Your investment decisions can transform your life. Simply earning a good salary alone will not assure your financial freedom, and bad investment decisions can ruin your capital or even your hard-earned money. Investment can be considered as the important factor that can either make your finances or can completely destroy your financial status. Good news is that you do not need an additional degree to learn how to invest, this knowledge can be gained by just reading few books, blogs and following the investment discipline of any successful business man or finance wizard.

The ultimate goal of the investment is to make sure that your money is actually working for you in the future. Investing is not rocket science it can be understood as simple activities done consistently to make sure that your money will grow in future. The act of investment should not be confined or restricted to only the money that you earn it must consider investment of time on self-improvement as well. People who understand the importance and urgency of investing their time and money will always be ahead of the ones who consider it only associated with money.

“Investment means the act or process of using your money for profit or material result.” The most important phrase to focus on in the definition is “using your money” so the entire result of any investment activity will depend on efficiency and effectiveness of your ability to use your money to achieve your financial goals. So, the first step should be to define your financial goals in a clear manner and setting deadlines to achieve those goals.

The next step should be to arm yourself with the knowledge about investing and deciding where you want to invest your money. In this phase you must quantify how much you are planning to invest and what is the time for which you want to make this investment. Most important characteristic of a successful investor is to know when to enter in a particular segment of the market and when to exit.

This decision of deciding your entry and exit points will not only quantify your expected profits but will also force you to find out and plan your next investment.

Once decided and planned your investment the only thing left for you to do is a flawless and disciplined execution of your investment plan and this is the part where most of the people fail. We will discuss how you can avoid distractions and progress towards your financial freedom by following your investment plan. You can only execute your plan when you can forecast what would be hurdles that you will find in your investment journey and plan a strategy in advance that you need to follow to overcome those hurdles.

What is Investment? A Complete guide to start your investment journey.

 

Here are some tips that you can follow to create your investment strategy:

  1. Invest in your self – The most important asset that you have to achieve your financial goal is you. Investing in yourself means that first you need the knowledge or skill set to generate a decent income stream for yourself. During this process of acquiring skills for income generation you must also arm yourself with the knowledge of investing. It will not happen overnight but the output would definitely be worth time and effort. In this digital age you can plenty of books and content that you can use to educate yourself about investing.
  2. Resist the temptation – Now it is easier said than done. But the difference that you will observe by just learning this habit of saying no to anything that is forcing you to spend unnecessarily will save you a hell lot of money that you can use either in upskilling yourself or planning an investing in upcoming future. You have to learn to simply just avoid expenses that are not necessary.
  3. Make room in your earnings for investment – Remember we defined investment as an act of using your money so you have to allocate some percentage of your money towards investment. You can use the most basic 50 -30 -20 rule to allocate 20 percent of your earning towards investment each month so that you are making your money ready to work for you in future. It takes time to follow good habits and its you for who you are planning and investing right so it is worth the habit.
  4. Take a look around- You must be aware of the current trends and must be informed about the upcoming trends or the market niches because trust me an early bird does get the worm. As an investor it is very crucial to find the new horizons which can serve society and can create value for the society those are the market segments for investing in which you should prepare yourself. You never which new venture can give you amazing results and make you financially independent. So, look around, be informed and be ready to find new path breaking discoveries to invest in.
  5. Plan for emergencies – It is very crucial to take some portion of your income towards an emergency fund because these events will make a big hole in your pocket if you are not planned and prepared for them in future. It is just not about the financial aspect that a person should plan, on a personal level as well you do not want your loved ones to suffer just because you planned to plan for them.
  6. Take care of your health – It will not seem an important factor but your plans will suffer if you are not productive and for that you should be in good health. Make sure that you have health insurance. Include healthy habits being on budget doesn’t mean that you should not take care of your health. Healthy person has many wishes but a sick person has only one. Allocating money towards a healthy regime and a healthy diet means that you are avoiding medical expenses in future and taking a health insurance safeguards you and loved for any medical emergency that can arise in future.

 It is your money and most importantly your time that you are investing for your future goals. No one is responsible for it, so it is your responsibility to be disciplined and focused on your goals. Everyone is motivated and high on adrenaline rush at the start to be the next big thing but it’s only the ones who are consistent in their efforts and willing sacrifice it all for their dreams end up being successful. Remember if you cannot dream you cannot start, but if you are not consistent you won’t finish.

