Budgeting

Wealth Management: A Few Aspects we Should Stop Overlooking

Image source Pixabay

Wealth creation is largely an elaborate process for most – at least for those who haven’t really amassed it (wealth) overnight. Though we don’t acknowledge it often – a financial cushion is simply not about building emergency funds. As integral a part of the wealth creation process that we are talking about, for us a “financial cushion” is created the moment we start talking about finance management or wealth planning.

As we go through the post in our quest for the less known ways with the help of which we can achieve our desired level of wealth creation, we will understand how important a role the sense of self efficacy ends up playing here.

How is the Concept of Self-Efficacy Linked to our Finances?

Yes. We don’t find ourselves understanding or rather discussing the psychology behind wealth-creation. And once we start doing that, we inevitably go back to Albert Bandura’s concept of self-efficacy, which actually goes on to determine a person’s thoughts, actions, motivation and behavior in the most powerful manner imaginable. He pointed out that people with a powerful sense of self efficacy are capable of viewing difficult tasks as challenges that need to be mastered in contrast to people with a weak sense of self-efficacy who view these same tasks as risks that should be avoided.

Since his revelations, financial experts at large have actually been trying to link the concept of sense of self-efficacy with finance. As Bandura had pointed out, self-efficacy is bolstered by various factors including:

  • Experiencing success
  • Controlling the emotional and physical responses
  • Choosing good role models
  • Reacting to encouragement

Why is it Important to Understand and Acknowledge the Role of Psychology behind Wealth Creation?

When it comes to financial success your sense of self-efficacy is definitely bolstered by your ability to pay off a large debt or for that matter staying away from expenditures on things you wanted to buy but didn’ need. Think about your friends early in their careers – living from paycheck to paycheck and often turning to the expensive quick loans in order to sponsor immediate needs. You are not required to do the same because you had planned your finances way before you had actually started earning. Do remember all these can act as major catalysts as far as laying the foundation of the sense of self-efficacy is concerned.

One of the most overlooked parts of wealth-creation is the psychology behind wealth-creation itself. The way we manage money actually has a lot to do with how we perceive our financial responsibilities. A lot is determined by the role models that we choose for ourselves. For instance, if we see someone in our family or friend circle fulfilling an almost impossible financial task, then we’re bound to be inspired to replicate the sense of self-efficacy. Additionally, a lot is dependent on the role models that we choose to be. The way we deal with our finances – or rather respond—to our pecuniary challenges from time to time- goes on to help us set examples for our kids as well. The need for prioritizing wealth management becomes a habit with them.

Understanding the psychology behind wealth-creation is important because only when you’re estimating your emotional reaction to certain financial responsibilities properly can you work towards changing them if needed.

For instance, today if you think that you will absolutely drown yourself in debts just in order to get out of your mortgage then you probably are someone with a very poor sense of self-efficacy. You can work towards developing a more positive change when it comes to the way in which you’re thinking about your financial responsibility now.
Besides mastering the psychology behind wealth creation, do make sure you are paying attention to these often overlooked aspects of this particular process.

How Often are you Replacing your Car?

You probably aren’t one of them who think that you should only change or rather replace your car when you NEED to! What we don’t realize is that every time we’re taking a loan from the bank to buy a new car the bank holds the title until we clear off the loan. Your car notably depreciates by 25% in the first year and by 50% in the next two years. Most of us end up trading our old car for new ones without even using the previous car optimally. However, we have already paid taxes, insurance, and loans on a depreciating asset. We might as well always refuse to acknowledge this but it’s only the car dealers who end up making profits in this case. There is a dire need on our end to stop selling assets too soon. You will understand how your efforts towards wealth creation will suffer owing to this habit of yours.

Investing

While saving remains a major financial goal at an early age—investing doesn’t. Ask most of the millionaires out there and they will actually tell you that investing is at the heart of prudent wealth creation. The tried and tested mantra in this regard is to subtract your exact age from 100 followed by investing the percentage of that number in equities and related funds including exchange traded funds, mutual funds and index fund.



How are you dealing with your Monthly Subscriptions?

