The financial information provided in this article is for informational purposes only and is not intended to provide specific financial advice. Financial investments carry an inherent risk that you may lose some or all of your investment. Investors should independently and thoroughly research and analyze each investment before investing. Consequences of such risks may include, but are not limited to, federal/state/municipal tax liabilities, loss of all or part of investment capital, loss of interest, contractual obligations to third parties and other risks not specifically listed herein. You should consult a financial advisor for advice regarding any specific financial investment questions. Therefore, it is essential to have the skills of how to manage money.

Managing money is more than frugality. Money management is about recognizing how we emotionally respond to financial decisions, understanding the basics of financial products and markets, and creating a plan that will help you reach your life goals. This article will guide you on how to manage money. Explore new research that explains how our intuition can lead us to make common mistakes, review the most important information about financial products and theories, and learn how to create a financial plan even if you've had trouble staying on track in the past.

Managing money is more than frugality. Money management is about recognizing how we emotionally respond to financial decisions, understanding the basics of financial products and markets, and creating a plan that will help you reach your life goals. This article will guide you on how to manage money. Explore new research that explains how our intuition can lead us to make common mistakes, review the most important information about financial products and theories, and learn how to create a financial plan even if you've had trouble staying on track in the past.

Our emotions often lead us to make wrong decisions when it comes to managing money. The emerging field of behavioral finance shows why risk management is difficult, and why managers choose the wrong investments, buy the wrong insurance, and fail to meet their own goals. The first step in creating a financial plan is not necessarily knowing what to do. It is important to know your limitations so that you can implement strategies that will work.

The basic principle guiding money management is life cycle finance. Life cycle effects play out throughout our lives when we make money decisions. Through this information you will learn how to use the life cycle framework to make better and more consistent choices in all financial matters. You'll also learn when and why it makes sense to borrow and save. What is investment risk really? The Life Cycle Framework is a powerful concept that will change the way we think about managing money.

This framework will provide the information needed to make better financial choices. Modern portfolio theory and market efficiency make choosing the right investments incredibly easy. You'll learn how to choose mutual funds for your 401(k) and how to manage different accounts to give you the highest possible return for the amount of risk you're willing to take.

Following a life cycle plan involves understanding borrowing and investment choices over time. Education is the most important investment. You will be introduced to options for saving for educational expenses and you will be able to decide whether it makes sense to go into debt for college expenses. It will also explain how to manage credit and debit cards, how to get and maintain a credit score, and how the credit industry works. We'll also look at the pros and cons of buying a home, how to get a mortgage, and what type of mortgage makes the most sense.

The science of risk management explains how to choose insurance products that protect against major risks while ignoring some popular products. The basic philosophy of the federal tax system will be introduced along with the various deductions and exemptions that can be used to lower the tax bill. Learn about the most important aspects of estate planning, including options for transferring assets outside of a will and the legal documents everyone must complete to ensure loved ones are taken care of. Retirement planning involves estimating how much you will need to save for retirement, when you will retire, and how best to invest to meet your retirement goals.

This information covers the basics of putting together your own financial plan and how to hire an expert to help with the process. You will learn the steps involved in putting together a budget that balances spending needs and future goals. We will also look at how to create an investment strategy statement and how to manage investments over time. This information will demystify the investment advisory profession by reviewing the types of financial advisors, how they are paid, and who can and cannot make recommendations in their own best interest.

Understanding Your Financial Brain

Understanding Your Financial Brain - Money management requires knowledge of financial products, investment and risk theory, and tax regulations. But we also need to understand how we make mistakes. In this article you will learn the most important information you need to manage your finances. You'll also gain insight from the emerging science of personal financial decision-making so you can avoid letting your emotions get in the way.

How do we prepare ourselves for an uncertain economic future when so much is at stake? Money management requires knowledge of financial products, investment and risk theory, and tax regulations. But we also need to understand how we make mistakes. In this article you will learn the most important information you need to manage your finances. You'll also gain insight from the emerging science of personal financial decision-making so you can avoid letting your emotions get in the way.

Financial decisions and the brain

Our brains are constantly struggling, especially when it comes to making financial decisions. We know what we should be doing, but we often don't do it. Because we don't have only one cognitive system. We have two primary parts of the brain that influence how we respond to money.

Financial decisions and the brain - Our brains are constantly struggling, especially when it comes to making financial decisions. We know what we should be doing, but we often don't do it. Because we don't have only one cognitive system. We have two primary parts of the brain that influence how we respond to money.

Many Americans believe that they should be saving more for retirement than they actually are, but not doing enough to actually do anything about it. When we are planning for the future, we use a small part of our brain behind our eyes called the prefrontal cortex. This part of the brain likes to think it's in control. In fact, when there is evidence that it is out of control (for example, after a market crash) it goes a long way to justify why all the stock was sold.

The truth is that the prefrontal cortex that we use to make conscious decisions is not really in control. He is likened to a rider on the crest of an elephant. The rider can usually guide the elephant just fine, until the elephant decides that it really wants to go somewhere.

The elephant part of our brain is called the limbic system. This is a very old part of the brain and takes up a lot of real estate in your head. It is responsible for things like emotions, automatic responses to stimuli, and memory. Keeping your prefrontal cortex active takes a lot of work. The limbic system is much faster and more efficient, and it is the part that we use in our daily activities.

Successful financial planning is not just about knowing what to do, but how to create a plan that actually works. This means recognizing that it can be tempting to impulsively spend on credit cards or never put money into your 401(k), especially if you've had such problems in the past. The best plan is to control your emotions.

