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Finance

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Personal FinanceIt is important to plan the finance for any regular expenditure suchas the basic needs of any person like food, clothes, accommodation,bills etc.To be able to for fill all your personal needs you must have some kindof personal income, which will cover these expenses.The sources of personal income might be:Salary or wages =============== A regular earned income from employment, for these earnings the employee and the employer both have to pay a deduction to the government such as income tax and N.I. contribution. Overtime An extra earned income for the additional hours of work Commissions ----------- An employee can get a percentage of the selling price of product from his/her employer. Bonus ----- Bonus is an earning for good performance at work place. Interest -------- Interest using your money to create more money, expressed as a rate per period of time, usually one year, in which case it is called an annual rate of interest. Winnings -------- You may win money from playing the lottery or gambling on sport events. Gifts ----- Money received from a friend or relative on a special occasion such as birthday. Sale of personal items ---------------------- Earned income from selling personal items Gross and net pay ----------------- Gross pay is the total amount of money earned by an employee before any deduction is made. Net pay is the amount of money an employee receives after deduction have been made for income tax, national insurance and any voluntary contribution such as pension contribution. Regular and irregular earned income ----------------------------------- Regular earned income This is the income earned by a person on a regularly basis e.g. Salary Interest on savings Irregular earned income Irregular earned income is the money what you receive occasionally, these can be payments that the employee may be entitled to but which are not received on a regular basis such as commission, bonus and overtime. Other examples of irregular income can be: Sale of personal items at car boot sale Gifts Additional weekend or holiday work Expenditure Some expenses are arguably more important than other - opinions differ but the general consensus is that you must pay: Rent - this varies according to type of accommodation, location and duration of lease. Food - this depends on your appetite and your style of living. Fuel - i.e. electricity, gas and water Telephone - this is definitely controllable but can run away with the money, particularly mobiles. Socialising - going out, buying tickets for special events or cinema. Laundry - can sometimes be quite costly especially if you are keen on sport. Other expenses - these are inevitably and unique to you e.g. smoking, clothes, car expenses, CD's/ DVD's, sports etc. Difference between everyday expenditure and contingencies --------------------------------------------------------- Everyday regular expenditure includes payments for accommodation; for example rent or mortgage. Also payments for travel such as bus and train fairs, and petrol expenses for car. Contingencies are unexpected spending and would need sufficient savings to ensure that the result would not be a large debt. An example of a contingency is if your car broke down you would need to pay for the repairs. If there is no savings for contingencies then there might not be sufficient money available to meet regular expenditure. Monitoring financial transaction The monitoring of financial transaction is important, as it is the way to record, monitor, analyse and optimise the management of personal finance. This way is also beneficial for individuals as they can take control of their finances and this avoids many unnecessary downfalls and losses. These are financial transaction documents that can help individuals to monitor their financial situation. Bank statement Bank statement is issued to customers, showing them how much money is in their account and it giving listing details of credit/debit card transactions. These statements are only available to customers who hold currant account, loan account or saving account. Passbooks Banks and building societies issue passbook, which is used for withdrawals and deposit from a person savings account. Cheques Cheques are an order in written to the bank to pay a named person or a company a set amount of money. Pay slips These are financial documents issued by the employer. It gives details of gross pay deduction made to give net pay. Bills These are statements received from suppliers of water, electricity, gas, telephone, etc. Reconciliation Reconciliation means to balance your account monitoring your income and outgoings. This is also a way to update any outstanding direct debits. It is check and control if the amount, which is deducted the same as the amount you have spent. Another way to monitor your personal finance would be to create a cash flow forecast this will monitor all your inflows and outflows. An example of a cash flow forecast is: Income Amount Outgoings Amount Salary Parental contribution 1200 100 Rent Food Energy supply e.g. water, gas, electricity House expenses Council tax Savings Other expenses 500 200 50 80 20 300 100 Total 1300 Total 1250 Financial Advice Still not sure about your financial situation, don't worry because there are handful places where you can get advice. Most of the financial advisers are banks and BS like: Barclays; Halifax, Lloyd TSB, Abbey, Midland, HSBC, Nationwide etc. Bank and building society The majority of these organizations have their own financial products, so they may only offer limited advise on their own products and in some cases on a small range of products offered by one or more companies. Independent financial adviser There are thousands of independent financial advisers across the country that offers you financial product available in the market, because they are independent they can give you the best advice you need. Tied advisor People who represent a single organization such as banks and building societies are called tied advisors. They are only able to offer advice on a limited selection of products, which are the banks and building societies. Therefore, they cannot advice you on whether these products are more suitable for you than available elsewhere. Information from the media and websites It's good for young adults to go and search on the Internet for financial advice. The website what may help you sort out your personal finance are: www.moneyfacts.com www.fsa.co.gov www.bbc.co.uk/money Not only the Internet