CFI.co, Author at CFI.co Blog

Are you dreading tax time and don’t know where to start? You’re not alone. According to the Federation of Small Businesses (FSB), it takes small business three weeks every year in order to comply with tax rules. You’ll find that preparing ahead of time by doing research and budgeting will help you pay self-employment taxes easily without the stress. The confusion comes from how much you have to pay depending on different percentages of your earnings. We’re here to help cut down on the time and smooth away some of the confusion. Read on for our top six self-employment tax tips so you’ll know how to do taxes correctly once the time comes!

1. Budget for Taxes

If you were working on a side-hustle and didn’t earn over £1000 throughout the year, you’ll be happy to know that you don’t have to tell the HMRC that you’re self-employed. You also don’t have to pay taxes for the first £12,500 you earned.

If you make more than this, however, it’s important that you plan ahead and budget for taxes. According to UK tax laws, you’ll need to pay 20% for income between £12,500 and £50,000. This bumps up to 40% for income between £50,001 and £150,000.

Lastly, it increases to 45% for income of over £150,000. This also includes your income if you rent out properties.

We recommend setting some money aside in a separate savings account every time you’re paid. This will help you keep track of what you owe and also help you remember that not all the money you earn is yours–even if it feels like it!

2. National Insurance

It’s also important that you budget for the National Insurance payments that need to be made. If your profits from self-employment are greater than £6,475, you have the pay a rate of £3.05 a week for Class 2 National Insurance. This is paid through direct debit to HMRC.

If you’re making between £9,500 and £50,270, you’ll also need to pay 9% of your income for Class 4 National Insurance as well. For profits greater than £50,270, you’ll have to pay 2% of your profits. What you have to pay for National Insurance will also show up in your Self Assessment tax return.

3. Payments on Account

Even if you budget ahead of time, you may find that the HMRC is asking for a task bill that’s higher than you predicted. One reason could be because they’re asking to collect taxes that are due in the current year as well. They calculate this based on your earnings from the last year.

You’ll need to make your payments on account in two instalments: before midnight on 31 January and 31 July. Budgeting ahead of time will help for your first payment, as this is where you’ll find that for your first year, you’ll need to pay 1.5x more.

4. Claiming Mileage

It’s important to remember that you don’t have to pay based on your entire profits. You can claim expenses that you used for business in order to cut down on what you owe come tax time. If you use a vehicle for business, this is one of the easiest ways to claim some expenses.

Here are the mileage rates that you need to remember:

For the first 10,000 miles in the tax year, 45p per mile
25p per mile above 10,000 miles
24p per mile for motorbikes
20p per mile for bikes

The easiest way to keep track of these miles is to use an app that can automatically log your route and do the mileage calculations for you throughout the year. Many of them allow you to name and categorize your trips.

If you take frequent trips to the same location, you can even have the app automatically categorize the trip based on the route so that you don’t have to always manually input the information.

5. Claiming Home as Office

If you work from home frequently, it’s also important that you also make note of this on your Self Assessment. If you’re a sole trader or partnership, the easiest way to do this is through the simplified expenses rules.

Depending on the hours you work from home, you’ll be able to claim a flat rate. For instance, if you work for 25 to 50 hours, you’ll be able to claim £10 per month. If you work 101 or more hours, you’ll be able to claim £26 per month.

6. Find a Bookkeeper and Accountant

It’s important to remember that you don’t have to suffer through taxes alone. As your business begins to grow, there’s no shame in finding the help of a bookkeeper as well as an accountant. A bookkeeper will help keep all of your records organized and up-to-date so that they’re easier to compile during tax time.

An accountant can help you through the process of doing your taxes. Even better, throughout the year they can help you make smart business decisions. They’ll analyze the data and help you find ways to maximize profits and minimize expenses.

Self-Employment Tax Tips: Preparing Ahead of Time

When it comes to self-employment tax tips, our best piece of advice is to begin preparing as soon as you begin your small business. Keep track of your income and expenses so that you can predict how much you need to pay and how much you can deduct.

Then, create a separate savings account so that you can funnel a percentage of your earnings away. That way, you won’t become attached to the income you earn that still belongs to the government.

There’s also no shame in asking for help–bookkeepers and accountants are professionals that work with small and large businesses each day. They’ll help you explain the tax rules and procedures better as well as provide ways to keep your income organized. Even if you’re not looking for tax advice, accountants can help you make better business decisions.

Ready to stay in-the-know when it comes to financial news for SMEs? Take a look at our finance archives to stay on top of the latest developments throughout the world!

Budgeting

Budgeting for Beginners: The Ultimate Guide

ByCFI.co

Creating a budget is one of the best things you can do for your financial health. Budgets are like road maps giving you direction. To help you manage it all, we’ve rounded up the ultimate budgeting for beginners guide.

We’ll go over how to make a budget, where to start, and budgeting tips to help keep you on track. Here’s your go-to guide to creating a budget.

Where to Start

When creating a budget, you’ll want to start with your goals. Your goals could be anything from building up your emergency fund to saving for a home. Thinking about your goals will help you better understand where you should put your money.

If your goal is to retire early, for example, a good portion of your budget will go towards retirement savings. If your goal is to pay down debt, you’ll focus your efforts on reducing your credit card bills.

One helpful tip is to set small, attainable goals that will help you reach your larger goal. Let’s say your end goal is to pay off your debt.

Start with the low-hanging fruit and pay off your smallest or highest interest debt first. Paying off a small credit card, for example, will leave you with a few hundred extra pounds each month to pay off a larger card.