Another conflict between the rational brain and the emotional brain is what economists call hyperbolic discounting. Experiments show that we are very impatient when making decisions in the present and more patient when making decisions about the future. In brain scans, the prefrontal cortex lights up when you're planning for the future, but the limbic system lights up when you're making a decision right now.

Research has shown that when CEOs receive excess cash, they spend it buying other companies or investing in dubious projects. All of us have a hard time resisting temptation. In order to resist temptation, it is necessary to be free from temptation. Savings accounts are a classic example of a concept known as narrow framing, or simply framing, that financial planners have been using for decades to help their clients meet their long-term goals.

If you deposit a $10,000 paycheck into your checking account, it will be spent. A good strategy is to deposit paychecks into a savings account and then transfer the money to a checking account. Savings accounts take a few days to transfer assets to a checking account before you spend. Because the transfer takes place in the future, you have to use your rational brain. If you force your rational brain to intervene before your limbic brain is tempted, it can reduce annual costs by thousands.

Avoidance of financial losses

Losing your emotions is difficult. Why do we dwell on losses? The best guess is that loss aversion gave the ancestors a better chance of survival. If you panic when you lose part of the winter food supply, you are more likely to move on to the next harvest. But that emotional response is not as useful in modern financial markets. In fact, this is why many people underperform the market, buy the wrong insurance, and avoid taking sensible risks.

Avoidance of financial losses - Loss aversion is attractive because we seem to give much more weight to small losses than to large ones. This is not logical because small losses are a normal part of risk taking and we are rewarded for taking risks. People will purchase an expensive insurance plan to protect themselves against the loss of a $500 iPad, but they will not increase their liability limits on a car insurance plan to protect themselves against a larger loss.

The 2008/2009 stock market crash was brutal for investors. Many financial advisors fielded dozens of calls from clients who wanted to stop the emotional pain and get out of the market. Logically, we know that stock prices go through cycles, and that the worst time to sell is after prices fall.

But the rational part of our brain can be overridden by the more powerful emotional part. When the market bottomed in early 2009, investors pulled record amounts from stock funds. An investor who sold $100 in stocks in early March 2009 and invested in a money-market account would have made a few dollars in the summer of 2013. Patient investors saw their stock investment more than double to around $250.

Loss aversion is attractive because we seem to give much more weight to small losses than to large ones. This is not logical because small losses are a normal part of risk taking and we are rewarded for taking risks. People will purchase an expensive insurance plan to protect themselves against the loss of a $500 iPad, but they will not increase their liability limits on a car insurance plan to protect themselves against a larger loss.

Everyone focuses on the reference point. If you start a new investment plan, you'll focus on the original amount invested and compare your results to this reference point. Some investment advisors try to shift their client's reference point by providing annual statements, which are less prone to losses from fluctuating markets, rather than quarterly statements.

Avoiding losses means you don't care enough about your profits. Experiments have shown that the pain of a loss is greater than the joy of a gain of the same size. Happiness from profit is related to the concept of risk tolerance. If you are risk tolerant, or your experience and knowledge allow you to control your emotional responses, you will be willing to lose money to earn more on average over time. You will begin to accept losses as an inevitable part of reaching your long-term financial goals. If you can control your myopic and loss-averse tendencies, you can reap long-term bonuses by accepting investment risk.

Other behavioral barriers

In addition to having difficulty controlling emotions such as avoiding harm, the prefrontal cortex is also slow and easily fatigued when we have to make many decisions. A common sales tactic for car salesmen (for example overwhelming customers with complicated information). When we are faced with information overload, all we want to do is make a decision and go home because our emotions have overwhelmed our weak rational brains.

Other Behavioral Barriers to Money Management - In addition to having difficulty controlling emotions such as avoiding harm, the prefrontal cortex is also slow and easily fatigued when we have to make many decisions. A common sales tactic for car salesmen (for example overwhelming customers with complicated information). When we are faced with information overload, all we want to do is make a decision and go home because our emotions have overwhelmed our weak rational brains.

Brain fatigue can lead to poor decisions when you have to make an offer on a home, choose a mortgage, or agree to buy an investment product from a salesman. The solution is to never make a big, important financial decision without sleeping on it. This is a piece of conventional wisdom that can be explained by neuroeconomics.

Another limitation of our rational brain is its tendency to focus on information that is readily available. For example, one is more concerned about flying in an airplane if there has been an accident recently. But when we over-weight recent events, we are ignoring the basic probability that this event will happen.

A tendency to focus too much on recent events affects our general feelings about the economy. It is well known that customer sentiments flow with the business cycle. When there is an economic expansion, people are very optimistic about the future. When there is a recession, we are very pessimistic. When we are pessimistic, we start to lose our love for risky assets like stocks. When we are optimistic, we cannot buy enough stocks.

This cycle of optimism and pessimism also affects expected returns on stocks. When sentiment is low and stock prices fall, it can be a great time to rebalance your portfolio by selling bonds and buying more stocks against what sentiment would dictate. When sentiment is high and share prices rise, this can be a good opportunity to sell stocks and rebalance the portfolio into bonds.

But it's also very difficult, which means our rational brain has to override our emotional brain. Veteran investors can do this by reminding themselves of past market recoveries. Or you can choose investments that will automatically rebalance and avoid the elephant entirely.

This advantage of automated tools is one of the most surprising and powerful findings in educational studies of the past decade. The best strategy is to keep the elephant out of the process, especially when it comes to saving for retirement. This effect is so powerful that it has completely changed how we think about retirement strategy. Humans tend to follow the path of least resistance, and we often overestimate our future willingness to change our bad habits. Recognizing that we're going to be as lazy tomorrow as we are today can help us choose strategies that are more likely to work.

