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What is the Law of Small Numbers? Meaning, Examples & More.

What is the Law of Small Numbers? Meaning, Examples & More:

Often we don’t realize but the game of investment can be closely connected with hardcore psychology. You must have heard many people say: research before you invest.

While that is absolutely true, you must also know what to research for. While being on a searching spree, generally, you find many online (or offline?!) resources which tend to favor a kind more than the other. Enter, The Law of Small Numbers.

A data has multiple dimensions and each one of them is responsible for inferring the data in a different context. Statisticians tend to choose the attributes (read dimensions) very carefully. The choice of attributes is not random, of course. A couple of data mining techniques such as “Decision Tree Induction” can carry out specific attribute selection methods to take exact inference.

Coming back to the real context, “The Law of Small Numbers” is actually a law confirming fallacy. It says that the length of data is an important consideration for a data as the probability of it being relatable is directly correlated to the length of the data. Read more of this article to get to know about “The Law of Small Numbers”.

The Loophole in the Probabilistic Inference:

Imagine our whole world running on the rules of probability! However fancy it might seem, it is not actually possible otherwise you would be having a fair chance to everything, wouldn’t you? The point is that probabilistic results are always relative. You can neither expect nor confirm the extent of its reality.

The source of the data that you are picking for your hypothesis and inference is of great importance here. Rather than completely shifting your focus to what does a data infer, you might want to shift your focus to where the data has been picked from (and possibly how).

Random Sampling is one of the famous probabilistic sampling techniques which goes with a very basic rule: Each element has an equal and a fair chance of getting picked. Now, nothing in this world is absolutely defined by itself and so the fair & equal chance is quite a hypothesis.

Also read:

Causal Explanation/Causal Narrative:

A Causal Narrative is something which is derived from general human behavior. You must have not realized but we humans have always indulged in pulling out inferences from the pieces of information that are provided to us. The data, however, is not always full-proof.

To put it in clearer words, the data can be churned out as a result of random sampling which makes it even more difficult to put a word to the analysis done through its inferences. You must note that Random Sampling inferences are sometimes misinterpreted as the whole account of the data is not clear and was in fact collected randomly. Similarly, a causal explanation of a data which has been collected or sampled randomly does not always pull out exact inferences.

Why? – Because we are trying to infer a cause for something which has no cause (by its nature).

Hence, equal attention must be paid to the method which has been used for collecting the data.

Sparse Population & an Example:

In a famous statistical puzzle related to kidney cancer among the 3143 counties in the US, the data had two interesting (& confusing) inferences at the same time.

Inference 1: US Counties with the lowest rates of Kidney Cancer have the following attributes:

  • Mostly Rural
  • Sparsely Populated
  • Located in traditionally Republican states in the Midwest, the South, and the West.

Inference 2: US counties with the highest rates of Kidney Cancer have the following attributes:

  • Mostly Rural
  • Sparsely Populated
  • Located in traditionally Republican states in the Midwest, the South, and the West.

Now, how two exactly opposite (in nature) inferences can have exactly the same attributes?

The key attribute or factor here in this example is the sparse population of the data collected in the first place. In fact, a misinterpretation of the data source has been done because of the sparsely populated data as a small population (generated with a random chance) is inclined to show greater extremes in terms of deviations.

Let’s understand this context better in terms of another famous example:

Take an example where a jar of equal red and green marbles is placed and you need to pick 4 marbles out of the jar randomly. The possible outcomes noted are:

  • 2R/2G <- Actual Population Mean
  • 3R/1G or 3G/1R
  • 4G/4R <- extreme outcome (has 12.5% chance)

When the Sample sizes are increased and for example let’s say we’d be picking out 7 Marbles instead of 4 then the probability of extreme deviation (i.e. picking out 7 same colored marbles) is reduced to only 1.8%.

This result is in fact derived from the very famous law –  “The Law of Small Numbers”.

(Credits: Kevin deLaplante)

Conclusion

The law of small numbers explains the Judgmental bias which occurs when it is assumed that the characteristics of a sample population can be estimated from a small number of observations or sample data.

Therefore, while studying any survey, the length of data should be given an important consideration as the probability of it being relatable is directly correlated to the length of the sample.

Ways to Save for Your Retirement

3 Simple Steps to Save for Your Retirement.

3 Simple Steps to Save for Your Retirement:

What you earn, i.e. your income is centered, mostly, when it comes to “how much you actually need when you get retired”.  But, are you really sure that the math used here is all correct? I am not.

Suppose if you draw a hefty sum from where you work (monthly) but barely manage to save a dime out of it; would you retire rich? I guess not.

On the other hand, if you get to save even a 30% (roughly) of whatever that you earn in a month, you’d definitely be at a much better place than the former you, right? So, the math here needs to be shifted to “savings and expenditure” and not on the overall income.

You’d be surprised to know that still many are sticking to the former notions of 70% of the income but yes, there are loopholes:

  1. You wouldn’t want to get through an entirely miserable young age just to retire rich, would you? – That, sometimes, becomes the case when you try to save 70% of your income.
  2. You are certainly not including the notion of current taxes and increasing health expenses as and when you grow up.

Strategically, therefore, the 70% rule is a decorated bubble. The question is how much do you actually need in order to retire rich? Let’s answer this question carefully in this article.

3 Simple Steps to Save for Your Retirement:

1. When Should You Start Saving?

The best answer to this question would be: “as soon as possible”. You are 21, well and good! 31? It is still not too late to start. You can always jump start your emergency funds whenever you want to. However, being consistent is the only key.

The best part about starting early is the “power of compound interest” even on low proportions of monthly savings. You can save as less as 5000 INR a month and see a huge difference years later.

However, if you are in your 30s or 40s, don’t worry; cutting back on a couple of things would work well for you to get you a feasible retirement fund. As we mentioned, the power of compound interest on your savings, you need to take your picks on where you should invest your money.

Fixed Deposits, Mutual Funds, or SIP? Different people have different priorities based on their own risk-taking capabilities. Choose your own option!

Also read: What are Assets and Liabilities? A simple explanation.

2. Ask for a Raise:

If you are confused what does it have to do with your retirement savings fund, wait up? We have an answer for you: The net sum of income you earn in your first decade of working makes much more impact on your net total of emergency or retirement fund.

Asking for a raise would balance out the money going directly from your bank account to your savings account. In the best scenarios, you could use the raised amount to go into your retirement fund (fully or partially) which would act as an extra cash for you in future.

Research says that about 37% of the employees who get a significant raise annually are those who ask for it. So, the next time, don’t wait up until the annual records of employees are checked but ask for the raise whenever you feel necessary.

When should you ask for a raise?

Honestly, there’s no strict rule for the same. But if you are asking for the possible options then it could be one of those times whenever you have successfully completed a project or have brought a fruitful result for the business you are working for.

3. Does Fixed Deposit always Work?

According to traditional sayings, you should focus more on keeping your savings in a fixed deposit. These days, it is quite controversial to choose where to put all your stakes on?

The greatest advantage that a fixed deposit offers is that it can be unsealed quite easily in case of an emergency. When you choose any other option to put your money into savings, you don’t actually get this leverage. Moreover, you might have to pay an extra unnecessary sum in order to unseal your deposit in case of emergency. True.

However, the rate of interest provided on a fixed deposit is very, very low. In fact, it is incomparable to other means such as mutual funds. Viewing the other side of the coin, mutual funds investments can be quite risky. They are subject to the market risks and what not.

Also read: Where Should You Invest Your Money?

What is the best way to invest then?

Now, the correct way is to break your proportions into pieces and put them into different means such as fixed deposits, stocks, mutual funds, real estate etc. There is no compulsion or a set of predefined rules to govern the context of retirement savings.

The magic lies in the way how you balance your savings and lifestyle.

Should You Use Credit Card

Should You Use Credit Card? Mystery Explained.

Should You Use Credit Card? – Pros and Cons of Using Credit Cards:

The credit card also bears the name of “debtless debt” which makes your catching up with your needs and requirements quite easily. In fact, this is the bottom-line for those who recklessly use credit cards for purchasing things.

The debate that revolves around the propaganda of using a credit card is endless with different opinions associated with different sets of people. Let’s break this rationally by seeing the possible alternatives of using a credit card:

  1. Paying cash – going the old school way,
  2. Using your debit card with instant balance deduction from the bank – a kind of digital money method.

In countries like India (the developing ones), we still have a way to go before we can use credit card everywhere. I am not talking about the online stores or any other huge retailer’s stores but at places like a parking lot or small stores, one can’t possibly choose to pay via a credit card. Therefore, using hard cash is the only way around. But we won’t only stop here stating this argument; let’s objectively view different pointers, pros, and cons of using a credit card as a payment method.

