CFI.co, Author at CFI.co Blog

Did you know that more than 63% of people in the United Kingdom are in debt? When it comes to finances, it can be hard to take control of your own money. It might sound easy in theory, but when it comes down to it, many people end up spending more than they should.

Fortunately, this isn’t an inevitable problem as long as you have a budget plan. But how should you go about creating a budget in the first place, especially if you’ve never tried doing it before? Keep reading and learn more about how to budget your money so you can leave your debt behind you.

Try the 50/30/20 Budget Plan

At some point, you may have heard of the 50/30/20 budget plan, but what is it exactly? It is actually one of the most efficient ways to budget your money and it involves splitting up your income into three sections. First, you will need to spend around 50% of your income on necessities.

Be sure to calculate this after you factor out your taxes. Your necessities, as the name suggests, should only include things that you can’t live without. So, your necessities would include your rent, car, and other things such as food.

The majority of your income will go to these things because they are the most important. When you create a budget like this, you won’t have to worry so much about having to pay for your necessities because they will be the first thing that you pay for in the first place. But what should you prioritize next after you’re done spending money on your necessities?

Next, you will want to divide around 30% of your income for your wants.

What You Need to Know

Your wants, as the name suggests, involve things that you want to enjoy and splurge on. For example, you can spend money on going to a movie, buying a nice new pair of shoes, or anything else that you might feel like doing.

Spending money on your wants, of course, is one of the more enjoyable parts of starting a budget. However, you will want to be careful not to go overboard with your wants. Many people enjoy spending money on fun things that they end up forgetting all about the 50/30/20 rule.

As long as you keep in mind that you should only spend 30% or less of your income on wants, you won’t have to worry about running out of money and ending up in debt. Finally, there is the 20% of your income that you will need to focus on debt repayment and savings.

This 20% is very important because it can help you dig yourself out of your financial hole so you can leave all of your debts behind you. It might seem difficult to do at first, especially if you have a mountain of debt, but as long as you’re persistent and follow the rest of the 50/30/20 financial budget, you will eventually reach your financial goals and be free of debt.

Keep a Close Eye on Your Money

The 50/30/20 budgeting plan will only be able to take you so far when it comes to saving money and getting out of debt. It won’t be able to help you plan out the details of your budget. Instead, you’ll have to do that for yourself.

The problem that many people have when it comes to budgeting is that they forget about the little details of their finances. Many people end up getting so distracted with large costs such as medical bills, rent, and other things that they end up forgetting about the smaller costs and making the mistake of thinking that they don’t matter.

However, you will find that small costs are just as important as large costs. This is because small, unaccounted costs can easily start to pile up if you’re not careful.

The Details

For example, suppose you buy a charger for your phone, some snacks for the car, and a few other small things.

All of these items are quite cheap on their own, so you might not even bother factoring them into your budget. However, after a few weeks or months of ignoring these small costs, you will start to wonder why you aren’t saving as much money as you were hoping. The reason will be that these small costs have been slowly siphoning your savings without you even realizing it.

This, of course, can put your budgeting plans quite far back. To avoid this, you will need to stay on top of everything you’re spending, even if you’re only spending very little. This can be tedious at first, especially when spending money on very small items, but eventually, it will become a sort of habit, and it will be like second nature to you.

Once you get the hang of keeping an eye on your money in this way, you will find that it will be easier than ever to save your money and stay dedicated to your budgeting plan. Once you accomplish that, it will be quite easy to leave your debt in the dust and start saving money.

What You Need to Know About Creating a Budget

Creating a budget can be hard at first, but it isn’t impossible. The 50/30/20 rule can be especially helpful for those who have never tried budgeting before. It involves splitting up your income into needs, wants, and savings.

That way, you won’t be confused about what to do with your money. More than that, keeping an eye on everything you’re spending can be very helpful. To learn more, contact us here.

Finance

10 Money-Saving Tips to Survive Inflation

ByCFI.co

During the rest of 2022, it is estimated that global inflation will reach 5.7% in advanced economies and 8.7% in economies of developing countries. What is inflation? It is the decline in the purchasing power of currency and can seriously affect an individual’s financial health as prices rise. Luckily, there are many things that you can do to prepare for inflation. Do you want to learn how to survive inflation?

Keep reading this guide for the top 10 money-saving tips that will help with surviving inflation.

1. Assess Your Spending Habits

Assessing your spending habits is one of the easiest ways you can save money in times of high inflation. Inflation can make it difficult to stick to your budget, so you should try to identify all the areas where you are spending money.

This will allow you to adjust your budget and change your spending habits in response to the higher prices.

Are there things that you can temporarily stop paying for to save money? Consider all of the non-essential expenses that you can cut back on!

2. Avoid New Debt

Another important tip that can help you save money as inflation rises is avoiding new debt when possible. In the last year, interest rates have risen, which makes it more difficult to pay off your loans.

This is especially difficult if you have variable rate loans, as the rates can change without much notice.

Avoiding new debt can help you reduce your monthly payments and will give you more financial flexibility!

3. Pay Off Existing Debt

Not only do you need to avoid new debt, but you must also pay off existing debt. When you are in debt, you are responsible for a monthly payment. These obligations can make it more difficult to pay for the things that you need to survive.

To pay off your existing debt faster, you should try paying more than the minimum payments on your balances each month!

4. Have an Emergency Fund

Building an emergency fund is necessary for any budget, but is especially helpful when inflation increases. This will help you plan for the future and will protect you in the event of an emergency or changes to the economy.

It is a designated savings account that has reserve funds and will provide you with a buffer that will protect you as prices continue to increase.

5. Wait for Large Expenses

If you were planning on making any large purchases, like a new car or a new appliance, these prices may be affected by inflation.