Most advisors know that the single best way to help clients save more for retirement is to have them bring a retirement form from their personnel office, fill it out during a meeting, and then mail it back to their employer. Once an employee starts saving more for retirement, they may not notice a decrease in their wages. Research shows that retirement savings are incredibly sticky, once you choose a percentage or monthly savings amount, almost all employees stick to that amount forever.

Knowledge does not always lead to success. More important than knowledge is the ability to use that knowledge to change habits and take steps to avoid forcing your rider to run. And don't think that academics are less confident in their ability to control the brain. In fact, they're probably worse.

Overconfidence is another important behavioral barrier to financial decision-making. Men in particular believe they can do better than the market. Unfortunately, researchers have found that overconfident men trade more often, and this frequent trading results in lower investment performance than investment accounts owned by women. If you're a man, one surefire way to improve your investment performance is to embrace a dose of humility and stop trying to beat the market.

Another important finding from investment account research is that we all have a tendency to sell our winning stocks and hold our losing stocks. It also relates to loss prevention. Locking in a loss by selling a stock that has fallen in value may be painful, but it feels good to profit from a winning stock. Investors will sell their winners and keep their losses.

The problem is that stock prices exhibit short-term momentum. Today's winners may also be tomorrow's winners, and today's losers will continue to decline tomorrow. So, the best strategy is to either hang tight or get rid of your losers. But that means fighting with an elephant.

Managing money with life cycle theory

In economics, the frame used for financial decisions is known as the theory of life cycle. Like many scientific principles, it is very easy to understand. But despite its simplicity, life cycle theory is incredibly powerful in helping to realize the financial decision. The basic logic of Life Cycle Finance is that you should spend your money when you get your money most happiness and save you a lot. At the end of this article, you may have a completely perspective on your financial life.

The assumption of the theory of life cycle

If you are buying in a life cycle theory, you have to understand some of the assumptions. None of these perceptions are radical, it all means. But combine these wise understanding in a box and you can get some amazing results. You will find that the behavior of the behavior you understands is not so wise under the theory of the cycle. You will find that the financial choices that seem unrealistic are actually rational.

One of the notion of a life cycle theory is that economists have reduced the minor use of money, where utility is another word for happiness, and how much happiness is the cost of spending every extra dollar. The declining marginal utility understanding states that we get a little less happiness from every extra dollar spent.

This is the essence of life cycle finance. Think of borrowing and saving as bad or not as good, but consider the transfer of a real life in your life. Borrowing means that you spend less in the future to spend more today. Savings mean that you spend less today so you can spend more in the future.

According to Life Cycle Finance, you are doing right to how much happiness gives you in all your life -long periods of life in the young, medium age, retirement period. This means that we get the most happiness in life, because we do not live in luxury in the cycle phase of a life. If you agree with the idea of reducing the minor utility of expenses, it means that spending the same money for each year of your life makes you the happiest.

You can see how life cycle is different from some traditional financial wisdom. Life cycle theory says that you should be both borrower and lender. When you are young and investing in education, you should be a borrower and when you are earning in a middle age, you should be a lender. You are just borrowing and lending by using financial tools like accounts, mortgage, student loans and mutual funds.

Traditional wisdom indicates that you should always save money. You may have heard that saving 10 percent of your income is a good idea, and the more the younger you are, the more rich you will be in life. This is undoubtedly true: If you are always saving, you will always be rich. But the goal is getting rich?

In general, those who have more money appear to be more happy. But there is not much evidence that people who spend $ 200,000 a year are much more happy than those who spend $ 100,000 a year. In fact, sitting on more money can be a burden. So, instead of thinking about a game of life, the goal is to create the biggest heap of money, think of the game where the money you have is the goal of taking the maximum benefit in life.

Another important assumption of life cycle planning is that your income follows the approximate pattern in your life. When we are at the age of 20, we often make very little money, but often invested in our education. And the life cycle of education has a major impact on the planning.

If you have college education, your income will be very low, you can earn nothing while you are in college and go deep into the debt. But your way of earnings in your life will look very different from someone who has never been in college. More education is the way of steepper earnings. In other words, your income starts low, but at the middle age, you will create a lot if you have a college degree.

So, at the age of 25, you should save $ 40,000 per year for retirement? Life cycle model says he or she should not. A 25 -year -old girl is making money as the economists are called permanent income. If you are earning in their lives in their lives and dividing them with their life expectancy, you get permanent income or if you can easily spend the money every year.

Savings and investments

When you are young, it may cost money on things you enjoy in retirement. It costs a lot quickly in the cycle of life, known as durable items, the largest home. At the beginning of the life cycle, you can spend a large portion of your income with a mortgage. Some of these payments go to the loan interest, but the remaining 15 to 30 years of mortgage is towards compensation. You can consider a type of mortgage payment as a form of saving.

Investment is not just a stock or bond, you now reduce your costs to increase the cost of the future. Education is an investment because in the future you spend time and money to increase your income. In the same way, mortgage is an investment because you have been enjoying your home for many years after you pay the youth. Each payment is partly an investment.

Life cycle planning is about making sure you get the maximum amount of money. Not about being a millionaire until you are 40 years old. It is about recognition that you have many years on this planet, and you need to get maximum in everyone. Often, rich retired people have a very difficult time to spend all the money made from time to time. And they represent all the money trade: all the money is now in the bank to the rich retirement because he or she did not spend it when he or she was a child.