What is a credit card?

A credit card can be acted as a payment option which allows you to buy or purchase things or service on credit until a specific period of time. To put it in simpler words:

If (or not) one doesn’t have cash available at a specific point of time, one can make use of credit card to use the credits to pay at a later date. 

The keyword(s) to pull out of here is to “pay at a later date”. For revolving accounts, a minimum balance statement is due on every month end. On the other hand, for a charge card, the full balance to pay is due on every month end.

Various stores and merchants are now dismissing the use of cash as a mode of payment already. In fact, they only accept their fee through credit cards due to obvious security-related concerns. However, unlike the US, there is still a lot of scope remaining with hard cash in India. In fact, one can totally live without a credit card in India.

Also read: What Would You Rather Have: Rs 10 Lakhs Right Now or 1 Paise Doubled Every Day For 31 Days?

Credit Card – A kind of free cash? Or Not?

If you want to steer clear out of troubles, you must never consider credit card as a form of free cash. Remember, whenever you ask a bank for a loan, your credit history is checked thoroughly and it better not be bad to get your loan cleared. The amount you are using your credit card for has to be paid back in time to the bank or else you will be charged with heave penalties.

Thus, contrary to popular beliefs and no matter whatever people say, a credit card is not free money. If you don’t have the money right now, you should never charge your credit card then. Otherwise, it would be very tough for you to repay the amount in time.

Now that you have understood the basics of the credit card, the next big questions- Should you use credit card? Before jumping to any conclusion, first, let’s discuss the pros and cons of using a credit card.

Also read: An Income Tax Basics Guide for Beginners -Understand TDS, Section 80C & More.

Should You Use Credit Card?

Credit Card Pros – The Green Signal

1. Security and Convenience – There’s always a dilemma of “how much to withdraw from ATM?” No matter what, either the money you withdraw is going to be huge that there will always be a fear of theft or else it would be very inconvenient to withdraw money from ATM time and again because you ran out of money. Enter, Credit Card – a convenient mode of payment. You could always leave your money in the safer hands of the bank and can use your card for your purchases.

2. With Credit Card comes Big Rewards – As much as you use your credit card, the points on your card keeps increasing. Additionally, you can get other cash backs on several purchases, gas rewards. Many credit cards offer you free insurance on your air ticket, bus ticket, and hotel payments. Whatever that you save on your hefty payments can be considered as “incoming money” right?

Credit Card Cons – The Red Flag

1. The Free Money Dilemma – With a privilege of having to pay back later, we always end up spending way more than we should. That is where the banks are earning. Always remember, the exciting cash backs, reward points and other benefits that come with credit cards are always issued while keeping the profitability factor in mind.

2. Hurts your Credit Score if Abused – If your credit score is abused, you won’t be able to earn many credits or rather, it would be difficult. This brings your heavy responsibilities of balancing the use of credit card to a normal extent. Moreover, there are times when the credit card issuers don’t clearly state the terms and conditions and trap the users. Be the smarter one and ask for it in the beginning to specify all the terms and conditions.

Conclusion:

Obviously, there’s no free meal in this world. If you are using a credit card today, you have to pay back later. However, the use of credit cards provides a lot of convenience to its users. Further, it can be handy in case of a tight budget where it’s better to use credit than to ask for debt/loan.

Also read: #11 Best Passive Ways to Make Money While You Sleep.

Tags: Should You Use Credit Card, credit cards, credit card pros and cons, should You Use Credit Card instead of cash
herd mentality

The First Golden Rule of Investing -Avoid Herd Mentality.

Herd mentality is a very common investing psychology seen in most investments done by the people. Here, a majority of past investment done by the mass constitutes a refined data to show inferences.

An investor’s natural instinct goes with the ones of masses, which means that he/she doesn’t seem to have a rational view on a certain investment but is more likely to deviate where the majority mass is moving – this little phenomenon is known as the “Herd Mentality”.

The term has been derived from the natural instinct of a number of sheep walking together in a herd so as to avoid falling into the pitfalls of danger.

herd of sheeps

If you look around, our daily actions are based on this little psychological term that we have just read about. If we break down the context of “Herd Mentality” to its core, we would find out that the concept is more related to “how do the natural instincts work for humans”.

Interestingly, you can also find a large population of investing community following herd mentality psychology in making various financial decisions like buying new property or investing in the stock market. Seeing others getting profited with an investment, our brain tells us to go for it without a second thought.

Why does herd behavior happen?

Although investing collectively is harmful and irrational, however, most of the people choose this tendency because of two basic (human) reasons:

  1. Strong social pressure: Most of the people like to be accepted by a group, rather than branded as an outsider or outcast. Following what the others are doing is a natural way of becoming a member of that group. That’s why following the herd is the logical tendency to avoid social pressure.
  2. Irrational belief that a large number of people cannot be wrong: In general, people believes that the larger the group of people involved in any decision, the lessor is the chance of the decision being incorrect. Again, this is a natural instinct of humans. Until and unless anyone has little experience and expertise of the domain, he/she avoid directly opposing the masses.

Herd Mentality in Stock Market:

Many of the worst financial crisis in the stock market like dot-com bubble or the economic recession of 2008 can be attributable to the same human tendency- HERD MENTALITY. Here are few examples of herd mentality in the stock market from day to day market scenario:

  • Buying a stock which everyone else is buying :

The buying decision of an average investor can be easily influenced by the actions of his friends, neighbors, or acquaintances. Suppose all your friend bought one specific stock whose price is rising day by day. Further, all your friends are making fun of you that you didn’t buy that stock when then initially recommended. What would be the natural instinct of an average investor here?

If everyone around you is investing in a particular stock, then the tendency for potential investors is to do the same. However, this strategy never turns out to be fruitful for an investor in the long run.

herd mentality stocks

  • Investing in ‘Hot’ Stocks

Hot stocks are the darlings of the new investors as these stocks are the ones which are constantly in news and everyone is talking about its upside potential. However, hot stocks become ‘hot’ only when the majority or herd moves their money in this stock after seeing so many other investors doing the same thing.

The ones who are actually going to get benefit from these stocks are the ones who invested in these stocks way before it became a hot stock. The rest (herd) who puts their money in these stocks (when the prices are already high) is going to lose their hard earned money in the stock market.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

How to Avoid the Herd Mentality and Make Better Investment Decisions?

It is quite clear by now that judging “collective” behavior wouldn’t do any good when it comes to making an important decision about investments. Most naturally, following what majority of people has chosen is always a tempting and “safe” option to go for. However, without foreseeing the background, one can’t be sure of any important decision.

Jumping on a bandwagon without knowing every bits and piece of details about it is something unnecessary in the investment domain. Before making an investment, make sure that you do the following things:

1. Do your research: A little bit of research never hurts. In fact, this should be one’s habit before making any investment. You can use various references to know the details about any kind of investment you want to jump into. In fact, the more you read, the better it would be.

2. Consult a financial advisor: If you cannot give enough time for the research/study, then why not consult an expert. He/she will be able to give you a better advise compared to your amateur friends or neighbors. 

At last, use your wit to take your decision!

Also read: Loss Aversion- How it Can Ruin Your Investments?

Get Rid of- Confirmation Bias For Good

Get Rid of- Confirmation Bias For Good!

Investing Psychology: Confirmation Bias

“People only listen what they like to listen” is a generic statement which has deep-rooted psychological meanings.

If you consider psychology and investment, both go hand in hand. Since the two are closely related, you would know that one changes (or alters) the effects of the other. One such psychological phenomenon is known as “Confirmation Bias”.

Let’s put this phenomenon forth with an example:

While purchasing a phone online, do you take the efforts to check for its reviews online? If yes, congratulations, you are an intelligent buyer.

However, the point is something different. Suppose that you really wanted to buy this phone for a very long time and have finally managed to have the savings to purchase it. Now, when you are reading the reviews, you would actually consider every positive review about the phone but will mentally decline the negative ones. Sounds familiar?

This concept is related to “Confirmation Bias”. Now, this was a basic idea just to give a glimpse of how this works to our readers. As we will proceed with this article, we will discuss a bit more about the confirmation bias and how it can affect your investment decision.

Human Mind and Biases:

As complex as our human mind is, scientists have been able to infer different phenomena related to the subconscious human mind. The confirmation bias is a result of one such phenomenon. Before moving further, let us discuss – what does the term bias mean?

When a human mind is determined towards one particular behavior, it subconsciously rejects the pieces of evidence against it while confirming the ones that go in its favor.

