Question

Finance is exciting! In this course, we learned how money can grow through the use of compounding and interest rates and your growth strategies may now be different. What are your new financial goals? Would you like to become more liquid, to save more for your retirement, or to start a new business? Whatever your goals, finance is right at the core. Think about what you learned in this course regarding investing to complete this assignment.

Write a two to three (2-3) page paper in which you:

1. Describe (3) ways you will invest in your future based on the principles of finance discussed in this course. Include terminology from the course and use citations as necessary to support your explanation of the terminology.
2. Discuss one of the (3) ways you feel most confident as a way to invest in your future. Explain your level of confidence.
3. Of the (3) ways you will invest in your future, discuss the one you perceive might be the most challenging. Then, discuss how you might overcome some of those challenges.

Answer 1

Although the answer completely depends on the discussions you had in your class, I will try and answer in a more generic way . Hope my answer adds value to your learning.

Finance is Indeed fun and exciting. In fact I would like to add that it is more of a common sense thing too. For instance, if some one offers me $100 today or $100 a year later, I would definitely demand the $100 today . This is the most basic and most important concept of Finance - Time Value Of money. A dollar today is worth more than the dollar a year later.

Malcolm Gladwell in his book The Tipping Point shares an interesting example to explain the power of compounding.

Start with a stack of one cent. Place one coin on a checkerboard square and double it as you move to each square. How much money will you have on the 64th square?

You will be astonished to know that it would become - 9,223,372,036,854,780,000

You would beat Bill Gates' highest level of net worth at Rs.90 billion – one million times over! P=2^ (n-1)

Albert Einstein had once remarked – compounding is the greatest invention ever.

If you give someone funds on loan, you would ask for certain Interest. Now this Interest rate broadly depends on three factors.

Risk Free Real Rate of Return: The rate of return required for the sacrifice of present consumption.

Inflation Premium: Purchasing power of money comes down due to rise in inflation. When people have more spending power and funds are available at cheaper rates, Inflation goes up. Hence, the lender tends to lose the value of his money for which he will charge inflation premium to compensate for the loss of purchasing power.

Risk Premium: Credit default risk , market risk, country risk(In certain cases), liquidity risk etc are some types of risk which a lender would like to cover before lending for which he will charge Risk premium as an reward for taking these additional risk.

Now coming to my financial goal , It is fairly simple. My money should work harder than me.And for this I would start in the following manner -

“Do not save what is left after spending; instead spend what is left after saving.”

Simple exercise at the beginning of each year can make a lot of difference

Step 1) Identifying My own current Sources of Income and expenses. Bi-furcate my expenses into fixed,recurring,one off, unavoidable. I will keep a check on your spending.

If you don't know where you are going, you'll end up someplace else.”

Step 2) Identify my Long term needs – What are my long term goals? May be buying a house ,a car, a foreign trip. How much will it cost me in future? Do an analysis on that. Needs and wants change with time.Today owing a house may be a luxary but 10 years later it would become a neccessity for me.Hence I will start planning today itself.

A goal without a plan is just a wish.”

Step 3) Prepare a plan of investment as per my needs in Step 2 (Understanding the power of Compounding) . There are many investment options available I will balance between equity and debt investment. Follow the "Rule of 100 minus Age" for asset allocation related to Investing in equity. The rationale behind this is , when you are younger, your risk taking capacity is higher as compared to when you grow older. As we grow, our responsibilities increase and we are not in a position to take too much risks..Taxes eat a lot of the earnings ,hence I will also factor in taxes to see my net gains.

Lastly , I leave you with some timeless readings to learn about investment. Remember, learning is a life long process but you should also implement what you learn. The best investment that you can make is in yourself. Take calculated risks in life. Do let me know in comments section what else are your doubts or want me to write on, I would surely oblige. All the very best for a bright future.

1. The Intelligent Investor ~ Benjamin Graham
2. Security Analysis ~ Benjamin Graham
3. One Up On Wall Street ~ Peter Lynch
4. Common Stocks and Uncommon Profits and Other Writings ~ Philip A. Fisher
5. Warren Buffett’s Letters to Shareholders
6. The Black Swan ~ Nassim Nicholas Taleb
7. Fooled by Randomness~ Nassim Nicholas Taleb
8. Accounting for Value ~ Stephen Penman
9. It’s Earnings That Count ~ Hewitt Heiserman
10. Financial Statement Analysis: A Practitioner’s Guide ~ Martin S. Fridson
11. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports ~ Howard M. Schilit
12. Creative Cash Flow Reporting ~ Charles W. Mulford
13. Financial Warnings ~ Charles W. Mulford