Be watchful of your monthly subscriptions and your membership fees. While it feels great not to pay off all the dues at one go, do let us tell you monthly subscriptions and membership fees will eventually find you at the receiving end if you are not really keeping a check on them. There are so many times when even unused subscription fees end up killing your savings! Don’t underestimate the need for going back to or rather reviewing your subscriptions every month. If you are not using something do make sure that you are cancelling the same without fail. If you are prioritizing control over your expenditures you simply can’t ignore these subscriptions at any cost. Don’t pay up for what you don’t need. That’s perhaps the cardinal rule of personal finance management.

 


Start planning your finances in your 30s – Hoard enough cash for a stress-free life

Image source pixabay

Gone are those good old days when you thought that the best way out is to hoard cash in your bank account. This is mainly because the returns that you get from saving money in your bank account will always be less than what you can earn from investing money in FDs, bonds, SIPs, stock market and mutual funds. For all those who wish to remain financially independent, the key is to invest your dollars at the right place.

However only investing your money won’t be enough as you also need to be track your progress so that you can remain invested even in the long term. Financial advisors always recommend people to start investing early during their 30s so that they have enough time to measure their success and learn worthy financial lessons. Here are few tips which can let you invest more, spend less and save more.

  • Don’t fall into the trap of collecting quick profits

As per what Warren Buffet has to say, one should invest only in those assets which he knows best. He even added that if someone invests in things which he doesn’t know, he is actually gambling. It is not that you will always require being an expert to accomplish investment returns which are satisfactory. But in case you want to become an expert, you can seek help of an investment advisor or follow a course to which you can gradually respond.

  • Bear in mind the philosophy of the rich and the poor

There is a famous perception that financial planning entails saving a little but after spending and then investing that little savings. If you have to understand the philosophy of the rich and poor, you’ll have to know that the rich usually invest their dollars and then spend the little amount that is left and this habit makes them even richer. On the other hand, the poor people spend their money and then invest the amount which is left over.

  • Understand the frugality approach

Are you often overcome with guilt and shame during the end of the month because of the fact that you think you’ve spent too much on something that you could do without? Do you think this is the right approach that you should have towards your expenses? Adopt frugality. Frugality is not just cutting down on your expenses but it is about selecting the things you love and spending on them and cutting down on those which you don’t love.



  • Cut down on borrowing money from people and lenders

Credit cards are certainly attractive options. When you borrow money which isn’t affordable now, it becomes affordable within a few months time. Warren Buffet says that he has seen most people fail on leverage – which is borrowed money. He thinks that the world could run in the same way even when so much leverage is not taken. In fact, you can make lot of money if you don’t borrow money so much.

Hence, if you’re wondering about the reasons behind saving and investing money, take into account the tips and advices shared in this post. Start off early so that you can get enough time to take care of your finances.


Capitalize on your retirement sweet spot years – What steps to take

Image courtesy

While you’re heading towards your retirement, there are high chances that you’re also stepping into a special time to do some really worthy tax planning. What is the sweet spot? It is the stretch of time in between when you retire from your full time job and when you begin to take the minimum distributions from the 401(k) plan or the traditional IRA account by the age of 70 and half.

Given the fact that full-time work is behind you and the mandated distributions are lying in front of you, this is also the time when you seem to be included within the lower tax bracket. This is why it is the best time to take a look at whether or not the strategies can work well along with the taxes. You will definitely get ways in which you can seek benefits of low rates on taxes but it is vital for you to ensure that any move that you make are in line with you personal retirement goals. How are you supposed to monetize on your lower tax bracket? Here are few ways.

Adopt the ROTH way

How about converting your conventional IRA or your traditional 401(k) plan into a Roth IRA? Though you will still be liable to pay taxes on the amount which you converted, yet the rate will definitely be lower. As against converting them, if you left these assets in a conventional 401(k) or IRA plan and not do anything with them till you started taking the minimum distributions, such withdrawals could possibly push you within an increased tax bracket. This is why. The tax rate that would be applicable to the assets would definitely be higher. If you withdraw an amount from your Roth IRA, this is tax-free and there aren’t any minimum distributions which come with them. In case you convert, you will be locked in.