While we as human beings are found doing this all the time, these actions can be pretty dangerous while making an investment.

Also read: Loss Aversion- How it Can Ruin Your Investments?

Investment and the Confirmation Bias:

Psychologically speaking, an investor would be more inclined towards his pre-occupied information and knowledge about certain kinds of investing. While considering the pros and cons of a certain kind of investment, the buyer would most likely go with what he used to believe until now.

For example: Making an investment in Bitcoin is dangerous and pointless.

If this is an investor’s pre-occupied notion then he would most likely not invest in bitcoins in future. Moreover, the information that will be fed to the investor in favor of this notion would be acceptable to him. On the other hand, the information that would oppose this notion would be rejected by the investor.

bitcoins

Most obviously, this particular bias is not only limited to investment but prevails in almost each and every domain. If you notice closely, the confirmation bias restricts you to consider only one point of view and pushes you to almost reject the others which are lethal to decision making in investment. In fact, in order to make good investment decisions, one needs to consider a scenario multi-dimensionally.

If one fails to do so, he can make wrong investment decisions possibly incurring heavy losses in future.

Also read: Why Nobody Talks About VALUE TRAP? -The Bargain Hunter Dilemma

Confirmation Bias in the Stock Market:

There are various scenarios in the stock market where you can find confirmation bias influencing the investment decision of an investor. Here are few examples:

  • When an investor finds a ‘hot’ stock in any financial website/magazine, he/she will research it further only to prove that the supposed ‘potential’ is real. They might look at plenty of positive news regarding that stock. In the same time, they’ll ignore the red signs, just by making excuses like ‘It’s not going to affect the company much’.
  • If the stock price of a company starts falling, the investors start looking at all the negative flags only. Even if the setbacks are temporary and the company might have a good long-term future potential, however here the investors are more biased to the negative flags and totally ignore the positive factors concerning that stock.

confirmation bias stock market

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

How to Avoid Confirmation Bias? 

The easiest approach to avoid confirmation bias while investing it to take an expert advice from a trained financial advisor.

Don’t we always take a second opinion from our friends or colleagues for every little thing we do? Be it selecting an outfit for an important event to taking major life decisions, a second opinion actually helps in backing up our decision. Therefore, you would want your second opinion to be totally unbiased and reasonable, wouldn’t you? That’s what expert advice is for.

Make sure that you ask for an advice from an experienced investor or from an expert financer. An expert advice makes you see the alternatives in a better way.

Nevertheless, with practice and experience, even an individual investor can avoid confirmation bias, without even taking help of an advisor. Here are two important steps that you need to contemplate in order to avoid confirmation bias.

1. Look at each and every dimension: Considering only pros or only cons about an investment would make the information partial (incomplete). Hence you need to view a scenario from different angles in order to make a backed-up decision.

2. Take some time before you pop a decision: Time is an important factor and it actually helps in unfolding various new information with it. An intelligent investor knows the amount of time he needs before he could finalize his decision. 

Conclusion:

Confirmation bias is not new to the investing world and do not regret if you have been following this psychology even without knowing. However, now that you understand that confirmation bias can adversely affect your investment decisions, you need to avoid it.

Although confirmation bias is a human instinct- nevertheless, you can control/avoid it with practice and experience.

Also read: Case Study: How 100 shares of WIPRO grew to be over Rs 3.28 crores in 27 years?

winner's curse- investing psychology

Investing Psychology: Winner’s Curse

Investing Psychology- Winner’s Curse :

Have you ever had a chance to participate or witness an auction?

If yes, then you would relate to this better! As interesting as the name of this phenomenon sounds, the outcomes are pretty relatable too.

Many statisticians, mathematicians, and successful investors have discovered and scribbled a pretty common sequence of scenarios that happens mostly during the auction. Let’s try to give you an overview of this:

A bidder sitting in an auction and trying to repeatedly bid on an asset often gets intimidated to continue his bidding even if it is not profitable.

As obvious, in such scenarios, the last one to bid gets the asset and hence gets the title of “the winner”.

But has he actually won? What do you think? The inference can be a bit deeper than you are assessing it to be.

Such scenarios are quite noticeable everywhere – from IPL auctions to jewelry auctions to the real estate to the stock market, you might get to see this every time. The phenomenon could be explained clearly with the use of a couple of suitable examples in this article.

“Winner’s Curse” is quite noticeable in the domain of investing. Generally speaking, a newbie tends to fall in such pitfalls quite often! Keep reading this article to know more about the winner’s curse!

Also read: How to Earn Rs 13,08,672 From Just One Stock?

The Auction Scenario:

If you haven’t had a chance to witness an auction yourself then you have a chance to virtually experience it over here!

Basically, an auction is a set up organized by the “current owner” of an asset who is interested in selling the asset to one of the bidders who are participating in the auction. The owner can be a bank or any other financial institution as well.

A set of people who are interested in purchasing the “on sale” entity are called bidders who have the leverage of placing the bids on the entity. The bidding starts with a base price (the one put forward by the “current owner”) and the bidders have to one-up their biddings to own the asset/entity.

The mentioned set of actions is repeated until no bidder out rules the last bidding. As a result, the final bidder gets the asset – sound simple?

Where is the loophole?

Suppose if the real (true value) price for the asset was 1 hundred thousand dollars and if the final bidder claims it for two hundred thousand dollars, would he still be called as a winner?

Psychologically speaking, the overwhelming and competitive environment of bidding in an auction makes the bidder claim the entity at a higher price than what is profitable (admissible).

This overestimation of the final bid for an entity is actually the cause of “winner’s curse”.

winner's curse graph

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

What triggers this curse?

They say, “Emotional stability is one key factor when it comes to investing”.

You would have seen various collaborations of multinational companies. In fact, the whopping amount for which the shares for a certain company get sold is quite huge, right? Well, the winner’s curse is actually playing the cards for it sometimes.

In fact, various multinational giants get caught in this trap. Is it emotional friction or winning at any cost? I’d say both.

The human brain works in a pretty competitive way and the reason can be delved into the core of cognitive science. After the “successful bidding” one gets to realize the loss incurred but the dust gets settled by then.

A rapid increase in an entity’s price followed by its contraction is a sequence followed by various financial experts. The strategy works when a number of people get lured by the so-called “lower prices” of the assets and end up paying for it.

Also read: Efficient Market Hypothesis -The Only Theory That You Need to Read Today.

Winner’s Curse in the Stock Market:

Winner’s curse is not new to the stock market. You can notice multiple scenarios in the stock market where the investments of the people are influenced by the winner’s curse. Few of the best examples are:

1. Buying stocks at a high price.

In the stock market, every now and then, you may come across a storyline where people are buying expensive stocks because they don’t wanna lose the opportunity. Here, they are ready to bid a huge price to win that stock. However, purchasing an overvalued stock (only for the sake of winning) is never advantageous for the investors.

2. Investing in IPOs where the insiders are selling their stakes and public is bidding.

IPO is a scenario where a company offers its shares to the public for the first time. During an IPO, insiders like Promoters, Family, Early Investors- Angel capitalist, Venture capitalist etc are selling their stakes to the public.

However, do you really think that the insiders will sell their stakes to the public at a discount?

Anyways, in order to win, the public is ready to bid a high premium (most of the time) for that IPO. However, after the IPO gets allotted to the people, the winner’s curse starts playing its role.

Also read: Is it worth investing in IPOs?

stock market bidding

You might want to steer clear of this the next time you go for a hefty investment, right? Don’t worry you can try out some precautionary measures with which you should do fine at the “war zone”.

Things to Remember while Bidding:

1. Just as analysis and research are two important things to do before making an important investment. Similarly, knowing the true value of the asset you are bidding for is quite important before you even go for it. You should know that you stick to your actions even better once you have the basics cleared in mind.

There must be a fair standard price of the commodity you’d be bidding for. Get to know about it beforehand.

2. Draw a line: Putting aside an emotional mindset is the best thing that you can do while bidding for an asset as emotions and finance don’t mix well together. As soon as you start placing your first bid, you should know where to draw the line. This would help you hold your grounds in a much better way.

3. Know how important it is for you to win: Rational arguments are always better when you are in a confused state of mind. Ask yourself why does winning actually matter to you?

Also read: Loss Aversion- How it Can Ruin Your Investments?

5 Things You Should Know Before Getting Your First Credit Card

5 Things You Should Know Before Getting Your First Credit Card.

5 Things You Should Know Before Getting Your First Credit Card:

Contrary to popular beliefs, the credit cards are not to be mistaken with “free cash” or else be ready to fall into the trap of endless repayment and paying penalties.