Managing finance is one of the fundamental aspects of the business which not only ensures the sustainability of the business but also monitors whether the business is able to meet its important goal which is generating profit. Valuable insights regarding the efficiency of a business’ performance can be quickly and conveniently analysed by going through financial statements. Clear and thorough understanding of the financial statements like Cash Flow statement, Balance sheet, and Income statement not only provides information regarding business performance and financial needs but also ensures that informed decisions regarding finance and also makes sure that compliance and legal requirements are met regarding business operations. Hence ability to analyse financial statement is crucial to stay informed to make profitable and effective decisions and ensure that growth potential of the business is harnessed to maximum extent.

 Balance Sheet

Balance sheet can be understood as a sheet which shows the assets owned by the company, liabilities that the business owes and the owner’s equity which is what is left when all the liabilities are paid off. Balance sheet is an excellent way of determining a company’s underlying financial health. It serves as a great source of information for making decisions regarding expansion which is when assets are more than liabilities and also serves as an alarm to raise profits when your liabilities are more than assets.

Balance sheets when maintained properly can provide data to calculate important financial ratios such as current ratio, quick ratio and debt- to- asset ratio which can provide quick glimpse of the state of business to the business owners and can help in decision making about various aspects of business.

Components of a Balance Sheet:

Assets: The space allocated on the left-hand side of a balance sheet is for the assets that a company owns or have created. The assets column includes cash in the accounts, inventory, hardware or equipment and the receivables that are to be obtained from the clients or customers. Intangibles like goodwill generated, the value of your brand or logo is also included in assets part of your balance sheet.

 Liabilities: The right-hand side of your balance sheet is divided in to two parts and the top part is allocated to the liabilities which is nothing but detailed list of what the business is supposed to pay which can include the account payable which the business owes to the vendor’s, the debt obligations to the lenders or banks or the monthly salary obligations. Liabilities can be classified in to short-term liabilities (like account payable and short- term loans) and long-term liabilities (like mortgages, bond payable and long- term loans).

       Owner’s Equity: Owner’s equity or Shareholder’s equity is placed right below the liabilities column it refers to what is left after every liability of company is paid. In small businesses owner is usually the sole shareholder.

Why It’s Important:

Financial Health: Balance Sheets are reviewed and analysed to monitor financial health of a company. Comparison between assets and liabilities gives a clear picture about liquidity and solvency of a business.

Decision Making: Balance sheets are analysed for the making the strategic decisions like expansion, investment, mergers and selling. Balance sheets provides information of balance between assets and liabilities over a certain period of times and the shift in this balance helps in making the strategic decisions regarding the business.

Financing: Balance sheets are crucial in assessing the risk and potential return on investment for the investors. If a business has created more assets greater is the return on investment and lower is the risk in lending money to the business.

Interpreting the Balance Sheet:

  • Current Ratio: Current ratio of a business can be calculated by using the current assets and current liabilities from balance sheet for a business. Current ratio is simply the ratio of current assets to the current liabilities. It tells about a company’s ability to pay short term debt. If the value of current ratio is lower than one than the risk of default is higher. A value greater than one usually indicates good short term financial health of a company. However, if the value of current ratio is way above one it indicates that the assets are not being properly used by the company.

 

  • Total Debt to Total Asset Ratio: This ratio serves as a metric to determine a company’s degree of leverage and solvency. As the name suggests this ratio is simply the ratio of total debt to total assets owned by the company. Higher the ratio higher is the risk for investors and lenders to invest in the business. For an example if the Total debt to asset ratio of a company is 30% it means that the 30 percent assets of the company are financed by the creditors and 70 % assets are financed by the stakeholders. Usually, ratio of 30 to 50 percent is considered to be a good Total debt to asset ratio.

 

  • Quick Ratio: Quick ratio is measure of capacity of a business to pay off its short-term obligations using most liquid assets like accounts receivables, cash, market securities and cash equivalents. It is calculated by dividing the company’s most liquid assets excluding inventory or assets which ca not be easily liquified to generate cash by the total current liabilities. High value of quick ratio indicates better liquidity and financial health. However, a lower quick ratio means that company may struggle in paying off the liabilities and might have to sell the inventory and assets to pay off debts.


