The tools for personal finance have been developed over time by different mathematicians and investors. These tools can guide you from the very beginning of your decision whether or not to invest to the point of diversifying your investments and making the most out of your investment. Here we will only look at the most commonly used investment methods stage by stage to equip you and Ray on their journey of using personal finance to make investments.
Calculating the Intrinsic Value
The first and foremost decision that Ray will have to make is whether or not to invest in a particular company, commodity or otherwise. For this, you need to understand how the stock prices work. Stock prices are actually more market based and vary according to market demand. As the demand increases so does the price and vice versa. But for Ray, getting the most desired or popular shares will not do him any good as their prices will already be quite higher. Hence, in this matter, Personal finance guides to invest in shares that have a chance of rising in the future. In other words, the shares that are lesser in price due to lower demand but actually have a higher intrinsic value, or actual value, should be the prime concern of an investor.
Intrinsic value basically accumulates all the future returns that you can reap out of a company in its price. The thumb rule of investment here is that, if the intrinsic value of a stock or a share is lower from its original price, you should consider buying the shares and if the opposite case is true then you should definitely not buy the share. This is because an efficient market will quickly adjust to the intrinsic prices as the investors grow more and more aware. This concept is actually derived from corporate finance and is used widely in finance companies to determine whether or not to invest in different projects. In Personal finance, however, the concept has been adjusted so that it fits better in the category of simple finances you can still use these concepts in your life to make most out of your investments.
Hence, if Ray were to buy stocks that had a lower intrinsic value than the actual market price, chances are that in the upcoming years, that share will get reduced to its intrinsic value. Thus, now the same shares that Ray had bought for, say $1000 dollars might get worth of only eight $800 dollars. In the opposite case, if Ray uses the tools to invest in shares with a higher intrinsic price, soon the market will adjust according to it. Hence, let’s say Ray invests in shares for a $1000 dollars that are actually worth $1500 dollars. As more and more people buy these shares for their lower prices, the market demand will push the prices of the same shares to $1500 dollars. At that point, if Ray were to sell his shares, he will make a profit of $500 dollars, hence making his very first profit. Therefore, by just doing some simple calculations, you too can stay ahead of the market and make more and more profit out of it.
You might be thinking that making $500 dollars by doing just a few mathematical calculations is a pretty sweet deal, but, what if I were to tell you that there is still more you can make by doing only a few more calculations? This another tool of simple finance explains just how Ray and you can do that.
Investing your money in just one entity might seem like a safe choice. It’s also easier to manage that investment and seem a little less complicated. But the truth is, that by investing in only one company, one type of bonds or one type of any mode of finance for that matter puts you and your resources at dire risk. What if your calculations were wrong, or if not that, what if the company suddenly got hit by the financial crisis? There are always only a few factors that you can control while the factors of the macro environment at large will always be there to make or break your investment. So what can we do when all our calculations, research, and tools can be rendered useless by even the smallest factors of macro environment?
Ever heard of the saying, “Don’t put all your eggs in one basket?”, this is exactly what a wise investor does in situations like these. When a macro environment factor is at work, there are always winners and losers in the market. What an investor should do is to play on both sides. Then, even if one of his investments are lost, they’ll be compensated, too much extent, from his other investment. This process of diversifying your investments is known as Portfolio Diversification or Portfolio analysis. This concept again has been derived from finance companies. However, finance companies use it at a more complex level. Hence, by simplifying this concept of finance investors all over the world are making active use of this tool.
To clarify let’s again take the example of Ray. Say, Ray, after reading this article, decided to diversify his portfolio. He decided, that for now, he will be diversifying his investment into two segments, shares and ForEx. Let’s say that the US dollar, for some reason, has devalued in comparison to Euro. This will have a negative impact on the company shares especially if that company depends on importing from the UK. Hence, the once-lucrative market shares might decrease in value overnight. Had Ray invested all his savings in that particular company shares, he would have faced a severe loss but due to diversification, there is still a silver lining in this state of crisis for Ray. What happened here is, that due to the devaluation of the US currency, the Euros that Ray holds are now of more value. Therefore, by simple diversification, Ray was able to protect his investments from ever getting lost.
And there are a number of different tools other than these, such as trend analysis, calculating amortization, portfolio returns, and whatnot that are there to guide you. However, it is completely understandable if learning all these tools can be havoc. Luckily, many Personal Finance companies incorporate all these formulas and developed applications making it, even more, easier for you.
Therefore, if you want to use Personal Finance to manage your money and resources, then the following applications can help you do so;
For Managing Investments
- SigFig Wealth Management
- Personal Capital
Other than that, Personal Finance companies also act as a consulting firm. These companies provide you expert opinions and guides you to use your money wisely. In this way, you can even start using personal finance without having to learn any of the tools. However, it is always a plus to have knowledge about these tools as they will provide you with more insights than otherwise.
Don’t worry if you find it difficult to go through all these tools by yourself. It is quite understandable for a person with no prior knowledge of finance to use these tools. Personal Finance companies have also introduced the concept of Personal Finance Class. These classes help you understand the basic knowledge that you need to equip yourself with to use the financial tools. Hence, before starting to invest, you should start attending Personal Finance classes that can help you on your journey. Personal finance companies introduce these to help investors learn from the basics to the professional tools of Personal finance and therefore, new investors should especially consider attending these classes.
Many of these Personal finance classes are available online and therefore, you can attend these classes from anywhere you want at any time you want and equip yourself with the knowledge you need. However, Personal Finance classes can only teach you the tools of personal finance. The trick is to apply these tools correctly at the right time. Hence, while using personal finance for investments, it is very important to learn from your mistakes. Therefore, in this field of finance, your biggest teacher will be the experience itself.
Hence, all in all, there are a number of advantages that you can get from inducing personal finance in your lives and the journey just keeps going on. Although these tools are normally categorized as simple finance tools, they are so powerful in nature that several investors have made quite a hefty amount over it. From simple management of your pocket money to getting rich quick, personal finance can better organize your life and help you achieve your goals quicker. And while there are a number of tools that you can use to maximize investments, many applications are there to make your journey even simpler. If you want to go beyond the norm and involve yourself directly with investments, you should then consider attending online Personal Finance classes as they will help you understand the core elements of personal finance. However, your biggest teach will always be your experience.
Now all you need to do is to start managing your pocket money today and see how simple budgeting might make you the next Ray Dalio, the boy who started investing when he was only twelve from his savings to the man who became one of the richest people in the world just by using personal finance as a part of his life.