Thinking in the case of the marginal utility of the cost is a great use. You can now spend your money or you can spend in the future. Things like having children or investing in education now attract towards spending. A large drop of scales in the future to spend a large drop off at cost after retirement.

Financial risk

The idea of a marginal utility of money is essential to deal with a wise manner with financial uncertainty. Risk is the possibility of loss. And the disadvantage is that you have to spend less than expected. Your permanent income is an estimate based on how much money you expect in the future. If things don't work, you may have to spend less. If the loss is really serious, you have to reduce your costs very much.

An important risk of living daily is that you will be smaller than expected, and those left behind your spouse and the children will not get access to your income. This can greatly reduce the standard of living for your family. In addition to being emotionally traumatic, life cycle theory says that severe drop in costs is always to be avoided.

No one knows how life is going on, but you have a great strategy to plan your savings and spending on the basis of great information about the future. Once you find out how much money you expect in your life cycle, you can estimate your permanent income and try to spend the same amount of money every year.

Economic risk is that if something bad happens, such as Breadwinner's death, your costs are likely to be greatly reduced. Why not reduce your costs now by buying insurance if you can prevent a huge fall from unexpected losses?

Basic investment

Choosing the right type of financial asset (such as stocks, bonds or shares of a money market mutual fund) is a smart investment. In this information, you will be introduced to the basic characteristics of investing so that you can decide which investments make sense for your financial goals. In addition to learning the names of various investments and their basic characteristics, you will learn ways to think about investments that fit within the life cycle framework.


One of the fundamental characteristics of financial assets is liquidity. Liquid assets can be converted quickly. You have a checking account so you can write checks and immediately turn your financial assets into cash. Liquid assets are good because they can provide immediate resources to pay for health emergencies, expenses during unemployment, or unexpected home repairs.

One drawback of liquid assets is that they have a very low or non-existent rate of return. Because their value does not change based on market fluctuations, liquid assets are very safe. A safe asset has a lower return than a risky asset. So, one of the costs of keeping money in your checking account is that it doesn't grow in value over time because of the investment risk.

Another disadvantage is also related to the rate of return. Since investors must receive compensation to lock up their money, returns on investments that are easy to exchange for cash will be lower. An example of this is a CD - certificate of deposit, which is less liquid than a checking account because there are penalties if you cash it out early. CDs are less attractive to investors who may need cash for an emergency. Therefore, the return of a CD will be higher than that of a checking account.

A third disadvantage of liquid assets is that they create temptation. When you don't have cash, you're not tempted to spend money on vacations or new clothes. But once money starts rolling into your checking account, it's hard to say no to things you can afford. This means that what economists call trade-offs is liquidity. Easy access to cash is great, but you have to trade off high returns and temptation costs. Other assets also have trade-offs, and many of these trade-offs are associated with risk.


Another important characteristic of financial assets is uncertainty about the future value of the investment. Unlike liquidity, most investors dislike risk. When buying an asset such as a stock or bond, we expect its price to be higher in the future and a payout that represents the difference between the cost of the investment and its value in the future. This payout is a return on that asset. Risk is when you don't know what the payout will be, and more volatility in payouts means more risk.

Most people do not like the uncertainty of risk. This is why stock investors have historically received higher returns on their investments. Their payout is more variable, meaning that when they go to spend the money invested, it can be a lot or a little. Remembering that spending the same amount every year brings us the most happiness. Uncertainty opens up the possibility that you will have to spend less.

If you're a bond investor with $5,000 to spend, how much less happy would you be if you only had $2,500 to spend? How happy would you be if you had $20,000? Are you willing to take a 50/50 bet to spend less or more? This is the essence of a concept. Known as risk tolerance.

A risk tolerant investor is willing to accept a 50/50 chance of underspending or overspending. A risk-averse investor takes a typical $5,000. This is called the risk trade-off. Risky investing is not for everyone, if you are going to take investment risk you need to be able to accept volatility.

Imagine you invest $1,000 in government bonds at age 40 and you are 100 percent sure that it will turn into $5,000 in 30 years. At age 70 you have earned 5.5 percent on your investment, the risk-free rate of return. Instead, imagine that you invest in stocks and there is a 50/50 chance that you will get $2,500 or $20,000. On average, you will earn $11,250. That equates to an eight and a half percent return over a 30-year period.

The risk premium is the difference between the 5.5 percent return on an investment in government bonds and the 8.5 percent return on an investment in stocks. How much extra return, on average, do investors get for accepting more variance in payouts?

In the 20th century, the equity risk premium, or excess return investors received from investing in US stocks, was close to five percent. This means that the average investor must be very risk averse. The opposite is because he or she needs such a high rate to buy the stock. This means that stock investors have just gotten lucky in the United States, or it's a little bit of both.

Investors with a long-term horizon would do well to hold an investment mix with a large share of stocks, even if they are very risk averse. This is because even if stocks perform poorly in some years, they tend to bounce back, making long-term investments in stocks less volatile than short-term investments in stocks. Because stocks can go up or down a lot over a period of months, but if you extend the time period, they are historically less risky.

There are two reasons why many less sophisticated investors shoot themselves in the foot when they invest in stocks, underperforming the stock market average by a significant margin. First, they can't handle that the stock is going to lose money. One of the best strategies for building wealth is being able to accept the occasional loss, when it makes sense to take the risk. And for most long-term investors, holding a percentage of stocks in your portfolio makes sense.

