11 October 2013

The 5 basic money knowledge that you should know

The five basic money knowledge that I found necessary to revise them based on my experiences are stated as follows, that are, Risk and Return, Opportunity Cost, Compounding, Time value of money, and Car loan. 

1. Risk and Return

It is well-known that the level of return is always equivalent to the level of risk taken. Nonetheless, nothing is certain in this world, so that this rule of thumb. For example, the risk may appear much higher than its actual risk due to irrational behaviour of human beings. When this situation happens, you can actually get very attractive award by taking a little risks.

2. Opportunity Cost

Generally, opportunity cost implies that you may lose "something" when you allocate your limited resource in other "things". The limited resources can be time and money. However, one should bear in mind that future is unpredictable. The "something" is going to lose may be something else or something unexpected. Thus, I do not think we really need to allocate too many time to "optimise" the potential return based on "opportunity cost".
Life always surprises us.

3. Compounding

Again, another interesting topic when somebody is trying to convince you to invest your money in long term. Look, long term investment does not mean you need to hold a particular shares or asset for long term. Personally, I think an effective way for long term investment is to allocate and monitor your fund in long term.
For example, you invest $100 in Share X and earned 10% this year. Is it possible to earn 10% again next year? Maybe.

If the chance to maintain your desired return rate next year is low, then it is better for you to locate your limited fund to another share or asset so that your desired return can be maintained or even improved.
In short, long term investment does not equal to holding a particular asset for long term. It should be a long term management on our investment portfolio.

4. Time value of money

Time value of money is all about the purchasing power of our money. Today one dollar has higher VALUE than the one dollar after one year in our capitalisation world. The benefit is all people have been forced or encouraged to invest or spend their money so that the economy can be improved.
Since moderate inflation is good to improve our world and is unavoidable in long term, our long term investment objective should higher than inflation to maintain our purchasing power.

5. Car loan

Generally, the value of car is depreciated 20% annually in Book Value. In other words, the value of your car should be ZERO after five years. Therefore, it should not be surprised that many business person tends to buy a 2nd hand car to reduce this kind of unnecessary loses.
That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage for latest sharing.

Written by: Xaivier Chia

P/S: The above sharing is solely based on personal insight and information that believed to be reliable. Your valuable feedback are very welcome.


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