Sell off few winning financial assets

In case you have any asset like stocks which are in your taxable account, it is rather an advisable option to look at whether or not it would make sense to sell them off so that you could be included in a lower tax bracket. This is one of the best opportunities through which you can monetize on the gains on which you’ve been sitting. The rate of tax on long-term capital gains is entirely based on the adjusted gross income. For instance, in case a married couple has income that’s under $77,200, they won’t have to pay any taxes on the gains. You also need to be aware that the people who fall under the category of high earners like married couples with adjusted gross income which is more than $250,000 are usually subject to an added 3.8% of investment income.



Employee stock options should be determined

For all the people who are heading towards their golden years with certain employee stock options, they can exercise such options at their lower tax bracket which could possibly be a smart option. What if the value of the stock is high and the exercise price is low, you will get too many in-built gains. You could use lower tax to exercise few of the other options which you have at hand.

Therefore, if you wish to maximize those retirement sweet spot years, you should take into account the above mentioned options and lead your golden years in peace.


3 Steps To Early Retirement!

The dream of retiring early for many, remains just that – a dream! Escaping from the rat race and the 9-5 drudge is a tempting thought, but unfortunately feels intangible. People do retire early though, what is their secret? Retiring early would give you the chance to enjoy life to the full whilst still in good health. You could opt to travel to the places you have always wanted to visit or learn a new sport.

There are ways of planning for an early retirement, but it must be put into action as soon as possible – today preferably! This article aims to highlight ways of saving enough money to enable you to retire early.

early retirement

image source

Invest any savings

If you are lucky enough to have savings, make them work for you. If you take the decision to invest your savings in stocks and shares, or participate in financial trading it could be potentially very lucrative and will be a huge boost to your retirement fund. Investing your hard earned cash is not without risk and you need to be fully aware of the process. The internet has opened up opportunities for everyone to get involved in financial trading, up until recently financial trading was the sole domain of stock brokers in the city. There are numerous trading platforms to choose from and lots of advice available. CMC Markets is a trading platform which will guide you through the process of trading using contracts for difference (CFD’s). Many trading platforms offer the option of “practicing” first before parting with your well earned money. Financial trading is not to be taken lightly, always seek professional advice.  

Create a budget

To enable you to save enough money for retirement you need to budget carefully. This will enable you to squirrel away any money saved into your retirement pot. Saving sounds a simple concept, but it needs to be managed carefully. Start today and don’t put off until a later date. Putting aside a certain amount of money every month doesn’t depend on how much you earn, getting into the habit of putting a little by every month will soon allow your retirement fund to grow. It’s worth remembering that you won’t need as much money to live on once you’re retired. You won’t have the costs associated with the daily commute and any children you have depending on you are likely to have flown the nest.

Property

Aim to have any outstanding mortgage debt paid off by the time you retire. This will reduce housing costs dramatically. You could also release the equity in your home by downsizing, also you won’t need to live close to a commute route, enabling you to move to a cheaper area.

Investing in property could be another lucrative option, you could build up a portfolio of rental properties or embark on a renovation project.

 


3 Signs that you’re ready to retire in 2018 – How to know it’s the right time

Image source: Pixabay

There are many who tend to time their retirement and try to retire in such a manner that they reach a definite milestone like ‘complete 35 years on job’ or ‘saved $1million’ or ‘reached 65 years of age’. Little do they realise that more than reaching any milestone, one has to be psychologically and financially ready for a retirement. When you were tied up with deadlines, when you had to commute through a large distance and when you didn’t have time to check your pending work e-mails, all you may have been thinking about in your mind is the perfect time for retiring from work.

But how are you supposed to know which is the right time for retirement? Who will tell you about the most common signs? Well, we’re here to help you with the few signs that will prompt you about the best time to retire from your 10-5 cubicle and embrace a life of freedom.