If possible, it is best to wait to buy these large expenses until it is completely necessary. This way, you can start setting aside extra money to prepare for the increased prices!

6. Shop Sales

Being frugal and learning to save money can help you survive when prices start to rise. One way you can do this is by starting to shop sales. Just because prices are starting to rise doesn’t mean you can’t enjoy the things that you normally purchase.

Instead, you can just wait until things go on sale to buy them!

There are also other ways you can save money, like buying in bulk or using rewards programs to save money.

7. Diversify Your Portfolio

Having a diverse portfolio can help you prepare for increasing inflation and will help you save money! It is important that you have investments that will continue to appreciate, even as the value of money decreases.

Make sure you don’t put all of your eggs in one basket! Having many types of investments will ensure that you don’t lose all of your investments to inflation and will protect your portfolio.

8. Find Ways to Increase Your Income

Not only do you need to save money when you are dealing with inflation, but you also must find ways to increase your income. This will help balance the rising costs to keep up with the cost of living.

For example, you can ask your boss for a raise to account for changes in inflation.

There may be other ways that you can increase your income with a side hustle or a hobby that you can use to start making more money.

9. Conserve Energy at Home

There are many expenses that are often out of your hands, like your rent or mortgage payments. However, things like utility bills change each month and you can make changes to your habits to save money!

Finding ways to conserve energy at home can help you save money to combat inflation.

For example, you can start by turning off the lights in rooms that you are not using. You can also keep your home at a lower temperature during the winter and at a higher temperature in the summer months.

Making these small changes to your energy usage can save a lot of money in the long run.

10. Be Prepared

Finally, it is essential that you are prepared for inflation! You can often expect inflation rates to rise over the years, so learning to prepare for inflation can help you get through the difficult times.

Learning to be frugal and how to increase your savings will provide you with additional cushioning when inflation starts to increase.

When you are prepared, you don’t have to panic. You will know what changes to make to survive inflation and you will be okay!

Learn How to Survive Inflation by Preparing Now

Inflation is something that you cannot avoid. Still, there are ways that you can prepare for inflation so it doesn’t affect you as much as it affects others around the world. Following each of these tips can help you survive inflation without affecting your financial health.

Do you want to learn more about inflation tips to follow? CFI.co can help! Our bank provides expert advice about wealth management and finances and can help you prepare.

Check out our wealth management blogs today for more money-saving tips!

Banking

What Do Increased Interest Rates Mean for Your Wealth?

ByCFI.co

Congratulations, you’re a grown-up!

That means that your money is doing more than just sitting in a savings account. You’ve got an IRA and you’re investing in real estate. Heck, you might even have some stocks or bonds.

As a savvy and forward-thinking person, you are already aware that interest rates are the price of borrowing money. These rates affect everything from auto loans to mortgages. When there are increased interest rates, lenders make more money on each loan.

But what does all this mean for your wealth?

We’re going to dig into this question to see how recent increases in interest rates might affect your current and future expenses. Keep reading to get the scoop.

The Federal Reserve Bank and the Overall Economy

The Federal Reserve Bank is a private bank that works independently of the federal government. It’s responsible for setting interest rates and regulating the banking system. When there are economic problems, they can lower or raise interest rates to help stimulate growth in the economy.

In May 2022, federal interest rates rose by half a percentage to 0.75% – 1%. This may increase to around 3% by the end of this year if we stay on track with our current economic situation and the inflation rate continues to rise as predicted. So you should continue to keep up to date on how this latest federal reserve hike are impacting business loans and mortgages.

Your Existing Loans

It is important to know how the new interest rates will affect your monthly payments if you already have a loan. If you have a fixed-rate mortgage, for example, there won’t be much of an impact on your debt since it does not change based on market conditions. However, if you have a variable-rate mortgage or student loans, higher interest rates could mean that your payment amount will increase and become more difficult to handle.

To avoid any surprises in the future, consider refinancing at a lower rate now while they’re still available. This can help reduce the cost of borrowing and improve overall savings. Plus, if there are other options available, like shorter terms or even no prepayment penalties, refinancing may be well worth it!

Credit Card Debt

If you have credit card debt, your interest rate is likely to increase because of the Federal Reserve’s rate hike. This is because credit cards are based on the prime rate, which moves in tandem with the federal funds rate.

If you have outstanding balances on multiple credit cards with different rates, consider merging them into one debt with a fixed interest rate that better matches what you pay now. That way, your payments will remain stable whenever your current card adjusts its rates.

The Housing Market

The housing market is one of the biggest economic drivers, so it’s no surprise that any changes to this sector would impact your wealth.

When interest rates increase, it becomes more affordable for you to buy a new home. On the flip side, renting may become more expensive as landlords pass along their rising expenses by raising rents (or evicting tenants).

Increased Interest Rates and the Stock Market

When the Federal Reserve Bank raises interest rates, it can have a positive impact on bank stocks. In fact, when the Fed raised interest rates in December 2018, bank stocks performed very well. Reason: When the Fed raises interest rates, savings accounts can earn more money and people are likely to use banks more often.

The stock market as a whole does not react favourably to rising hikes from the Federal Reserve Bank though. Instead, it goes down because of inflation eroding away at investors’ returns.

There’s no guarantee how your investment portfolio will move if interest rates go up. However, it is good practice that you regularly rebalance your portfolio so that any potential losses remain minimal.

Bonds and Other Fixed Investments

When you invest in bonds, you are lending money to the issuer of the bond. The issuer pays a fixed rate of interest on this loan (known as “coupon payments”), which is paid at regular intervals (usually monthly). Most bond issuers are corporations and governments, although they can also be other entities, such as mutual funds.

