Financial jargons can seem boring and dry. Heck, even some financial experts may tell you that! However, what makes these things interesting is how these impact our lives positively. Note that these are not industry words you need to learn for a test or terms which just wealth advisors use in their daily work. These are terms which can save you a lot of money, give you financial security and find you more opportunities to save and make additional money.
In this article, we are going to give you some key phrases, definitions and concepts related to your personal finance.
Cost per use and Cost per unit
This is a measure of a unit of purchase, and is found by dividing the number of units by the number of times you use them.
Try this exercise. Before you buy something the next time, calculate the cost per use. For example you buy a chocolate bar for Rs. 40. You’ll eat it by evening, and so its Cost per Unit shall be 40/1. On the other hand, you buy a fruit basket for Rs. 300 which lasts you a week. So that is 300/7. From the point of sustainability, the fruit basket in this case has more value, right? Because it lasts longer! And…because it is healthier! Jokes apart, it is better to get something that lasts longer. The more frequently you buy something, the more you spend over time. Always think about how many times you shall be using the product.
Diversification
Diversification means having a healthy mix of investment instruments. For instance, you may think that having only stocks are better for giving you a higher return, but it is safer to have a mix of bonds as well. Besides that, consider having both domestic and foreign bonds, stocks and items of other asset classes like real estate properties, or chunks of multiple real estate properties. Also remember - insurance like car insurance is not an investment for returns; it is an investment for security!
Your parents may have taught you the moral story “Never Put All Your Eggs In One Basket.” In the case of investment options, that is highly applicable. Investing in only stocks, for instance, is a recipe for disaster since these are highly volatile and unpredictable in nature. Your stock may be performing well today. But tomorrow? Or the next year? Who can say!
Liquid reserves
These are your funds which can be accessed quickly without affecting their value.
You may have a wealth of funds hidden away in investments, savings accounts, etc. But what happens when you are faced with an emergency situation? Will you take money from your retirement savings, or sell your stocks and bonds? Even if you wanted to do these things, time is a problem in emergency situations. This is why you need to have enough cash at hand to get you through any emergency situation. Have enough liquid cash at home, not just plastic cards like Debit cards, Credit cards and ATM cards.
Opportunity cost
When you peruse and gain something, you give up something else.
You cannot satisfy only so many needs in your life. If you take one path or option, you can’t take others. For instance, with a finite amount of money you can invest only in Stock A or Stock B. If you choose to invest in stocks and bonds, you can’t have that invested amount in cash as well. In other words, to gain something, you sacrifice something else. The best thing you can do is to determine whether the thing you want is worth sacrificing other things for.
Return on Investment
This is a measure of performance for investments, and is found out by dividing the investment’s net gain by the cost of investment.
The things which you have investment on, are they worth it? How much return on investment are they giving you, and how to find that out? Find out the price of getting that investment, and divide it with its returns which you are getting from it. That’ll tell you something about its value.
Return on investment is relevant not just for personal finance, but in other facets of your life. For instance, if you are giving someone a cake, is it better to buy a cake or to make one yourself? This is understandably subjective. The concept holds true in case of your education too. For instance, is it not better to go to a college, which is expensive, but gives a 90% graduation rate per year and better job prospects?
Compounding
Compounding is a process that gives you exponential interest growth of your savings. Such funds generate their own interest and over a long period of time.
Compounding can work for you, but also against you in the financial world. In case of investment growth and savings, compounding is good. You get higher returns as your interest rate grows periodically. You can add the power of compounding in other areas of your life as well. Take exercising, for instance. The more you exercise the better you’ll feel, and the more you’ll want to continue. Its positive effects just keep continuing.
No comments:
Post a Comment