Sign #1: You are debt free and you’ve repaid all your high interest debts

The financial professionals usually don’t agree on the merits of paying off their mortgage before they retire. For majority of the retirees, the emotional advantages of repaying their mortgage can outshine the fiscal benefits of staying in debt. Retirees can still reap benefit from mortgage-interest deduction and grow the nest egg by investing dollars on the money they would have utilized to pay off the principal. There is broad acceptance of the fact that people should first repay their high interest credit card debt before they take care of anything else. So, if you find yourself debt free, you can think of retiring.

Sign #2: You have too many activities to fill up your day

When you’re planning to retire, you know what you’re retiring from but are you sure about what you’re retiring to? You’ll require few activities to fill up your days and whatever plans you may have, they should have a definite purpose in your life. As long as you were employed, it gave you an identity and a status that you enjoyed but when you step away from your career, this can lead to an identity loss. If you want to combat these, you can watch out for opportunities like volunteering which can give you a sense of recognition and belonging with the organization. Also consider the impact of your retirement on your spouse as they might find it uncomfortable when the bread-earning member suddenly starts staying around all the time.



Sign #3: You’ve built a strong financial safe

There are few advisers who say that amalgamating a huge amount like $1.5 million is much less vital than deciding how much you’re going to spend on your retirement. Take into account your annual expenses and multiply the amount by 25. In case you spend $75,000 in an entire year, you will then need $1.88 million to live on; keeping mind you will live for 25 years of retirement. From the total amount, subtract what you get from pensions and Social Security and the remaining amount is what you would have to fund on your own.

Therefore, do you think you’ve faced the above mentioned 3 signs in your life? If you’ve repaid all your high interest debts but you still didn’t save enough to retire, wait for the right time and keep saving religiously.


5 Best Short and Safe Investments in India

Safe investment

Image via Pixabay

There is very less risk involved if you park your finances in safe investments. This kind of investment is suitable for people who are retired and those who do not prefer to take risk. Also, there are several individuals who do not have the desire to take risks and due to this; they go for few of the finest safe investments in India. It is a common myth that for investments to be profitable, it must be done over an extended period of time. How-ever, this does not imply that short term investment is completely futile. The investments are done on short-term, usually ranging from 1 week to 3 years and they are suitable whenever an investor is willing to make the most of sizable funds which he/she is eligible to spend in the near future. This investment when carried out through safe options guar-antees good returns.

1. Fixed Deposits from KTDFC:

Fixed deposits are made available in different forms and they are available for a period as less as a week. Such investment options are registered as short-term FDs inside the banking web portals and they are perfect for transitory savings. In this, the interest rates are less but better when compared to that of savings account, also the interest rates rise with tenure.

It is found that KTDFC Deposits are one of the finest short term investment options be-cause company deposits are not protected and KTDFC Deposits are assured by the gov-ernment of Kerala. Basically, KTDFC is an enterprise owned by the government of Kerala. In this, the interest rates provided usually fall in the range of 8 to 8.5 percent. You can choose these deposits for the purpose of safety and for getting decent yields on your deposits. It is important to note that there will be a TDS that is valid for any interest ex-ceeding Rs 5,000.

It owns different branches in Kerala from where you could post your forms. You don’t need to be concerned about safety because the deposits are supported by the govern-ment of Kerala. The interest is the best that one can presently get. It is vital to note that interest rates are headed higher, therefore, it would be reasonable not to invest money for long tenures.

2. Debt Instruments:

Debt instruments are available in an extensive range including Bonds (Sovereign and Corporate), Government Securities, Treasury Bills, Commercial papers, etc. They carry average risk, provide improved returns than FDs, and they come with comparatively long duration. However, they can be executed over a specific tenure with expected returns. Of them, few are tradable as well.

The underline of the latest monetary policy was a boost of 0.25% in Repo rate and li-quidity neutrality. It is anticipated that this must support the Bond market as well as in-terest rates of approximately 8% on the cards. Moreover, it must enhance the returns for people looking to do investment in these instruments.

3. Short Term Mutual Funds:

The aim of this short term investment–Short Term Mutual Funds is to protect investors and earn moderate gains. As compared to few FD instruments, the returns are better. However, they are subject to market risks. The returns fall in the range of 6% to 9% for investment window varying from 18 months to 3 years. The aspect makes it a wonderful instrument when you intend to save for marriage, children’s education, etc.

