Sam

Top Trends That Will Redefine Banking and Financial Services

Trends that are about to transform the banking and financial services have already emerged and are heavily influenced by technology and the need to minimize associated risks. From process automation and making decisions using big data to risk assessment, banks are increasingly adopting different solutions to improve customer experience and stay ahead of the competition.

Process Automation

An increasing number of financial institutions rely on robotic process automation to improve accuracy and ensure that operations are more efficient. Examples of applications include processing of credit card, mortgage, and loan applications, updating the general ledger, processing real-time inquiries, and cybercrime protection. Using robotic process automation offers many benefits such as minimizing processing errors, ensuring accurate loan verification, and managing large volumes of data. RBA also allows for accurate updates of data in the general ledger, including liabilities, assets, expenses, and account payables and receivables, which are included in financial statements.

Artificial intelligence will also lead to increased automation of processes and tasks, thus improving customer experience. AI has different applications such as using voice assistants and chatbots to interact with customers, monitoring for fraudulent activity, and use of smart contracts.

Making Decisions Using Big Data

Financial institutions generate huge volumes of data on a daily basis, which is mainly done through individual transactions. Customers use their smartphones to pay bills, deposit checks, monitor their balances, and more. When they use online banking, purchase products and services, do research, and comparison shop, users generate data. This can help banks to gain insight of market trends, portfolio performance, and customer experience. Using big data analytics can help financial institutions to analyze feedback, personalize their products and services, improve risk management strategies, and create customer profiles. Customer profiles, for example, offer important insights such as service and product preferences, banking behavior and patterns, products that clients use, number of accounts, and demographics.

Security Is Paramount

Blockchain is increasingly used by finance providers to ensure that transactions are safe and secure. All transactions are verified without the need for third-party authorization. Acting as a form of a distributed database, data is shared among multiple users, which eliminates the risk of misusing it and improves transparency. Blockchain helps prevent fraud by making use of digital signatures that are based on private and public encryption codes.

Banks face different types of security challenges such as botnets, ransomware, stolen devices, and malicious code. Other forms of attack include social engineering, phishing, malicious insiders, denial of service, web-based attacks, and malware. Blockchain helps prevent security attacks of different kinds by encrypting data which makes it impossible to manipulate it for the purpose of fraudulent transactions. Confirmed transactions cannot be altered in any way. Among the many benefits for finance providers are improved intra-bank communication, data integrity, encrypted metadata, and secure agreements. At the same time, blockchain solutions still have a more limited application because they are expensive to develop and complex. Experts also claim that blockchain systems can only have two out of three components but not all. These are security, scalability, and decentralization. Scalability, for example, refers to the fact that they have more limited application in some sectors than others. Decentralization is another component which refers to the extent to which value, influence, and ownership are diversified. Some experts note that decentralization does not work well for big PoS-based networks.

Mobile and Online Banking Services 24/7

We are travelling more than ever in an ever globalizing world, especially before the global pandemic hit. Bank customers cross time zones all the time, making 24/7 on-demand mobile banking important. More and more financial institutions feature apps to offer support round the clock. Chatbots are increasingly used to respond to customer inquiries outside banking hours when no one works. This not only helps reduce costs for providers but enhances customer experience. Apps allow clients to make transfers, use digital wallets, and make payments from anywhere in the world. They can manage their personal finances efficiently and securely, including transfers, loans, deposits, and accounts. Mobile apps are used for loan repayment and origination, with support available for loan, deposit, savings, and current accounts. Mobile banking also offers access to a large variety of transactions such as bulk payments, mobile wallet transfers, international payments, standing orders, transfers to other financial institutions, and intra-bank transfers. Apps also allow for secure authentication through integration of third-party services, software token for strong customer authentication, eSignature, OTP, PIN, and biometrics.

Mobile and online banking services offer added benefits for customers, including smart notifications and alerts. These can be in the form of email alerts, text messages, and push notifications.

