Technology, Money & Questions

Posted by VK at 9:30 AM Comments

If you wish to attain financial freedom, the first and foremost technique to learn in the game of money is to pay yourself first. Doesn't matter how you earn your main source of income. Be an employee or self employed or business man, the source of income doesn't matter. All that matters is, how much do you pay yourself?

Ironically, I do not mean how much you spend by saying how much you pay yourself. To be specific, I'd say, "How much do you pay yourself for your personal investment towards building your assets?".

If you just take a moment to think about this, you will see what your eyes can't see in the game of money. It's all about how do you manage your cash flow. Typically, what most of us do? We pay everybody else first and then we think about us, am I wrong?

Lets take a typical example - A salaried employee, "Mr.Xyz" who earns a handsome amount every month. Now-a-days every salaried employee holds a credit card, very typically, our Mr.Xyz also owns one. Also, Mr.Xyz easily managed to buy a house in a somewhat-to-be-prime locality of the city with a very little down payment, thanks to the very altruistic banks. Mr.Xyz says, "At the least, I'm going to save on my income tax". Truly false notion, Lets talk about this later. Suddenly, riding his bike seems to be a tedious task for Mr.Xyz. Here he goes, "What's life without a car? Lets get one, next years salary increment will take care of the monthly EMIs". Well done!

Mr.Xyz seems to have a content and secured life for somebody who does not know anything about him. That's not the reality. In reality he is no where near to being wealthy. Let's take a look at his cashflow.

Mr.Xyz gets his salary every month, after tax deducted at source. And then, he transfers a major amount for his flat's EMI and then comes the EMI for his car. At last, he has to pay his credit card bill. So now, he has to plan how he is gonna manage the next thirty days with the remaining amount.

Do you see what's going on in here with our Mr.Xyz? He has no investments towards assets, all that he holds near to him costs him very dearly. As I said in my earlier posts, an asset is something which brings money in. But, Mr.Xyz has built a lot of liabilities, with very less or no asset. Remember, as soon as you take up a debt you become an employee for your debt. There are always at least two financial statements for every transaction, more so here. Mr.Xyz's house is a liability in his statement, but an asset which brings in a lot of interest in the bank's statement. You are working hard to make someone else wealthy.

So, think about it guys. If you have any small interest in attaining financial freedom, then you have to take care of your cash flow. If there is a flaw in your cash flow, irrespective of how much ever money you may earn each month, the hole in your money management will drain all of it. You're left with no other choice than to work for many more years to come.

Follow the rule: Pay yourself first.

Pay yourself every month for your investments towards building assets. Live frugally, well below your means. Avoid unnecessary debts, improve your financial knowledge and improve your chances of being financially independent.

Do not work for your debts, rather let your assets take care of your financial needs and you follow your heart to achieve your passion.

Posted by VK at 6:15 AM Comments

Gold had always held its superior place through out the history of civilizations mostly because of its rarity blended with its purely superior properties. It is hard, yet malleable enough to hammer it into a really thin leaf. Ancient Egyptians were very good at hammering gold into really thin leaves, it took 3,67,000 leaves to make a one inch pile. Even in the very early civilizations, people had made jewelry and other ornaments. From the Mesopotamian civilization to this 21st century, people around the world are still mesmerized and go behind gold. Very convenient, not sure whether we've got anymore place left to dig for gold.

Gold also served two other important purposes:
1) Gold as the currency of a nation - gold coins
2) Representative currency of a nation - currency backed by gold

Those countries who started using gold as a currency had hit the wall in no time because of the limited availability of gold. Most of the countries also used silver as a medium of currency. Nevertheless, all of them realized the fact that all these limited natural resources cannot be used for something very fluctuating in demand like currency. So, the majority of the world countries started to adopt the Gold Standard.

Enough with the introduction. Now, What actually was the GOLD STANDARD?

An economy which backed its paper currency with gold was said to follow the gold standard. In such an economy, at any given time, people can redeem their paper currency for gold.

To be more precise, the paper currency derived its value from the gold reserve. A country under the gold standard would set the price for gold, for example Rs.1000 for 1 ounce of gold. This effectively sets the value of the currency; as per this example, 1 rupee would be worth 1/1000th of an ounce of gold.