Write Out Your Income and Expenses

After you’ve set your goals, you’ll want to write out your income and expenses. You can’t make a plan for what’s coming out if you don’t really know what’s coming in. Write out any income sources you have.

Next, you’ll need to write out all your expenses. Separate your fixed expenses as well. Fixed expenses are expenses you have to have or pay such as rent and electricity.

Non-essential expenses include gym memberships, music subscriptions, and the money you spend on clothes. These are all expenses you can trim if the money in your budget becomes tight.

Check your bank statements for anything you may have missed. Go back a few months so you can see anything that’s paid quarterly. The more detailed you are, the more accurate your budget will be.

Where to Make Cuts

Once you see how much you have coming in versus what you’re spending, it’s time to make some cuts. Be realistic here. If you cut too much, you won’t be able to stick to your new budget.

Look at anything that’s non-essential. If it isn’t being used, cancel it. You may be surprised by all the subscription services you have that you aren’t using.

If you have three group fitness class memberships, for example. Choose your favourite and stick to one.

If you’re spending more than you’re bringing in, cutting items will help you get back on track. Keep your goals in mind here. If it isn’t helping you reach your goals, cut it.

Making a Budget

To start writing out your budget, begin with your fixed expenses. Rent, student loan, and your car payment are examples of fixed expenses. You need to pay for these each month.

Next, look at your utility payments, cell phone, and grocery bills. Groceries are one you can be flexible with if you need to. If you’re eating out for three meals a day, cut this down and increase your grocery budget to save money.

When you’re assigning items a budget, be realistic. If you’re used to spending £500 a week on groceries for a family of six, start by cutting that down to £300. If you try to live off £50, you’ll probably end up ordering takeaway and blowing your budget.

The next part of your budget should include reaching your goals. Remember to work on small goals to help you reach your larger one.

Carve off any disposable income towards reaching your goals. If these aren’t included in your goals, make room for saving for emergencies as well as retirement.

What to Use

Your budget can go on anything from a piece of paper to an online app. A spreadsheet that you can access online and from your phone is also helpful. You want to be able to see your budget whenever you need to.

There are a number of helpful budgeting apps as well. These often synch with your bank accounts, so your income and spending are tracked.

Cutting Down Fixed Expenses

Fixed expenses are harder to cut down. Rent, for example, has to be paid. If rent is too expensive, this is where getting a flatmate is helpful. You can split the rent, utilities, and even some groceries. You two can also share a car.

If you live in an area that’s walkable, you can also sell your car. You’ll use less petrol, save on car payments, and insurance.

The more you save and pay down, the less fixed expenses you’ll have. With budgeting, you can go from paying three credit cards to one.

Have Weekly or Monthly Meetings With Yourself

Once your budget is in place, you’ll want to make sure you’re staying on track. Host weekly or monthly meetings with yourself to make sure you’re staying on budget. It’s so rewarding to see yourself meeting your goals.

If a goal is to pay down debt. Pull up all your accounts online and check on your progress. When you see that debt number go down, put that money towards your emergency fund or another goal.

Budgeting for Beginners

Budgeting for beginners starts with accountability. You need to hold yourself accountable for your spending.

The only way a budget works is if you keep it realistic and set small, attainable goals. For more money advice, check out the finance section.

Wealth Management

7 Common Financial Planning Mistakes That You’re Probably Making

ByCFI.co

The average household in Britain has over £15,000 in debt. You may think to yourself, well I’m not out £15,000. There’s no way I’d ever accumulate that much debt.

Debt is often connected to large purchases like homes, automobiles, or student loans. We know about that debt. We are prepared for it.

But the debt that creeps up over time is the trickiest. A little bit here, a little bit there seems fine. Before you know it, though, you’ve matched that £15,000 and then some.

Don’t let small mistakes in your financial planning lead to big debt. Check your habits against the following seven mistakes that we see most often. Read through for tips on how to avoid them and what habits to adopt instead.

1. Putting Your Emergency Fund on Hold

One of the most common financial planning mistakes is not having an emergency fund. This is enough money to cover your basic expenses for at least three to six months.

Maybe you’re in school or working your minimum-wage first job out of university. Saving what you can, even if it’s £20 a month, makes a difference.

But over the course of a four-year degree, that £20 a month grows to nearly £1,000. And that doesn’t include interest earned from your bank!

You may be out of school and established in your career. If you do not have an emergency fund, you need to start one as soon as possible.

Begin by sorting out how much money would cover six months of expenses (Netflix or Amazon do not count). Divide that number by how many months you can take saving up for it.

Once you have a plan, get your first payment into a bank account with a decent APY.

2. Paying Down Debt Without Saving

You may not have an emergency fund because you’re paying off student loans. You aren’t alone! In fact, in England, 1.3 million students receive financial aid each year.

But it’s imperative to keep saving even as you pay off your debt.

Loans often come with steeper interest rates. So your best course of action is to make larger payments against your debt upfront. In tandem, make smaller payments toward your savings.

Once you’re debt-free, you can save faster. Consider saving the same amount you were using to pay off your debt each month. After all, you’ve already practised not using that money for other things.

3. Not Saving for Taxes

Smart financial planning accounts for every expense, and that includes taxes! You try to think of everything: the mortgage, the kids’ education, daycare, pet care, investments, retirement. It’s easier to forget about taxes while planning your finances because they come up only once a year.

When you do get your tax return, you don’t want to find yourself pulling from your savings account. Average the taxes you paid over the last five years and divide that by 12. That’s the minimum amount you should be putting away each month for your taxes.

If you are in Australia, take a look at Sydney’s dedicated SMSF advisers for advice.