When interest rates rise, the price of bonds decreases to attract investors. Issuers might even be forced to reduce the interest rate they pay out in order to attract investors.

Personal Spending

It’s not uncommon for people to panic when they hear the word “interest rate hike.” But it’s important to remember that interest rates affect all sectors of the economy. While they might have a negative impact in some areas, there are others where higher rates can be beneficial.

Some people may choose to spend less when interest rates are high, but this could also be a good time to invest in certain areas. For example, if you’re thinking of buying a home, a higher interest rate may mean that you’ll have to pay less each month for your mortgage. It will also likely mean that the value of your home, along with other investments you make during this time, could appreciate at a faster-than-average rate.

Wealth management during this period of inflation can be difficult, but if done correctly, it can lead to financial stability.

Protect Your Wealth in Any Economy

As you can see, increased interest rates have a lot of implications for consumers. But don’t worry—by paying attention to these trends and making smart decisions about where to invest your money, you can still work to grow your wealth.

With careful planning and a clear idea about your spending habits, you can take control of your money situation. Check out our other blogs to learn more about how to protect your assets during periods of economic instability.

Finance

Protecting Your Portfolio: How to Choose Stocks to Invest In

ByCFI.co

According to CNBC, academic studies estimate that 85 per cent of day traders lose money — and that’s just the professionals. By the numbers, amateur traders had an even harder time with the stock market. Between 401ks and private investments, however, it turns out that most Americans own shares in some capacity. In 2022, for instance, Gallup found that 58 per cent of adults admitted to owning stocks.

But there’s an open secret in the investing world:

To be a successful investor, you have to know how to choose stocks to invest in. It sounds pretty simple, but the process is more complicated than it might seem.

Would you like to be profitable, retire early, and achieve all your wildest dreams through the stock market? Keep reading to learn how to build a winning investment portfolio.

1. Figure Out Your Trading Personality

This is about to get surprisingly philosophical. But truthfully, buying stocks isn’t just about dollars and calculations. It’s also about having the right mentality towards the market.

Have you ever met someone with such an abrasive personality that they could make sandpaper feel like silk? Talk about the last person you’d hire as a grief counsellor.

In the same way that some personalities don’t always mesh well with certain professions, investors can set themselves up for failure by choosing the wrong investment strategy.

Are you a high-risk and high-reward kind of person? Or do you take a slow-and-steady-wins-the-race approach to things?

Before you start looking at charts and evaluating broker spreads, you’ll want to understand your risk tolerance levels and your ideal day-to-day trading habits. This will give you a general sense of what a sustainable trading strategy might look like for you.

2. Set Your Portfolio Goals

Imagine you’re watching a wilderness survival challenge on TV. One team brings a map, a compass, and a GPS. And the other team is winging it.

All things being equal, the group with the map is more likely to reach the final destination first, right?

While most investors would agree that they want to make money, it can be hard to tell if you’re doing well or you’re underperforming when you don’t have financial targets. Consider this:

From 1926 to 2021, the S&P 500 has had an annualized return of roughly 10.5 per cent. Can you beat that result? Should you be trying to?

When you have specific benchmarks, it becomes a lot easier to evaluate stocks within the context of your overall investment portfolio goals.

3. Establish Trading Rules

So at first glance, this might sound like How to Start Investing 101. But having rules of engagement around your stock purchases is one of the most important investment tips you’ll ever get.

Stock market investing is about compounding returns. When you’re changing strategies on a whim, it becomes harder to cash in on the full growth potential of your investing approach.

However, that’s only half the story. Along with a reasonably well-established set of rules, you’ll also want to ensure that your strategy can respond to market conditions.

During the COVID-19 pandemic, for instance, the hospitality and travel industries were hit extremely hard. But as restrictions eased and borders started reopening, suddenly everyone wanted to book flights and hotel rooms. A well-rounded trading strategy would have considered both the short-term drop in the market and the potential for big returns in the medium to longer term.

4. Become an Industry Expert

Fast forward a few months from now. You’ve developed your strategy and found a few positions you like. Now all you have to do is start buying stocks and watching the money roll in, right?

Well, not necessarily.

The internet is full of people telling each other to, “Do your own research!”. But beyond settling online disputes, it’s a sound piece of advice for aspiring stock market investors.

Here’s why:

Contrary to popular belief, the stock market rarely moves totally at random. Maybe there’s an under-the-radar scandal taking place that only people following the news would have noticed. Or perhaps, because you didn’t understand the principles of Hollywood accounting, you decide to pass on a stock that you would have purchased otherwise.

When push comes to shove, you don’t want to be one of those investors who can’t sell any of their shares in the buggy industry because consumers are buying cars. It doesn’t matter if you’re purchasing mining stocks or retailers — keeping your finger on the pulse of the trends can allow you to make better purchasing decisions.

5. Manage Your Risks

It’s not enough to just purchase stocks and let them grow. You also want to have a serious answer to the question, “How will I protect my profits in a market downturn?”.

To that end, common investment risk management strategies include:

Buying stocks in safer, steadier companies
Hedging
Using stop losses, options, and derivatives
Investing in bonds and mutual funds

Most profitable investors use a mixture of these strategies. After all, if you’re investing for retirement, for instance, your portfolio should become gradually less risky as you get closer to leaving the workforce.

But whatever you choose, there’s one thing that most experienced investors can agree on:

Being a profitable investor isn’t just about picking the right stocks and watching your portfolio value increase. It’s also about knowing when to cut your losses.

How to Choose Stocks to Invest In

Have you ever wondered how some people know how to choose stocks to invest in while others just don’t? The answer more than likely boils down to consistency.

