Understanding Finance from scratch

Chapter 25 How to Make Money Make Money, Deposit in the Bank or Invest——Learn some knowledge about investment and financial management every day (1)
Investment and financial management let money make money
There is a small janitor's house next to the football stadium in Dortmund, Germany. There is an old couple living in it. The man's job is to clean the field every day and mow the lawn before the game.Many fans who come here to watch football are familiar with this kind old man, but almost no one knows that this old man is the star and millionaire Rotar Huber who dominated the stadium. Huber, 51, often regrets his lavish life, repeating things like "If only I had saved a little..."In fact, Huber's life is not the bleakest. Some stars can only live on relief money.According to a survey of 150 retired stars, only 9% of the retired stars still maintain their previous life, 44% live an ordinary life, 21% live in poverty, and 26% live in poverty. Indebted.

From being a millionaire to being an old janitor, this kind of story can let us understand why we should take good care of our own pockets and do a good job in investment and financial management.For ordinary investors, what issues should be paid attention to in investment and financial management?

There is a popular saying in the society now: If you don’t manage money, money will ignore you.You must know that managing money does not start until you have money. In fact, whether you are shopping, depositing money in the bank, or buying insurance, you are all managing money.We should strive to make investment and financial management a part of our lives, so that we can give ourselves a good guarantee.

The first step in making a financial plan is to figure out your own financial situation.First, find out how much you have: "How many assets do I have? How many liabilities?" One of the easiest ways to do this is to spend a few minutes compiling a balance sheet listing what you own and what you owe.In the asset column, list clearly what liquid assets you have-cash, bank deposits and short-term investments, etc., what investment assets you have-stocks, bonds, funds, real estate, etc., and what fixed assets you have-houses, cars, etc. ; In the debt column, list clearly what short-term debts you have-credit card loans, loans from relatives and friends, etc., and what long-term liabilities you have-housing loans, auto loans, etc.In addition, it is necessary to estimate more accurately: "How much income will I have in the future? How much will I have to spend? For example, how much is my annual salary income, how much is my other income, and how much will it change in the future? My monthly necessities How much are the living expenses, and how much are the other necessary expenses?" After finding out the family background and knowing your income and expenses, you can formulate your own financial goals and financial plans.

To develop a financial plan, you must first establish your own financial goals.If you don't have a clear goal, then your plan will be carried out loosely, and you will even give up quickly.Financial goals can be divided into three stages: short-term, medium-term, and long-term.This requires a multi-decade financial plan.All goals need to be established now, and plans must be formulated and implemented immediately to make dreams come true.To formulate a financial plan, you need to weigh income and consumption, clarify how much of your income will be used for consumption and how much will be saved every month, and you must also use deposit savings, securities investment, purchase of insurance and other means to accumulate and increase wealth.When implementing financial planning, you must pay attention to strategies and persevere in order to accumulate enough wealth in the end.

Of course, investment and financial management must also be safe and reasonable, which requires you to grasp the principles of investment:

One of the principles: matching returns to risks.As the saying goes, "there is no pie in the sky", "there is no free lunch".Investment and risk are matched.High-yield high-risk, low-yield low-risk, this is the "iron rule" of investment.If you hear others advise you to invest in a certain project, saying that this project is very profitable and has absolutely no risk, at this time you must be careful-there is no such good thing in the world that only makes money but does not lose.

Regardless of investing in securities, real estate, or gold and other "exotic goods", the risks and returns are matched, and there is no risk-free investment.Therefore, you must keep this "iron rule" in mind. On the one hand, prevent being deceived by the temptation of interests, and on the other hand, you must control the risk within your own acceptable range, so as to set a corresponding profit target.

The second principle: live within our means and do what we can.In order to live in a spacious and big house, some people borrowed a large amount of loans, but their income was pitifully small. After deducting the monthly repayment, there was not much left, and they cut down on food and clothing every day.Such examples are not uncommon. "Being within your means" is the age-old law of making ends meet, and you have to "bow your ears" to it.When planning family income and expenditure, we must comprehensively consider short-term and long-term living arrangements, and scientifically arrange income and expenditure plans.

In order to make a fortune in the stock market, some stockholders bought all the "retirement money" they had saved all their lives in stocks. As a result, once the stock market changed, they lost all their money and even their future pension funds. "Do according to your ability" is another ancient rule. You must reasonably consider your family's risk tolerance and expected income goals, and don't blindly formulate excessive financial planning.

Principle [-]: Do your homework and don't invest blindly.In investment and financial management, we often encounter various "hot spots": there are "hot stocks" in the stock market, "hot houses" in the real estate market, and "hot stamps" in the collection market.In fact, hot spots do not necessarily have high returns, and sometimes they are even traps, allowing you to plunge into them and not be able to jump out.When an investment becomes popular, it is often when its price reaches a high point, so it is very irrational to blindly chase hot spots.

Investing in financial management is a very professional subject that requires a lot of time to study and research. You need to think rationally and independently, and blindly following the trend will suffer.