There are benefits for banks too, including centralized administration and control, improved security and reliability, and efficient legacy systems. New mobile banking systems also allow financial institutions to integrate different channels and make use of emerging and cloud technologies. Finally, providers benefit from partner integration, centralized monitoring, and data integration.

Risk Assessment

Data allows finance providers to identify customers with low-risk and high-risk profiles. Machine learning solutions process information to monitor transactions and user location and behavior and thus prevent fraudulent transactions. Banks increasingly use machine learning and deep learning to process multiple streams of data and make decisions regarding security risks.

The global financial crisis placed an increased emphasis on risk detection, assessment, reporting, and reduction. Trends in detection and management are influenced by customer expectations, new policies and regulations, and new types of risks that are expected to emerge. According to experts, machine learning has the potential to create more precise models with better predictive capability. The addition of new streams of data over time helps improve their capacity.

Banks face multiple challenges, including insolvency, liquidity, sovereign, foreign exchange, operational, credit, market, and interest rate risk. Foreign exchange risk, for example, refers to changes in the value of liabilities or assets resulting from exchange rate fluctuations. When it comes to credit, there is always a possibility that borrowers fail to repay principal and interest amounts. Machine learning can help offset such risks by mining through huge volumes of data and extracting useful information. It comes from different sources such as metadata, customer interactions, consumer apps, etc. To boost their analytical capabilities for risk detection, banks are increasingly adopting AI and machine learning. There are different applications for banks to explore, including monitoring for conduct breaches, detection of money laundering and fraudulent activities, and risk modelling.

Credit risk monitoring is important for financial institutions and is based on loss given default and exposure at and probability of default. New algorithms have been shown to perform better compared to traditional formulas.

Banks also use a variety of methods for credit scoring, including nearest neighbor, Bayes classifier, logistic regression, and discriminant analysis. Again, artificial neural networks yield better results when it comes to classifying customers as creditworthy or non-creditworthy.

In general, banks use a number of tools and algorithms for risk mitigation and detection, including standard and machine-based solutions. These include random forest, extreme machine learning, fuzzy rule based system, survival analysis, and logistic regression.

COVID-19 and the Canadian Housing Market

By Sam Leave a Comment

The housing market in Canada shrank due to the coronavirus crisis, and new construction and sales are expected to remain at below pre-pandemic levels in the next two years. Experts discuss different scenarios, from real estate crash to growing demand for detached homes and rise of real estate due to inflation.

Real Estate Crash

The flood of properties for sale may lead to a real estate crash, and CMHC already warned that the market will experience a historic recession. Home sales have declined due to job loss and financial hardship, and prices are expected to plunge by 9 to 18 percent in 2020. Still, experts believe that the chances of a real estate crash are low because of the moderate impact of the pandemic on global markets. According to RE/MAX Canada, more people are looking to invest in properties because of plunging stock prices and financial market uncertainty. What is more, top-tier properties are now in demand in cities such as Vancouver, Toronto, and Montreal, which can help offset a “significant cooling”. A real estate crash is an unlikely scenario in Canada, according to RE/MAX. This would involve a sharp decline in prices due to a rise in supply, coupled with stagnant demand. While demand is certainly declining and expected to further decline, an influx of supply is unlikely.

The good news is that prices in large urban centres such as Vancouver and Toronto are expected to increase and even exceed pre-pandemic levels by mid-next year. What is more, Scotiabank senior economist Marc Desormeaux highlights that both demand and supply shrank meaning that potential buyers are not looking for homes, and homeowners are not selling. Prices were to drop significantly if supply stayed constant or increased and demand fell, which is not the case in Canada. One possible scenario is that homebuyers choose to sell in the coming months, either because they can’t afford to make mortgage payments or they need to boost their retirement savings. While this may result in an influx of supply, potential homebuyers may choose to wait until the economy shows signs of recovery. Over 3 million Canadians lost their jobs amidst the pandemic, and many worry what the future holds.