It is found that funds like HDFC Mutual Fund and ICICI Prudential provide Fixed Maturity Plan Mutual funds that are quite convenient for people looking for good returns. Fur-thermore, they come with better susceptibility for risk because their performance can be effortlessly tracked. The funds can also act as an amount for emergency funds.

Making an investment in safe debt mutual fund schemes guarantees you to provide ex-cellent investment prospects for the medium to long-term perception. Debt mutual fund typically park their money in secured government bonds, commercial paper, debentures, etc., which makes them safe naturally.

4. FMPs (Fixed Maturity Plans):

The FMPs (Fixed Maturity Plans) generally have tenure of less than 1 year. Basically, these are mutual fund units which are considered secure, because the amount is capita-lized in safe AAA rated instruments. Whenever you wish secured and finest investments, it must not be a bad idea. If you can invest for minimum 1 year then and only you could perceive certain benefits in matters of profits. These are short term investment which is regarded as safe.

It is important to remember these are essentially not tax-free investments and thus they are completely taxable for the investor. Therefore, to that extent, the returns are slightly reduced.

The investments made into these funds are generally safe because they capitalize only in highly rated government paper. It is necessary to note that unlike FDs they do not assure any interest rate, an investor needs to consider their previous track record, investments did, etc. to assess the interest which can be earned. The investment option can serve as a recommended option in an increasing interest rate cycle because investors can lock in high rates. Furthermore, FMPs are thinly traded on the stock exchanges, and investors can get their way out through this route if needed.



5. Mahindra Finance FDS:

These kinds of FDs are secured and also provide excellent interest rate. It provides an interest rate of 8.75 percent when you apply online. It comes with tenure of 33 and 40 months. Moreover, the 15-month deposit brings you an interest rate of 7.95 percent. This is acceptable if you consider a declining interest rate system that we are presently living in. Moreover, an individual can also focus a few of the secured small finance banks, from where you can obtain interest rates reaching up to 9.50 percent. The investment option is safe because it was recently provided a license by the Reserve Bank of India.

Majority of people struggle to fulfill their financial needs for short-term and therefore they go for safe and short-term investments in India. These options are safe by nature and also they are accomplished to meet the financial goals in near future.

 


Few things about millennials that befuddles Gen X – How are they making money?

Image via Pixabay

There are so many things about the millennials which amuses the older and the younger generations. From not paying attention to their home ownership woes to paying back friends through apps, the young generation of millennials are doing things in a different way than Gen X and baby boomers. The case is also true with the way they make money. Off late, it has been studied that the millennials have taken a disparate approach towards employment as compared to what their parents and grandparents did.

Stability was a factor that was valued by the senior workers and this is what made them stick with the same company for decades. But this trend is changing too and the younger workers are always on the lookout for flexibility and hence they’re desperate to switch from one job to another. Younger workers or the millennials are all having separate priorities for their jobs like their never-ending desire to swap working in a 9-5 job restrained in a cubicle to working in a coffee shop. For the gig economy, they’re shunning all sorts of monotonous jobs.

Do all millennials earn a passive income?

Due to the fact that the gig economy matured during the time when the millennials were ditching their jobs for part-time ventures, there is a constant assumption that all young adults are engaged in a side job. If they’re not making money doing several odd jobs on TaskRabbit or driving cabs for Uber, they’re doing something which can make them rich.

But these are cases of stereotypes and they don’t always reflect the entire generation. Majority of the millennials are young professionals who might be lawyers, doctors and traditional occupations. It is seen that there are more retirees and senior people with side hustles than the millennials.

Are side jobs important for the millennials?

Despite the fact mentioned above that majority of the young adults are involved in side-hustles, that do not rule out the fact that side hustles are not necessary for them. As per the Millennial Economy Report of 2017, 45% of the surveyed millennials were all involved in side jobs. They believe in spending their dollars on experiences rather than on things. And it is through contract work or gig employment that they can earn money for living those experiences. This way they’re also earning cash for college and the ones who are saddling with college loan debt are getting ways to pay them back.