  • Debt to Equity Ratio: This ratio is also considered as a gearing ratio as it indicates the percentage of debt a company is using to finance its operational activities rather than their own capital or resources. It is simply calculated by dividing company’s total liabilities by the shareholder’s equity. Although some amount of debt leveraging is considered good for running a business but when ratio of debt exceeds a safe value the business is considered risky by the investors and lenders to invest. A high value of debt-to-equity ratio means that the company heavily relies on the financing and hence is considered a risky venture by the creditors. This ratio can be observed over to assess the change of company’s reliance on debt.

 

Understanding balance sheets is a mandatory skill for people owning a business or thinking about starting a business. Businesses are run to make money and without understanding the flow of money and management of this flow of money it can become extremely tough to financially manage a business. Balance sheet provides complete information about the money which is used to create assets and the money which the business owes to the creditors, suppliers, employees etc. Analysis of various aspects like liquidity, sustainability, solvency of a business can be easily made by maintaining a balance sheet and reviewing it periodically. It is a common saying that probability of success of a business depends majorly on the ability of its owner to manage finances efficiently.

Selecting the right insurance policy is just like picking up your dentist, it might seem like a strange analogy but if we think logically all of us avoid our dentist till it becomes really painful so having a good dentist is a good insurance against future dental problems. If selected carefully insurance policy can provide plenty of benefits along with the financial security in case of any unfortunate related to health, your house, business and even in case of death. It is crucial to pick the right insurance to make sure that you are not under insured and are not overpaying for the insurance. It becomes really important to understand the insurance pitfalls to select the best insurance policy from the best insurance company.

1. Not Assessing Your Needs Properly

One of the most common insurance mistakes is to not completely assess your insurance needs like coverage requirement and risk factors that can affect your coverage. Without analysing the coverage needs and risk factors majority of people end up overpaying for their insurance and getting a lesser coverage then what is required. Analysing your coverage requirements as per the type of the insurance is essential, whether it is your health, car, home or life insurance analysing your financial situation and setting the coverage amount based on this analysis can avoid a lot of trouble in future. Analysis of risk factors like your age, lifestyle occupation and location can impact your coverage level.

Solution:

The insurance tip here would be to completely analyse the coverage requirement and consult an insurance advisor regarding the risk factors and their impact to avoid this insurance pitfall which may lead to issues like high premiums, less coverage etc.

2. Overlooking Policy Details

Avoiding key terms in terms and conditions which are often overlooked can give you really unpleasant surprises when you would be filing the claim in future. This insurance mistake is very common in United Kingdom because most people do not take the time to understand the terms used in the agreement and sign their insurance documents in a hurry. People miss the key details like exclusions in the insurance policy, coverage limits and the conditions on which the coverage is contingent on, and majorly deductibles which is the amount that will be coming out of your pocket before your insurance starts working.

Solution:

Just remember the orthodox and boring advice of reading the documents carefully before signing them because in case of insurances you are paying to covers up your losses in case if anything goes wrong and no one would like surprises if something goes wrong while filing for the claim. Complete information regarding the variables like limits, deductibles and exclusions is required to make an informed decision about insurance policy as it is very easy to get mislead by the advertisements and sugar-coated pitch of your insurance agent. If you are not sure about the technical jargon used in the agreement of your insurance policy you can always ask your insurance agent to provide complete information regarding the terms in the agreement. 

3. Choosing Based on Price Alone

It is one of the most obvious insurance mistakes which a majority of people in the United Kingdom make. Selecting the insurance policy on the basis of price alone can actually take away a lot of benefits away like a decent coverage, can lead to high deductibles, and can mostly have poor claim process. Insurance is basically a service and price alone should not be a criterion to select the insurance policy. Selection of insurance policy should be fair mix of an affordable price, manageable deductibles, and a decent customer service while filing for the claim. 