An influx of supply is also unlikely as the pandemic hit the construction industry. Many developers worry about construction stoppages and delays while others cannot get building permits. Estimates by the Canada Mortgage and Housing Corporation confirm this. A drop of 51 to 75 percent in housing starts is expected in 2020 compared to pre-pandemic activity. The industry will only return to work by mid-2021. Prices and sales, however, depend on consumer and business confidence once restrictions are lifted and the pandemic is over. It is difficult to predict how quickly the economy recovers because researchers are still in the process of studying the new virus and developing models and possible scenarios.

When it comes to real estate markets, experts warn that some factors are more difficult to predict but also play a role. One is how many Canadians cannot afford to own a home after government subsidies and mortgage deferrals are terminated. Another is how many people will lose their jobs and become permanently unemployed. How many businesses will close is another factor that will have an impact on demand and sales prices.

The Impact of Immigration Decline

Experts also point to the fact that the real estate market shrank because immigration declined significantly. In 2019 alone, 341,000 foreign nationals settled in Canada, 11 percent of whom coming to Vancouver and 35 percent moving to Toronto. The Bank of Nova Scotia estimates that a 1 percent population decline is equal to 1 percent decline in real estate prices.

Flood of Properties

Some experts predict a flood of properties because of a decline in rent prices that makes it increasingly difficult for landlords to make money on them. Rates for condominiums and rental apartments have gone down in Ottawa, Edmonton, Calgary, Vancouver, and Toronto. The biggest decline is in York, Ontario, with rates falling by 12.6 percent. Two cities experienced rental price increases – Montreal by 0.6 percent and Regina by 1.6 percent.

Rise of Real Estate

Another possible scenario is the rise of real estate due to money printing and inflation. Massive government spending to support businesses and households could result in inflation and price increases. What the Bank of Canada did was print money to buy bonds, which is what other central banks did so that people spend their money elsewhere. In fact, what governments aim to prevent is deflation, which is the opposite of inflation. Many believe that deflation is a likely scenario due to low demand and high unemployment rates. While money printing helps businesses recover and rebuild capacity, low demand may result in a significant decline in prices. People stop buying all sorts of commodities, from plane tickets and gas to vehicles and real estate. Others disagree, however, and warn that we are headed to inflation. According to market analyst Gary Tanashian, pouring money into the economy results in inflation as it is difficult to reduce the amount of cash in circulation at a later stage. Once restrictions are lifted and everything goes back to normal, with people dining, shopping, and travelling, the economy will face excess dollars in circulation, coupled with increased demand. What central banks can do in this scenario is raise interest rates to control inflationary trends.

Rising Demand for Detached Housing

Detached houses are considered safer during a pandemic which may result in rising demand. The Covid-19 crisis slashed home sales by 50 percent in markets such as Toronto, and listings for semi-detached and detached homes decreased by 14 percent between March 17 and 23 and by 30 percent between March 17 and 30. In May, however, prices of detached homes increased by 2.6 percent in the Greater Toronto Area. While listings are still a handful, real estate agents explain that this is mainly because of the restrictive rules on showings. When showings cannot take place, sellers simply choose to terminate them.

Impact of the Housing Market on Other Sectors

Many Canadians are hesitant to travel amidst a growing global pandemic and are allocating their travel money to renovation and construction projects.

At the same time, the fall in prices and home sales already has a significant impact on sectors such as construction, financial services, and the furniture industry. Construction businesses, furniture stores, banks, and other businesses depend on real estate sales to operate and make money. Not only this, but with travel restrictions, stay-at-home orders, and social distancing rules, many people venture out just to buy household supplies, medications, and groceries. The real estate industry has been hard hit as restaurants, entertainment venues, and shops closed doors. The coronavirus crisis made it increasingly difficult to keep up with mortgage and lease payments, and many businesses chose to move online or close. Others took a transformative approach to strengthen relationships with customers, partners, suppliers, investors, and employees that will help them to succeed past the pandemic crisis.

