard sense. d: lacking in responsiveness: obdurate unfeeling i.e. a hard heart.

8 a (1): difficult to bear or endure i.e.hard luck or hard times. (2): oppressive inequitable i.e.sales taxes are hard on the poor.

9 a: characterized by sharp or harsh outline, rigid execution, and stiff drawing b: sharply defined: stark i.e. hard shadows.

10 a (1): difficult to accomplish or resolve: troublesome i.e. hard problems.

As used in this article, hard money is intended to convey the idea that because of the current economic conditions, many financing needs will be more difficult to accomplish. They will require great exertion and effort to overcome the economic obstacles of the current economy. Compared to 2006 and 2007, periods of relatively easy money, to obtain financing today you will have to have firm, definite facts to support your financing needs. And the cost of money will be more difficult to bear. Hard money is harder to find, harder to obtain and harder to repay. Nevertheless, hard money may be an economic necessity as a means to an end to grow a business or complete a real estate transaction.

Why is 2008 a time of hard money? This is a difficult question to answer. If you ask 3 experts you probably will get three different answers. It may be the economic equivalent of The Perfect Storm- a True Story of Men against the Sea. The phrase “perfect storm” refers to the simultaneous occurrence of events which, taken individually, probably would be far less powerful than the result of their rare combination. These occurrences are rare by their very nature, so that even a slight change in any one event contributing to the perfect storm would lessen its overall impact. The stock market crash of 1929 and following depression exemplifies a perfect storm of economic consequence.

What are these events today? 1) The Mortgage Melt-down. Major financial institutions in the United States are incurring billions of dollars in losses due to the loss in valuation of their investments in mortgage securities. The consequence for borrowers is that these institutions are less inclined to take risks when loaning money for fear of additional losses. And their regulators are demanding that regulated lenders raise their credit standards for borrowers to qualify for a loan. 2) The devaluation of the American dollar versus other world currencies. The U.S. government is spending ginormous amounts of money in excess of what it collect in revenue due to the political compulsion to spend taxpayers’ money, the war in Iraq, Hurricane Katrina (and other natural disasters) and the war on terrorism. This makes our currency less valuable. It makes importing to the U.S. more expensive. The American people have less money to spend on goods and services, and their money buys less than it did a year ago because prices of necessities such as gasoline are higher. 3) The current tendency of Federal and State governments to reduce funding for social services, health services and education because of inadequate revenues; this hurts individuals and businesses who have less money to spend on products and services which creates additional drags on our economy. 4) The diminishing value of residential real estate all across the United States. This is related to the mortgage meltdown and the fact that many people incurred debts that they cannot repay. The real causes of these events are complicated and beyond the scope of this article. Suffice it to say that these are hard times and hard times create needs for hard money loans.

What exactly is hard money? Here are seven examples:

1) A commercial real estate loan where the borrower receives funds based on the value of the property, usually 50% or less, at an interest rate higher than a bank would charge. This is the most commonly understood type of hard money. In this financing, neither the income from the property or the borrower demonstrably supports the repayment of the loan.

2) A real estate loan to buy a residential property where the borrower cannot prove their income. This may be accomplished with financing from a seller, the only party willing to take the risk of non-payment.

3) A small junior lien on income producing commercial real estate where the first lien is very large. For example, a million dollar second lien behind a ten million dollar first lien. Most lenders simply do not want to consider a loan of this type because of the potential liability for repayment of the first lien. It is ten times the risk of the secondary loan.

4) Most loans to people with less than excellent credit. Many loans are based on credit scoring. If you do not have a credit score that is high enough for the lender’s requirement, you simply do not get their loan and you may or may not be able to find a hard money loan to accomplish your objective.

5) Accounts receivable financing to construction contractors, medical providers and sellers of agricultural products. Most factors do not offer to these sectors of the economy because of the risks and complexities that are involved.

6) Purchase order financing for items with gross margins less than twenty percent. The twenty percent margin is a benchmark for sufficient profitability in a transaction to pay all financing costs and create profits for the business after all costs are paid. During hard economic times margins are squeezed. It is a vicious cycle.