Solution:

Coverage provided by the insurance outweighs the importance of cost as the purpose of taking an insurance is to cover for loses due to any unfortunate incident which can be related to car, house, health, business and even life. A good balance between the cost of the insurance and coverage provided should be the most desired aspect and not the cost of insurance alone. Another important factor to select the insurance which should be considered along with the cost should be capability of the insurance provider to handle claims and ratings for the customer service. When these factors are considered together an informed decision about the insurance can be made and the blunder of selecting the cheap insurance policy can be avoided.

4. Not Reviewing and Updating Your Policy Regularly

Life is dynamic and is full of changes and so are the risks associated, with each new event in life comes the need to make changes to the insurance policy. Events like getting a new car, getting married, having children, buying a home or the most common one aging with each of these changes in your life comes the need to make changes to the policy to ensure that you are covered and secured for any unexpected event. Most people in United Kingdom make the insurance mistake of not updating the insurance policy they have. This can lead to less coverage than required and also in some case lead you make for the coverage which is not even required.

Solution:

A very simple tip to avoid this insurance mistake is to review your policy regularly to make sure that you are policy is updated with your current situation. A good practice would be to update your policy every year.

 

5. Not Checking the Insurer’s Reputation

An insurance policy is mainly taken to provide financial support during unfortunate times through claims for covered assets. The last thing that anyone would expect is delay in getting claims in those unfortunate times. The insurance mistake of not checking the insurer’s reputation is made either due to ignorance or due to accepting a low-cost insurance offer. This one silly mistake can severely impact the process of getting a claim and sometimes even leading to denial of claim by insurer.

Solution:

A very logical and common sense-based solution to this problem is to make the insurer’s reputation the first thing to check while selecting an insurance. This can be easily done by checking the reviews and ratings for the insurance provider on various comparison websites for insurance providers in United Kingdom. You can easily check the company stability of the insurer by the help of ratings given by agencies like A.M. Best, Moody’s, or Standard & Poor’s.

Insurances are taken to make sure that we are financially secured in unfortunate events. But mistakes like not checking the coverage, only considering cost of insurance policy, not considering the reputation of the insurer etc. will not only mess with the financial security but will also put the customer under financial stress even after having a policy. By having complete knowledge about the insurance mistakes and their solutions customers can avoid the insurance pitfalls and can secure their assets and ensure that their future is insured completely and efficiently.

The process of buying a house is simple you give some down payment and get a mortgage for the remaining amount. But the trickiest part of the process where most of the people make mistakes is getting the right type of mortgage at the right interest rate with the right features and for the correct tenure. Now these are the factors about mortgages that have the direct impact on the mortgage characteristics and will decide how easy or tough it will be for you to handle the mortgage. By avoiding certain mistakes and following these tips you can make sure that you will get the best deal available for yourself and will be able to manage the mortgage easily.

Not Checking Your Credit Score Early

Consider a situation where you have gathered entire information needed regarding the mortgage and have negotiated the best deal regarding the property that you want to purchase. But your mortgage request gets rejected due to your credit score. Just because of one mistake of not checking the credit score before applying you will lose the property and this rejection will also impact your future requests for the credit as a new inquiry impacts the credit score.

Solution

The solution to avoid this mortgage mistake is to be aware about your credit score before you even think about getting a mortgage. If your score is great than you can plan for other aspects of your mortgage, if your score is not great you still have time to resolve any discrepancies related to your score or even work on the factors to improve your credit score.

Failing to Save for a Sufficient Deposit

A large deposit will not only reduce the amount for which you will be getting the mortgage but will help you to get a better deal for your mortgage in terms of the interest on the amount you would be taking to mortgage. This mortgage mistake is more commonly seen in the first-time home buyers in the United Kingdom.

Solution

Planning in advance is the key here in avoiding this mistake. Try to go for saving at least 10-20% of the value of the property and you will observe much better deals in terms of the interest rate for the mortgage. People usually go for dedicated savings accounts or government schemes to plan for the down payment amount.

Overlooking Additional Costs

This mistake is made majorly by the new home owners in the United Kingdom. People who don’t have complete information about the costs that they would have to take care of in addition to the cost of the property usually end up getting unpleasant surprises when costs like stamp duty, legal fees, survey costs are accounted with property price. This mortgage mistake can increase the mortgage amount as it is obvious that you will not plan for what you will not usually expect to happen. Your deposit will come up short and you would have to increase the mortgage amount and hence you will end up paying more interest for missing details about the total expenses in buying a house.

