Financial Ratios and Statistics – FahStats

Archive for December, 2010

Constant changes in our lifestyle and overgrowing dependence on credit cards and bank loans are creating havoc in our personal income management, and the best way to avoid falling into a debt trap is to start personal budgeting. It is a way for an individual to effectively manage his money without having to worry about his future.A personal budget can be defined as a financial plan that sets limits on the amount of money that an individual would spent on each category in a given month. A good budget takes into account factors such as the total income of an individual or family, any outstanding debt, savings for retirement and funds for emergencies.One can start personal budgeting by tracking monthly spending, and should try to account for every dollar spent. At the end of each day, one should write down a list of expenditures on a piece of paper or a spreadsheet. However, each personal budget should be made with the primary motive of saving money. Budgeting can help pull down one’s credit card debt. Regardless of the goal, the budget should be primarily aimed at spending money intelligently, so that each dollar is worth its value.The most important step in financial planning and budgeting is to be realistic and stick to the plans made. Another aspect is to adjust the budget so that one does not give up on the process.In the end, budgeting helps an individual to save for a better future and meet the goals of financial freedom, debt-free living, and a comfortable retirement.

Know your current financial situation. Know you debts level. Calculate your income and expenses by taking into account the following:

Mortgage repayments
Personal tax
Loans and overdrafts
Living expenses
Emergency funds
Car expenses
Entertainment
Holidays
School fees
Credit card debts
Family commitments

Before you start investing your money on any investment products, you should know how much you could spare each month for investment. General rule is that, you should clear your debts first, then save and invest later. That is to say the more money you put aside now, the better it will be for your future. I would say put aside 10% of your income for rainny days. 10% is a small amount that you won’t feel a pinch. Save it until you have managed to build a “dam management funds”.

2. Prepare funds for dam management. This goes in line with point 1. You need to keep at least 3 to 6 months ofyou income as dam management. After you have managed to do that then additional money that you saved can be used to invest.

3. Protect yourself and your family first. By this point, I mean you should have the basic life insurance that insure you and your family against terminal diseases and accident. This is very important as even though you might loose all your money through investment and if you or your family members need medical attention, it will be well taken care of.

4. Know your risk level. If you are not able to take big risks, short term investment and swing trading is notfor you. It’s better to invest in mutual or trusts funds which will give a steady payout and have lower risk.If you are a high risk or medium risk taker, you can try invest in stocks, growth and hedge funds.

5. Diversify your investment. Expert would tell you it is a must to diversify your investment. Your investments needto have a steady mix of stocks, mutual funds and/or bonds. Beside that, your should invest in different industryand/or different regions. This will help you minimize your risk as fluctuations in the markets will not have a big impact on your investments. Your ideal mix will be 20-40% stock and the rest mutual funds and bonds.

6. Do your homework before you invest. It is good to seek expert advice. But, the money is ultimately yours. So you need to do some research and make a sound decision on what to invest even though your financial advisors might have already worked it out all for you. This is to make sure you know what you are investing and able to keep track of them. If your investments suffer loses you will be able to make a right decision whether to sell or hold if you know your stuff well.

7. Do stock take yearly if not frequently. Your investment might already be reaping in profits. But, it is good to know how well you fare at the end of the day. Reinvest the profits and celebrate if you have success. This will serve as motivations for you and will make you more determined to acheive your financial goals.