Successful investors have consistent rules and due diligence procedures. And they’re also consistent about keeping up with industry news and growing their positions.

We can give you general investment tips about purchasing stocks with growth potential and portfolio protection. But uncovering hidden gems and staying profitable in the stock market is actually quite simple.

First, you need to find a stock-picking approach that makes sense to you. Then, you need to keep doing what works.

Are you looking for more information on all things investing? Check out the investment management section of our site to see more content like this!

Finance

7 Financial Tips Every Business Owner Should Know

ByCFI.co

46% of entrepreneurs don’t have any form of business education. These entrepreneurs struggle to formulate sound business financial plans. They unintentionally do things that sabotage their businesses’ growth. As one of these entrepreneurs, you should look for ways to fill this knowledge gap. To help you out, here are seven financial tips every business owner should know.

1. Separate Personal and Business Finances

As a small business owner, you don’t see the need to have two different bank accounts. You claim you can separate the personal and business finances on paper. Unfortunately, having a single bank account will lead to business financial woes.

You’re going to use business funds for personal stuff and struggle to make finances balance.

To simplify money management:

Open a separate bank account for your business
Instruct your customers to pay for products/services your business sells via this account
Avoid withdrawing money from this bank account for personal expenses

You want your business to stand as an independent entity.

2. Learn to Create a Periodic Business Budget and Stick to It

Most new business owners adopt a “wing it” approach when dealing with expenses and revenues. They have no idea how much money they’ll spend on a given expense. And that’s why their businesses constantly face money problems.

To counter this challenge, learn how to create a business budget. The idea is to allocate money to things that smoothen business operations. Also, a budget will help you track business expenses, thereby enhancing accountability.

3. Know When to Seek Professional Business Financial Advice

As a new entrepreneur, you assume that you’ve to figure out everything yourself. You experiment with different business management practices hoping one will work. Sadly, you make errors that hinder business growth and threaten its survival.

Instead of this trial and error approach, know when to seek professional financial advice. You want to find experts who educate you on things such as managing business credit. Also, seek advice on common financial problems small businesses face and how to overcome them.

The great thing is that you’ll find many affordable business financial experts using the internet. Besides, leverage online entrepreneurs’ forums to get financial tips from other business owners.

4. Always Track Your Working Capital

A business can report profits yet go under due to working capital problems. Working capital is the money used for the day to day business operations. It’s current assets (cash, account receivables/unpaid invoices, and stock) minus current liabilities (account payable and debts).

Your business should strive to have positive working capital as this means you’ve enough money to cater to recurring expenses. To achieve this goal, learn how to effectively manage your business’s cash flow. You want to avoid cash flow problems that disrupt operations.

Here are some of the things you can do to improve your business’s working capital:

• Cut all unnecessary spending
• Give debtors incentives to pay you sooner
• Request your creditors for longer repayment periods
• Examine your company’s cash flow patterns
• Explore cash flow loans

You want to adopt a proactive working capital management approach to streamline operations.

5. Choose the Right Business Investors

When facing business financial woes, it’s tempting to take money from anyone. The problem is that some investors are the wrong fit for your business. Some will use their investment to strong-arm you into doing things you don’t like.

Others will insist on a high return which your business can’t afford.

To avoid all these problems, take time to screen investors to find the right ones. You want to partner with people who share your passion for the business. On top of funding the business, you may also want to find investors who are experienced within your business area and can advise you on how to run it.

6. Plow Back Profits

Once your business starts generating profits, it’s tempting to withdraw all of them. You argue you’ve waited for so long, and you deserve to be rewarded. And you’re right, yet to grow your business, you need to plow back the profits.

Here are some of the ways you can reinvest the profits:

• Hire more employees and expand your workforce
• Invest in new technology that gives you an edge over the competitors
• Increase your sales and marketing budget
• Open another business branch
• Start a business emergency fund

Your goal is to invest in things that give your business stability and stimulate growth. You want to forgo current profits with hopes of reaping huge ones in the future.

7. Protect Your Enterprise Against Fraud

Cyberattacks cost companies $200,000 on average, putting many of them out of business. That’s why you should look for ways to curb these risks.

Here are some of the measures you can take to prevent cyberattacks:

• Train your staff on modern cybersecurity practices
• Invest in data encryption
• Only use secure devices and networks
• Undertake systems audit regularly to test for weakness
• Develop policies on how to handle data breaches to cut losses
• Buy cybersecurity insurance
• Consider hiring a cybersecurity consultant

Implementing these measures will help you keep up with the latest technologies without compromising cybersecurity. You want to accept electronic payments from your customers. Also, you should take advantage of different e-commerce platforms to expand your business’s reach.

Boost Business Growth by Adopting Practical Financial Tips

To stimulate business growth, you need to learn how to handle its finances effectively. Rely on the above financial tips to give your enterprise an edge. The idea is to improve your business’s working capital to give it stability.

Also, know when to seek professional business financial advice. Finally, be careful when choosing investors, as they’ll impact the business’s direction.

Please check out our Business and Finance sections for more incredible financial tips.

Economics

What Are the Key Recession Indicators to Watch?

ByCFI.co

The Great Recession which occurred in 2009 was so significant that it affected the whole world.

It came about after the US housing market bubble (which had been growing) suddenly burst. A recession is a bad economical state that can lead to significant losses for organizations and individuals. It’s much easier to remain secure in a recession if you know it’s coming ahead of time.

There are some recession indicators you can observe that often precede a recession. For some of these key indicators, keep reading.

1. Yield Curve

When looking at the global economy, one of the most noted trends indicating a coming recession is the “yield curve”. The yield is the interest rate on treasuries or government bonds, and these bonds have varying duration lengths (known as maturity). Some last for just a month, while others last decades, and the yield curve compares how the interest rate of these bonds changes with time.