Dealing with Your Finances during a COVID-19 Crisis

By Sam 2 Comments

Handling personal finances during a pandemic can be a challenge, especially for people who lost their jobs or saw their income shrinking. As employment dropped by over a million between February and March, it is not surprising that according to a survey by Statistics Canada, more than 30 percent of workers are worried that they might lose their jobs. The pandemic already has a profound effect on the economy, and many wonder how long it will last and how deep it will be. In times of uncertainty, securing your personal finances can help you go back to normal in the aftermath and relieve stress and anxiety. Building an emergency budget, applying for government aid, and dealing with debt are some of the things to do to sail through the crisis.

Build an Emergency Budget

An emergency budget includes essential expenses such as groceries, housing, transportation, and medications. With stay-at-home orders and isolation, many of the non-essential expenses are significantly less, so this is a good time to create a financial cushion to weather the storm. If you are saving toward long-term goals or big purchases such as home renovation or buying a new vehicle, it is best to postpone and focus on building an emergency fund. You can try to reduce some of your fixed expenses as well by lowering your rent, using household appliances at night, and turning off the lights when you are not at home. Contact internet, cable, and cell phone services to check if they have cheaper plans you can switch to. For student and personal loans or credit cards, call your financial institution to check whether they can lower your interest rate. Unnecessary spending must go. This includes things like vacations, entertainment, clothing, and electronics.

Apply for Any Government Aid You Qualify for

The Canadian government introduced a number of economic measures to ease financial hardship and help businesses and households that are struggling financially during the pandemic. Persons not eligible for paid sick leave and staying home are entitled to receive up to $900 bi-weekly in the form of an Emergency Care Benefit. This measure is in place for a period of 15 weeks. Eligible categories include parents looking after children due to school closures, those with sick children, persons taking care of sick family members who tested positive for coronavirus, and those who were ordered to self-isolate or are quarantined or sick. Self-employed persons also qualify. Under the Covid-19 Response Plan, businesses have access to credit through the Business Credit Availability Program, under which they are offered loan guarantees and other types of financial support. Businesses operating in different sectors qualify, including tourism, exports, air transportation, and gas and oil. Support is also offered to businesses trying to avoid employee layoffs and includes the Temporary 10% Wage Subsidy and Canada Emergency Wage Subsidy which pays 75 percent of wages.

Manage Your Finances

To manage your personal finances successfully, it is important to detail your financial goals, whether it is changing careers, starting a family, or buying a new home. You may want to prioritize goals such as saving toward retirement over going on vacation in light of the ongoing pandemic. Once you have established priorities, it is time to create a budget and plan your expenses. List all sources of income that you currently have, for example, wages, salary, alimony, real estate, mutual funds, bonds, and stocks. Then add up all expenses, including rent or mortgage payments, loans, transportation, and groceries. By subtracting expenses from your total income, you will see where you stand. It is also a good idea to track how your income changed due to the coronavirus crisis to see whether it has a serious impact on your finances.

Look for Help if You Are in Debt

How to deal with debt depends on how much you owe, whether you have multiple outstanding balances, and what the repayment terms and interest rates are. Have a look at your credit report and compile a list of all debts, including due dates, monthly payments, rates, and outstanding balances. Track payment progress every few months. If you notice that you made little progress, it is time to look for help. Debt counseling is one option to consider if you feel overwhelmed and are struggling with credit. Contact a reputable agency to work with your creditors and come up with an agreement to repay your debts. Agencies typically need details such as your financial institution, income, outstanding balances, assets, and financial situation in general. Keep in mind that some agencies charge handling and set up fees. There are alternative solutions to look into, depending on your situation, including credit counseling, negotiating with loan providers, and bankruptcy.

Financial Support for Small Business Owners

If you are a small business owner currently experiencing difficulties, it pays to look into options for accessing financing under the Business Credit Availability Program. Non-for-profits and small businesses are eligible to apply for an interest-free loan called the Canada Emergency Business Account. SMEs and non-for-profits are eligible to receive up to $40,000, and those who repay a total of $30,000 can apply for forgiveness provided that the amount is paid in full before or on December 31,2022. Other options for small business owners are cash management advice and payment deferrals offered by banks. Under the BDC Co-Lending Program for SMEs, businesses apply for loans, as 20 percent of the amount is extended by their finance provider and 80 percent by the Business Development Bank of Canada. Principal postponements and working capital loans are also offered to help businesses impacted by the coronavirus crisis. Working capital loans come with no study fees, flexible repayment schedules, and lower rates. Businesses are eligible to apply for up to $2 million.