4. Not Budgeting for One-Time Expenses

Alright, so you’ve made an emergency fund, you’ve paid off your debt and you’ve budgeted for taxes. Well done, you! Next, we’re going to consider the other annual, one-time expenses you may not be considering.

For example, one annual event, in particular, comes around the same time every year in December. You may recall a lot of expenses associated with it: ribbon, wrapping, gifts and cards. We’re talking, of course, about Christmas.

It could be Christmas, Hanukkah or your child’s birthday party. Either way, make sure you add these one-off expenses to your budget. Think of it this way: a budget is also a great way to keep from overspending during the next holiday season.

5. Living Beyond Your Means

Speaking of overspending, that’s one of the easiest financial planning mistakes to make. Here’s where your consumer debt can creep up on you over time.

It starts with one handbag that’s just a little over your price range. Or a fantastic deal on that new teapot online even though you really don’t need a new teapot. It could even be buying your morning coffee at the cafe instead of making it at home.

These £5, £10, £15 splurges here and there may not seem like much, and they aren’t if they’re one-time-only purchases. But over days, weeks and months, you’re subtracting hundreds of pounds from your budget.

If you want to be able to splurge now and then, add it to your budget. Put away a few pounds a week and treat yourself to a fancy cafe treat once a month. Save up for that nice handbag or decide whether you can live with the teapot you already have.

6. Not Diversifying Your Investments

If you’re not investing (and you don’t have heaps of debt to pay down), you should start. It’s the best way to see your money grow over the long run.

But one mistake we see with new investors is not diversifying their investments. What this means is putting all your money into one kind of industry. For example, investing everything you can into real estate investments.

This isn’t a wise way to invest because it leaves you at a higher risk. If the real estate market drops, you’ll suffer a greater loss than if you’d diversified. If you’d invested in real estate as well as lumber, technology and food, for instance.

If you’re not sure whether you’ve diversified your accounts, speak with your bank or an advisor. They’ll be able to offer suggestions on ways to improve your profile.

7. Ignoring Your Company’s Retirement Plans

And while we’re on investments, let’s talk about saving for retirement. Even if you’re in your twenties or thirties, you should be contributing to a retirement plan.

Thankfully, many companies offer retirement savings plans to their employees. These plans usually take a portion of your paycheck and put it into your retirement account. Sometimes, companies will even match your contributions up to a certain number.

Either way, it’s worth looking into! It saves you from spending that extra money and gives you an added incentive to save.

Strategies for Financial Planning

Organizing your finances may not be the most glamorous undertaking, but it is a critical one. Use these financial planning tips to help you navigate your finances with confidence.

And if you’re curious about getting started with a financial advisor, check out this article.

Private Equity

6 Types of Private Equity

ByCFI.co

We live in an unstable financial world. This has meant that those seeking to invest are desperate to know where they can find a safe bet. As a result, interest in the different types of private equity (PE) has gone up.

Private equity is an investment made by funds who are not listed on the public stock exchange. Companies use the funds for a range of different things but the end goal is the same for any investor, a return on investment.

So how many different types of private equity are there?

Let us show you and after reading you will see that there isn’t an area of business that doesn’t benefit from the various types of private equity.

Venture Capital

Made famous with the tech boom of the late ’90s, venture capital funds invest in start-up, emerging, or small businesses. This is done with the hope of a return on investment should the company become successful.

There is a clear risk in doing this as these companies don’t have a solid track record of turning a profit. However, the potential sizable windfall has made them very lucrative.

Young companies on the market for the support of venture capital fall into two categories.

Early-stage funds focus on looking for budding enterprises with extremely capable leaders looking for capital to develop technologies etc. Later stage funds for emerging businesses that may have already exhibited a profitable business plan and may be looking to expand or step into new markets.

Examples: Whatsapp and Facebook started life being funded by VC’s.

Leveraged Buy-Out

A leveraged buy-out is when a PE fund uses part of its capital as well as borrowed funds to acquire a controlling stake in a company.

Operating similarly to a mortgage, capital is raised (up to 90% through loans) and the existing debt is offset by any profits gained by the company purchased plus any existing assets that they may have.

The goal of any PF fund who performs a leveraged buyout is to stimulate the profitability of the newly acquired business. To do this they will reduce expenses or change their financial strategy via financial engineering.

Mature, profitable businesses are prime candidates for LBOs due to the high levels of debt that are involved.

Examples: Heathrow Airport, Manchester United and Hilton Hotels are some famous examples that have been involved in LBO’s in recent history.

As a comparison, a management buyout is a form of acquisition in which a company’s existing management acquires most or all of the company from its parent company or non-artificial person.

Growth Capital

At times a company may wish to expand or step into new markets in a way that they feel will be profitable long term. To do so however they need the money that they don’t have. In this case, a PE firm can choose to invest to stimulate this growth, which is the basis for Growth Capital.

Companies in this position are usually stable and financially secure. This means that although similar to VC, investors take minority stakes and leave the day to day running of operations to the business.

Growth capital funds are willing to invest in businesses that they see as reliable and profitable, even if at times the company in question doesn’t have a long track record. This means that they sit in the middle of VC’s who look for new blood and LBO’s who need a sure bet.

Examples: Deliveroo is seeking to benefit from $180 billion received due to growth capital.

Real Estate

Investing in real estate is perhaps one of the most well-established types of private equity. This is likely due to the constant and steady cash flow investors enjoy over time as well as the potential of high returns.

Commercial real estate is where most of the investment goes. This includes such things as office blocks, shopping centres, multi-family apartment buildings. Other areas such as land are also included however this is more speculative and therefore seen as more of a risk.