A Credit Card, if used rationally and in a balanced way, can be a huge gift for mediocre spenders as it allows you to spend on your necessities even if you are practically broke. However, be sure that you will be able to earn cash to repay the amount in time or else there will be penalties in your name. Looking for benefits associated with credit cards? Let’s help you out with a few scenarios:

#1. Benefits Associated With Credit Cards:

  1. If you are not earning (or will not be earning) for a while, you can always pay your bills and pay for your necessities using a credit card assured if you can pay for the amount later.
  2. There are multiple rewards and cash backs that come with the use of credit cards on bill payments and even for shopping.
  3. Various credit card issuers provide you with insurance on your flight tickets and bus tickets.
  4. With a good credit history, you can apply for loans easily in any bank.
  5. Convenience is the middle name of a credit card as it allows you to pay for anything through a card and without requiring you to withdraw cash from ATM every now and then.

But with benefits, there come responsibilities and in this case the wisdom of rational spending. Let’s know things about credit cards to know more about it.

#2. Credit Card Interest Rates in India

The interest rate varies from bank to bank in India. However, ICICI Bank is the leading issuer of credit cards in India. The interest rate keeps falling in the range of 1-3% for almost every bank that issues credit cards. Apart from the interest rate, there are other benefits associated with credit cards which have to be kept in mind before purchasing a credit card. For example:

Some banks offer free insurance on ticket bookings through credit card and others provide various cash backs on bill payments. These are a few factors that influence the mind of a buyer. The interest rate depends on the following factors:

  • Repo Rate: Repo rate is the rate at which the RBI lends money to the commercial banks of India.
  • Reverse Repo Rate: The rate at which the RBI borrows money from the commercial banks of India.
  • Repo rate directly influences the interest rate on credit cards whereas the reverse repo rate inversely influences the rate of interest.
  • Prime Lending Rate: Various banks fix the interest rate on a credit card keeping in mind the current prime lending rate.

#3. Fees on Credit Cards:

There are times when a credit card issuer (bank) does not clear the terms and conditions for a credit card. The terms and conditions specify various fees that are to be charged before issuing a credit card to the holder. The fee structure is as follows:

  1. Joining Fees: These days, many credit card issuers are issuing credit cards without associating any joining fee to it which means that a holder can gain access to a credit card without having to pay any fee in the beginning.
  2. Annual fees: The free (or paid) credit cards issued are associated with an annual fee which has to be paid on a per year basis. Again, the annual fee to be paid varies from one bank to the other.
  3. Interest Rate: The main pointer through which a bank earns on credit cards is the interest rate that it charges on these cards. Generally, the interest rates vary from 1-3% in India.

Also read: An Income Tax Basics Guide for Beginners -Understand TDS, Section 80C & More.

#4. Minimum Payment on Credit Cards:

In layman terms, the Minimum Payment is a scheme which allows you to settle a minimum amount on your overall (monthly) credit card bill if you are not able to pay the entire bill at once. However, the remaining balance which is carried forward for the next month is associated with a higher rate of interest.

Benefits: 

  • Save you from a penalty in case of “partial payment”.
  • Saves a bad mark on your credit history.

Disadvantages:

  • Interest-free credit period is not provided in case of Minimum Payment
  • Keeps you trapped in an endless loop of repayment.

#5. How Credit Cards Affect Your Credit Score?

The credit card can hugely determine your credit score as it defines your immediate decisions and management of your debt. If you plan to balance out your spending every month, credit cards can have a huge positive impact on your credit score.

  • Your Credit Mix accounts for 10% of your FICO score
  • Closing Credit Card Accounts can hurt your credit score
  • Your Payment history (or late repayment) can hurt your credit score up to 30%
  • The amount of debt you carry can affect 30% of your FICO score.

Also read: How to Invest in Share Market? A Beginner’s guide

An Income Tax Basics Guide for Beginners

An Income Tax Basics Guide for Beginners -Understand TDS, Section 80C & More.

An Income Tax Basics Guide for Beginners -Understand TDS, Section 80C & More:

Often people cry out for Income Tax deductions but a few out of them literally understand the whole concept. Started a new job? Does Income Tax worry you so much? Don’t worry; it is no rocket science to understand. All you have to do is to sink in a few basics of Income Tax to get things clear. Some would ask:

Why is it even necessary to know about Income Tax?

To attain a financial stability, you would definitely need to understand the income tax basics. To help you out further, we are going to un-knot the complications of Income Tax and put it in a simplified manner for the beginners to understand. So, if you are just starting out with a new job, take the informed first step towards your new financial journey. Let’s start – shall we?

An Income Tax Basics Guide for Beginners:

Figure out your Salary:

Head over to the HR department in your company and ask them for the salary slip. The salary slip would contain a few pointers in which your salary would be divided. Another document known as “tax statement” could also be asked from the HR department to know how much tax is deducting from your payout.

Key Note: Companies that give HRA which allows you to save tax if you are living on rent. It is one of the ways through which you can save easy bucks on the tax.

Further, you should mark the major components in which your salary is divided to know the overall scenario better.

Assessment Year: 

Assessment year is termed as the “financial year after the previous financial year”. According to Indian standards, the financial year (tax year) starts on 1st of April every year and closes on the 31st March of the following year. It doesn’t matter when you’d start your job, the financial year or the tax year would close on 31st of March, every year.

1st April – 31st March (of the following year) = 12 Months. 

In the assessment year, one files the return of the previous financial year. For example, the period 2018-19 will be the assessment year for the period 2017-18 (12 months). Suppose if you start with your new job sometime in February, 2017. In that case, you’d have to fill the return for the period 2016-17 (active months from February 2017 to march 2017) until 31st of July, 2017.

To simplify it further, see this example:

Active months of working – 1st February, 2017 to 31st March, 2017
Tax Year – 2016-2017
Assessment Year – 2017-2018.

Please note that the last date to file your return is 31st of July every year (for the assessment year).

Also read: Where Should You Invest Your Money?

Income Tax – More than the “Income” You Earn?

Your salary might not constitute the entire income you earn monthly/annually. There are other sources through which one earns his/her income which we are going to list down below. Make sure to note that the components divided might not even suit your case.

Where else do you earn an income from?

  • Salary – The amount that you receive daily/monthly/weekly as per your employment’s agreement constitutes the income from your salary. This also includes the leave encashment and other allowances you get.
  • House property related Income – The income that is gained from a house property which might be either self-occupied/rented/owned. The gain of income from any other building would also be included in the same.
  • Capital Gain – Whenever you sell your asset/property, there’s a gain in your income. A tax is deducted from the gain.
  • Income from Business – If you run a side business other than your “regular job”, the income earned on the same is also tax deductible.
  • Other Sources – Income that arises from the savings bank accounts, FDs (fixed deposits) and other sources of saving are deductible of tax. (This does not include the amount invested in mutual funds).

Also read: The Best Ever Solution to Save Money for Salaried Employees

Section 80 C – Your Best Friend!(?)

Basically, the income taxable amount is calculated by the following formula:

Gross Income (sum of all the pointers mentioned above) – deductions = taxable amount.

Here’s what the elder generations preferred to do in order to increase the deductions and lower the taxable income – “Open a PPF Account”.

If you want to raise the amounts of deductions to lower the taxable amount under 80C, you can open a PPF account. A PPF account can be easily opened by depositing a minimum of 500RS. On the other hand, one can deposit a maximum of 1,50,000 INR in a year. The interest gained on the PPF account constitutes the income gained from the other sources under the section 80C. Thus, every year, you can claim the deductions and can save your income tax money.

Finally, a tax slab is applied on your net taxable income to calculate the final Income Tax amount you are liable to pay.

Income Tax Slab for Individual Tax Payers & HUF (Less Than 60 Years Old)

Income Tax Slab Tax Rate
Income up to Rs 2,50,000* No tax
Income from Rs 2,50,000 – Rs 5,00,000 5%
Income from Rs 5,00,000 – 10,00,000 20%
Income more than Rs 10,00,000 30%

for FY 2018-19

Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1 crore.
Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.
Health & Education Cess: 4% of Income Tax.
*Income tax exemption limit for FY 2018-19 is up to Rs. 2,50,000 for individual & HUF.

Read more here: Income Tax Slab & Rates- ClearTax

TDS (Tax Deducted at Souce):

TDS is the tax deducted at Source which gets automatically deducted from the income you gain from various sources such as the interest on your savings account. Employers estimate the net annual income and deduct (as per the tax slab) the tax payable from the salary (if the taxable amount exceeds Rs 2,50,000 annually).