Take Care of Your Mental Health

Your mental health is as or even more important than your personal finances. Mental health help is offered to all Canadians who experience emotional pain or crisis or have suicidal thoughts. Crisis centres across Canada work to help people who feel confused or stressed, such centres being the Vancouver Island Crisis Society, Telephone Aid Line Kingston, Safe Haven Women’s Shelter Society.

The government also offers advice on how to deal with stress and anxiety in a crisis. In times of physical distancing, communication is important, and people are encouraged to talk to family members and friends through social media, video chats, phone calls, and email. It is also important to exercise, eat healthy and balanced meals, and worry less about things that you cannot control. If you need mental health help, you can call a registered psychologist or your primary healthcare provider. Other sources to look into include Crisis Services Canada, the Kids Help Phone, and Hope for Wellness Help Line. The Kids Help Phone offers emotional support to young people aged 5 – 29 while Crisis Services Canada offers support to all Canadians through crisis organizations and distress centres.

7 Financial Goals to Set in 2020

By Sam Leave a Comment

Investing a little bit of effort and time in outlining your financial goals will help you to improve your financial situation in 2020. This will also help you to develop a sound long-term strategy for your financial future.

Do Your Taxes Early

Like it or not, the tax season is coming up quickly, and it pays to file your taxes before the deadline. Reporting your eligible expenses and income is far from fun but procrastinating will make it more stressful. The deadline for filing in Canada is April 30, 2020. Early filing also ensures that you receive credit and benefit payments such as the working income tax benefit, GST/HST credit, Canada child benefit, and guaranteed income supplement. Eligible taxpayers are also entitled to claim the Climate Action Incentive if living in New Brunswick, Ontario, Manitoba, and Saskatchewan.

Getting your taxes done early is easier if your income sources include:

Grants
Bursaries
Fellowships
Scholarships
Support payments
Social assistance
Employment insurance
Disability insurance

Completing your tax returns is not as easy if you have rental or business income, are self-employed, have declared bankruptcy during the previous or current year, or have capital losses or gains. In this case, it is important to get your taxes done early to ensure that you have plenty of time to gather all documents and pay taxes that you owe.

To file your taxes, you will need to provide information such as your home address, banking details, number of children, and marital status. You should also report income in the form of benefits, investments, and self-employment and employment income. Claim tax credits, expenses, and deductions to lower the amount you pay. You can complete your tax returns in different ways, including by phone, on paper, and by software.

Fix Your Credit

The first thing to do is plan to get your credit in check regardless of how much you owe. Start by listing all debts that you owe, including due dates, monthly payments, total amount, and creditors. Make sure you update your list to check on your progress and see where you stand. Making timely payments each month is obviously a must. Late and missed payments will affect your credit score and will make it more difficult to pay off your debts. If you have multiple debts, you may want to set alerts to help you avoid late payments. It is also important to decide which debts to pay off first. If you have multiple credit cards, start with the one that carries the highest interest rate. Make sure you make the minimum payment on your other accounts to avoid penalty interest and to stop your debt from growing.

Create a Financial Plan

Setting a budget will help you to stay focused on your financial goals and get control over your money. There are other benefits to setting a budget such as organizing your savings and spending and paying off debt faster. The first step to creating a budget is to look at your income or how much you can afford to spend on a monthly basis. Start by listing different sources of income such as your salary, wages, alimony, and benefit and credit payments. Other sources of income include rental and dividend income, royalty and interest income, and capital gains. Once you get an idea of how much money is coming in, you have to look at your expenses, including fixed and variable expenses. Examples of variable expenses include car maintenance, home repairs, and groceries. Fixed expenses, on the other hand, include things like credit card and loan payments, car insurance, utilities, rent, and service payments such as cell phone, Internet, and cable TV. Compare your income and expenses to see whether you need to adjust your spending to meet your expenses and save enough to achieve your goals. You can either try to increase your income or cut back on both fixed and variable expenses.