Bonds with a longer maturity typically have higher interest rates. For investors, this presents a ‘higher risk, higher reward’ situation. When investing in a bond, a lot more can go wrong in 10 years than in 10 months, so by accepting the risk of a longer investment, they also want to receive more in return.

An inverted yield curve will slope downwards and shows that investors are asking for higher yields for short-term investments. This means that they believe there is more risk in holding a bond for a short period.

Historically, the yield curve has been known to precede downturns. A lot of economic indicators seem to lag as they come after the event. A yield curve inversion, however, comes beforehand, making it a suitable indicator to see where the global economy is going.

2. Confidence Indexes

While economics is mostly about facts and figures, people’s feelings still play a large part. A typical example is the trade war that’s going on between the US and China. It has given firms a feeling of uncertainty about the future, which has caused delays in investments and hiring.

Predicting economic trends isn’t easy, and getting things wrong can result in huge losses for businesses. Situations that make people uncertain result in a lot of caution as people don’t want to make any wrong decisions.

This even affects the choices of consumers. When people are worried about the state of the economy and are unsure how things will go, they become more reluctant to spend money. The result of this is reduced profits made by businesses.

Many organizations publish regular reports regarding confidence amongst businesses and consumers. Recent years have seen some notable dips in confidence, causing some economical issues.

With that in mind, month-to-month fluctuations are not something to be too worried about. Like many economical factors, the long-term is more important, and confidence is generally more stable in the long run.

3. Employment Data

Each month the Department of Labor publishes a report on the job market. It contains several employment measures that can be important indicators of a potential recession.

Among the various data points included is the number of hours worked, which is sometimes claimed to be a leading indicator. This is down to the number of hours a business gives to its workers. When they’re worried about sales dropping, the first thing most companies do is cut hours.

Another data point listed is “temporary help”. This is a measure of temporary workers that businesses take on. When a company is less confident they’re likely to take on more temporary workers rather than permanent employees.

“Jobless claims” is another indicator, giving an in-depth look at the labour market. The time frame is also tighter as it’s posted weekly, rather than monthly. It’s simply a count of people applying for unemployment benefits, which is naturally higher when fewer people are working.

4. Leading Economic Index

Like the yield curve, this is one of the few indicators that predicts where the global economy will head. It’s generated by the Conference Board and is comprised of 10 datasets including:

Average weekly initial claims for unemployment insurance
S&P 500 stock index
New orders index
Average weekly hours worked by manufacturing workers

A negative year-over-year index has historically been closely associated with recessions. Businesses often use this index to plan future activities, helping to protect them in the event of any downturns.

5. Gross Domestic Product

Gross domestic product (GDP) is a measure of economic growth, and any time the economy isn’t growing, we’re in a recession. Whenever the economy is faltering it will be clear when looking at the GDP. It’s worth noting, however, that the GDP normally fluctuates, so it’s not always a cause for concern.

Comparing the GDP to longer-run expectations from economists can help give an insight into whether or not fluctuations in the GDP are something to worry about. This information can also help determine the “output gap”.

The output gap is the difference between the maximum possible output of the economy (as viewed by economists) and the actual output and can be positive or negative. When the GDP is adjusted for inflation it’s known as the “real GDP”. Sometimes the real GDP will go above its potential, and will then fall back down below it.

6. Recession Probability Model

This is a compilation of data based on the three-month and ten-year treasury yields. It’s specifically designed to determine how likely there is to be a recession in the coming year and is typically updated at the start of each month.

The likelihood is measured as a percentage, and anything over 30% is considered a warning sign. When it reaches the 30% point, it means a recession is predicted for 12 months from that time.

Watching for Recession Indicators

Ultimately it’s not entirely possible to say exactly what will happen in the future with the economy, but the recession indicators above have historically proven to be good signs to follow. Paying attention to these is the best way to know when we’re on our way into a recession.

CFI.co has all the latest information on financial news and economical developments. If you have any questions for us click here to contact us today, and you can sign up for our newsletter to stay up to date.

Economics

Investment Portfolio Management: How to Hedge Against Inflation

ByCFI.co

2021 saw an inflation rate of 7%, making it the highest rate in decades.

Inflation is a constant factor and affects all investors. It can result in losses for individuals and businesses, and the best way to avoid these losses is to hedge against inflation.

So what does it mean to hedge against inflation? Keep reading to find out.

What Does Inflation Hedge Mean?

Inflation is one of the most important economic forces for investors to understand. It’s the reduction in the value of financial assets along with the returns that those assets produce. While some assets naturally lose value with time, this refers to a loss in terms of purchasing power and relates to all assets.

Investors work to increase their wealth with time, and to do this they need to hedge against inflation. An inflation hedge is an asset that produces returns that match or exceed the inflation rate. This means that with time, the value will either stay the same or increase.

Investors aim to incorporate these kinds of assets into their portfolios while removing any that don’t protect against inflation.

Best Investments to Hedge Against Inflation

Inflation rates change each year, meaning past solutions don’t always work. No assets are guaranteed to hedge against inflation, but some are far more reliable than others.

Gold

People often settle on buying gold to protect against inflation. Despite its popularity, there have been some periods where inflation has been very high and it has not quite stood up.

Gold has a correlation of 0.16 to inflation, which isn’t particularly high. It’s worth noting that gold also generates no dividends or interest, which some other assets do. This means that to hedge against inflation its value has to increase at the same rate.

Real Estate

Real estate has long been one of the best assets for hedging against inflation. The value of property tends to increase at a higher rate than inflation does. On top of that, property can generate a lot of income through renting/leasing.