Principle Four: Control Desires, Don't Be Greedy.Zhang San bought a stock, and when the stock price went up, he expected it would continue to rise, so he was reluctant to sell it; when it fell one day, he was reluctant to sell it again, hoping that it would rise back up, but the stock price fell again and again until it was stuck.Such examples abound.At any time, you must let rationality overcome desire, and set profit targets and stop loss limits for your investment: if you reach your profit target, you must withdraw quickly; ” to prevent further expansion of losses.

Personal financial management must outperform CPI in the era of negative interest rates
Many people may have heard such a story: In 1626, the colonists bought the entire Manhattan Island of New York, about 24 square kilometers, from the Indians with only 45 dollars worth of clothing, beads and other small items.Today, Manhattan Island can be said to be the most prosperous and most valuable real estate in the world.According to 2004 estimates by the U.S. tax agency, the value of land in Manhattan as a whole was approximately $1690 billion.The original $24 has become $1690 billion, an astonishing increase in value.However, let's do the math carefully. In 378 years, it has increased from US$24 to US$1690 billion, which is equivalent to an average annual growth rate of about 6.18%.Although the growth rate does not seem high, but after a long time, the growth rate will be very amazing, which is the power of compound growth.The value of a house lies in its location, that is, more of the value of the land, while reinforced concrete and glass are worthless.The reason why a house can preserve its value also lies in the fact that the replacement cost, especially the land cost, and the rent increase with inflation, rather than any essential growth.So when inflation comes, the house can at least maintain its value, but the value-added above inflation will not be too much.Statistics on the New York real estate market also show that in the past few decades, New York's real estate value growth has only exceeded inflation by a little bit.Therefore, the house is at best a defensive weapon and cannot completely defeat the wolf of inflation.

Speaking of this, I might as well mention a word by the way: the Indians who sold Manhattan Island did not regret it at all.Because they don't think land is private in the first place, but think that land, air and water belong to everyone.Moreover, they do not own Manhattan Island at all. They are residents of Long Island, New York, who just passed by Manhattan Island. Selling land to the colonists is purely empty-handed.

Here comes the question, how should we protect our family wealth during the period of rising CPI?

You may think that the monthly increase in the CPI data by a few percentage points may be very general, but the prices of a series of foods such as vegetables, meat, rice, oil, and milk continue to rise, and the money in the pockets of the people is becoming less and less expensive. The feeling of flowers is real.The protracted sound of "rising" has forced the people to live more carefully.

Thrifty Chinese are the best at saving. Depositing spare money in the bank has almost become a living habit of the vast majority of Chinese people.But if someone tells you one day that your interest income is far less than the "erosion" of inflation, that is to say, you are losing money while saving money, and the actual return you get is negative, Do you jump up excitedly?This is not alarmist talk, but a fact that is happening.

Let's take Beijing's 2013% increase in CPI in October 10 as an example. If you have 3.4 yuan hidden at home, its purchasing power will only be equivalent to 1 yuan in one year, and the difference of 1 yuan will be It has been evaporated; if you save for the survival period or save regularly for one year, if the after-tax interest does not reach 9660 yuan, it still cannot keep up with the increase in prices, which means that you are defeated by the CPI.Such a metaphor may be rough and simple, but it reflects the direct impact of CPI on the wealth of ordinary people.Therefore, only by defeating the CPI can it be possible to maintain and increase the value of family wealth.

Vegetable prices have increased, fruit prices have increased, and oil prices have increased... Everyone is shouting "inflation is coming".If you put your money in the bank, even if the interest rate is raised, compared with the diminishing purchasing power brought about by inflation, the interest income will eventually shrink in assets.Under such circumstances, how to rationally arrange consumption, reduce living costs, and increase property income has become an unavoidable problem for many ordinary people.So, how to choose wealth management products under inflation expectations, investors must plan ahead.

The first step in investment and financial management should be to maintain no loss.So what to do?buy gold?buy house?Is it useful to buy these things?
Personal financial management planning against the era of negative interest rates should include maximizing income and wealth, effective consumption, accumulating wealth for retirement, and meeting life expectations. The investment objects that can be selected include stocks, funds, bonds, futures, foreign exchange, gold, Real estate, savings and many other products.In the current downturn in the stock market and funds, it is best to choose to diversify your investments.In addition, for families with little accumulation, it is best to invest early and pay attention to the power of compound interest.

In addition, investment and financial management should pay attention to the growth of income, and don't try to get rich overnight. For many ordinary income families, the growth of wage income is still relatively slow.Learning and making necessary financial investment is an important means to relieve the pressure of life brought about by rising prices.

If you have enough strength and enough negotiating power, you must insist on increasing your quotation for labor remuneration, it is best to ask for salary advances; it is best not to borrow money or to borrow as little as possible to buy a house.Buyers who take out mortgage loans from banks should repay their loans as early as possible.This is mainly due to interest rate risk considerations.Although inflation may be beneficial to the debtor, under the condition of changing interest rates, the owner-occupier who borrows to buy a house is not in a favorable position; generally speaking, under the shadow of inflation, owning real objects is always better than owning currency. When it comes to labor contracts, as far as possible, remuneration in kind should be used as much as possible, or remuneration based on a rate or divided into remuneration like taxation, so as to minimize the loss caused by inflation.