Investing in real estate on this scale in the past has only been open to high net with individuals or institutional investors. The reason? The large amounts needed to contribute.

Examples: Blackrock is the biggest private equity firm in this sector with properties as diverse as the MGM Grand and Bellagio in Las Vegas to Center Parks in the UK.

Infrastructure

Investing in infrastructure involves three main areas of investment, utilities, social and transportation.

Utilities include investing in the energy sector, water distribution and telecommunications. Social investments involve education facilities and hospitals and transportation can include toll roads, rail and airports.

Why are these types of private equity desirable?

Well as they are providing essential services, even though there is not much room for potential growth, it is a low-risk investment. This means you as an investor can rely upon steady and stable returns.

Additionally, infrastructure funds allow more flexibility in where your money lies, meaning it is better protected in an often volatile market.

Distressed Private Equity

More and more on the news, we hear of companies facing hard times being bailed out at the last minute by private investors.

These types of private equity are known as distressed private equity.

Getting involved in distressed private equity will require a wide range of skills on the behalf of the private equity fund involved. Not only the standard business acumen is necessary but an understanding of bankruptcy laws and capital and credit structure among other areas of expertise may be called upon.

So why would someone choose to invest in a company going through major difficulties?

Mainly because the purchase value becomes so low that they can make a massive profit from turning fortunes around. Any future sale or even going public can make distressed private equity extremely lucrative.

Examples: The trainer brand Converse filed for bankruptcy at the turn of the millennium and was saved by Footwear Aquisition Inc for $117.5 million. They later sold it to Nike in 2003 for $305 million.

Clarity on the Different Types of Private Equity

Deciding where to invest your money, is one of the decisions in life that can have the most ramifications for you or your clients future.

For that reason, we hope that this deep dive into the different types of private equity has left you with a clear idea about the available options.

If you would like further advice or you have a question that needs answering don’t hesitate to contact us!

Investment Management

8 Essential Money Management Tips for 2021

ByCFI.co

Money: it makes the world go ’round. Not only do we need it to pay bills and buy groceries but to send our kids to college and eventually retire.

The trouble with money, however, is that it’s difficult to manage. We spend it so frequently and on so many different things that we can have issues maximising its usefulness.

This is why it’s important for you to brush up on your money management skills. Need a little help with the matter? Then read on because here are eight essential money management tips for 2021.

1. Establish a Budget

The first thing you should do is establish a budget. This will help you see where your money is going and how much money is left over after you’ve paid all of your necessary expenses. Necessary expenses include rent, utilities, taxes, insurance premiums, groceries, gas, and the like (things that you have to pay for in order to survive).

To create your budget, we advise you to use either a phone app or an online spreadsheet. There are all sorts of budgeting apps out there, including Mint and Personal Capital, to name just two.

Use these apps to write down the name of each expense as well as the amount of money that you need to allocate to each of them. This will show you how much spare money you’re working with each month, helping you to realise new ways of spending your disposable income.

2. Track All Spending

In addition to creating a budget, you should also track all of your expenses. This includes non-necessary expenses as well as necessary expenses. Non-necessary expenses include but aren’t limited to money spent on hobbies, money spent eating out, money put in savings accounts, and the like.

Only by tracking these expenses can you know whether or not you’re over or underspending in a particular area. For instance, you might find that you’re spending too much on fast food and too little on your retirement contributions.

If you don’t track your spending, you become susceptible to making an excess of frivolous purchases. These purchases will provide you with a feeling of quick gratification but will hurt your financial standing in the long-run.

3. Save for Emergencies

Life is unpredictable. Rarely do things go to plan. Whether it’s a perfectly good furnace that stops working in the dead of winter or an automobile that gets sideswiped by an aggressive driver, emergencies do occur.

What’s important is that we have the money saved up to help us get through these emergencies. If we don’t have this money, we’re forced to turn to credit cards, and once we turn to credit cards, we start sinking further and further into debt.

This is why, every month or so, you should be putting some of your money into an emergency fund savings account. Generally speaking, it’s wise for your emergency fund to equal 3 to 6 months of your average monthly expenses.

4. Contribute to a Retirement Fund

You don’t want to have to work for the rest of your life. In fact, if you’re like many people living on this planet, health issues will eventually prevent you from doing so. This is why you need to contribute to a retirement fund.

Generally speaking, it’s wise to contribute 10% to 20% of your income to retirement, year in and year out.

5. Take Advantage of Multiple Accounts

One of the reasons that some individuals have trouble managing money is that all of their money exists within the same bank account. As a result, they end up spending money that they would have used for other purposes. For instance, instead of using the money for future healthcare expenses, they end up spending it on fast food.

How do you get past this problem? The answer is to take advantage of multiple bank accounts. This way, you can separate everyday spending money, emergency savings money, healthcare savings money, and otherwise.

6. Set Goals

You should always have financial goals that you’re working towards. Whether this is buying real estate, purchasing a car, stashing money away for retirement, or otherwise, setting goals can help to keep you on the straight and narrow.

If you don’t set goals for yourself, you’re likely to spend money on hollow purchases. For instance, you might overindulge in food or alcohol or musical performances, or athletic events.

7. Pay Off Debt Strategically

If you’re like many people on this planet, you have debt to pay off. This could be credit card debt, student loan debt, a mortgage, an auto loan, or otherwise. In any case, you should pay it off as strategically as possible.

First, see if you can get any of your interest rates reduced. You might be able to refinance with a different lender or you might be able to talk down one of your current lenders. It’s possible and certainly worth a try.