Solution: 

The art of detailed budgeting can avoid this mortgage mistake if done properly including every possible cost related to the property. Just by being updated with the current stamp duty rates and the other fees involved can save a lot of money and avoid a great deal of stress in dealing with these charges later. 

Not Getting Pre-Approved for mortgage

It can be really annoying if you are able to find a house that has everything you need but you are not able to get approved for mortgage in time for the deal. Searching for a house without a pre-approved mortgage will leave a lot on the chance of your mortgage request to be approved.

Solution

Solution is really simple follow the basic common sense and start searching for your dream home only when you are pre-approved for the mortgage. As it will not only provide you a clear picture regarding the budget but will also convey your seriousness in buying the property to the selling party or broker.

Choosing the Wrong Mortgage Type

This mortgage mistake happens mainly due to lack of knowledge and awareness about mortgages. If the mortgage which you have selected is not a fit for your financial situation you will definitely face long term implications with respect to interest rates and compatibility with the payment criterion for the mortgage. Most people make this mistake because they have some predefined notion about the mortgage types and without doing complete research, they pick up the wrong mortgage and face financial implications. To make an informed decision one should know about the features of various mortgages types like fixed rate, variable rate, tracker mortgages etc.

Solution

To avoid this mistake a basic knowledge of various mortgage types and features is required. Once you have a basic understanding of mortgages and their features you will be able to analyse which mortgage is best for your financial situation. Taking guidance from the mortgage professional can be really beneficial in making an informed about selecting the best mortgage for you.

Not Reviewing Your Mortgage Offer

Not reading terms and conditions of your agreement carefully can lead you in a lot of trouble when it comes to your mortgage as you might end up agreeing to terms which are desirable and can create financial issues later on while repaying your mortgage.

Solution 

The solution to this lethal mortgage mistake is also very simple. Reading the agreement completely and going through each aspect of your mortgage can save you from choosing the unfavourable terms and regretting later on. Coverage and deductibles can be confusing sometimes for the people who are not familiar with the basic mortgage terms. Customers must not assume anything if terms are not clear and must seek help of the mortgage advisor to get clear understanding about every aspect of your mortgage.

Failing to Secure Mortgage Protection Insurance

Taking any kind of credit without securing it with insurance can leave you unprotected in case of any kind of unfortunate event. Insurance is very important in case of mortgage as it will give protection in case of any unfortunate event for your property. People making this mistake are either completely unaware of the risk or are either too confident that nothing can happen to them. Taking mortgage without insurance is equivalent of putting your property for auction in case any unfortunate event.

Solution

Insurance for mortgage provides a cover for your property in case of any unexpected and unfortunate life event. Taking an insurance proves that you handle debt responsibly as it not only prevents your property but also protects your loved from facing repayments in case of an unfortunate event. So, mortgage tip here would be to be responsible and get insurance for your mortgage to protect your dream house in case of any unfortunate event.

Conclusion

It takes a lot of strategic planning and accurate decision making to pick the right mortgage. Keeping these mistakes in mind while deciding for the mortgage will not only enable you to avoid these mortgage pitfalls but will also help you in picking the mortgage that synchronizes completely with your current financial situation and future financial goals. If you are not familiar with technical terms regarding mortgage it is better to find a mortgage advisor. So keep on saving and remember taking care of few mistakes can help you greatly in getting an excellent mortgage for your dream house.

Financial modelling is the most basic skill required throughout the entire spectrum of finance which includes personal finance, investment banking and corporate finance, strategic business planning etc. The entire decision-making process depends on the efficiency of financial model. An inefficient financial model can lead to catastrophic consequences. This blog will be restricted to the personal finance management aspect of financial modelling and will cover financial modelling challenges and financial modelling tips to enable you to make accurate and efficient finance model for your business or personal financial management.

 

Lack of Clear Objectives

Clarity in the objective is most basic and mandatory requirement to create a robust and efficient financial model. Financial models created with unclear objective will not only be tough to analyze but will also lead to ambiguous and confusing insights which would be hard to work on. Financial models should be built with the clear objective whether it is for valuation, budgeting or decision analysis.