Flexibility is given more priority over loyalty of jobs

Even though a millennial doesn’t take help of the gig economy and goes behind the traditional employment options, they will most likely never stick to one employer for a long time now. In fact, in most companies of Silicon Valley, the average time on job is somewhere less than 2 years as the millennials are focussed on constant development of their job responsibilities and they also keep looking forward to a hike in their salary which doesn’t come in as desired in most companies.



Hence, to conclude, it can be said that millennials are not the same as the older generation as long as their job prospects are concerned. If their present job won’t let them lead a good lifestyle or pay down debt, they’re definitely better off somewhere else.


5 Simple Ways to Improve Your Financial Stability

Image from Pixabay

It’s quite natural for all of us to pass through situations in life wherein it gets tough to maintain financial stability. Many of you are into a job that’s not worthy of your skill sets and you’re already aware of it. You may try out a few simple things to improve your financial situation.

Consider 5 different ways to become more stable financially:

1) Sell off all unnecessary things

There are a number of unnecessary things that you purchase very often. If you aren’t using them, you may consider selling them at eBay. All of these unwanted items can help you bring in more money. So, you must create a list of such items.

2) Pay off debts faster

Your debts might grow if you’re not paying much attention. Many people tend to opt for a loan with much higher interests; they would often end up applying for another loan to pay off the first one. You may have to take out loans during a financial crisis. But it’s in your best interest to pay them back as soon as possible. It will help you in lowering the rate of interest, which would otherwise keep increasing. You might prefer a few online loans with simple repayment terms over your other options.

3) Cut down your monthly expenses

Have you been able to check out your outstanding bills that are recurring in nature? Although it’s a small payment, you might forget it every time the due date gets nearer. You must read through every item that you’re being billed for and strike off things that aren’t necessary. Now, for this, you’ll need to spend some time and be more attentive.

4) Start saving at the beginning of every month

Get a portion of your earnings transferred to a savings account right at the beginning of every month. By putting money aside, you’ll be left with a small budget to continue for the entire month. This way, you’ll be able to avoid making any impulsive purchase that might lower the amount of savings. Once you get wiser about saving money, your monthly budget will reflect a much smaller amount going towards these Burger Kings and McDonald’s.



5) Start making some passive income

Apart from earning your salary, you may consider some form of passive income that helps you bring extra money. You may check out a few online options like that of writing content or developing your free website if you wish to earn more without investing anything initially. You may even earn an extra amount by way of banner advertising after setting up your YouTube channel. The online outlets will often provide a few opportunities that let you convert your hobbies into a form of passive income.

You can save or make money by utilizing every opportunity that comes your way. You must save money out of every opportunity that comes your way. Apart from that, you must also work towards creating new opportunities that help you pursue your end objectives. You’ll always achieve a few things that you deserve by working hard. You’re bound to experience more of financial stability when you work sincerely and relentlessly.


More employers link between health and wealth – Financial wellness programs

Image via pixabay

The link between financial and physical health is more intensely related than what you may ever think. Did you know that your financial fitness can have a direct impact on your health and similarly your health can also have a direct effect on your financial fitness? As per reports from the Financial Health Institute, three-quarters of the population in the US report that their finances are their main reasons for stress. The total amount of savings that you’ve accumulated, the costs of college tuition, how much you’re setting aside for retirement and your health care costs can all constitute financial stress.

These reasons for stress would lead to negative impacts like anxiety, depression, high blood pressure, migraines, anxiety, heart disease and stomach ulcers. If this leads to unhealthy behaviors like smoking, drinking can lead to more stress.

How about building a fiscally savvy workforce

Although there are several corporate wellness programs which concentrate on prevention and management of chronic diseases, stress management and enhancing physical fitness, yet they often tend to overlook a vital aspect of a person’s overall health, which is financial wellness. Nevertheless, as more and more employers begin to realize the strong connection between wealth and health, they have started taking steps to imbibe financial education within their different benefit programs.