Next, establish a debt payoff plan. We recommend attacking the high-interest debt first. While doing so, just be sure to pay the minimums on your other loans.

The reason for doing this is to eliminate some of your interest burdens. The quicker you pay off the principal, the less interest you’ll have levied against you.

8. Set Some Money Aside for Fun

While you don’t want to spend all of your disposable income on non-necessary expenses, you should still spend some of it on them. After all, if you’re not having fun in life, you’re barely living in the first place.

It’s often recommended that you set aside 30% of your income for fun money. However, this isn’t manageable for everyone. Meet your savings goals first, and then budget for fun.

Need More Help With Money Management?

Money management isn’t an easy matter. It can take a lot of research and a lot of practice. If you need assistance with it, our website can help.

We have articles on everything from business to economics to hedge funds to insurance and more. If you’re looking to brush up on your financial expertise, this is the place to be.

Browse more of our money management strategies now!

Finance

Hedge Fund vs. Private Equity: Everything You Need To Know

ByCFI.co

Despite coronavirus-related struggles in other industries, UK asset management funds are thriving. Total assets under management hit £8.5 trillion at the end of 2019, up 10% from the year prior.

There’s never been a better time to place your money with an investment fund. But when it comes to a hedge fund vs private equity, which one should you choose?

Today, we’re helping you out with this guide to understanding hedge funds and private equity firms. Ready to learn more? Then you better keep reading because this one’s for you.

What Hedge Funds and Private Equity Funds Share in Common

Hedge funds and private equity funds are different. But they share in common their target investor, type of business partnership, and revenue streams.

Check out the biggest commonalities between hedge funds and private equity funds below.

The Target Investor

Hedge funds and private equity funds have the same target investor. They both prefer high net worth individuals. Usually, that means investors must have $250k or more to invest.

The Partnership Structure

Hedge fund companies and private equity firms tend to have the same business structure. Namely, they’re both limited partnerships (LPs). LPs consist of a general partner(s) (also known as managing partner(s)) and limited partners.

The general partner(s) run the day-to-day aspects of the business and have full liability for any debts accumulated. The limited partner(s) has a contracted limited liability for any debts and doesn’t partake in day-to-day operations.

The Profit Scheme

Hedge funds and private equity funds have the same profit scheme for partners. Both types of funds pay general partners a contracted management fee. Plus, they pay each partner a pre-determined percentage of annual profits.

Management fees tend to equal approximately 2% of the value of the asset under management. For example, a private equity fund manager might make 2% off the sale of one of his portfolio companies.

PE and hedge funds base performance fees on profits. For example, a hedge fund manager might receive 20% of gross profits after the sale of stock.

What Is a Hedge Fund?

Hedge funds are institutions that make investments with money pooled from high-net-worth individuals. Because they trade on borrowed funds, hedge funds are risky. This is especially true during times of economic downturn.

Hedge funds tend to be less regulated than similar investment institutions. This has to do, in part, with the fact that hedge funds don’t work with smaller investors. You must be an accredited investor to invest in a hedge fund.

Keep reading for three additional factors that explain the hedge fund vs private equity distinction.

Hedge Funds Goals

A hedge fund’s goal is to make as much money in as short of a time as possible. This is called a short or short-term investment strategy.

Note that the short-term nature of hedge funds’ investments means investors can cash out any time.

Hedge Funds Investment Strategies

Because they’re short-term investors, hedge funds tend to only invest in strongly liquid products. These products can easily and quickly be turned around for a profit, which the hedge fund can then invest in new assets.

Hedge funds are less picky when it comes to the specific type of investment they’ll make. Stocks (take a look at this S&P 500 heat map), futures contracts, currencies, derivatives, and bonds are all fair game for hedge funds.

Hedge Funds Investment Structures

Hedge funds feature an open-ended investment structure. This means investors can not only take profit whenever they want, but they can also add more money into the fund whenever they want.

This is due to the short-term nature of hedge fund investments.

What Is Private Equity?

Like hedge funds, private equity (PE) funds accumulate wealth from high-net-worth individuals. Firms then invest that money into privately held companies. This makes PE investments far more stable than hedge fund assets.

A PE fund can be made up of a pension fund, which is a company’s retirement fund. More commonly, it’s an actual PE firm. Accredited investors fund PE firms in a similar fashion to hedge funds.

Here are three more factors that differentiate PE from hedge funds.

Private Equity Firms Goals

A private equity fund’s goal is to curate an investment portfolio with the potential for profits in the next 4–7 years. This is called long or long-term investing.

As you can imagine, long-term investing makes it trickier to cash out. Most PE firms require investors to commit to 3–5 years at the least. Some firms require investors to agree to invest for 7–10 years before realizing profits.

Private Equity Firms Investment Strategies

Private equity firms invest in private companies directly using one of two strategies. The first strategy is to purchase the company outright. This can be done either through a leveraged buyout (LBO) or a venture capital investment.

A less common strategy is to purchase controlling interest via a public company’s shares. When a private equity fund does this, it’s usually because investors plan to de-list the public company from the stock exchange.

Once a private equity fund acquires a company, it hands that account over to its fund managers. The fund managers monitor the company over time to ensure the investment will pay off in the long run.

Private Equity Firms Investment Structures

Private equity funds use closed-ended investment structures. In the same way that investors can’t take profits for 3–10 years, they can’t add new money to the investment either.

This is due to the long-term nature of private equity investment strategies.

Hedge Fund vs Private Equity: The Bottom Line

When it comes to the difference between a hedge fund vs private equity firm, the biggest thing to consider is the investment strategy.