Advantages:

1) Since the actual currency is backed by equivalent gold, the government cannot go on a printing spree or rather the cash flow in the economy is controlled by the availability of the gold reserve. This normalized the inflation in the economy over a long run.

2) Introduced the first use of formalized exchange rate in history. The exchange rate under the gold standard monetory system is determined by the economic difference for an ounce of gold between the two currencies.

Disadvantages:

There were actually more disadvantages than the notable advantages brought by the gold standard.

1) Because of the limited availability of gold, a country on gold standard cannot take control on the fluctuation of demand for currency internally.

2) A gold standard severely limits the stabilization policies the Federal Reserve can use. For example, most economic recessions can be mitigated by increasing the money supply into the economy. When the currency is backed by gold, a limited natural resource, no stabilization activities could be done.

3) Inflation or deflation in the economy solely depends on the production rate of gold in a particular country.

Luckily, soon after the revival of the Great Depression the world countries realized the flaw in the system and moved out of the gold standard. Now, none of the major countries follow gold standard. Still, gold is one of the main commodity every country keeps in reserve and humans are still fascinated by this precious metal.

P.S.
I could not even imagine how USA would have handled the recent economic recession if it still followed the gold standard. How many tons of gold they should have had in reserve in order to print 1.7 trillion dollars? Can you imagine?

Posted by VK at 11:07 AM Comments

Majority of the countries in the world have the fiat money system in place. The currency of such countries are not backed by any commodity [like gold or silver]. Fiat money any country as such is worthless without the backing of the government of that country. Fiat money is the legal tender according to the government decree of collecting taxes and other charges. The value of the fiat money is only backed by the confidence of the people over the government as well as the other financial institutions those who accept the fiat money. The value of all the commodities in the country fluctuates purely based on its demand.

Since, the fiat money is not actually being backed by any commodity, the federal reserve of a country has enormous control over the monetory condition of its country. During economic recession a country following fiat money system can ingest more cash flow in to the economy in order to help in the recovery.

In the recent recession time, the US Federal Reserve have printed 1.7 trillion dollars and pushed into the economy literally backed by nothing. Ever highest in American history. What does this actually means? The purchasing power of the US dollar is actually reduced because of this very high liquidity.

The fiat money system has its own intrinsic difficulties. Since, the countries are allowed to print as much paper money as they want, there is a very high chance for HYPER INFLATION if proper regulations are not in place. Hyper inflation is the terminal stage of any fiat currency. Hyper inflation is often the result of increasing regular inflation to the point where all confidence in money is lost.

In a fiat monetory system, the value of money is determined by the confidence. Usually, fiat money loses its value when the government which acts as the issuer refuses to further guarantee its value.

As long as we've got strong monetory policies governed by the federal reserve, backed up by the government, the fiat money will continue to have its value.

Posted by VK at 11:04 AM Comments

Posted by VK at 8:50 AM Comments

In my last article on Assets and Liabilities we saw that traditionally anything and everything that appreciates in its value over time is considered to be an asset. But, our traditional explanation doesn't holds good in this information era.were money holds an important place as never before. Hence, I suggested you to take a different perspective towards Asset, the Rich Dad, Poor Dad way.

An asset is something that not only appreciates in its value over time, but also brings cash inflow from time to time.

Going by this standard for assets, we can consider all the following instruments as assets.

1) If you are a business man, your business is your biggest asset. If you manage to make it successful, your business will bring you lot of cash inflow on top of appreciating in its value.

2) If you are an employee, your exclusive skill on your career domain is your important asset. You are paid for your skill. So, you need not hesitate to invest on your self improvement which would help you grow in your career.

3) Properly planned and rented buildings are absolutely wonderful assets. Of course, only if they are not mortgaged or the income from those rented properties is actually more when compared to your monthly installment.

4) Any virtual asset that brings you money is an asset. Virtual asset is something that exists in the virtual space, i.e., over the internet. There are several instruments available in this information era to make money via internet. Your speciality website can bring you lots of money through advertisements, blogs also work in the same way. The notable thing is, these assets also grow in its value over time.

5) All your investments are assets. Money invested in stocks, mutual funds, bonds, PPF etc,.

Build more and more assets if you want to become wealthy over time.