Another reason many people lose money on their investments is related to a concept known as the dumb money effect. People put money on investments after good growth in value. If you pick a hot stock or hot sector now, it is likely to underperform in the future. Investing in the overall market is a good strategy.


This leads to the third important characteristic of financial assets:

Diversification – In general, you want to hold a mix of assets in your portfolio that is well diversified. By pooling assets, you can reduce the overall volatility of your investment portfolio.

Individual stocks are very volatile. One stock may go up 50 percent in a year while another goes down 50 percent. But if you had half your money in each stock, your portfolio wouldn't have changed at all.

But even if you have a diversified portfolio, you cannot escape the volatility caused by the ups and downs of the stock market to some extent. When the market rises, most stocks rise in value. Most stocks have negative returns when the stock market declines.

No amount of diversification will eliminate overall market risk. This type of market risk is known as systematic risk. Think of it as the risk involved when you invest in the overall financial system. As the economy oscillates back and forth between recession and expansion, you cannot get rid of systematic risk.

Modern portfolio theory recognizes that there are two basic types of risk. The first type is systematic risk which you cannot get rid of. Another type is the risk that comes from investing in a single stock instead of investing in different stocks. This is called unsystematic risk.

Individual stocks carry a lot of unpredicted risk because anything can happen in their business that doesn't affect the economy as a whole. The type of unsystematic risk that affects each firm is also known as firm specific risk. As an investor, you shouldn't really care about how much firm-specific risk a company has (unless you work for that company). Because if you invest in dozens or hundreds of different companies, this firm-specific risk is eliminated.

If you have a diversified portfolio, systematic risk is important, because it's the risk you can't get rid of. Modern portfolio theory states that the riskiness of your portfolio is directly related to the amount of systematic risk you are taking. And since investors don't like risk, you should have a higher expected return if your portfolio has more systematic risk.

Investors get a higher expected return for taking on more systematic risk, and they get no additional return for taking on systematic risk. This is because one can get rid of systemic risk through diversification. If it's easy to get away with, instead of investing in a diversified mutual fund, taking on more uncertain risk by investing in just two or three stocks may not give you higher expected returns.

The most diversified portfolio you can get is a portfolio that invests in every type of risky asset, including American and international. Stocks, bonds, real estate and even commodities. This is called market portfolio. It is as broad as possible. And since investors are only rewarded for taking systematic risk, the more assets you accumulate, the more efficient your investment will be, because you're eliminating all the risk that you can free up.

Modern portfolio theory says that instead of owning five or six different mutual funds, you're better off owning one well-diversified, risky mutual fund and one risk-free mutual fund. The percentage of your portfolio that you invest in risk-free and risky mutual funds depends on your risk tolerance and the time frame of your investment objective.

Keep it simple

You don't need a complex investment portfolio. There are smart, hard-working people who try to beat the market, but can't. All information is incorporated into stock prices and all stocks are priced based on their systematic risk. This is called market efficiency.

The fact that you can't beat the market may sound depressing, but it's actually a good thing. This means that someone who knows nothing about the stock market can do better than most professional mutual fund managers. That's why many experts say the best mutual fund strategy is to use what are known as index funds that don't try to beat the market. They give you a well-diversified mix of stocks that capture systematic risk and reward.

Research in finance shows that simple has historically outperformed more complex strategies over time. With so many investment options out there, it's easy to get intimidated. But you need not fear. Take some risk, stay away from your investments until you meet your goals and choose simple, cheap, well-diversified funds.

Main financial instruments

Financial instruments are products that we buy in the market as saving instruments. In this information you will learn that a simple strategy using passive investing of stocks and bonds will not only make you better off in the long run but also keep you from worrying about investing. The goal of financial management is not to beat the market but to get the most out of life. Keeping investments simple is the best strategy to get the most out of your money.

liquid assets

A liquid asset is used when you have to pay a bill. Cash is generally considered the most liquid asset, although you wouldn't pay an electricity bill by putting cash in the mail. For this reason, the main purpose of cash is direct transactions between individuals. Many people believe that they can negotiate a better deal by paying a person or business in cash.

For most liquid transactions, the most useful liquid accounts are checking accounts, money-market accounts, and money market mutual funds. Usually checking accounts pay the least (if they pay) and money market funds pay the most, listed in order of the interest you earn from each.

Checking accounts allow unlimited monthly transactions. If they are taken out by a bank that is a member of the FDIC - Federal Deposit Insurance Corporation, they are protected against bank failure up to $250,000 per bank. You can deposit money into a checking account by writing a paper check, using a debit card, withdrawing money from an ATM, or making an electronic exchange.

Money market accounts limit the number of transactions per month but usually offer slightly higher interest rates. New online high interest savings accounts can be the best deal for those who want cash access and don't mind transferring money between savings and checking accounts online. Both money market and savings accounts are FDIC insured up to $250,000 per account.

Mutual funds invest in securities such as stocks and bonds. One type of mutual fund can be used as a liquid account and is called a money market mutual fund. Money-market funds differ from money market accounts in that they are not insured by the FDIC. But they invest in safe, short-term bonds like US Treasuries, so they're not really risky.

All these liquid funds are fully taxable. That means you will pay income tax on the interest. Think rationally about how long it takes to get a good deal. If interest rates rise, it becomes even more important to ensure that you are investing liquid funds in a high yield account.

A good plan for liquid funds is to keep enough money in a checking account for any short-term expenses. Keep the remaining liquid assets in a high yield savings account that you can transfer back to your checking account at any time. Having both in the same organization usually provides a seamless transfer. Don't go above your FDIC limit, and have a liquid asset plan to cover emergencies.