If you want quick returns now, a hedge fund’s short-term investing strategy is for you. Meanwhile, investors in it for the long hall may benefit from investing with a private equity firm.

Looking for more financial advice from Capital Finance International? Check out our finance blog posts right now!

Finance

Investing in Your Child’s Future: Expert Tips on How to Start Saving for College

ByCFI.co

Are you looking to prepare your child for a future of academic success? While not all children will choose college after they’re finished with school, there are over 2 million students in higher education programs in the United Kingdom alone. This means that it isn’t unlikely that your child will become one of them.

But how do you afford higher education? With the costs of colleges rising by the year and student loans setting students up for financial distress, it’s a good idea to start saving for college as soon as possible.

It’s a daunting idea, but we want to help give you some direction. Keep reading for a few tips on how you can start setting your child up for academic success by learning how to save for college ahead of time.

Start Early

This is the most crucial advice that we can give you when it comes to preparing your child for college. You need to start as early as possible.

Higher education is expensive. While it’s possible to put aside enough money as your child enters their teen years, it’s much more difficult, especially for families who are in lower income brackets.

This means that you should start while your child is still young, preferably in their infancy or toddler years if you’re able. Some parents choose to start before the child is born.

The longer you have to save, the more money you can accumulate with fewer adjustments to your day-to-day spending. This is even more important if you have multiple children who all plan on going to University.

The rest of our tips apply regardless of how early you choose to start saving, but they’ll be more helpful if you start with plenty of time to save.

Create a Budget

Every household, regardless of the intention to go to college, should have a budget to adhere to. This makes saving easier.

First, calculate the income of your household. If your children have jobs, only include their income if they contribute to household necessities.

Make a list of all of your bills and spending that can’t be avoided or changed. These include internet, taxes, utilities, and the costs associated with your home such as rent or mortgage. Take these out of your income.

After this, consider your grocery bill. How much do you spend every month, and where can you cut down? Also, consider other areas in which you may be able to cut back, whether they’re necessities or not.

How much do you spend on gym fees or leisure activities? What about shopping?

With all of these things, you’re going to break your list down into “needs” and “wants.” These categories will help you learn where you can cut back.

Everyone needs food and clothing, but how much do you spend that isn’t necessary? For example, how much food waste do you accumulate? How often do you buy excess snacks, or expensive brands of items when the basic brands are just as good? See what you can do to reduce your spending in this area.

Do I Have to Cut Out Everything?

You can still spend money on non-essentials. You should be careful and work them into your budget ahead of time.

You want to add a percentage of your earnings to emergency savings, saving for the future, and college savings. All of these are important.

After this, set aside money for fun and leisure activities so you’re still able to go on holiday and provide nice products and experiences for your family.

Put Aside a Portion of Every Paycheck

Speaking of setting aside money, putting aside a portion of your paycheck dedicated to college is a great idea. The earlier you start, the smaller the portion needs to be.

Make sure that it’s a reasonable amount based on your necessities. For some people, this may be as small as 1% to 5%, but this amount still makes a difference in the long run.

Choose the Right Savings Account

Savings accounts aren’t all equal. While you may be used to the savings account associated with your normal bank, consider alternatives.

When you’re choosing a savings account for a college fund, look at interest rates. You’re saving for a long time, and a higher interest rate means that you get more out of your account. Your money won’t be sitting, it will be accumulating.

Most savings account interest rates are available to view online. Don’t choose a savings account before seeing what the best bank can do for you.

Involve Your Child

Your child can help you save for their education once they’re old enough.

If you like, you can give an allowance for household chores when they’re young. Teach them the value of money by taking a small portion out of their chore money to save. If they save even a small amount every week, by the time they’re ready to go to school they’ll have a small, but not inconsequential, amount of money.

As they get older and get their first jobs, talk about putting aside part of their paycheck for college. They may be resistant, but if you’ve been successful in teaching them about money, they’ll understand how important this is.

Finally, encourage your child to strive for scholarships. There are plenty of scholarships available based on demographics and academic performance that your child can apply to in order to help offset the expense of a college education.

Saving for College Paves the Way for Success

Affording college is difficult for many families. This is why saving for college early is so critical. With the right steps, you can send your children to school so they can reach their full academic potential.

For more on finances, banking, and important news updates, visit our magazine. We’d also love it if you’d subscribe to our print version so you never miss a story.

Banking

Commercial Banking vs. Private Banking: What’s the Difference?

ByCFI.co

Are you stuck between choosing a private bank or a commercial bank? There are so many options and services to sift through when you’re considering the kind of bank that you want to give your business to.

If you’re feeling confused, you’ve come to the right place. We’re going to tell you the differences that you need to know between private banking and commercial banking. We’re confident that you’ll be able to choose the perfect bank for you after reading everything we have to share.

Commercial Banking vs. Private Banking

There are a few main categories that we’re going to discuss when it comes to the differences between commercial banking and private banking:

Deals
Lifestyle expectations, hours you’ll put in
Popularity
Money

We’ll discuss other, smaller details as well, but we note these categories to hold the main differences between the kinds of banks.

What Is Commercial Banking?

Commercial banks offer loans, investment opportunities, deposit services, and more to businesses and individuals. In addition, commercial banks serve governments and other entities.

Many commercial banks function as chain locations, meaning that a commercial bank may have locations across the world. Others may stick to certain regions.

The banks are considered commercial because they are publicly traded and they are required to be chartered by the state and/or federal authorities.

Commercial banks offer personal and business trust services as well. This means that they will be able to provide extra services that you might be looking for in a bank.