Quick Note: If you need help in e-filing your income-tax return, feel free to check out this site– ClearTax. It’s Quick, Easy & Free!!

clear tax

Tags: Income tax basics, Indian income tax basics, Income tax basics in India, learn income tax basics
How to Meet Your Investment Objectives with Income Funds

How to Meet Your Investment Objectives with Income Funds?

Mutual Funds is not only an investment or a onetime business, it goes on and gets managed professionally on a large scale. And when it comes to professional management, the best example of the type of mutual fund to invest in is the “Income Funds”. The risk involved in Income Funds differs from a fund to fund. It can be highly volatile or it can be pretty stable too. While talking about the Income Funds, the important question to ask is:

Why does one need to invest in Income Funds at all?

Answer – As the name suggests the word “income”, income funds can be chosen to diversify your portfolio. Generally, diversification helps in mitigating the risk to a larger extent. Income Funds are diverse i.e. there is a lot to choose from these funds. Moreover, the funds can invest in both equity and debts as well. Even the investment can be merged up into the combination of both equity and debts. Income Funds are also known to invest globally and thus have a greater reach. Having said that, let’s explore more about the income funds in this article. We will also delve into details about various kinds of income funds to clarify the case further.

Let’s answer this first: What is an Income Fund in simple terms?

Income Fund falls in one of the many categories of Mutual Fund that strongly focuses on the “current income” (which can be considered as a dividend or interest) on the current income. The investors can either choose to go for divided short-term capital for short-term spending or can go for long-term funding distribution. Example – Retirement Funding. As we see, the prospect of income fund is very flexible.

Any investor has a choice to choose in between individual securities and managed investment funds.

Also read: What is Mutual Fund? Definition, Types, Benefits & More.

Types of Income Funds:

1. Fixed Income Funds:

As the name suggests fixed, we can figure out that the strategy or funding has a fixed rate of interest along with a fixed maturity. Since the types of security vary widely in the case of income funds, an investor usually has a wide spectrum of choices to choose from. As there’s a fixed amount of interest rate involved, it’s pretty easy to calculate the annual and hence total return with which, the total of maturity amount can also be calculated easily in the case of fixed income funds. This kind of funding is preferred by both stable and aggressive investors differing on the quotient of the type of security.

2. Bond Funds:

Another kind of funding is introduced as the bond funds which is considered as the most common type of funding. Bond Funds offer varying risk as they further can be invested in various places. Considering the safest case, the Government Bond Fund is considered as the most conservative one. Since the Government Funds invest in the treasury (US Based) a slightly safer option. On the other hand, some prefer to invest in Government Security Agencies which generally turn out to provide a higher return than the former choice.

One thing to keep in mind while making an investment in the Bond Income Fund that the total maturity amount is never fixed. With the fluctuations increasing in the secondary market, the amount keeps on changing.

Tax-Free Returns: The municipal bond-funded investment offers a tax-free return to its investors which actually saves a lot more money than other investment options. On the other hand, the corporate bond-funded investment would deduct a tax on the matured amount but on the positive side, it gives a better return on the investment.

3. Specialty Fixed Income Funds:

Not all the income funds invest in Government Bonds and Municipal Bonds. The Specialty Fixed Income category of Income Funds is the one that invests in the senior secured loans which are fully and completely collateralized I.e. the loan is secured by the asset pledged by the borrower. Such kind of fund investments falls on the safer side of the scale of risk.

The liquidity is also high in these funds. In fact, the funds are available to access on a monthly or quarterly basis. Another example of a Specialty Fixed Income Fund is the Mortgage Backed Fund. What happens, in this case, is that the investor becomes a shareholder whenever a borrower borrows loan amount from banking institutes against the mortgage. The mortgage put forward by the borrower acts as a security for his loan amount which makes the specialty fixed income to fund further freer from risk.

Also read: What Would You Rather Have: Rs 10 Lakhs Right Now or 1 Paise Doubled Every Day For 31 Days?

4. Stock Income Funds:

The Stock Income Funds are different and somewhat lesser risky than the bond fund investment type. In the Stock Income Fund, the investor gains a steady dividend on a monthly or quarterly basis which is mostly 1-2% higher in terms of interest rate than the government bonds.

It all comes falling to one question again, the requirement of the user. Having said that, a proper research on the risk associated as well as the methodology of the professional management is very much needed before making any kind of investment. It takes just a couple of minutes to get updated on the current news which is the key to be a smart investor.

Nonetheless, the bottom line for an income fund investment is the conservativeness you’d prefer in your return. The rest does depend on what you pick.

How to Pick a Mutual Fund?

How to Pick a Mutual Fund? A Beginner’s Guide.

How to Pick a Mutual Fund?

Are you a financial newbie and just learning to pick things piece by piece? Don’t worry; you are in the right direction. Considering you are here, reading this article, you are one step ahead.

Now, let’s quickly clear all your queries associated with picking the best deal out of many. Needless to say, investing in a mutual fund is a matter of lacks of rupees and sometimes a matter of crores, one needs to be very deterministic while picking out the best suitable option. When we say “best”, we are doing two things, mainly.

  1. Evaluating different options for mutual funds.
  2. Comparing those with their past (historical) records.

A good head start, therefore, can be done by self-evaluating the needs. In layman’s terms, what are you planning to achieve after you get an access to your matured fund?  – Housing? Marriage? Home Development? … Or Education? 

While the reason can vary from a person to person, the risk-bearing also does.

To explain it better, if you’re planning to clear your debts with the matured amount, you can’t tolerate greater risks associated with your fund. That’s the reason for taking the end goal into clear consideration. Further, in this article, let us know what all you need to know to pick the best possible option for a mutual fund. Stay tuned!

1. Get Acquainted with Risk Tolerance:

Clearly, the objective or end goal does alter the consideration of “Risk Tolerance” moreover; it helps you know how much risk you can sustain in your portfolio. Personally, if you can’t toleration too much of underperformance in your portfolio then picking out highly volatile mutual funds is not an option for you.

What exactly is risk tolerance? – It is explained as the amount of deviation (negative) associated, from the expected returns on an investment which an investor can withstand.

Since mutual funds are influenced by the movement of the market, one can’t accurately predict the happenings but estimation never hurts. However, there’s a quick math for you to remember “maximum risks = maximum returns”. But the question is again, “can you sustain it?”

Pro Tip: Aggressive Risk Tolerance (ART) understanding can help various high scaled investors to put their chances on portfolios with super high risk.

On the other hand, Conservative Risk Tolerance (CRT) does give a little to no scope for a risk to penetrate into a portfolio.

Also read: How to Measure Risks in Mutual Funds?

2. Know about Different Fund Types: 

There are several types of Mutual Funds in the market. In fact to count in all 4 directions of the world, one has 8000 choices to make for mutual funds. But it again comes down to one single point – the end goal.

  1. If your needs are for the longer term and you can sustain risk, you can choose the capital appreciation funds. As mentioned, the risk associated is on the higher side but given that, the growth of return is also magnificent.
  2. If your needs are to be catered for a shorter term with minimal risk, you can go for the income funds. The income funds give you a stable return with a realistic percentage. What’s the advantage? – Minimal to no risk.
  3. If your needs are for the longer term, however, you don’t want any risk to be associated with your portfolio, balanced funds are the best choice you. Sure, the return wouldn’t be magical but you can get the benefit of “long-term investment” and can minimize the question of risk as much as possible.

There are several more types of funds to be explored in the market. Choose the one that you think is best suitable for your end goal.

3. Know about the charges and fee structure: 

When you purchase a mutual fund, you have to pay a charge or fee initially or when the shares are sold. In both the cases, the fee is known as a load.  

The load can be further classified into

  1. Front-end load – When you have to pay the fees initially while starting a mutual fund for yourself.
  2. Back-end load – When you have to pay the fees when you sell your shares in the fund. (Generally, a Back End Load is applied if you decide to sell your shares before a specific time period, say 7 years of purchase). This limits your activities of “share selling”.)

Administrative charges are another kind of charges that are associated with an investment. The administrative charges are charged by an insurer mainly for record keeping or t=other important administrative facilities given on an investment.

What do you need to keep in mind? – Make sure to read the literature of Mutual Fund before & after purchasing it to keep track of administrative charges, management expense ratio, and other charges. This will help you clear all the hidden complexities about the return on investment.

Also read: Best Mutual Funds in India -Policy Bazaar

4. Evaluate Past Trends and Fund Manager’s Activities:

The final but very important step is to bring in the case of historical data. When it comes to a prediction, historic data helps in backing up the decisions.

When it comes to evaluation, let’s quickly know what pointers to keep in mind:

  1. What are the previous results that a Fund Manager has managed to deliver without a fail?
  2. Does the past trend show that the portfolio is extremely volatile under specific conditions?