When you are buying investment property, you should not buy stocks and bonds directly. Most people do a terrible job of picking stocks. Therefore, the best advice is to buy a pre-diversified mix of stocks and bonds through mutual funds or exchange-traded funds.

Mutual funds

The most popular way for small investors to buy stocks is through mutual funds. Mutual fund companies basically do only paperwork. The fund buys stocks and bonds in the market and then sells mutual fund shares to investors. This share represents your cut of the overall mix of stocks and bonds in the mutual fund. A fund company keeps track of who owns what percentage of stocks and bonds in their portfolio.

The most common mutual funds match the S&P 500 which buy shares of stocks in the Standard & Poor's 500 stock list of large corporations that do a good job of representing the US economy. A mutual fund company takes your money and buys the stock of each of these companies. Because some of these shares can be worth hundreds of dollars, it makes sense to send your money to a fund company rather than trying to buy the shares yourself.


Corporations need money to purchase supplies and buildings for growth, and for research and development to manufacture products. A small private business may rely on a bank or the owner's own savings. Corporations can use the capital market to sell securities such as stocks and bonds.

This is a great system. This means companies don't look to the big banks, which can only lend to companies with a track record of profitability. Corporations with a good idea may or may not issue shares of stock to investors. Investors can provide capital to these companies. Some of them work and are profitable. Some of them go bankrupt. But that's okay, because smart investors will diversify their stock holdings.

Another way to think of the stock market is that you lend money to a corporation, which uses the money to hire managers and workers for production, and then sells that product back to you, giving you back a portion of the investors' profits. That's how a well-functioning capitalist system works. Citizens provide capital that then makes the most efficient use of it for the products people want.

You use stocks and bonds to provide capital to corporations. A stock gives you a theoretical share of ownership in that company. Actually, it doesn't pay us much, but if you have enough stock, you can vote on the board of directors, and for every share of stock, you get a dividend that's a percentage of the company's profits. Small investors own a small portion of the company's value.

The value of a company is considered to be how much profit the company expects to earn in the future. Some companies are currently not making any profit. Therefore, the market predicts how successful the company will be in the future. Stocks whose profits are expected to increase in the future are known as growth stocks.

Value stocks, on the other hand, are older, dividend-paying, profitable companies whose earnings are not expected to grow in the future. Obviously many of them are boring. Because of this, value stocks tend to have reasonable prices and tend to outperform over time.

The best way to invest in shares is through a mutual fund or exchange traded fund, which is similar in concept to a mutual fund but trades in the market instead of issuing and redeeming shares through a fund.

There are two types of mutual funds. Actively managed funds hire fund managers to choose which stocks to buy and when to buy or sell them. About 80 percent of all mutual funds are actively managed. This fact makes little sense, as actively managed funds consistently underperform passively managed funds.

One of the biggest reasons actively managed funds underperform is because they have to pay the fund manager. This means that the fund must outperform an index like the S&P 500 for the extra money you pay for the fund manager. Unfortunately for the fund manager, he or she has to pick the right stocks already in each index and avoid the wrong ones. There is no evidence that any fund manager can consistently pick the right stocks to beat a passive index.

Choosing a stock mutual fund is easy. All you have to do is find a diversified passive index fund and hold it over time. You will do better than other fund investors, who try to make it complicated. One way to get additional diversification benefits is to invest in a passive fund that includes both US stocks and stocks in other countries. An easy way to do this is through what are known as global index funds, which spread your money around the world, including the United States. Your best bet is to invest in a single global index fund with a low expense ratio.


If you've ever invested in a CD - Certificate of Deposit, you already know what it's like to hold an investment that looks like a bond. You pay for the CD today and then wait a few years to get the principal plus interest you paid. Bonds are a little different, as most pay interest every six months, called coupons.

The bond's maturity date is when the contract between you and the company ends and they pay you back your initial investment. This assumes the company is still in business, which is one reason why it's important to diversify your bond investments.

Bond values rise and fall for two reasons. If interest rates rise next year, the value of the bond will decrease, especially if it doesn't mature for several years. In general, bonds give you higher interest rates than liquid investments, so once you've filled your emergency savings account, consider putting money into both bonds and stocks to get higher returns.

Additionally, bond coupon payments are taxed at ordinary income tax rates. Other types of investments, such as stocks or exchange-traded funds, will pay dividends or increase in value. Both of these have historically been taxed at a low rate, hence known as tax advantaged investments. Bonds are tax exempt investments.

There are two important things to remember about bond investing. The first is that you should consider your overall investment portfolio as a combination of taxable accounts and tax-sheltered accounts, such as a 401(k). If you want to invest 50 percent of your portfolio in bonds and 50 percent in stocks, that doesn't mean that both your taxable investment accounts and your IRA/401(k) accounts should be a 50/50 mix of stock and bond funds. Smart investors will keep their tax-exempt bond funds in their 401(k) and their stocks in a taxable account.

Another thing to keep in mind is that if you invest in a bond fund, the duration of that fund will determine how much the fund will rise and fall as interest rates change. In general, long-term bonds are most sensitive to changes in interest rates. However, long-term bond funds have a higher average rate of return than short-term bond funds.

Another characteristic of bond funds is whether they invest in government bonds or corporate bonds. The most important reason to look into this is that government bonds can be tax-advantaged, in which case you should keep them in a taxable account. Corporate bonds are among the most tax-deferred investments, should they go into an IRA or 401(k).