Some commercial banks dabble in private banking, which we’ll discuss later. By having a section or branch of private banking, commercial banks can reap the benefits of the private sector and expand their reach to those consumers who are better fit for the world of private banking.

Who Should Use Commercial Banking?

Commercial banks are more targeted towards the general population. If you consider yourself to be just another citizen in terms of wealth, you should look towards a commercial bank for your banking needs.

A commercial bank will give you everything you need while catering to your needs and the needs of just about everyone else.

Commercial banks conquer in terms of numbers because of how many people they are built to service. Commercial banks are made to take care of most of the consumers in an area, meaning that they are likely to handle anything that you may want or need to do with your money.

How to Choose a Commercial Bank

If you think commercial banking is for you and you’re looking to choose a commercial bank, you should focus on the services they offer. The commercial bank that you’re looking at may offer loans, investment opportunities, credit accounts, and more.

Plus, you might find that your commercial bank has a special savings account with a great interest rate or a checking account that you can open for your child.

Before you go to choose your commercial bank, you need to look at what kind of services and offers you want from the bank that you’re using. Talk with several different representatives about what the best services are and what kind of services you can take advantage of as a customer there.

What Is Private Banking?

Private banking is a whole new world to those of us who have only been involved in commercial banking.

These kinds of banks focus on wealth management for the extremely rich. This means that they’re more focused on growing money and ensuring that money is kept safe.

While a commercial bank does keep your money safe, private banks are famous for being locked down at all times when it comes to the money in the back.

Who Should Use Private Banking?

Those who have high net worths should invest in private banking. Yes, we do mean it when we say “invest.” Because private banks work with customers who are more likely to pay more fees and keep more money in the bank so that they can get the services that the private bank offers.

If you’re a high-net-worth individual who wants a bank that has estate planning, personalized banking, tax services, and money advisory services, the world of private banking is for you.

How to Choose a Private Bank?

If you think that you would fit into the world of private banking and you’d like to join a private bank, you should focus on the services they have and the money that they want in the bank. In addition, you might want to keep an eye on the fees even if you don’t care for tiny charges like those.

When you’re choosing your private bank, you should talk with several different places and talk about what kinds of services they have as well as how much it would cost to have those services available to you.

Your bank may charge a membership fee for access to these kinds of services, but they may also charge in addition to an already existing membership fee.

The banks that you’re considering should have a full list of any fees that they have. Be sure to pick this up or look this up when you’re considering joining a bank. Even if you don’t care about small charges, you should watch out for large charges that may come your way.

More on the World of Finance

Whether you think that you’d thrive more in the world of commercial banking or the world of private banking, we’re confident that you’ll be able to choose the right bank for you if you focus on your personal financial needs. By looking at what you need and what services you’d like, you’ll be able to find a bank that works the best for you.

If you’re looking to learn more about banking and finances, we invite you to check out the rest of our blog. We have a plethora of information about banking and everything you need to know about it to thrive and succeed.

Banking

7 Benefits of Digital Banking

ByCFI.co

If you’re still writing paper checks, waiting in line at the bank, or meeting with banking associates in person in 2021 and beyond, you’re missing out.

In recent years, digital banking has exploded in popularity, with research suggesting that nearly 70% of people in the UK use mobile banking, with 86% using it as their primary banking channel. If you’ve noticed this growing trend, it may leave you wondering, “Should I start digital banking?”

If you’re unsure about making the leap, it’s time to learn more about the benefits of digital banking—and why you should take advantage of this new technology.

1. Simplified Onboarding

Online banking makes the onboarding process much easier for new customers. With a virtual process guided by the latest technology, applicants can provide required documents to open an account in no time at all—with no need to spend time on a face-to-face meeting with a bank associate.

Of course, it’s still important, both now and whenever you access your digital bank account, to follow through with basic online security practices. Be sure to look for the lock symbol in the address bar, avoid using public WiFi, and use a strong password to keep your data safe.

2. Higher Interest Rates and Lower Fees

This benefit, of course, can vary from bank to bank.

However, in general, you’ll find that online bank accounts tend to have higher interest rates than traditional alternatives. A high-yield online checking account, then, can earn you a little more in interest per year than an account with a traditional bank.

One other money-saving perk is the lower fees. Because online banking demands less overhead than the brick-and-mortar alternative, many online banks pass those savings along to customers. This means that you’ll find lower (or no) monthly maintenance fees, minimum account balances, and even transaction fees, depending on the bank you use.

3. 24/7 Banking From Anywhere

There are few things most of us hate more than a lengthy queue—especially when we only need to take care of a quick transaction.

With digital banking, it’s possible to take care of banking tasks from anywhere and at any time, which opens up a world of convenience. Most banks offer mobile apps that allow you to access your accounts even when you’re out and about, allowing you to double-check your transactions in real time. What’s more, your easy banking pairs well with any budgeting apps you already use for extra convenience.

4. Easy Check Deposits

Most mobile banking apps will save you the trouble of heading to a brick-and-mortar bank each time you need to cash a check. The process is simple: using the camera on your phone, you’ll need to take pictures of the front and back of the check. Certain banks may have additional requirements when you cash checks online, like writing a specific phrase in addition to endorsing the back of the check, but the process remains fast and easy no matter where you bank.

5. Online Bill Pay

For easier bill pay services, digital banking is a must. With most online banks, clients have the opportunity to set up payees in their account, allowing you to send a payment to the company or client in question whenever you need to. This ensures that you no longer have to worry about checks getting lost in the mail!