Settle Bad Debts

Paying off bad debts will help you to improve your credit score. Such debts are in collections because you are unable to pay them back. The best thing you can do is settle or pay the full outstanding balance. First contact your debt collector and try to negotiate a settled payment in exchange for deleting the account from your report. Offer an amount that is smaller than what you owe. If this doesn’t work, then offer a full payment to get the account removed.

Make a Long-term Savings Goal

The first step to making a savings goal for yourself is to actually name your goal. Examples of goals include creating an emergency fund, saving to pay off debt, and saving for down payment, your kid’s education, or retirement. Examine your goals to decide whether they are long-term, mid-term, or short-term. Long-term goals such as retirement and college education require a lot of money and careful planning and take several years to achieve. Mid-term goals such as paying off credit card debt or buying a new car do not take as long to achieve but certainly longer than short-term ones. Short-term goals, on the other hand, take one year or less and include things like buying a new washing machine or going on vacation.

Find a Financial Planner

If you lack basic knowledge of debt management, investment, and financial planning, you may want to use the services of a financial advisor. Advisors have expertise across a wealth of topics such as tax strategies, wealth management, insurance coverage, budgeting, and saving. They can help you to develop a financial plan and stick to it as to achieve your long-term and short-term goals. Your advisor will help you to choose from different types of insurance coverage such as disability, term life, and long term care. You may be asked to fill in a detailed questionnaire to help assess your financial situation. The questionnaire typically includes questions about your expenses, sources of income, assets and liabilities, and future income and retirement income sources. The answers will help your advisor to assess your financial strength and risk tolerance. The financial plan that you develop with your advisor will be based on your liquid capital, assets and liabilities, and net worth.

Ready to Invest?

Finding new companies to invest in can be tricky, especially if you have little or no experience. In this case, you may want to invest in companies across different sectors in S&P, including health care, consumer discretionary, industrial, consumer staple, energy, and material. Other sectors to look into are utility, real estate, telecom, technology, and financial. Choose companies that are good for growth or value investing. The approach that you choose to include companies in your portfolio depends on your financial goals and risk profile. If you have a low-risk profile, then consider dividend stocks. Growth stocks are a good option for those who wish to invest in long term growth while value investing is a preferable choice if you are looking for stocks that are trading below their book or intrinsic value.

Financial Secrets Nobody Told You About

By Sam 5 Comments

Thinking out of the box is the key to achieving financial freedom and accumulating wealth. Most people believe that earning a college degree and working a well-paid job will help them to earn a good living. Here are some secrets that well-to-do people rarely share that will help you to attract wealth energy.

Budgeting to Build Your Net Worth

Budgeting is the first step to financial stability and the first technique to master. Budgeting means tracking your spending over time to see whether any money is left after covering all expenses. There are bills and expenses that most people pay on a monthly basis – debt payments, groceries, gas, water, and other utilities, transportation, and housing. In addition to regular expenses, there are also less predictable or unexpected expenses such as insurance coverage, gifts, vacations, and home and car repairs. They may reach 10 to 30 percent of your monthly expenses. Budgeting also involves adding up sources of income such as bonuses, salary, and wages. What is left after deducting your total expenses from your income is money that you can use to create an emergency fund or invest to build wealth. If there is no money left to invest and increase your assets, you will never be able to build a healthy net worth.

Increasing Your Net Worth

Budgeting is only the first step to achieving financial freedom. The next step is to focus on your net worth which is the difference between the total assets that you have and your liabilities. Examples of assets to include are tangible assets such as land, inventory, and personal possessions, including collectibles, jewelry, electronics, and vehicles. There are also non-physical or intangible assets such as franchises, software, patents, and copyrights. Personal assets are intangible and tangible and may include things like savings and retirement accounts, insurance, and works of art. Liabilities, on the other hand, are obligations or debt that you owe. Liabilities include things like vehicle and student loans, credit card balances, and mortgage payments. One way to increase your net worth is to eliminate debt and another is to buy assets that generate income. Such assets are, for example, bonds, certificates of deposit, money market savings accounts, and single family rentals.