Invest in stocks and bonds

The best way to invest in stocks and bonds is through passive, well-diversified, low expense ratio, exchange-traded funds and mutual funds. To get a high quality, relatively tax efficient investment portfolio, you may only need one fund that invests in both stocks and bonds around the world, called a global balanced index fund. But these funds are pretty rare, so your best bet might just be a US balanced index fund or a 50/50 mix of S&P 500 funds and a corporate bond index.

Another simple strategy is to invest in global bond index funds in your tax sheltered account and global equity exchange traded funds in your taxable account. If most of your investments are in an IRA, start with the optimal asset allocation first, for example, 50 percent stocks and 50 percent bonds.

Over time, stocks tend to bounce around a lot. After stocks fall or rise in value, rebalance your portfolio so you still have 50 percent stocks and 50 percent bonds. Rebalancing forces you to buy more shares when they fall in price and sell them when they rise in value.

How to use credit optimally

Credit gives you spending flexibility and convenience. But it can also be a temptation that prevents you from reaching your long-term goals. Getting the most out of credit means understanding how the consumer credit system works, but it also means being aware of your own limitations. In this information, you'll learn some strategies for those struggling with credit, including how to get the most out of borrowing tools like credit cards and consumer loans.

Credit card

Credit cards are issued by banks. The bank makes money from interest on your credit card loan balance, late payment fees and interchange fees. The interchange fee is about two percent of every charge you make and is paid by the merchant to the bank. The bank also pays a portion of the fee to the credit card company. Americans spend about a dollar a day on interchange fees, and that money shows up in slightly higher prices at businesses.

Banks compete to reduce these charges. About half of the fees are returned to customers through rewards cards. This could include a cash percentage of each transaction returned to you at the end of the year, or points for gift cards, hotels or airline travel. Another way to recoup these fees is through incentives for signing up for credit cards.

Carrying credit card debt is expensive and can derail your long-term goals. Why Do You Carry Credit Card Debt? Many people suffer from narrow framing. You tend to think of your investment accounts as existing in a world separate from our credit cards, but they don't.

Financial habits can be very powerful. If you're used to carrying credit card balances, you often think that sometime in the near future you'll be more responsible and pay them off. Then, when the future comes, we are tempted by the same things that tempted us yesterday and succumb to the same spending habits. Understanding your habits can help you develop tools to break them.

If you have enough liquid and investment assets to pay off your credit card debt, do it. But understand that if you don't change your habits, you will probably end up with these debts in the future. A simple solution is to reduce your credit availability. Limit yourself to one or two credit cards and ask your bank to lower the spending limit on each. Cancel your other cards.

One method of reducing unnecessary costs is to make each one more prominent. One of the psychological problems with credit card spending is that it keeps you out of financial transactions when you buy something. Empirical studies show that shoppers who pay in cash are less willing to pay higher prices for goods and are better off imagining other things they could buy with money.

A powerful personality trait associated with credit abuse is impulsivity. If you think you're impulsive and have more credit card debt than you'd like, chances are you'll work on your impulsive tendencies to get yourself out of the debt hole. Reducing available credit card balances, paying in cash, sleeping on large purchases, and avoiding fancy shopping malls or the Internet can all help you avoid impulse spending.

If you don't have enough money to pay off your credit card debt, develop a plan to reduce the debt each month. Reduce credit availability and avoid impulsive spending. One problem is that you don't have room in your budget to make that payment this month, so you're tempted to wait until next month to write a check. A good strategy is to set up automatic payments to the bank each month from a checking account.

Debit card

The popularity of debit cards can seem like a mystery, because they lack many of the key benefits of credit cards: there are no rewards, you don't get free float between when you spend money and when you pay it back, and your account balance can disappear if someone steals your card. If you're just starting out, using a debit card won't help you establish a credit history either.

The good news about debit cards is that you don't have to spend as much interest on credit card balances. Debit cards withdraw money from your bank account instantly, so you can't spend more than you should. Therefore, debit cards avoid some of the behavioral pitfalls that many credit card users experience. But the biggest reason for the increase in debit card use is its popularity among people with poor or no credit who cannot get a credit card. Today, paying by card is more convenient than cash.

Credit cards are preferred over debit cards for people who pay off their balances every month. They give you rewards and up to a month of free credit before you pay off your credit card bill. But for those with self-control issues, they also provide a tool to dig themselves into a credit hole. If you're not in the habit of paying off your credit card balance in full every month, a debit card offers you convenience without the temptation.

Car loan

The most important sources of consumer debt are student loans and mortgages. Besides credit cards, the next largest source of consumer debt is car loans. There are two basic types of car loans. A standard car loan is a typical amortized loan where your payments consist of interest and principal. Principal is the amount you borrow and you pay it off over time with your car payments while paying interest for the privilege of borrowing.

Equity is the difference between the current market value of the car and the remaining principal on the loan. You can think of equity as your share in the car or a percentage of the car you own. The value of a new car continues to depreciate rapidly in the first year.

At the beginning of the loan, the interest portion of your payment will be higher because you still have a lot of money. This means that, after one year of ownership, you may have little or no equity. Negative equity is known as being underwater. When you try to trade in your car, it has a negative value towards a new car. Equity becomes positive at the end of the loan.

Shopping for a car loan is always a good idea. Start with your local bank/credit union. Your interest rate will depend on your credit rating and whether you're buying a new or used car. You can also finance your car at a dealership, but financing rates at a dealership can be uncompetitive and are often a source of profit for the car dealer.

Occasionally, you may be able to get a lower rate that is offered by the manufacturer to help you move a lower-selling car, but you have to compare the lower rate against other possible discounts. Taking a discount on the price and financing through your own bank can be a better deal.