Peeking into the literature of a fund manager can help you with this case, mostly. Also, taking an expert advice is always recommended for better decisions.

Lastly, you must know that in the market, the history does not (read never) repeats itself. That is, don’t rely blindly upon the past data without bringing in the possibilities for future prediction. Both the cases help in their own way when it comes to mutual funds. A little research with a proper guidance can take you one step forward to your end goal (high return on your investment) – that’s the bottom line.

Also read: What Would You Rather Have: Rs 10 Lakhs Right Now or 1 Paise Doubled Every Day For 31 Days?

risks in mutual funds

How to Measure Risks in Mutual Funds?

How to Measure Risks in Mutual Funds?

Before you jump start your monthly-SIP or lump-sum equity plan, let’s get this clear that these investments are subject to market risk. Now when this statement pops up or scrolls by on the big fat TV Screen, what do you think it means? To put it in layman’s term ‘You cannot expect a fixed return on your fund invested.’ There’s always a risk of market volatility gawking on your funds.

Fret not; you can always research better to invest better and make sound investment decisions when it comes to mutual funds. Let’s quickly come to risk measuring.

Yes, it’s possible and within your means to delve into the true basics of indicators; alpha, beta, and r-squared that tells you what risk is associated with your fund portfolio. Other statistical measures such as calculation of standard deviation and shape ratios are important to calculate or estimate the risk.

Sure, all backs up the estimation values as when it comes to the volatility of the market, no one can put a word to it. Market volatility is altogether a sensitive scenario which depends upon several factors including politics. Let’s know learn how can we calculate/measure risks!

Also read: What is Mutual Fund? Definition, Types, Benefits & More.

Modern Portfolio Theory:

Or should we say a bible for expert investors? Although there are various “SIP-Calculators” and other calculators that track “Mutual Fund’s Growth and Return” but without considering the omnipresent risk factor, one cannot take his pick. Let’s tell you why!

MPT or Modern Portfolio Theory is a theory defined as:

For a given market risk level, the maximization of investment return is supported by the theory of Modern Portfolio. 

The objective of these portfolios is to maximize the return (profit) on a fund investment while considering (and hence minimizing) the level of market risk.

As mentioned, the market is not static, it is ever changing. Therefore, to make an estimation of how the market will deviate and how will it affect your own fund. For a desirable return, it’s possible for an investor to construct a portfolio such that he/she could minimize the whole lot of risks.

The question is, how? The answer lies in the introductory part of this piece. There are a handful of indicators and other statistical measures that help us calculate the risk involved. Once we track down the possible risks (in numbers – thanks to the statistical measures), we can find ways to minimize those risks.

One thing to keep in mind is that return of your portfolio is calculated as the weighted sum of the return of the individual assets in your portfolio.

For example, (6% x 25%) + (4% x 25%) + (14% x 25%) + (10% x 25%) = 8.5%

The portfolio is divided into four parts (assets) for which the return is expected as 6%, 4%, 12%, and 10% respectively. The total becomes 8.5% and the risk associated with the assets giving 4% & 6% return is mitigated or balanced.

modern potential theory

How to Measure Risks in Mutual Funds?

Alpha:

Risk-adjusted calculation on a fund can be done using the alpha measure.Alpha uses a benchmark index which is the center of calculation for this indicator.

Basically, alpha takes the risk-adjusted return (performance) of a fund investment and compares it with the benchmark index. This comparison yields out the possible value for alpha which specifies the performance or underperformance for a fund.  

Alpha is commonly a measure that specifies the security of a fund as per the benchmark index. Let’s say, after the calculation, the value of alpha is 1.0. It means that the fund has outperformed as compared to the benchmark index by 1%.

On the other hand, if the value of alpha is -1.0 – it means that the portfolio fund has underperformed as per its benchmark index (mostly due to the volatility of the market).

Also read: The Best Ever Solution to Save Money for Salaried Employees

Beta:

The next indicator to measure the risk associated with a mutual fund is beta. Beta talks general i.e. it takes the whole market into consideration and analyzes the systematic risk associated with a specific fund portfolio. Just like alpha, the values of beta or “beta coefficient” also tell us a “market-compared” result.

However, the value of Beta can be calculated using advanced statistical analysis technique known as “Regression Analysis”. Beta is affected by the movements in the market. By the standards, the market has a value of 1%.

If the value of beta comes out to be less than 1, the volatility of the fund will be lesser than that of the market. Similarly, if the value of Beta is captured to be more than, say 1.1% then the volatility of the fund is 10% more as compared to the volatility of the market.

What’s favorable for the fund with least risk associated? – Low beta. 

Standard Deviation:

The calculation of Standard Deviation has a plethora of applications around the globe in various sectors. And luckily, one in the sector of Finance. Standard Deviation graphically shows how scattered a particular distribution is. In plain and simple words, SD or Standard Deviation makes use of the historical data to put an analysis over the current funds.

Generally, an SD-graph would tell how deviated is your “annual rate of return” from what it is expected from the historical sources. Using this calculation, the future predictions can be made most naturally.

A volatile stock has a higher Standard Deviation.

Mean is a measure of central tendency which holds an importance while calculating the values of Standard Deviation. SD tells how much dispersion of data is there from its mean. Various expert investors make use of this indicator to minimize the risk factors in a portfolio.

standard deviation

Also read: Where Should You Invest Your Money?

Summary:

As we have seen, there are various possible ways through which one can estimate the risks in mutual funds.

A portfolio consisting of different assets would have different risk factors associated individually. Therefore, to make the best decision and to minimize the individual risks in your portfolio, the indicators mentioned above can lend you a helping hand.

For a finance newbie, these things might be no less than a rocket science right now. However, eventually one can get a hang of it. After all, a good investment is most naturally important for a good return.

Life Expectancy - The Most Important Variable in Retirement Planning

Life Expectancy: The Most Important Variable in Retirement Planning

Life Expectancy is a crucial variable to monitor when calculating the needs for a retirement fund. The age which you are expecting to get retired in and a calculated life expectancy (obviously, keeping all the health aspects into consideration). Often while scrolling through the Google results for “how much should you save for your retirement”, the two major bars you have to set are:

  1. At what age, you are expecting yourself to get retired?
  2. What is the estimated life expectancy of yours?

Frankly speaking, the second bar to set is quite tough if not impossible. Precision is something which is quite hard to gain on life expectancy or your projected age. However, to stabilize a fund that’ll keep you going well for such and such years, you need to determine how much monetary fund you would require that will keep you active for dash years of inactivity. Needless to say, the calculations can’t be made accurate or 100% precise but you can always put a good analytical game to use and then act accordingly.

In this article, let’s read why “Life Expectancy” factor becomes important while you calculate retirement funds.

Why Is Life Expectancy So Important?

Whenever the question arises, there are basically two kinds of fears that develop in people’s minds:

1. What if one gets to live more than he/she expected?

I.e. the possibility of an underestimated life expectancy. In this case, your funds might meet a shortage in the later years. For example, suppose if you decided to retire at an age of 58 and you estimate your projected age to be “70 years”. You will have to manage your funds such that you get to stretch your living for 12 long years without an active income.

Please note that it also includes all the health check-up, rents, travel, and other miscellaneous expenses.

2. What if one overestimates his/her projected case?

The matter of life and death is probably the most unpredictable notions in the world. One does not actually know what might come the very next moment. In this case, overestimation can cause inconvenience. Suppose, if one is predicting his/her survival age to be 68 years. Now, suppose if one gets to live for 60 years, wouldn’t the money in the savings fund go completely wasted?

These two reasons make financial experts believe that “life expectancy” and its accurate prediction is actually an important variable to consider.

Also read: #11 Best Passive Ways to Make Money While You Sleep.

How to Determine Life Expectancy?

We have already established the fact that calculating one’s life expectancy is not an easy task, is it? But, there’s always a way out. We can predict a bit accurately with a few tricks that you must read.

1. Consult generic tables:

Researchers have worked hard to finally be able to present to us a normalized table with which we can predict our estimated life expectancy. The table is based on a generalized current age scenario through which you can actually predict how many years you are left with (according to statistics, of course).

For example, if Mr. X is 45 years old, he can expect another 38 years to live. Moreover, 0.4167% chances say that he could die this year.

Needless to say, these predictions are not including lifestyle scenarios and other health-related concerns.

Also read: The Easiest Asset Allocation Method- 100 Minus Your Age Rule

2. Online Life Predicting Applications (More accurate):

As we have noticed that the former means of calculation wasn’t considering some of the crucial aspects that could alter a standard result. The variables include the family history of a specific disease, eating habits, and lifestyle scenarios. The online applications that predict life expectancy such as Living to “100 life expectancy calculator” (available on Apple Store and Play Store) can accurately estimate one’s life expectancy.