7) Loans to businesses that are particularly negatively affected by the current economy. For instance, a loan to build a new lumberyard is impacted by the downturn in new real estate construction and a lower need for lumber. Most banks would simply decline to consider such a loan. The same is true for developers seeking to build new housing tracts or office building developments. This is not a good time to try to start a new mortgage brokerage company; although it may be a good time to be a hard money lender provided that you are very, very careful in assessing your transactional risks.

What do all of these situations have in common? In times of easy money these situations would be less costly to finance and more likely to receive funding. Today, the lender’s answer to your request for funding is more likely to be a polite but strong “no way”. Many lenders have effectively (if not actually) shut their doors. Many lenders will simply decline to lend on hotels/motels, gas stations, owner/user properties, properties with any environmental issues. Borrowers who do not have FICO credit scores above 680, with substantial net worth and income will find it is very difficult to obtain many types of loans. Fortunately, the door for accounts receivable financing is still wide open.

The bottom line: Hard times in our economy will tend to force more individuals and businesses to borrow hard money- if they are able to get any money at all. Commercial financing with hard money will tend to grow as traditional sources of financing from banks and institutional lenders simply will not be available.

Business Finance – 3 Blunders to Avoid And Popular Ways to Seek Referrals Today

Business Finance – 3 Blunders to Avoid

When you have your own business, it is important to follow some basic financial rules. Keeping track of the money flow and expenses helps you decide if your business is making enough money or spending too much on supplies. Your business should always have a strategy to follow as well as projected cash flow. Money is important in every aspect of business.

Below are some of the following business mistakes that you should try to avoid:

(1) Not keeping accurate records in your business finances can affect a business negatively.

It can hurt cash flow and the decisions and plans that you make for your business. If you find that you do not have time to keep track of accounting, it is a good investment to hire somebody to keep track of finances. If you conduct business from home, you also need to make sure that you keep two separate accounts: one for business and one for home or personal items.

(2) Not staying informed about business laws.

You need to educate yourself about Occupational Safety and Health regulations, worker’s compensation laws, unemployment insurance and employment laws. By not keeping yourself educated about business laws, you could possibly make careless mistakes that could affect your business.

(3) Not filing or estimating quarterly taxes.

Taxes are also very important when it comes to business. You should familiarize yourself regularly with the latest tax info for business and learn about filing estimated taxes early. If you don’t estimate what the cost of taxes will be each quarter, you could end up paying a large sum of money at the end of each year. Not estimating the cost of taxes or paying more taxes than you bargained for could hurt your business financially.

It is important that you avoid these business blunders so that you can be sure that your business is run professionally. Always stay educated and up to date on current business laws and practices. Not staying familiarized with business laws or your financial status could cost you more down the road.

Popular Ways to Seek Referrals Today

Referrals are important in any business. Referrals help us build a reputation and bring in new customers/clients. Without referrals, a business can’t grow.

Below is a list of ways that you can attract more referrals to your business.

• Attend meetings, luncheons or other business events and meet others who are in similar business markets as you.

Find out how other business owners create strategies to meet new clients. Attend events held by the city or other organizations where you might have a chance at meeting new clients.

• Familiarize yourself with online social networking.

By learning about other people’s interests, you can educate them about your business and services. There are millions of potential clients who are on social networks such as Facebook and Twitter each day. Visit online blogs that pertain to your market and leave comments. Be sure to leave your name website link somewhere in the visitor field in case readers or the blog owner wants more information.

• Speak with your current clients and customers.

Your current clients may have family and friends who need your services and products too. Create “coupon specials” for those who refer friends or family, and then offer introductory specials to those who were referred. Family members will often refer places of business or products to each other that they had a successful experience with.

• Post fliers, signs or business cards to attract more business.

At business events, be sure to leave your business cards, free magnets or pens that have the name of your business or website on them. People always love gifts that they can take home with them. If someone needs your services, they may call the number or visit the website that is listed on the pen or magnet.

There are several ways to attract referrals to your business. A business just can’t expect customers to show up unexpected. By going out to meet and learn about your potential clients, you can ensure the future of your business’s success.