You also need to decide how long the car loan will last. You can often get a lower interest rate by paying off the car over three years instead of five. In general, interest rates on car loans are higher than what you can get on liquid savings, so you're better off paying off the loan than keeping the money in a checking account.

One of the biggest mistakes people make when buying a car is being impulsive. They often go to the same car dealership and buy and finance the car on the same day. This means that the price they pay is higher than what they could get by shopping around, and the loan terms are less attractive. Being systematic about shopping around for the best price and best loan terms can pay off big.

Another mistake people make is focusing only on the car payment and not on how much they are paying for the car and what interest rate they are paying. Don't go to a car dealership without having some idea of the loan terms you can get from the bank, including the down payment, interest rate, and loan length.

Another way to borrow money for a car is through a lease. With a lease, you don't own the car after the loan ends. Leasing allows you to make lower payments that only cover the expected cost of depreciation on the car. It is possible to get a lease from a car dealer or from a lender that is not affiliated with the dealership or the car manufacturer.

The most important thing to remember about leasing is that you will be paying for the most expensive years of car ownership. The car depreciates the most in the first year and decreases slightly each year thereafter. Many people make the mistake of buying a new car every few years and bearing most of the depreciation and then handing the car over to another owner who pays much less each year.

Renting a car continuously is expensive. A possible exception is when car companies try to get rid of slow-selling cars by making artificially low lease payments. While this is an attractive option for buying a car, if you go this route, be sure to stay within the mileage specified in the lease and don't buy the car at the end of the lease.

Credit score

One of the most important determinants of whether you can get a competitive interest rate on a car loan or credit card is your credit score. A credit score can also affect how much you pay for car insurance and whether you get a job. Investing in a good credit score can pay off thousands of dollars in loan and insurance payments over a lifetime.

A credit score is not the same thing as a credit report, a credit report is a detailed list of your past credit experiences, including which credit cards you own. What is the current balance and have you paid them on time? If you haven't looked at your credit report recently, you can access it three times a year for free.

Check the accuracy of your credit report. The reason you get three free credit reports is because there are three primary credit-reporting bureaus that provide information to lenders: Experian, Equifax and Transunion. Get a report from everyone. There may be some inconsistencies in the reports due to incorrect information, so be sure to compare them. If you find any problems, you can dispute the data and the credit bureau must respond within 30 days.

When you apply for a loan, a lender won't look at your credit report, they'll use a number from your credit report calculated from your credit score. A credit score indicates your likelihood of defaulting on a loan. Academic studies show that credit scores do a good job of predicting default.

A credit score for Fair Isaac Corporation is also called a FICO score. FICO scores are not free. Getting your FICO score through costs $20 for each of the three credit-reporting companies. Before you buy a car or home, it's worth checking your score to see if you qualify for the lowest interest rate on a loan.

A credit score is made up of five main factors. The most important is the payment history. Second most important is your debt. These two factors make up two-thirds of your credit score. There are three other features that make up the rest of the score. First is the length of your credit history. The second is how many different types of credit you have. The last is how often a lender has searched your score for credit recently.

Investment in education

As with any investment, paying for knowledge involves costs and benefits. Many students enter college without fully understanding the costs and benefits of a degree. Most people think that college is more or less a requirement in today's workforce. But many students choose the wrong school, the wrong major, and the wrong financing, and some may never have gone to college in the first place. Although education is complex, it is perhaps the most important investment people make in their lives. And, as you'll learn in this information, making the right choices affects both income and life satisfaction.

Educational remuneration

Studies of returns to education show that your major is more important than where you go to college in predicting future income. There is also an increasing correlation between college majors and professions, meaning that you are more likely to transition from a more specialized major to a job in that profession.

Over the course of a lifetime, the payout will be higher from investing in key sectors that require more specialized skills in areas where workers are in greater demand. It is also important to enjoy your business. In general, an income above about $80,000 does not significantly increase life satisfaction. Learning as much as you can about your business by asking about salary and job satisfaction is a good way to make sure you're making the right investment.

Nobel Prize-winning economist Gary Baker speculates that education trains us to think critically and to be satisfied. Both these skills help not only in our work productivity but also in our personal life. These non-financial benefits must also be considered as benefits of investing in education.

One variable often left out of studies comparing the earnings of college and high school graduates, or engineers versus psychology majors, is differences in innate ability. Some students are better at learning complex information and completing high-quality written work on time. These types of skills are rewarded in the market regardless of what is written on your diploma. In general, more skilled students are accepted by more prestigious colleges and attend colleges with higher salaries.

Borrowing money to go to college is risky. This is a big risk if you are unlikely to graduate. College dropouts are more disadvantaged and come from lower socioeconomic backgrounds than college graduates. Therefore, the payoff from education will be higher for more talented students, and it may not be a good idea to encourage a low-income student to take on large amounts of debt to attend college.

Related Links

Finance - Complete information

Finance is the disciplinary study of money, currency and capital assets. Finance is related to economics but not the same as economics. The study of the production, distribution and consumption of money, assets, goods and services combines finance and economics. Economic activities take place in financial systems in various sectors. Hence this sector can be roughly divided into personal, corporate and public finance.

Financial Analysis - Complete Information
Just a few decades ago, financial analysis was generally synonymous with bookkeeping. This situation has changed with the advent of the modern finance, accelerated by increasing regulation. A brief and comprehensive history of economic analysis is then given, explaining its evolution to its present state and focusing only on developments relevant to the objective. The following article outlines what the solutions to these problems should be.