but also many magazines and newspapers like the economist, financial times, telegraph, observer, the guardian etc gives financial advice. There are also some programs on TV and radio what can help some people can get there financial advice from. FSA FSA financial service authority is there to protect consumer's interest. Financial advisers must be registered and authorized by FSA before they start working. Saving and investment Why save? We live in an uncertain world where jobs are easy to lose, incomes fragile and where relying on the state for anything more than a basic financial safety net looks foolhardy. Also the housing boom has meant that it has become more difficult to buy a property without a substantial deposit. So saving is more important than some people realize. Here are some tips for improving returns and/ or keeping down risk. What's the difference between saving and investment? Saving means putting some of your money away for emergencies or a short-term goal. All banks have savings account plans where your money will earn fixed rate of interest and be safe. Investment is when money is invested in shares that MAY show a better return. Where as with saving you know that you will earn at the end of a period with investment is this uncertain. So there is also a possibility that you MAY lose your money. Many people never take the time to set financial goals for themselves. They are too busy just getting by from day to day. Yet goal setting allows you to take control of your savings and work toward your dreams. Different goals may have different time frames. Generally, these goals can be divided into three time frames. Short-Term Medium-Term Long-Term Short-Term Generally, short-term can be accomplished within three months. Some examples include: * Building an emergency fund * Buying a new CD/DVD player * Saving for a short vacation Medium-Term These may take from three months to a year to reach. For example: * Saving to buy a computer * Buying a used car * Starting a college fund Long-Term These may take more than a year. They could include: * Saving £15,000 or more for a home down payment * Starting a business * Creating a retirement savings fund Saving and investment options One thing Britons are not short of in the world of saving is choices; there are more than thousands of saving products on offer from hundreds of financial companies. Here are the main categories and some idea of woo they might me suitable for. Bank accounts: Some bank accounts - particularly those operated over the internet - will pay interest rates as high as many savings accounts. You could find it convenient to use the account your pay-cheque goes into, and which you use for spending, for saving as well. But equally it could be confusing and you could lose sight of your saving goals. Savings accounts: Again, many of the best-paying accounts will be operated over the Internet. Nowadays 30-day or other notice accounts often pay little or no more than instant access deals. Fixed-rate accounts and bonds will generally pay more than ordinary variable rate savings accounts but they will require you to tie up your money for anything up to five years. Many savings accounts have introductory bonuses. Savers attracted by these initially high rates need to keep an eye on the rate once the bonus goes. Unit trusts: These are all types of investment fund, where your money is pooled with that of other savers and invested by a professional fund manager. Generally these funds invest in the stock market. With more than 1,000 to choose between from dozens of investment companies, it is possible to find funds investing in the most exotic stock markets and the most complex financial instruments. National Savings & Investments: National Savings & Investments also has a range of accounts and bonds, which are particularly useful for higher rate taxpayers. Shares: shares are small takes in a company. When you buy shares you become joint-owner of the company along with other shareholders. If a company is doing well the value of the shares might go up but if the company is not doing well the value of the shares might go down, what means that the value if your investment might go down. Reasons for borrowing We almost all need some kind of consumer credit from time to time. The reasons fro this can be: * To make a purchase for example to buy a computer or a car * To mortgage a house * To start up a business · Borrowing money to invest in other companies Personal loans can be either secured or unsecured. A secured loan is linked to a major asset, usually the borrower's home. They are cheaper than unsecured loans but if you miss any payments you risk loosing your home. Secured loan is commonly used when borrowing larger sums of money over a long period of time. The other type of personal loan is an unsecured loan. Unsecured loans are usually available for smaller amounts (£500 - £15,000). These loans are more expensive because they are riskier for the lender as they can't repossess your house to recover the loan if anything goes wrong. Authorized loan this is when you notify or apply to the bank to run up an overdraft Unauthorized loan this is when you do not notify the bank to run up an overdraft. Overdraft An overdraft is money borrowed from bank or building society over a short period of time. It is when u agrees with your bank or BS to allow you to spend more money than what you have in your account. It is a handy method of short-term borrowing but the biggest disadvantage is that a high interest rate has been charged. Credit cards Credit cards are a very popular form of credit and often very cheap if it is used wisely. However they aren't really suitable as a form of lending because if you fail to clear debts it could leave you with high interest repayments. If you struggle with your money management or won't be able to clear your card each month then credit cards will probably be very costly. Store cards Some retail stores issue their own cards. These cards can only be used within the group's stores. They usually don't have fees nut the interest rates are generally higher then normal purpose credit cards. Hire purchase It is a system of buying things on credit whereby the seller of the goods is regarded as the dealer, the purchaser is regarded as the hirer and the finance company is the owner. The ownership of the goods bought on hire purchase does not pass to the hirer at the time of hire purchase agreement or upon delivery of the goods. the ownerships of the goods remains in the owner till the hirer has fully paid the price agreed upon in the hire purchase agreement.