There are certain bars which can be manually adjusted as per the real-time scenario which helps in backing up the predicted result.

Not only that, but these applications have incredibly easy interfaces to work with. Moreover, these applications suggest you ways or two with which you can stretch your life expectancy. Adopting a healthier lifestyle always helps financially for all the health-related costs it saves I future.

Here is the link to the two popular online life expectancy calculator:

world-life-expectancy-map-

(Source: World Life Expectancy)

Your Own Life

There are more than 50% of the people in the world who plan for the future. No matter how interesting those pep talks seem that say; “live in the present, let future come as a surprise”, no sane person would “actually” follow the advice.

Us humans being rational thinkers always plan in advance which is quite great actually. Other than being able to make rent, pay for food, and commute freely, you too might have a list of long aspirations you want to fulfill in “future”. Keeping everything in mind, you need to save accordingly.

Let’s hope for the best and let’s prepare for the worst.

Top 4 Things You Need to Know Before Investing in Bitcoin

Top 4 Things You Need to Know Before Investing in Bitcoin

Top 4 Things You Need to Know Before Investing in Bitcoin: Fast and extra cash is something that each and every one of us desires. Off lately, there has been huge talking about bitcoins and how they are “the right type of investments”, considering which, most people these days have been inclining towards these bitcoins. However, an investment should always be preceded by a good amount of research.

Just to help you with the case, let us get back to the basics and know what actually the theory of “bits and bitcoins” is.

1. Bitcoin Basics:

What is a Bitcoin?

A bitcoin can be safely termed as the “internet Currency of the New World” which can only be transferred/exchanged irreversibly unlike the regular digital currencies and digital money. They are basically hardcoded into computer languages & codes and are traceable to restrict its usage more than once.

In simple words, bitcoin is a purely peer-to-peer version of electronic cash that would allow online payments sent directly from one party to another without going through a main institutional institution.

Learn more about how bitcoin works here.

Is the investment in Bitcoin dangerous?

With so many people talking about the bitcoins these days, you would get to hear more than one opinion for it. Some say it is absolutely wasteful to invest in a bitcoin while the others consider it to be the future of all kinds of investments.

Good or bad, investing in a bitcoin is “quite an investment” as the value of 1 bitcoin in US Dollars is 7960.08 (as of 27 March’2018).

How can you purchase a bitcoin?

There are multiple ways to purchase a bitcoin. First and foremost of all, you would need to install the Bitcoin Wallet or optionally, you can also use the desktop Bitcoin Wallet which also keeps you updated of the current news, trends, and information related to Bitcoins. You can use your real currency to buy a bitcoin either through Bitcoin Exchanges or through private sellers as well. The Android Bitcoin Wallet let you use it as a kind-of real currency by allowing you to pay for items and services through your purchased bitcoin.

You can also purchase bitcoin using mobile apps like Zebpay, Unocoin etc.

Bitcoin Checklist: Make Sure to Consider Each One of Them Before Investing in Bitcoin

2. Invest only what you can afford to lose:

Just like any other investor, you too can get overwhelmed by the power of money especially when it is proposed to come in a multiplied factor. Even many experts get lured and overwhelmed while investing. You, as an investor, need to know your baseline and never dare to jump over it.

The question arises; how to identify this baseline?

Well, researching is the key! The first rule to investing in Bitcoin lies in researching. Good News: There are various internet resources through which you can get a deep insight into how everything works from road to hill. However, the baseline is that you don’t have to put all your eggs in one basket.

Moreover, if by any chance, you find yourself getting lured in “Bitcoin debt investing” don’t do it! Bitcoin debt investing traps you in an infinite loop of debt (with sky-high interest rate) and you’d have to pay it even if your Cryptocurrency investment doesn’t show any return.

This goes the same for stock market, the only difference that the Cryptocurrency Market has is that it is global and it offers you a list of extended leverage. Also, it is digital.

Also read: Where should I invest my money?

3. Don’t leave a lot of money in exchanges:

Okay, this might contradict many minds of experts but it is, however, true. Even the popular exchange platforms for Cryptocurrency can be hacked (quite easily) and your entire money might get lost in a fraction of seconds. Even the longest and safest password with 2-factor notifications fails in preventing your account from malicious use.

To play it safe, either don’t make a hefty exchange via any other exchange platform no matter how trustworthy it claims it is. Optionally, if you do want to put a hefty exchange bet, make sure that you don’t leave your money (digital currency) in there for a longer period of time.

4. Always Go with a Safe Exchange Platform:

With a plenty of options flowing across the surface of the internet, it becomes quite tough to choose which one to go with. However, for a backed up decision, you need to consider each and every factor about the exchange platform to finally end up to a conclusion.

Some Cryptocurrency Exchange platforms offer to give extended leverages such as a wide marketplace to buy services/commodities from which might lure you to invest using their platform. A good idea, however, is to read online reviews.

A Review of an application or website interface helps you know that you are going with a trustable name. One of the major concerns to get through for an online exchange platform is of “security”. You need to know the historical records that concern safety and security when it comes to online Cryptocurrency exchange platforms.

Having said that all, Bitcoin and other altcoins have become revolutionary pillars when it comes to digital finance. Above all, make sure you take your picks wisely!

Also read: Getting Smart With Investment in Gold.

best ways to save money

#3 Best Ways To Save Money- That 90% People Are Not Using.

#3 Best Ways To Save Money:

Monetary freedom, isn’t the whole world revolving around it? Generally, you, I, and others have this notion in our minds that in order to retire rich, you need to earn millions. Earning a decent remuneration is definitely certain but is this the whole picture? I am afraid not.

Where does the trick lie? – Well, the trick lies in the power of saving.

We personally know a ton of those people who have earned below par for their entire lives but have managed to retire rich. If you are diligent enough to know how this works for people with a median wage, you need to rely on the power of religious savings.

Moreover, you also need to know how to put a full stop to reckless spending in order to save money. With the title, the picture gets a little clearer but we have barely scratched the surface yet.

The best ways to save money is by cutting back on the big stuff. However, cutting on big kinds of stuff doesn’t even remotely point to living in misery. No, it doesn’t! Then what does it mean in its true form? Let us all know in this article.

1. Maintain a Ritual:

Consistency always works out. For your monthly expenses, you need to maintain a ritual to save your income. You might perhaps save 100 bucks a month by choosing a cheaper alternative to your monthly errands but if you do it consistently, you will definitely see a positive change in your savings account.

  • Revise of Dish/Cable plans and switch to a cheaper monthly plan.
  • Cancel unnecessary monthly subscriptions.
  • Remove your saved credit card details from your most used online stores.
  • Cut down on your food expenses by cooking meals yourself instead of ordering them online.

Such rituals individually wouldn’t reflect a significant amount but collectively such rituals manage to save a heck load of money.

Also read: The Best Ever Solution to Save Money for Salaried Employees

2. Validate your needs:

Not validating your needs is one of the major causes of reckless spending. You’re smart enough to back up your own choices to shop.

You know, there aren’t going to be enough clothes, gadgets, footwear, and what not in your wardrobe no matter what the number of such stuff you purchase.

Us humans being rational thinkers have this capability to justify each of our purchases. We can start this by asking these questions whenever we pick something up from a shelf:

  • Do I really need this?
  • What was the last time when I made the same purchases?
  • What purpose am I purchasing this for?

Validating your needs make sense whenever you are going to put a significant amount of money on a commodity. If you really need it, you can purchase it by all means. However, if there is no specific need for the same, you can always use the saved money to something significant and crucial – say, your rent.

Also read: What are Assets and Liabilities? A simple explanation.

3. Optimize your “big expenditure”:

It is quite clear that 1. Housing and 2. Transportation is the two most “fund-eating” necessities we have to pay for every month.

No matter how big you are earning, you’d have to pay for rent and transportation costs unless you are of course living in your own house. If your savings are actually taking a toll on you, you need to reconsider your choices.

All you have to do is to carefully monitor better options. If you can, switch your high rented apartment and move into a cheaper one. However, saving money shouldn’t be corresponded to living out in misery. On the other hand, for transportation, switch to the means of public transport.

Walking more often to run regular errands also helps not only in saving your income but also helps in maintaining your body shape.

BONUS (For students and recent graduates): 

4. Consolidate your Student Loan:

Putting all your eggs in one basket is never considered a better option.