REITs (real estate investment trusts) are companies that own or finance real estate that generates income and covers a range of sectors. Of the different REITs available, equity REITs have the best correlation with inflation. Mortgage REITs are another option, but can sometimes underperform when inflation is high.

Commodities

Commodities generally perform well against inflation and include a range of assets such as:

Oil and gas
Precious metals
Grains and foods
Timber
Building materials

You can invest in these through stocks, which will increase in value as the commodities do.

ETFs (exchange-traded funds) track price movements of different commodities, generally holding derivatives or futures instead of the actual commodities themselves. These are ideal for investors who don’t want to invest in a commodity directly.

TIPS and Floating Rate Bonds

TIPS (Treasury Inflation-Protected Securities) are government bonds. They are pegged to inflation, meaning they will increase at the same rate. The coupon payment is reset every year to match the CPI (Consumer Price Index).

Other floating rate bonds work similarly but are pegged to interest rates rather than the CPI.

Stocks

Stocks are another very well-known investment choice. The thing that’s noteworthy with stocks is that they do best when inflation is modest – ideally between 1% and 4%.

When inflation is below 1% most stocks will have negative returns. Above 1% will give positive returns, but when inflation is over 4% it generally exceeds the returns from stocks.

The return rates can vary a lot depending on the type of company a stock is. Companies that deal with sustainable resources tend to have a better correlation with inflation.

Some companies can change their prices without much change in costs, meaning they can adjust to meet inflation. Companies that use many raw materials can’t generally do this as they have much less flexibility.

Value stocks can be a good choice as they don’t tend to be too sensitive to price increases. Dividend stocks are also good as they raise dividends with time.

Worst Investments to Hedge Against Inflation

The above assets are generally good options for hedging against inflation. There are, however, some places you can put your money that aren’t nearly as good.

Most people keep their funds in cash, but it tends to always experience value erosion. Short-term fixed-yield instruments are similar, so not the best choice.

Long-dated US Treasuries and corporate bonds have fixed yields and almost always underperform. Inflation is often higher than the coupon, which will result in a negative inflation-adjusted return.

High-end luxury goods stocks and discretionary goods may seem like a good idea, but when prices rise people tend to opt for cheaper alternatives, which makes these stocks underperform.

What About Crypto?

Bitcoin and other cryptocurrencies are very recent assets, and there is still a lot of debate regarding them. Many people claim they’re an effective hedge against inflation, but due to how new the technology is, there currently isn’t enough data to say for a certainty.

Hedging Limitations

Even with this knowledge about the different options for hedging against inflation, some limitations make it difficult.

Inflation projections aren’t set in stone, so they won’t always be accurate. Even someone with years of experience in investing won’t always make the right purchases.

While it’s fairly clear that some investments are better than others, no assets are perfect for hedging against inflation. You should do as much research as you can into the options you have, and make a choice based on what you think is best.

Be aware that there’s always a risk with any investment. Determine the risk before investing so you know what the losses will be if things don’t go how you want them to.

Making the Right Choices

Making decisions when it comes to investing is never easy. No one ever knows for certain how their investments will pan out, and there’s always a chance of losing money. The best thing you can do to hedge against inflation is to diversify your investment portfolio – that way, if one of your assets doesn’t do well, you have less chance of making significant losses.

Staying informed with the latest financial news will help you make the best decisions. Click here to head over to CFI.co and sign up for our newsletter so we can keep you up to date.

Banking

Investment Banking for Beginners: What You Need to Know

ByCFI.co

Did you know that the average investment banker makes more than eighty thousand dollars a year? And that’s before any bonuses that they receive.

Not only is it possible to make a big difference in the world as an investment banker, but you can also make a lot of money. Unfortunately, many people choose not to pursue these types of careers because they don’t understand what is investment banking.

To help you make sense of what it’s all about, we’ve created this guide. If you want to learn more, read on and we’ll tell you what’s important to know.

What Investment Banks Do

Most people have no idea what investment bankers do. They know that it’s an important career, but they aren’t certain why this is.

It’s incorrect to think that investment banking is all about greedy people in business suits who think about nothing else except their next investment opportunity. This is because more and more people are choosing to take ownership of their own financial futures by making investments in assets that will increase in value.

In most situations, this involves developing relationships with investment bankers. While traditional banks mainly take deposits and lend money to people and companies, investment banks sell securities.

It’s common for investment banks to invest the profits from these securities into big projects that traditional banks might consider to be too much of a risk. Here are some of the most common kinds of projects that investment banks tend to get involved in.

Offering Finances for Big Projects

Many investment banks invest their money in large infrastructure projects such as building roads and bridges. These kinds of projects need huge amounts of money to complete. Investment banks invest money into these projects with the belief that they will generate revenue once they’re completed.

Investing in Companies

It’s common for young companies to seek help from investors. Even though many company owners invest their own money to start their companies, this isn’t usually enough. This is why they often choose to create an initial public offering (IPO).

The basic idea behind an IPO is for a business to sell itself to the public. It’s the job of investment bankers to find investors who want to buy securities from these companies.

Mergers or Aquisitions

When it’s in a certain company’s interest to acquire or merge with another company, they seek help from investment bankers to seal the deal. Investment bankers often provide companies with the financing they need to acquire or merge with other companies.

Managing Assets and Offering Brokerage Services

One of the fundamental goals of investment bankers is to make investments in areas where it’s likely to bring returns. They often do this by acquiring clients who trust their investment bankers to manage their money. Investment bankers do this by choosing individual stocks or by finding mutual funds.