In addition, fixed investment in funds known as "lazy people's financial management" is also an investment method that can be tried.Fund fixed investment means that investors invest a fixed amount in a designated open-end fund at a fixed time every month, similar to a bank's zero deposit and lump sum withdrawal.If investors have a certain risk tolerance, they can also consider index funds. The characteristic of this type of fund is that the increase follows the change of the index and can often achieve higher returns.

In fact, regardless of whether inflation is coming, ordinary people should work hard to make more money, increase income and reduce expenditure carefully, and at the same time should learn more about financial management, so that the money in their hands can maintain and increase in value, and use money to make money.In today's context, the focus is on investing in stocks, funds, and gold.But there is a premise that the debt ratio of household assets must be well controlled, and it is best not to exceed 50% to 60%.Under this principle, the proportion of each asset is allocated according to the source of funds and the needs of personal liquidity.

In addition, it is necessary to understand government policies and statistics. Read more financial magazines to understand changes in information such as interest rates, exchange rates, and stock indexes. It is like reading the weather forecast to understand the difference between "sunny" and "rain". newspaper.On the financial page, the daily weather can be seen at a glance, so that you can make your own investment decisions based on the weather in a short period of time.Remember this quote from George Bernard Shaw: "The mark of a truly educated man is that he is deeply moved by statistics."

Finally, it needs to be emphasized that accumulation and consumption are a relationship that will never change.Without accumulation above consumption, your quality of life will inevitably decline.It is good for your income growth to outperform the CPI, but if the accumulation cannot outperform the CPI, there will be risks.

Compound Interest: A Bad Account Lost by the U.S. Government
There is an old story about a king who loves to play chess and is very skilled in chess. As long as anyone can beat him, the king will grant him any request.One day, a young man finally won the king. The reward the young man asked for was to put a grain of wheat in the first square of the chessboard, and put twice the amount of wheat in the previous square in the second square. They are twice the amount of wheat in the previous grid, and the grid of the chessboard is always filled.The king readily agreed, but the king soon discovered that even if all the grain in the treasury was given to him, it would not be enough for one percent, because even if a grain of wheat weighs only 1 gram, it would take tens of trillion tons of grain Wheat is enough.

This is the power of compound interest!Although on the surface, although the starting point is very low, after many times of multiplication, the final result will become a huge number.There are three factors that affect the accumulation of wealth: one is the capital with value-added ability, the other is the effect time of compound interest, and the third is the significant growth that accelerates the process of compound interest.Obviously, starting investing early and enjoying compound interest is the best way to grow your money quickly.

So, how should investors do compound interest investment in life?

First, we need to clarify the definition of compound interest.Compound interest is the economic concept corresponding to simple interest.The calculation of simple interest does not need to include the interest in the principal; on the contrary, the compound interest has to be incorporated into the principal and calculated repeatedly.Compound interest is compound interest. It means that the annual income can also generate income. Specifically, the entire loan period is divided into several sections, and the interest calculated on the basis of the previous section is added to the principal to form an increased principal. , as the principal base for the next period of interest calculation, until the interest of each period is calculated, and after summing up, the interest for the entire loan period is obtained, which is commonly known as rolling interest.

How powerful is compound interest?You will know after reading the short story below.

In the severe winter of 1777, the revolutionary army led by General Washington, the commander of the United States at that time, ran out of ammunition and food. Washington asked the people of Pennsylvania for help. 5 US dollars in food supplies, this loan of about 40 US dollars in total, the borrower is the Mainland Congress, and the annual interest is 45%.

In 211, 1988 years later, the US$45 with principal and interest had rolled into US$1416 billion. This astronomical amount of debt was enough to bring down the US government.When Hadwin's descendants offered to repay the loan, the U.S. government would of course refuse to repay it.

The former European financial ruler Rothschild once said, "I don't know what the seven wonders of the world are, but I know the eighth wonder is compound interest." The power of compound interest is everywhere.It is as big as the society and as small as personal investment.Economist Keynes once focused on the role of compound interest in an article entitled "Possible Economic Prospects for Our Future Generations".At that time, the West was in the period of the Great Depression in the 20s. Many people believed that the prosperity of the world would not reappear in the future, but Keynes pointed out that the depression was just an intermission between the two prosperity cycles, and the "compound interest power" that supported the economic development of the West ’ didn’t go away.Keynes had already discovered at that time that the rise of modern society began with the accumulation of capital in the 30th century, and this rise led mankind to enter the "Age of Compound Interest".Interestingly, Keynes told us in no uncertain terms that "the beginning of British foreign investment can be traced back to the large amount of treasure that Drake stole from Spain in 16".It’s just that after years of compound interest accumulation, “every pound of the treasure that Drake brought back in 1580 has now become 1580 pounds.”Such is the power of compound interest!

(End of this chapter)