Choosing the Right Investment Instruments to Build Net Worth

The key to building a healthy net worth is choosing the right investment instruments based on factors such as your investment objectives, age, and risk tolerance. There are advantages to being young such as fewer responsibilities, higher disposable income, and higher risk tolerance. If you are in your 40s, there are advantages as well, including more experience and better ability to identify and deal with problem situations. Your investment objective is also an important consideration, whether it is saving for retirement or making high profits. If your goal is to have some type of passive income or to keep your money safe, then investing in low-risk instruments sounds like a good idea. Interest paying bonds and fixed deposits are two options to look into. Bonds can be purchased from different establishments and institutions such as local and state governments, small and large companies, and foreign companies. Depending on the entity offering bonds, there are different types, including foreign, municipal, agency, treasury, junk, investment grade corporate, and corporate bonds.

Fixed deposits are offered by banks and feature higher rates than standard instruments such as savings accounts. Certificates of deposit also pay higher rates and come in different types such as liquid, IRA, jumbo, and traditional. If you have a higher risk tolerance, you can choose from a pool of high-risk options such as contracts for difference, equity investments, spread betting, and venture capital trusts. Investing in biotechnology stocks, for example, is risky, and the reason is that up to 90 percent of experimental drugs and therapies fail. Land banking is also a risky investment because the plots on offer are usually too small, brownfield, or green belt, for which planning permission has not been obtained. Other high-risk investment options include peer-to-peer lending, mortgage real estate investment trusts, and closed-end funds.

Developing Skills and Healthy Financial Habits

Persons who make sound investment decisions also have good money skills and financial literacy.It is important to develop healthy financial habits to stay away from debt and increase your net worth. Essential skills to focus on and master include tax, debt and credit, spending, and saving skills. Analytical skills also help with problem solving, prioritizing, planning, financial planning, and decision making. People with strong analytical skills are also good at risk management and risk analysis, troubleshooting, and data interpretation. Having good financial literacy is also the key to making sound decisions and achieving short- and long-term financial goals. People with good financial literacy have understanding of basic concepts such as interest rates, repayment terms, inflation, bear and bull market, and liquidity.

Diversifying Your Income

Relying on a single source of income can be risky because you are dependent on it, whether it is your regular job or rental income. The main types of income to look into are capital gains, royalty, rental, dividend, interest, profit, and earned income. Profit income refers to profits made by selling goods or offering services. Interest income is money that you get by investing in different interest-bearing products which basically means that you are lending money to an individual or institution.

Dividend income is an example of a passive source of income that you get by investing in company shares. Common types of dividends include liquidating, scrip, property, stock, and cash dividends. Building a balanced portfolio involves investing in a mixture of instruments for optimal returns. A conservative portfolio includes up to 75 percent of fixed-income securities, between 5 and 15 percent of cash and cash equivalents, and 15 to 20 percent of equity investments. A moderate-risk portfolio, on the other hand, includes up to 40 percent of fixed-income instruments, between 5 and 10 percent of cash and cash equivalents, and up to 55 percent of equities. After deciding on the right mix of assets, the next step is to choose from different sub classes of assets such as corporate and government debt or foreign and domestic stocks. The last step is to choose from different investment instruments such as exchange-traded funds, mutual funds, bonds, and stocks.

There are simple things to do to achieve financial security and freedom, including budgeting to find out whether any money is left to try to increase your net worth. Assessing your present net worth, on the other hand, will help you to see how close you are to reaching your financial goals. Choosing the right investment instruments will also help you to build your net worth and mastering basic money skills will help to this end. Financially literate people know how to track their spending, manage debt, create and stick to a budget, and make sound decisions when it comes to choosing the right insurance product or investment tool. Financially literate people are also in a better position to avoid costly mistakes such as being defrauded or falling victim to predatory lenders. Mastering essential money skills is the key to achieving financial health and making money work for you in the long run.