However, when it comes to something like education, one doesn’t think twice about doing so. We must tell you that opting for an education loan is a commitment for a longer duration. If you have a student loan on your head, we have a couple of life-saving tricks – one of which is to consolidate your student loan.

Statistics say that it takes anything from 15 to 20 years on an average for a student to repay his/her loan. 

Consolidation means to merge multiple loans into one single frame which makes sense to save interest amount. There are various consolidation options available all over the internet to explore. Private Federal Consolidation options still prevail in the market which sometimes is quite beneficial as well.

We know how it sometimes gets difficult to cut down on your regular expenses but you must realize that there is always more than one way to get through with things. This holds true for the financial sector as well.

We wish you all the good luck saving!

Also read: #11 Best Passive Ways to Make Money While You Sleep.

Tags: 3 ways to save money, save money, how to save money, ways to save, how to save money each month

6 Surprisingly Common Financial Mistakes People Make in Their 20’s

6 Surprisingly Common Financial Mistakes People Make in Their 20’s: It is often said that the mistakes you make in your early days come back revolving around to you in future. We all have been a spectator of how lifestyle standards have been raised to a whole another level. Statistics say that we tend to indulge in the reckless shopping’s mostly in our 20’s. Keeping up with the standards of style quotient might be one of the reasons for the adults to not pay attention at their savings. It is a matter of time when you get to realise how roughly life can strike you with its lows.

We don’t mean to scare you in the first place but in this article we have managed to gather some of the most common financial mistakes that people do in their 20’s that can end up making them financially vulnerable in the near future. You can pay your attention at them to know money mistakes to avoid in your 20’s. So, let’s get started.

Common Financial Mistakes People Make in Their 20’s

1. Pursuing a degree you don’t want to on a student loan:

Common Financial Mistakes People Make in Their 20's student loan

You have to admit that in your teen years, you find it very hard to decide what you want to pursue and make your career in. In countries like India we get influenced by the aspirations of our parents and society that eventually ends up getting us admitted in colleges for a degree that doesn’t even ring a bell to us. Most people choose to pay their college fee through loans that they have to repay at a considerable interest rate which can be really burdensome sometimes.

2. Getting influenced by big fat Indian wedding:

Common Financial Mistakes People Make in Their 20's wedding

Accept it or not, it is just one day party in which you blow your entire life savings just by being fascinated by that glittery and sugar coated wedding idea and plan. This is one of the major money mistakes to avoid in your 20’s. The wedding industry is one of the biggest industries of the country with an annual turnover of billions. Now, you need to understand that there are other important things in your life which you can spend wisely on. Have a good wedding but don’t put in your entire financial savings at stake.

3. Not being in a habit to save:

Common Financial Mistakes People Make in Their 20's no savings

Trust us; it is very easy to save a part of your income. With this habit, you would be able to make your future much better. Spending your entire income on things and services could insure you a luxurious lifestyle for now but at the same time, it is also putting you at a risky position in future. Life is really unpredictable and uncertain and you never know what you are going to need in future. Moreover, if you will look for a switch of job in future, you will definitely need some cash in hand to keep your stomach full for a couple of days until you get a hold of your new job.

4. Not keeping an emergency fund:

Common Financial Mistakes People Make in Their 20's no emergency fund

Most people choose to spend their money on shares and stock market without even knowing a bit of it. Instead you should maintain and put enough money in your emergency fund that will back you up in the odd times that might act as a hurdle in your life in future. You must put enough money in the fund for medical expenses and at least 6 month of unemployment. There are various ways and schemes provided by different insurance companies to ensure such funds for you. Sadly, most of the people in their 20’s fail to keep an emergency fund for themselves.

5. Not saving for your retirement:

Common Financial Mistakes People Make in Their 20's

The age group of 20’s is also known as the carefree zone. As the name suggests, most people are unaware and seem careless about their retirement plans. Of course, they must find the time of their retirement far enough to be out of scope but it is actually not. 20’s is the correct time to start your retirement fund. You must make sure to put a little every month in your retirement that would yield an amount adequate enough to feed you and fulfil your needs after your retirement. Another money mistakes to avoid in your 20 is not paying attention on your retirement fund.

6. Spending recklessly on credit cards:

Common Financial Mistakes People Make in Their 20's credit cards

Getting your hands on a credit card is very easy these days. Seems like teenagers in their 20’s cannot keep their hands off these credit cards! With amazing schemes, cash backs and numerous deals going on every day at various places make you spend a fortune through these easy cards. Now, you must remember that the money has to be paid by you only at the end. Most people get caught in their debts of credit cards bill and keep on paying for months and years to completely get rid of those debts. That is why one should remember to spend wisely in their 20’s.

I hope this post on “6 Surprisingly Common Financial Mistakes People Make in Their 20’s” helps the newbies in early 20’s to avoid these common mistakes.

Further, do comment below if you had made any big financial mistake in your 20’s.

Why You Should Start Saving Early featured image

7 Worth-It Reasons Why You Should Start Saving Early?

7 Worth-It Reasons Why You Should Start Saving Early? You may be a good spender or a hoarder of fancy things that grace up the lifestyle of yours but saving a little from what you get every month, comes in very handy for your future endeavours. Major problems in life always come unannounced and offer you a wee time to prepare for it. Nevertheless, it is never too late to figure out a little plan for your saving as it is said that as soon as you start saving, the better are the advantages. Let us guide you with the impeccable benefits of early savings.

Why You Should Start Saving Early?

1. More Saving = Less Unnecessary Spending

Why You Should Start Saving Early

The number of gadgets that you have won’t matter but the savings would. We all know how recklessly we get to spend as soon as we get our hands on those big fat pay checks. Also, half the things you buy aren’t even worth the money and therefore they just increase your reckless spending. If you stay firm on saving a part of your income as soon as you get it, you will make sure that you keep it safe and untouched until when in need. Therefore your own money is actually getting saved from being spent unnecessarily.

2. Gives you a way to live your dreams:

Why You Should Start Saving Early - Enjoying

We tend to have lots of dreams since our childhood to the time when life actually strikes us. Amidst of our busy schedules, those dream plans of ours start fading away. It never actually matter about the number you make but what matters is how much you have lived up to your own dreams. A little spending from the beginning helps in funding us to live our dreams in future to the full extent and worth a reason why you should start saving early. As you see, absolutely nothing comes cheap in the 21st century.

3. Chip in for your own education:

Why You Should Start Saving Early- Education

A good education is termed as an investment and not as expenditure. Anything that you spend for useless things for now can be saved in a fund that will provide you a quality education in future. Even if you are done with your under graduation, does it mean that it is the end of the ‘scope of your learning curve?’ NO. You can go ahead and pursue the degree you always wanted to in your post graduation and can follow your dreams. Nothing worth having comes easy and also for free. Save some money yourself to treat yourself with good education in future!

4. Bad times come without an alarm:

Why You Should Start Saving Early- Uninvited stress

Losing jobs, going downhill on health and family problems are some of the tit bits that life offers to everyone. You never know when you would have to experience the lows of life. All you can do as for now is to prepare yourself for the worst. Speaking of which, you should also make sure to have a strong financial back up for these toxic circumstances. Fixed deposits and saving accounts come in handy for the savings that you need to do. Being financially stable even during the bad times of life gives a great motivation to move forward.

5. Let the bank serve you with interest:

Why You Should Start Saving Early power of compounding

The principal amount that you deposit as your savings in bank is interested after a particular span of time. Moreover, if the interest is compound, you will get to save a heck of money if you will be consistent. The best idea would be to choose a bank that offers you a good interest rate on your savings. The sooner you start to save and deposit in bank, the better will be the final amount. That’s an easy math you can do yourself.

6. Be Ready with Your Retirement Fund:

Why You Should Start Saving Early- retirement

It often gets very hard to maintain your luxurious lifestyle after your retirement. That is going to be the time when you will regret not maintaining a retirement fund in your early days. You must know that there are a number of mutual fund retirement schemes provided by different firms across the globe but choosing the one that is most appropriate to you and at the same time, serve your needs to the fullest should be your pick. You must also make sure to read their policy agreement well enough before going with them.

7. You will be willing to take risks:

Why You Should Start Saving Early- risk taking

Life is all about taking risks but you should be smart enough from the beginning to be able to take the decision of risking things that don’t matter to you anymore. For instance, if you will be looking for a switch to a more decent company in future then you must have a financial backup already. Not having one actually stops you taking worth taking risks in life that have the potential of turning your world around. This way, you would be able to concentrate on your switch and won’t worry about the money.

That’s all. I hope this post on why you should start saving early changes your extravagant lifestyle. Further, do comment below any other reasons that you think should be mentioned on why you should start saving early list.