The main purpose of studying finance is to gain an understanding of the financial performance of a company, corporation or industry. By looking at a company's financial performance, decisions can be made about many things by many different players. Corporations are rated by different agencies that examine financial records and potential for growth. Fitch ratings are a good example of this. My employer has an A++ Fitch rating. This high rating allows a non-profit company to borrow money at lower interest rates. In a publicly held company, which is one that has shareholders, the main concern is to keep the shareholders happy. Shareholders infuse corporations they believe in (usually based on financial performance) with capital. When a company is considered a poor financial risk, the public will not be in a hurry to buy its stock. So who is affected by finance? Shareholders, as mentioned previously, are the focus in publicly traded companies. They are not the only people who think about financials, however. The CEO, CFO and any other "C" position have accountability to report to the board about the financial performance of the company. Management is responsible for creating and maintaining both capital and operational budgets. Employees are required to maintain certain standards of productivity. Customers are affected by finances as well. Consider gas prices, and how increased costs in production are passed on to the consumer. When looking at a company's finances, there are essentially four items to consider: the income statement, the price earnings ratio, the balance sheet, and the statement of cash flows, (Block, 2005). The income statement is a tool used to measure profitability over a given period of time, i.e. quarterly, annual. The income statement evaluates the cost of producing goods or services and the money that was made as a result of selling those goods/services. Gross profit and net earnings are two key features to look at. The price earnings ratio measures the relative valuation of earnings, (Block, 2005). This is a way of looking at how your company's stock earnings compare to other companies both within and outside your industry. This ratio is affected by many variables like marketability, sales growth, and the debt-equity structure of a company. The balance sheet shows what a company owns, and whether that capital is financed or owned, (Block, 2005). The balance sheet is like a snapshot of the company at one point in time. Company assets may include real estate, plant and equipment, inventory, and investments--like securities. One key element of the balance sheet is liquidity. This refers to the ability to convert assets into cash. The statement of cash flows is used to emphasize the critical nature of cash flow with respect to a company's operations, (Block, 2005). Like individuals, corporations have bills to pay. When an individual applies for a loan, the bank will look at a figure called the debt to income ratio. This ratio will tell the lender if the individual will be able to make their mortgage payments, car payments, utilities, etc. based on their current income. This is analogous to a company's cash flow statement. Using this basic information, financial analysts can perform more detailed research on the numbers. Ratio analysis, The Dupont Analysis and Trend Analysis are three examples of how financial analysts can use numbers to determine strength of performance and return on investment, (Block, 2005). When corporations are required to report their financials, they report by the Statement of Financial Accounting Standards, (SFAS), (Block, 2005). This standard includes the income statement, the balance sheet and the statement of cash flows. With an understanding of the basic financial reporting elements and who is affected by finance, it is time to consider how financial information can be used to make decisions. As mentioned above, more detailed financial analysis yields information on performance. Companies may choose to review their operations or supply chain management if they feel that improving them will reduce costs and increase profitability. Financial information may help steer a company to make decisions about what products or services they want to continue offering, or what services they may want to add. There are also ethical decisions that must be considered. Take the example of Martha Stewart, who was imprisoned for using insider information to prevent large losses on stock she owned. Financial information may be reported incorrectly or falsified as in the case of Enron and WorldCom. The Sarbanes-Oxley act was created to help remove the threat of individuals with power from covering up financial information to make personal gains. To conclude, it is important to consider all the key people involved when making financial decisions or reviewing financial performance. There are three essential documents used in financial reporting: the income sheet, the balance sheet and the statement of cash flow, which are all part of the Statement of Financial Accounting Standards. More detailed analysis can be performed using formulas like the Dupont Analysis. Finally, many important decisions are made based on financial data. It is important to ensure ethical handling of potentially damaging information, whether it is helpful or harmful to any party.

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Finance

...8. Moral hazard occurs when individuals tend to be very risky when there are protections if a loss occurs. This is more likely in indirect finance. For example, when an individual purchase a new car, they insure it and their policy dictates that if an individual accidentally hits their vehicle, they are obligated to a new vehicle. So after a few years and that individual gets tired of their vehicle and is desperately in need of a new one, they would intentionally drive a bit reckless to allow someone to hit their vehicle.  Lemons problem can be both indirect and direct finance. It occurs when one party to a transaction do not have the same degree of information. The party with less information take a risk hoping that the “lemon” is a good buy. For example, in the used car industry, the seller has all the information about the car and may limit the actual reason as to why they are selling the car, the problems the car has etc. intermediaries in the financial market can reduce lemon problems by reducing the attractiveness of direct finance by offering more incencitives to individuals when acquiring finances, offer provision for information, enforce laws on information given ensuring individuals receives sufficient information. Financial intermediaries have expertise in assessing the risk of the applicant for funds that reduces adverse selection and moral hazard. They have easy access to various databases that provide information on both individuals and businesses, and......

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