In fact, as per a report released by the Consumer Financial Protection Bureau, it was found out that all those employers who work to offer worthy financial wellness programs for their employees could reduce the financial stress of the employees, boost overall financial health and productivity. What do you mean by worthy and effective financial wellness programs? Well, they are actually those which support the financial picture and the complete financial health of a person and take a look at how a person’s personal financial life can fit in.

Cost barriers are being removed by employers

As the employers have started offering this education at their workplaces, the cost barrier has been removed as this is being considered as a benefit paid by the employer rather than an expense that goes out of the employee’s pockets. Due to the fact that it is something that is being promoted within the workplace, there isn’t any sense in taking off time from the employer to boost financial wellness and build wealth.

It can’t be denied that financial education is often tied to few major challenges of life like health insurance and retirement. A Financial Finesse manager, Danielle Encincas reported the way in which her company witnessed how employees are getting concerned about retirement and are not too certain about their ability to retire comfortably. Since the employees are asked to bear a large portion of the health coverage that has been sponsored by the employer through high deductibles and co-payments, it decreases their capability to save for retirement and this has a detrimental impact on their power to retire as per their planning.



This is why employees should keep a tab on their financial vulnerabilities which could be inadequate life insurance or insufficient college savings or maybe they aren’t retirement-ready as they thought they could be.
Therefore, as more and more employers identify the direct relation between health and wealth of their employees, they are taking the required steps to be of their help.


What Hedging Is and How it Assists in Risk Management

Image source Pixabay

It’s truly important for you to understand the practice of foreign exchange hedging before you find out why the businesses are now into hedging. In order to understand foreign exchange hedging, you must focus on its wide spectrum. While some people may wonder why you wear a suit for cutting hedges, other may appreciate your association with a hedge fund.

A business resorts to foreign exchange hedging for eradicating, mitigating, and minimizing financial risks. These risks are borne by financial transactions that involve any other currency than what the business considers as base currency for its operations. A large section of stakeholders are affected by foreign exchange risks; it includes individuals from various professional areas like sales staff, purchase managers, senior officers, finance experts, business owners, and general customers.

Few good reasons behind hedging:

International businesses offset risks by utilizing forex instruments through external hedging. Check out the most common approaches that these businesses adopt for managing risks.

1. Doing Nothing

Keeping yourself from taking an unnecessary step is certain an appropriate forex risk management strategy. However, you’ll need to be sure that it’s a truly justified and well-conceived idea to sit back and watch. In doing so, you’re actually accepting the daily spot rate. For a not-so-significant risk, it could be the appropriate step for you. Either your gross margins are quite high or you may have a much lower portion of your business transacted in a foreign currency. Again, hedging may not be perceived as a good strategy in your industry. You may sit back only under these conditions.

2. Full Hedging

Due to the capacity of exposure and the thin margins, this method doesn’t allow you to be exposed to foreign exchange risks. The hedging contract can be booked for all capex items, purchase orders, special projects, and invoices. Businesses that rely on a conservative approach are bound to find it more useful.

3. Padding Margins

This approach is about utilizing foreign exchange gains by padding profit margins actively; this approach compels you to indulge in high risks. This method is good for aggressive businesses that are capable of handling such risk exposure. Certain sophisticated products are incorporated in this method. However, it’s not possible for all businesses to follow this approach due to much higher risks.

4. Strategic Hedging

Planning a strategic move is the most usual approach towards foreign exchange hedging. This is certainly a great means of adding value to your business and minimizing risks with time. You must pay more attention towards every step of forex risk management while opting for strategic hedging. Ensuring predictability and stability are the key objectives of strategic hedging apart from safeguarding profit margins. You’ll need more input from outside sources in order to hit the right plan or strategy.



Bottom-line

Businesses hedge due to a number of negative and positive reasons. The good reasons behind hedging are those that combine your ultimate business goals while considering your general objectives. This is one way of identifying the most productive approach towards forex hedging for your business. You may even consider seeking expert advice as you won’t come across any silver bullet for picking a suitable approach.


%d bloggers like this: