Month after month, many
individuals look at their bank and credit statements and are surprised that
they spent more than they thought they did. To avoid this problem, one simple
method of accounting for income and expenditures is to have personal financial
statements. Just like the ones used by corporations, financial statements
provide you with an indication of your financial condition and can help with
budget planning. There are two types of personal financial statements:
oThe personal cash flow statement
oThe personal balance sheet
Let's explore these in more
Personal Cash Flow Statement
A personal cash flow statement
measures your cash inflows and outflows in order to show you your net cash flow
for a specific period of time. Cash inflows generally include the following:
oInterest from savings accounts
oDividends from investments
oCapital gains from the sale of financial
securities like stocks and bonds
Cash inflow can also
include money received from the sale of assets like houses or cars.
Essentially, your cash inflow consists of anything that brings in money.
Cash outflow represents
all expenses, regardless of size. Cash outflows include the following types of
oRent or mortgage payments
oThings you buy for fun (books, movie tickets,
restaurant meals, etc.)
The purpose of determining your
cash inflows and outflows is to find your net cash flow. Your net cash
flow is simply the result of subtracting your outflow from your inflow. A
positive net cash flow means that you earned more than you spent and that you
have some money leftover from that period. On the other hand, a negative net
cash flow shows that you spent more money than you brought in.
Personal Balance Sheet
A balance sheet is the second
type of personal financial statement. A personal balance sheet provides an
overall snapshot of your wealth at a specific period in time. It is a summary
of your assets (what you own), your liabilities (what you
owe) and your net worth (assets minus liabilities).
Assets can be classified into three distinct categories:
·Liquid Assets: Liquid assets are those things you own that can
easily be sold or turned into cash without losing value. These include checking
accounts, money market accounts, savings accounts and cash. Some people
include certificates of deposit (CDs) in this category, but the
problem with CDs is that most of them charge an early withdrawal fee, causing
your investment to lose a little value.
·Large Assets: Large assets include things like houses, cars,
boats, artwork and furniture. When creating a personal balance sheet, make sure
to use the market value of these items. If it's difficult to find a
market value, use recent sales prices of similar items.
·Investments: Investments include bonds, stocks,
CDs, mutual funds and real estate. You should record investments at
their current market values as well.
Liabilities are merely what you owe. Liabilities include current bills,
payments still owed on some assets like cars and houses, credit card balances
and other loans.
Your net worth is the
difference between what you own and what you owe. This figure is your measure
of wealth because it represents what you own after everything you owe has been
paid off. If you have a negative net worth, this means that you owe more than
Two ways to increase your net
worth are to increase your assets or decrease your liabilities. You can
increase assets by increasing your cash or increasing the value of any asset
you own. One note of caution: make sure you don't increase your liabilities
along with your assets. For example, your assets will increase if you buy a
house, but if you take out a mortgage on that house your liabilities will also
increase. Increasing your net worth through an asset increase will only work if
the increase in assets is greater than the increase in liabilities. The same
goes for trying to decrease liabilities. A decrease in what you owe has to be
greater than a reduction in assets.
Bringing Them Together
Personal financial statements
give you the tools to monitor your spending and increase your net worth. The
thing about personal financial statements is that they are not just two
separate pieces of information, but they actually work together. Your net cash
flow from the cash flow statement can actually help you in your quest to
increase net worth. If you have a positive net cash flow in a given period, you
can apply that money to acquiring assets or paying off liabilities. Applying
your net cash flow toward your net worth is a great way to increase assets
without increasing liabilities or decrease liabilities without increasing
If you currently have a negative cash flow or you want to increase
positive net cash flow, the only way to do it is to assess your spending habits
and adjust them as necessary. By using personal financial statements to become
more aware of your spending habits and net worth, you'll be well on your way to
greater financial security.
The real estate game is quite hard to navigate in these troubled financial times. Before, it was possible to make a property investment and to be sure that that investment is going to pay off. However, today, with the omnipresent shortage of money, the profit is by no means guaranteed, and there are many bad shortcuts that you can take. These shortcuts can easily leave you lying naked in the bankruptcy bushes with multiple financial cuts and bruises.
Since there are so many articles on what to do when investing in property for the first time, here are some definite don’ts when it comes to investing. Doing these things is something that should be avoided at all costs, if you have plans to rise to the top of the property investment game.
Don’t let your heart cloud your judgment
When purchasing your first home, it is only natural that you will let your emotions decide what you are going to purchase. You will live there, possibly for the rest of your life, and because of this, you will need to make sure that the house has that real ‘feel’ about it and that you will be able to call it home. However, when making a first-time investment in a house that is supposed to pay off later on, it is most definitely undesirable to let your emotions rule your purchase. You don’t want to end up with a house that you cannot rent or sell, just because you liked how the lawn was done or how nicely painted it was. Also, letting your emotions rule your purchase can lead you to over-paying for a house, thus going into red from the very beginning. This is why it is advised to perform thorough checks for the property that you are willing to purchase. Is the neighborhood right for attracting quality people to live there? Will the property provide the return that you require for the invested capital? When making an investment, always bear in mind that real estate business is governed by economy, not emotions.
Rushing in or procrastinating
There are three types of real estate investors, and these are: rushers, procrastinators and those who are in the middle. Of all these, only the last ones have a chance of making money in the real estate investing business. The other two groups usually never make it past their first investment, if they make one at all. And here’s why: The rushers are the ones who attend one seminar and see this as an excellent opportunity for them to get rich over-night and get out of their financial troubles. This is why they jump the first wagon that is open to them, and buy the first property they hear about. After that, they are left with a property they can hardly sell, or can hardly recoup the money they invested. When this happens, they usually quit the property investment, and that’s the end of it. The procrastinators are the ones who go beyond that one seminar. However, they have another problem. They go to too many seminars and get their minds overburdened with information. This abundance of information leaves them baffled as to what to do, and they usually pass up vital opportunities just because they are unsure of their further doings. They analyze things too much and end up doing nothing. This is called paralysis by analysis. The best thing to do here is to find the middle ground. While the first group may overcome their mistakes and learn through their experience, the second group will never get into the property business. This is why it is essential to note that you cannot learn everything at the beginning. You should learn as you go, but be sure to learn quickly. Only this way will you succeed in the harsh game that is real estate investing. In the end, all I have to say is to stress that these two of the most common mistakes should be avoided at all costs, because if you make them, you can count yourself out of the game before you have even joined properly. Avoid them, and there are great chances that you will prosper. Who knows, maybe in a few years’ time you will be the next big thing that happened in the real estate investment. Author
Damian Wolf is a writer and online marketer. He mostly writes about business opportunities and self development tips. Damian currently works on advanced online strategy for Simple Home Invest website , great Australian property investment service.
Investing in stocks is a risky business. There are some risks you have some control over and other that you can only guard against. Thoughtful investment securities selections that meet your goals and risk profile keep individual stock and bond risks at an acceptable level.
However, other risks inherent to investing you have no control over. Most of these risks affect the market or the economy and require investors to adjust portfolios or ride out the storm.
There are two ways to measure risk. One
is by using modern portfolio theory and the capital asset pricing model and the
second is to look at the various risk factors which affect a business.
Capital Asset Pricing Model
We will not discuss in detail this
theory of asset pricing as it requires you to have a working knowledge of first
or second year university level statistics and finance. Since this is an
introductory article, readers who are interested tolearn
more about the CAPMand
Modern portfolio theory are encouraged to attend a course in finance or seek
advice from a qualified advisor.
Basically, theCAPMmakes some major assumptions about
investors and their preferences. In order to use the CAPM to find the proper
discount rate, one must know three things: a stock's beta, the nominal risk
free rate, and the expected return on the market. Stock's with betas greater
than one are more risky than the market and betas of less than one are less
risky. For example, a stock with a beta of 1.5 is expected to gain 1.5% when
the market rises 1%.
Modern portfolio theory is also where
the main ideas about diversification come from. We will look at this concept in
more detail later. For now, we can define a diversified portfolio as containing
securities which have little or no correlation to other securities in a
portfolio or the market. These securities are then placed in a portfolio in
such a way as to minimize the volatility of the portfolio.
You may be scratching your head by now
but this is essentially the basic concept of diversification and minimizing
risk. There are a lot of disadvantages and advantages to using the CAPM and
MPT. One assumption of the CAPM I will mention is that there are two types of
risk. Market risk and firm specific risk. The CAPM assumes that investors only
get a premium return for taking on market risk because the firm specific risk
can be entirely eliminated through diversification. Thus, beta only measures
market or nondiversifiable risk.
Second Way to Measure Risk
The second way to measure risk is to
start by taking a nominal risk free rate. How do you do this? Well you take the
yield that is currently offered on US Government bonds that match your
investment horizon. For example, if you plan to invest for 5 years, you should
use the yield on 5yr U.S. bonds. Now add to this the premium for risk and
voila-you have your required return or discount rate. You may be asking, what
makes up the risk premium? Well, remember from lesson one there are five
things: financial, business, liquidity, foreign exchange, and political risk.
Financial risk involves a company's
capital structure. What is their debt/equity? What is their current ratio? etc.
We will look into how to assess financial risk in greater detail later in lessons
on accounting and financial statements analysis.
This involves the economics of the firm
you are looking at. Ask yourself, how will this company look ten years from
now? Do they have barriers to entry? (ie patents, economies of scale etc. more
on this in the economics lessons).
It has been shown through various
studies that firms which are private or thinly traded are sold at a significant
discount to their value compared with similar firms with active markets. Firm's
which can be easily bought or sold with little transaction costs are called
liquid or marketable. The lack of liquidity can occur if the stock you are
researching is not widely followed. It can also happen if you plan to liquidate
a large block of stock. Your transaction could bring down the price
Foreign Exchange/Political Risk:
This involves firms which derive
significant portions of their sales overseas. For example, many exporters to
Asia have been affected by weaker demand for their goods. Foreign
Exchange/Political risk can also happen because the company you are looking
into is heavily restricted by the government. Finally, different countries have
different accounting rules so you should be aware of this when investing in
When investing in foreign stocks, you
also run the risk of the U.S. appreciating. To adjust for this, you should
restate your foreign returns to U.S. returns.
Chairman of the Board and CEO of Berkshire Hathaway, says parents should start
teaching children about the importance of money at an early age, even in
Warren Buffett is one of the most famous billionaires in
the world. He also loves sharing his advice with kids as part of his Secret
Millionaires Club. Here, he answers five questions, including what he thinks
the biggest mistake is that parents make when teaching their kids about money
and how he learned about money.
Do you think most parents do a good job teaching their kids
Most parents know
how important it is to teach kids about money and managing it properly. There
was a study many years ago questioning how to predict business success later in
life. The answer to the study was the age you started your first business impacted
how successful you were later in life. Teaching kids sound financial habits at
an early age gives kids the opportunity to be successful when they are an
What do you think is the biggest mistake parents make when
teaching their kids about money?
I think parents
need to start teaching kids about the importance of managing money at an early
age. Sometimes parents wait until their kids are in their teens before they
start talking about managing money when they could be starting when their kids
are in preschool.
What made you want to launch the Secret Millionaires Club? What
do you hope kids get out of it?
There are a number
of educational programs out there, but there are not many programs that teach
about Financial Literacy at an early age. Secret Millionaires Club can help
kids develop the right habits that will serve them well for the rest of their
life. If this program can have some effect on youngsters and help them develop
better habits on money, it can have a major impact on their life when they are
Where did you learn about money?
My dad was my
greatest inspiration. He was my hero when I was six and he is still my hero
now. He is an inspiration to me in every way. What I learned at an early age
from him was to have the right habits early. Savings was an important lesson he
taught. I had all kinds of small businesses when I was growing up. When I was
six I started my first business. I bought a six pack of Coke for 25 cents
and sold the cans for a nickel apiece. I also sold magazines and gum door to
What is the best lesson you've taught your own kids about money?
I taught all of my
kids the lessons taught in Secret Millionaires Club. They are simple lessons
that are meant for business and for life.
— By Warren Buffett
Warren Buffett is the chairman and CEO of Berkshire Hathaway.
Follow him on Twitter@WarrenBuffett.
The stock market is not a simple math
equation. Even seasoned players have lost big by taking the same gambles
that originally made them successful investors. New to the stock market? Don't
enter the murky waters of Wall Street without these tips.
Choose a Dependable
Image via Flickr by socialwoodlands
Brokers play an essential role in the stock
market. You give these firms your cash deposit and in turn, they offer you the
tools that allow you to buy and sell stocks on the market. There are several
stock brokers to choose from. The differences between services generally boils
down to transaction fees as each company charges a specific amount per trade.
What's most important is going with a broker that has a track record for
providing a reliable service.
Image via Flickr by puuikibeach
with the KISS Principle So you've set aside a budget that will be
used exclusively for your investment endeavors. That's all fine and dandy, but
how much are you willing to invest per trade? Whatever it is, hopefully it's
something small. It would be a shame to blow the whole budget on a single bad
trade. Starting small gives you an opportunity to understand the dynamics of
trading stocks, essentially are allowing you to get some experience under your
belt without putting your entire budget at risk.
The KISS principle tells us that any given
system is at its most efficient when you "keep it simple stupid."
This old school concept is one beginner investors should live by. The stock
market offers a variety of ways to invest and make money. With that said,
newcomers are best suited for the basic actions of buying and selling. Most
brokers give you the ability to buy shares of specific companies and sell those
shares later down the road. There is much more to learn, but many new investors
have done well taking the simple route.
Once you've mastered the basics, you'll be more comfortable with option trades,
short-term trades, penny stocks and other advanced strategies. If you simply
can't wait, check out the Peter Briger executive profile to learn how you can get
Image via Flickr by 401(K) 2013
Rookie investors can learn a lot by
monitoring trends in and around the stock market. For example, if you know that
the share value of company A has been consistently dropping over its 52-week
range, that is probably a sign that you should stay away. On the other hand, if
you know that company B has released a hot selling product or recently
announced huge quarterly revenue gains, their stock may be a worthy investment.
Trend watching will call for some dedicated research on your part, but this is
hard work that can pay off big in the end.
Seasoned investors will tell you that the stock market doesn't make any
promises. There are no guarantees regardless of how much money you invest.
If there is one silver lining, it would lay in the more you know the less
likely you are to make critical mistakes.