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Tuesday, December 06, 2022

your money and interest

your money and interest

For the time being, protected from inflation, Interest rates are rising rapidly in Argentina, We read headlines announcing new growth ordered by the Central Bank, we hear economists analyzing the impact of measures on the economy and we see ads on YouTube where alleged analysts claim to beat inflation with interest. There is a formula to give, but for information in that ocean, do we manage to save something or do we just get lost like a sailor who has lost sight of the land due to fog?

To clear the horizon and succeed, in today’s column We’ll approach the concept of interest from different angles: that of the debtor, that of the person who starts saving, and that of the investor.,

In this way, we will review together some tips for implementing interests in your life in the most convenient way.

A wrong and very common practice among debtors is to reduce interest. Thus majority buy everything in installments and when faced with monthly summary, decide to just comply Minimum card payment, which represents just 4% of total spend during this period, This election takes those Assume—often unintentionally—excessive interest rates Which turns into a snowball and leaves them on the verge of a financial abyss.

To make matters worse, the interests they will face from that moment are calculated through an amortization system that is not convenient for the debtor, known as Direct amortization system, where the amount of interest to be paid is initially defined by the total amount outstanding, regardless of whether or not the capital portion is subsequently repaid,

Understanding the weight of interests means acting differently. That is, start paying off credit cards in full every month without exception and try to pay off past debts, if any.

When faced with the specific question of which of the first three loans should be struck (unpaid capital, interest generated or new summary), most financial advisors will answer that it is best to honor the one with the highest interest rate, but the advice is wrong. The best thing is to use the Cash Flow Index (ICF).

The ICF is a system developed by Garrett Gunderson that prioritizes the pre-cancellation of loans based on the inflow of funds that each month takes over from the debtor, month after month.,

The calculation is as follows: Loan amount to be paid / Minimum monthly payment,

The lower the outcome, the more necessary is the pre-cancellation of that loan,

The ICF tells us that, if the result is between 0 and 50, the loan is too harmful or harmful to our wallets, so it is advisable to prepay it as soon as possible.

A result between 50 and 100 speaks of not so much harmful debt, which in any case should be taken into account so as not to lose sight of its development.

100 since it won’t be as relevant to our personal finances. Therefore, the stimulus for its pre-cancellation is reduced.

Compound interest is a benefit obtained by those who reinvest the interest earned by them.

The methodology is simple: Every time they charge interest, they add it to the capital invested. In this way, they increase future capital and interest, which will also be reinvested, so as to maximize income.,

This process will allow them to increase the funding base to anticipate future profits, as we saw in this note weeks ago.

What is the difference between simple interest? Basically, what is known as simple interest does not take into account the interest previously received for the generation of new interest, whereas compound interest does.

Fixed terms, dividend-paying stocks, coupon-paying bonds and any other type of placement with positive cash flow are tools that provide us Two Allies: The Magic of Time and Compound Interest,

If we let them work as a team, we’ll be able to accomplish our physical goals faster, without risk increasing the risk. Of course, at first the growth in interest will be slow, but later, over time, reinvestment of interest, coupons and/or dividends will pay off so much that we won’t be able to trust the unbounded distance with the initial capital. The acceleration will be exponential.

At this point, for the most curious readers who can’t wait Know how long it will take them to double the value of their investmentI present to you 72. rule ofA mathematical tool that can be very useful.

Let’s look at an example of using it:

If we invest our money with compound interest at the rate of 25% per annum for a certain period (reinvesting the interest collected every year), then dividing 72 by that number gives us 2.88. This means that, to double our capital, we would need about 2 years 10 or 11 months.

The rule of 72 can also be used to calculate the rate at which we need to double the capital in a given period. In the example the account would be: 72 / 2.88 = 25.

In this case, we are not talking about financial interests, but about contractual interests, which can cause great harm to unsuspecting investors.

Specifically, we are referring to people who usually rely on the recommendations of their financial advisor, who are often employees of the bank or stock exchange company through which they invest their money.

While the investor only thinks about increasing his wealth, the financial advisor will only have in mind to increase the income of the bank or stock market company he works for.,

For a financial entity, the best thing that may happen is that the investor performs a number of tasks, in order to charge him a lucrative commission, or to obtain financial products and services from the bank, even if it is not really for him. convenient or not. have them.

This is a typical deterrent for investors who want to grow their wealth and do not have their own readings of the market and the minimum training required to provide financial instruments.

The truth is that the information we provided in this column last year is more than likely to be Minimize the impact of conflict of interest to its minimum manifestation in order to achieve a business relationship where both parties (the person making the investment and the person giving the advice) can align their interests,

On the other hand, if we want to address important issues like the ideal weighting between stocks and bonds in our investment portfolio without going through a financial advisor, we can apply the Rule of 120, which takes into account our age. keeps. while calculating.

What is done is to subtract our age from the number 120. The result is the percentage amount that should be invested in shares, always according to this rule. The other part should be invested in bonds,

For example, for a 60-year-old man, the amount invested in stocks is 60% of his portfolio, which is the result of subtracting 60 from 120. The other 40% should be used to purchase bonds.

The strategy responds on the following grounds: When a person is young, they can take more risk in their investments, because at this stage of life, money is a “renewable” good. He still has years left to continue working and recover from a potential drop in the share price,

As a result, a 20-year-old is usually advised to invest 100% in stocks, as 120 minus 20 equals 100.

On the other hand, for an 80-year-old man with a percentage of investing in stocks being 40%, the capital invested in bonds gains more weight (60%).

It is known that donations are not quoted in the financial markets. On the contrary, they often resemble a financial jungle, where only those who know how to look after their interests survive. For this, the information and reflections in this column can be important.

If you focus on applying what you learn today, Your investment interests will become more than interesting and the results, as time goes by, will become more and more obvious.,

Until next week with more financial tips!

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