 

Solution

Defining a clear goal for the financial modelling and thinking it through completely to align with the intended goal will make the process of data collection easy. Without the clarity it becomes tough to collect the data required to seek out the aspect of personal finance in which you are lagging behind as per your financial goal. Setting a clear objective will not only help in creating a financial model that will also bring forward the aspect in which you need to create and monitor your financial model.

 

Inadequate Understanding of aspects of personal finance

Creating a financial simply means drawing insights and charting them for your personal finances and without the understanding of aspects of personal finance it will be challenging to collect and categorize data to draw insights regarding various aspects of your personal finances. Without the knowledge and understanding of various aspects of personal finance like budgeting, saving and expenses the financial model can lack insights regarding various variables which are critical with respect to personal finance management and this lack of insights can severely impact your financial goals.

Solution: 

Having a clear understanding of personal finance aspects will not only help in creating a robust and effective financial model but will also help in finding out variables that impact your personal finance. By avoiding this financial modelling mistake the effectiveness of financial model can be greatly enhanced.

 

Poor Data Quality

This financial modelling mistake can ruin the entire financial model and can give false insights which can lead to actions on the wrong parameters and can sabotage the complete progress towards the financial. No matter how efficient you are in your analysis you will never be able to draw correct information from data with poor quality.

 

Solution

Financial modelling tip to avoid this modelling blunder would be to keep the data updated, cross validate the crucial data points and use historical data to validate trends that you have observed in the historic data.

 

Overcomplicating the Model

Simplicity is an important aspect of any financial model. An efficient financial not only provides the insights but is easy to understand for anyone with little or no knowledge about the financial domain. Financial modelling mistake of over complicating model is more common with the people new to financial modelling. A complicated model will not only be prone to mistakes but is also harder to adjust if there is a change in the variables that impact the financial model.

 

Solution

A simple and elegant way to tackle this financial modelling mistake is to keep the model as lucid as possible by breaking the complicated sections in to smaller modules which can be analysed and understood easily. Documenting the model thoroughly will also reduce the relational complexities in the financial model.

 

Inconsistent Assumptions

Varying assumptions can lead to contradicting insights which will make the financial model unreliable. It is very important to keep the assumptions constant in various sections and modules of your financial model to maintain the consistency of your financial model.

 

Solution

Financial modelling mistake of inconsistent assumptions can be avoided by clearly defining and maintain a legend sheet for all the assumptions used in the financial modelling. As assumptions are dynamic and can change at any time depending on external economic factors regular review and adjustments throughout every module is required to keep the model consistent and reliable. Using a single sheet for assumptions for every module of the model will not only keep the model reliable but will also help in establishing relations between variable during visualization.

 

Ignoring Scenario and Sensitivity Analysis

This financial modelling mistake can take the financial model off track from the financial modelling objective. If you are including scenario analysis in your model your financial model will become impossible to follow and there is no use for a model which can not prescribe the right course of action to attain the financial objective.

 

Solution

To avoid this financial modelling mistake, it is crucial to include various scenario analysis which is basically analyzing the impact of change in one or more variable on the output of the model. Sensitivity analysis will provide the information regarding sensitivity of various variable in the financial model. It will provide a clear idea about the variable change in which can alter the entire financial model’s results.

Neglecting External Factors

If you are not considering the impact of external factors which are actually the confounding variables in the financial modelling like economic conditions, tax regulation changes and market trends regarding the variable insurance etc. Excluding these external factors can lead to misleading insights which can ruin your progress towards financial goal.

 

Solution

Including external factors like macro aspect of economics, regulatory updates and forecast regarding sectors like insurance etc will ensure that your financial model is providing relevant insights which are efficient and relevant. Considering the impact of external factors will increase effectiveness of model as the assumptions are updated regarding the financial model.

 

 Financial modelling requires clarity of objective and effective data analysis approach to extract information which is useful in controlling and managing personal finance. Information about these financial modelling mistakes will not only help you in avoiding these mistakes but will also improve the decision-making process of any individual who wants to manage his personal finance and achieve financial goals.

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