Posted by VK at 8:48 AM Comments

Posted by VK at 10:36 AM Comments

If you are a salaried employee, you might be well trained in planning your monthly expenditures. You know the amount of money that flows in every month and hence, you plan your expenditures accordingly.
What would you do if you happen to get a sum of 5000 rupees unexpectedly? May be as a bonus from your employer or from a tax refund or the amount which you thought that you won't get back. Most of the time, our immediate reaction would be spend the money. Again we can attribute this to our human nature, if we do not have a plan in place, we normally spend for a lovely day.

I don't say that you should not spend; instead, all that am saying is to have a plan and then think about how much you want to spend on what. In case if you get an unexpected 5000 bucks, I would suggest the following ideas for you.

1) Top up your emergency fund. If you have not started your emergency fund, or just started recently, this 5000 rupees will do a very good contribution. What is an emergency fund? Generally, the total amount of money required for your and your dependents survival for a time period of 3 - 6 months is considered as an emergency fund. It is necessary that you build your emergency fund along with your investments. Put your emergency fund in a savings account that yields best of interests in the market.

2) Subscribe for a good financial magazine. Financial literacy is more important for every individual in-order to live a decent life in this information era. Investing in your own financial knowledge will pay off very well in the long run.

3) Pay off your credit card debts. If you have credit card debts with interests, pay them off first. Paying interest for your credit card debt will be the worst sin you can force yourself to do.

4) Consult an investment analyst to plan your investments. Early investment is the key to a successful and wealthy retirement. A person who starts his investment by the age of 25 will have a substantial difference in the wealth accumulated when compared to someone who started off at an age of 35.

5) Join a gym. If you are not a member of a gym already, think about joining a gym. Your physical fitness has direct correlation with your mental acumen as well as your financial fitness. Note of caution: If you don't behave yourself, gym will be an instrument which sucks your money in.

6) Invest for your career. See if you can learn something new in your career domain. Register for a technological training or if you are an avid reader, you can invest in books.

7) Give a good service to your vehicle. If you have your own vehicle, a good service on time will save you a lot of trouble and maintenance costs.

8) Upgrade your house-hold appliances. You can use this money to fix the problematic appliances in your house or upgrade to a more energy efficient utilities.

9) Invest a part of it in mutual fund and forget about it. All you need is a thousand rupees to invest in any of the available top rated funds.

10) Use it for the greater good. Last but not least, you can be a philanthropist at last. Since, you hadn't planned anything for this unexpected money, use it to provide a meal for kids in an orphanage or use it to plant trees in your community.

So, What are you going to do when you have your unexpected Rs. 5000?

Posted by VK at 9:46 AM Comments

How much you earn is not really important. What's more important is, how much you are able to save? People, all over the world earn money in one of the four ways.

1) By working for someone
2) By providing services
3) From their business
4) From their investment

These four categories of revenue generation is present always, even in the industrial age. When we moved out of industrial age to information age, many a things got changed. One important change is the way people looked at their money. In the industrial age, people from the first two category had very less means for investments if they wanted to build wealth. And the major notion was to save money, rather than invest and build wealth. But, in this information age with a global economy, there are umpteen number of tools available for investment.

People from the last two categories - business men and investors, are already well educated financially. Otherwise, there is no way they could be successful. By financial education I doesn't mean a doctorate or a degree from a highly acclaimed university. All you need to know is basic financial instruments and mainly, one should learn to read financial statements and numbers. People who make money by working for someone or by providing services to others are in a real need of financial literacy in the current scenario. Simply saving money in your bank account will not do any good. Though your money is secured, it is hardly working for you. You have to get out of thesaving mode and start investing your money. Your money should work for you. It should generate more revenue. And there are a lot of financial vehicles available to do that. In India, you can invest your money in,

1) Equities,
2) Mutual Fund,
3) Government bonds,
4) Gold funds,
5) Retirement plans
6) Post-Office saving schemes,
7) Real estate etc.,

Every investment instrument has lots and lots of providers. You should be able to pick up the good ones and financial education will really help your brain to see what your eyes cannot see. It will help you to differentiate facts from opinions. Its your hard earned money and I'm sure, you will not prefer a blind date with it.

Well, do not hesitate to invest in yourself. Spend enough time and if needed, necessary money to train and equip yourself with knowledge. Your financial knowledge will pay you off very well in the long run.

Posted by VK at 9:51 AM Comments

Posted by VK at 8:08 PM Comments