The Demographics of Investment Banking

Just like other forms of banking, the investment banking industry is dominated by white men. Less than twenty per cent of members of boards of directors are minorities. Less than thirty per cent are women.

Most people who work as investment bankers know that this is an issue. This is why it’s becoming more common for banks to create diversity programs. The aim of these programs is to seek-out qualified women and minorities to work for their companies.

How to Get Your Start as an Investment Banker

Since it’s important for investment bankers to know how to make deals, they need to know how to sell themselves. This means that you need to know how to convince people to hire you if you want to become an investment banker.

At the very least, it’s essential that you have a bachelor’s degree in business or economics from a respected school. Most investment bankers also have advanced degrees in business and mathematics.

It’s also important to be a good networker if you want to become an investment banker. Most people get started by becoming interns at reputable firms.

What Are the Best Investment Banks?

The biggest investment banks are JPMorgan, Barclays Bank plc, Goldman Sachs, Citigroup, Morgan Stanley, Deutsche Bank, and UBS. There are also hundreds of smaller investment banks that do business in countries around the world.

Most of the largest investment banks generate revenues of more than a billion dollars. Clients of the largest investment banks include retail companies, hedge fund managers, and governments. People with pension funds or who have investments also indirectly do business with investment banks.

The Difference Between Investment Banks and Retail Banks

Retail banks usually work with individuals by taking in their deposits. In exchange for putting your money into a bank, these people accrue interest on their savings. Retail banks also lend money to people who need to do things such as buy a new house.

Investment banks work mainly with large companies that need lots of capital. If you run a start-up or a small business, chances are that you’ll do business with commercial banks rather than with investment banks.

In most situations, investment banks do not do business with individual clients. They are more likely to invest in large companies and projects.

What Is Investment Banking: A Multi-Billion Dollar Industry

If you’ve been wondering “what is investment banking?” it’s important to understand how different investment banks are from retail banks. While most retail banks do business with individual clients, the majority of investment banks invest in large projects and corporations.

If you found this article helpful, don’t forget to check out the other informative articles that we’ve included in our Banking dropdown. Regardless of whether you own a business or are an individual investor, we have many helpful resources.

Finance

How to Start Building Wealth as a Young Adult

ByCFI.co

Are you struggling with your finances?

A study shows that 6 out of 10 young people lack financial education. This leads many youths to make poor financial choices, credit, and investment decisions. This is why it’s crucial to learn basic financial knowledge early in your life.

Doing so allows you to make better financial decisions and apply effective management. Moreover, it can guarantee a stable, stress-free, and better future. Read on to discover some budgeting tips and start building wealth at a young age.

1. Set Your Financial Goals

Setting financial goals is essential when you plan to build wealth. It allows you to create a plan, track your progress, and stay motivated. Moreover, you make effective management that can boost financial health.

Keep note of your monthly income, expenditures, and other monetary activities. It must show that your finances can reach the target goal.

First, set a definite amount and time frame for reaching your goal. For example, you must save $15,000 by the end of the year. With this, you can determine the amount you to save from your monthly income until the year ends.

Next, assess the effectiveness of the saving system you follow. Then, adjust if you find it hard to stick with it. Consider categorizing your goals into short-term and long-term for easy tracking.

2. Budget Your Finances

Create a budget for your finances when building wealth. It ensures you earn more, spend less, and make wise investments. Budgeting allows you to track expenses and follow a plan that results in financial order.

Create a budget plan based on your income and expenditure. It determines the distribution of your finances in categories. You must identify and rank expenses depending on your priorities, too.

The budgeting techniques you can try are the cash system and the 50/30/20 rule. Each method offers ways to distribute and spend your money.

The cash system makes use of cash and disallows credit cards. It allows easy financial tracking. Moreover, the cash system makes you spend less.

Distribute your finances into 3 categories for the 50/30/20 rule. Allot 50% of your income to needs, 30% to wants, and 20% to savings.

3. Start Saving Now

Growing old does not mean you’ll eventually build wealth over time. You need to be proactive in saving to see substantial results.

First, identify the things that need funding. Ensure to categorize them into short-term and long-term goals. Then, estimate the amount of money you need and the time to reach your goal.

What are things you need to save for as a young adult?

Saving for retirement is vital to guarantee a comfortable life in the future. With this, open an Individual Savings Account or contribute to a retirement plan. You can ask your company if they offer company-sponsored plans.

Unforeseen events, such as unemployment, can exhaust your finances. Thus, consider opening an emergency fund to cover the expenses. Many experts recommend saving up at least 3 months or 6 months’ worth of living expenses.

4. Take Risks

A survey shows that only 23% of respondents consider investing in the stock market. Many hesitate to invest because of fluctuating stocks. With this, they lose opportunities that can boost financial worth.

Note that a declining market provides benefits, too. It’s the best time to invest and buy more shares because of their low value. You can expect a high return and portfolio growth once the market recovers.

Don’t be afraid to consider investing in the stock market. Keep note that you can earn more if you invest earlier. You can ask for financial advice from a Registered Investment Advisor, too.

5. Pay and Avoid Debts

Unpaid debt can build up and exhaust all your available funds. Most of them demand monthly instalment payments and carry high-interest rates. You must pay your debts to prevent using all your money as payment and save more.

Moreover, financial responsibilities increase as you grow older. It makes it hard to manage your finances. Borrowing small amounts when you need it is okay, but try not to fall into a pit of debt.

Stick to your budget, prioritize your needs, and only pay using cash. Being debt-free gives you financial freedom and security.

6. Keep Expenses Low

You can categorize expenses into fixed and variable costs. Fixed costs refer to predictable expenses incurred, such as rent, subscriptions, and insurance. In contrast, groceries and repair fees are variable expenses that can change.