In addition, automation can make regular billing tasks even easier. Setting up recurring automatic bill payments can help you stay on top of your cash flow for regular expenses, like car payments or subscription services.

When needed, you can also authorize providers to automatically remove money from your account when your bill is due. This can be helpful for providers like electric companies or mortgage lenders. To do this, you will need to provide the company with your bank’s routing number as well as the checking number of your account.

6. See Transactions at a Glance

When you bank online, all of your past transactions are easy to access and view at a glance. This makes it more convenient to check your account history on a regular basis, especially at a time when many of us worry about unauthorized transactions and identity theft.

If you are more accustomed to traditional banking, you may also catch sight of a feature exclusive to virtual banking: pending transactions. With pending transactions, you’ll be able to see transactions that a merchant hasn’t yet processed. This helps you see and understand the full context of your spending, even when a charge hasn’t been authorized yet.

7. Transfer Money With Ease

Whether you’re transferring money to your own account or paying back a friend for those concert tickets, money transfers are easy when you bank online.

Instead of visiting the bank in person, you can start an online transfer and input the details of the account you’re sending money to. Once your request is complete, the transfer may take up to three days to move to the receiver’s account, though it’s often far less if the receiver has an account at the same bank.

Harness the Power of Digital Banking

Given these benefits, it’s not hard to see why digital banking is poised to grow in popularity in the next few years. With added convenience and quick transactions, it’s easier than ever to make the most of your money with an online bank. Consider opening an account today to see the difference it makes!

For more of the helpful banking and finance guides you need, CFI.co has you covered. Check out our related posts for more insights.

Banking

What Are the Different Types of Credit?

ByCFI.co

You got to give credit where credit is due. And sometimes, credit is due to you. Credit allows you to pay back your debts and get loans. Millions of people in the United Kingdom have credit cards and use them wisely. But the average credit card debt per household still totals over 2,100 pounds. Many people assume that all types of credit are alike.

But there are some significant differences among the types of credit. Understand how credit works and you can reduce your debt. Here is a quick guide.

Revolving Credit

If you have a credit card, you probably have a revolving credit account. Revolving credit provides you with a maximum credit line.

Once you hit that line, your creditor assigns a payment you must make. You cannot use your credit line until you pay your payment in full. Most creditors allow monthly payments, but plans can differ.

If you cannot pay your monthly payment, it will roll into the next month. Your creditor will charge that payment with interest. Some creditors charge very high rates of interest, so you should try to pay in full every month.

The more on-time payments you make, the higher your credit scores will be. You are more likely to receive approval for loans and advance payments. Using less than your credit limit will also assist your credit scores.

Some creditors charge additional fees on top of interest rates. You may have to pay a cash advance or foreign transaction fee. Read the terms and conditions of your contract carefully before signing.

Instalment Credit

If you take out a loan, you probably have instalment credit. Instalment credit lets you borrow a set amount, which you pay off with fixed monthly payments.

Your contract determines the amount you will borrow and the time period of the loan. Even if you make on-time payments, you may have to pay interest. Keep a close eye on what the interest rates are through time.

Some contracts do not allow you to pay your loan off early. They may charge you a penalty for doing so, which can be higher than the amount you pay over time.

Several factors determine the terms of your contract. Your credit score is a major determinant. If you have paid off your loans on-time, your terms will be more lenient.

Your debt-to-income ratio is almost as important. If you have little debt on hand, your payments will be lower. The bank may make your payments higher if you have a high income.

You should show a stable history of employment, with no long gaps between jobs. You should also display any additional sources of income you have. The more sources, the more likely you will receive a strong line of credit.

Open Credit

Open accounts are rarer than revolving or instalment accounts. But some utility and cell phone companies do offer them.

An open account provides a balance that you must pay in full every month. Open creditors do not charge interest, but they can charge penalties if you don’t pay. In exchange for your regular payments, you receive services.

Open lines of credit don’t appear initially on your credit report. Companies may refer your information to credit bureaus if you are late on your payments.

An open credit account is the simplest kind of credit. As long as you pay every month, you should not run into difficulty.

Secured Business Line of Credit

If you are looking to start a business, you may receive a secured business line of credit. This is a special type of loan that is similar to a revolving line.

A secured business line sets a maximum amount that you can borrow. However, you can keep borrowing past your line. You need to make a payment, but you can break your payments up so you can keep borrowing.

To receive a secured line, you need to provide collateral. The most common types of collateral are property and equipment. Banks usually do not accept stocks for secured lines.

Real Estate Line of Credit

If you want to invest in real estate, you need to have some money upfront. A real estate line of credit can get you the resources you need.

Home equity determines many real estate lines. An investor exchanges equity they have in their house for money from a creditor. They can use that money to purchase a property, usually to renovate or flip the property.

Their line of credit is limited to what the investor receives from the creditor. But an investor has no restrictions on how they can use the cash. The credit line requires no other financial statements besides a personal credit report.

A real estate line is the best line of credit for a quick payment. But it requires a high credit score.

You can use the equity in your house as collateral and pay the loan back through monthly payments. If you default on your loan, the creditor can place a lien on your house.

The Five Different Types of Credit

Many people struggle with credit. They don’t understand how payments work, let alone that there are multiple types of credit. But you can distinguish amongst them.

A revolving credit line charges monthly payments. These payments can incur interest if they are not paid off. An instalment line provides less interest but sets firmer conditions for when you make payments.

Most utility companies use open lines of credit. Secured business lines are good if you want to start a business, while real estate lines are good for real estate investors.

Get the facts you need to strengthen your finances. Capital Finance International provides premium reporting on business and economics. Contact us today.