on personal finance
Capitalism operates through markets. In an ideal scenario, goods and capital move freely in the market. The fundamental premise is that the market, if left to its own devices, can solve almost all economic problems through sharing, synergizing, and mutual learning. However, in some ways, state intervention is also required to help markets function with optimum efficiency.
In financial matters, operating through a checklist is very useful. This is the best way to avoid the pitfalls that one is likely to commit in the heat of a moment. Most of the investment options will reach you through a smart marketing campaign and, apparently, will look quite attractive. Hence, it is important to have a checklist ready that should help you quickly see through such options for their validity and viability. The most important point in this regard is a skeptical mindset which should have a bias towards ruling out all the grey areas and seeing clearly whether a particular risk is worth taking or not.
Some numbers and ratios are very useful in financial planning. They enable you to set realistic and achievable financial goals. They also help you quantify your financial aspirations and make it easy to navigate through the challenges that come your way. You can make correct financial decisions with the help of these numbers and ratios.
Whether to start your own business or to invest your money somewhere is a question most of us confront in life at some stage. While starting your own business puts you in the driving seat, it also exposes you to a wide range of risks. Investing, on the other hand, has its own challenges.
In this blog post, I will briefly cover the pros and cons of investing vis-a-vis starting your own business.
When we think of making money in different markets by deploying cash we already have, mainly, there are two styles or approaches that come to our mind. One is to either start a new business or buy ownership in a running business and be a partner in the profit and loss that the business incurs during its operation. The other is to time your entry into and exit from the markets in a way that the difference of the buying and selling prices is your profit or loss. The former is an investment while the latter can be termed as speculation.
Due to a host of factors, the human mind does not always think rationally. Although there is a lot of room for emotions in many human affairs, there are certain areas where rational thinking is crucially needed. For example, you can’t afford to be emotional while investing.
Our evolutionary biology is at work when we behave emotionally where the situation demands us to act rationally. The advent of markets, especially the stock market, is a very recent development when viewed in the backdrop of human evolution. In fact, if the entire human history is plotted on a scale of 24 hours, the stock markets came into being only a few seconds before midnight!
Your ability to design a portfolio that best suits your financial needs has a central importance in personal finance. While smart capital allocation is the process or the framework, portfolio is the product or the outcome.
The process of designing your portfolio is also a balancing act where you accommodate different variables and reconcile various divergences. However, the central theme of capital allocation and portfolio construction should be to outline some realistic and achievable financial goals first and then have a simple and workable plan to achieve those with the available resources in a given timeframe.
Investing is committing your money to a business operation now, with the expectation to take out more money later. It has three core principles. The first and the most important is to protect the investment capital (the principal). Secondly, no investment is possible without thorough research which has many dimensions and takes time. Lastly, you have to be content with an adequate return. There should be a way of determining how much is adequate. This succinct framework of investing was propounded by Benjamin Graham in his book: The Intelligent Investor.
Whenever you think of committing your surplus capital to a product with the expectation of a regular income or creating wealth, you will have a range of options to choose from. However, these options will fall in one of these three categories: debt, equity, or real estate.
Although there are other options available like gold, cryptocurrencies, commodities, forex, and some other fancy names, those do not fall in the purview of this article.
You must have heard the term “investment”, often being used loosely. But when it comes to financial parlance, this has a specific meaning. It is usually confused with another similar term: “speculation”. But why is it even necessary to know the difference? After all, the ultimate purpose is to make money, isn’t it? If you think so, you might be asking for trouble. The purpose of writing this article is to explain the difference and to suggest a way of how to handle these two.