Reduce costs to allot more into your savings and investments. First, categorize expenses and rank them based on their relevance. Then, decide on the items to remove.

For example, you pay a fixed rate for your internet connection and music subscription. The internet connection is a necessity while the latter is a want.

7. Note Your Expenses

Noting every expense is one practice that helps in building wealth. It reflects spending habits that you can use to develop effective financial management. Moreover, it can determine your progress.

You can create a system using a spreadsheet or use a logbook to note expenses. Ask and keep receipts for every transaction. Spare at least 10 minutes of your time at night to input everything.

Check your list every week to assess your spending habits. You must determine if there are changes in prices, too. Adjust your budget, if necessary, based on your notes.

8. Explore More

Never rely on one source of income if you plan to build wealth. Try exploring other streams to generate more finances. Turn your interest or hobby into another source of livelihood.

You can find freelancing jobs on the web that fit your skills. Try opening a small business in your local community, too. Venturing into another job protects you from losses and boosts your financial health.

Building Wealth at a Young Age

Building wealth can seem like a daunting task, but it’s not impossible. The number of expenses increases as you grow older. Create a plan to manage your finances early to enjoy a stress-free and better life in the future.

Be smart with your money and invest in your future. You can contact us here for queries on finance, wealth management, and investments.

Digital Banking

What Is Digital Banking?

ByCFI.co

There are now 14 million people in the UK who have a digital-only bank account. 76% of citizens have also used an online banking service in the last 12 months. But, do you know what these services are?

Both digital and online banking have some major differences. Read on as we answer the question “What is digital banking?”

What Is a Digital Bank?

A digital bank is a financial institution that has all of its operations online. Services that were previously available at physical branches can be undertaken in browsers, mobile applications and digital environments.

They do not have brick-and-mortar premises but exist solely through digital means.

What Is Digital Banking?

Digital banking involves transforming all activities, processes and banking products into digital transactions. This allows them to be done anywhere with internet access, making banking much easier for the consumer. Most services are 24 hours and do not require a staff member to be present in a bank.

Obtaining Records and Statements

Transferring Funds

Withdrawing Cash

Bill Payments

Account Management

Monitoring of Transactions

There are also many advantages for the bank itself. As many processes can be automated, it reduces human error and the labour required for repetitive tasks.

What Is the Difference Between Digital and Online Banking?

These two terms may seem interchangeable. However, there are two key differences between them.

Online banking works through internet access. It has several basic banking products and functions. However, the system has limitations and it can not expand to add further services to consumers.

You would find this in use with traditional institutions that have added internet banking as an additional service. It works alongside their other operations.

Digital banking is more in-depth and flexible. It has API, automation and web-based service at its core. This means it can provide more security and cost-efficiency.

A digital bank exists solely online. You don’t have branches you can walk into to make deposits and consult staff face to face.

If you want the ability to expand and add extra features, then digital banking is key. Metrics and analytics taken from it can help improve the customer journey.

There is a third option: Mobile Banking. This is when banks create a designated application so that customers can perform services on their mobile devices.

Benefits of Digital Banking

Digital banking has several benefits. It is changing at a rapid rate bringing advantages for consumers, business owners and the banks themselves.

Increased Accessibility

Digital banking means residential customers, businesses and their employees can access banking anytime. All they need is a device and internet access. They can approve expenses, make purchases and transfer balances.

This can take place anywhere. It may be in the office, on a commute or on a business trip. With the addition of mobile banking, it becomes even easier.

Improved Customer Experience

A well designed digital banking system also creates a better user experience. Chatbots are often available to assist customers with any problems or queries. This improves customer service while minimizing the workload of staff in the bank themselves.

Not only can tasks like scheduled bill payments be set up, but tools for financial management are also provided. Statistics on spending and saving along with financial planning are available.

Central Account Management

With digital banking, all departments can be accessed from one location. This means you don’t have to deal with different representatives. With mobile banking, you can even download multiple apps to represent your different accounts.

Lower Costs

Fully digital banks operate with lower overheads as they have less staff and no physical premises to operate from. They can offer higher yields on savings, lower interest rates on loans and reduced fees as a result. This is often done to attract customers who may normally get put off by the absence of a physical store.

Benefits to Employees

From small businesses to large corporations, digital banking can provide a huge opportunity for employees. With digital banking for businesses, you can assign several corporate cards to employees who may need access to faster means of purchasing to do their job.

With real-time metrics and analytics monitoring, business spending also becomes easier. Reviewing spending by category and approving purchases or expenses instantly is an advantage. Policies can be created and individual thresholds set for individual employees on spending.

By providing financial autonomy, you empower your individuals. At the same time, you also retain control over the finances of the business.

Limits of Digital Banking

While it has many advantages, digital banking should be viewed as a bridge. It can never replace the interaction you get at a branch and some transactions, such as deposits of cash and withdrawals, can not be performed.

To get around this, digital banks usually allow cash deposits in designated partner retail outlets. However, this can often incur a larger fee.

Future of Digital Banking

Digital banking provides flexibility, but customer needs are bound to change. This means a modular infrastructure needs to change with them. What works now may not do in one or two years.

Many banks are now starting to adapt and incorporate digital asset transactions and management into their infrastructure. This includes digital payment wallets and transfers. All of this is provided alongside the standard services for fiat currencies that people need.

Starting with Digital Banking

Now you can answer the question “What is digital banking?”, you just need to find the services that fit your needs. Not all banks will have the same offers. Make sure you look to see what you need and who can make the best provisions.

If you found this article helpful, CFI.CO blog has many more to help. From banking to finance, we can get the most from your money. Click here to see all our business articles and let us help your business boom in the coming year.