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Showing posts sorted by relevance for query financial instruments. Sort by date Show all posts
Showing posts sorted by relevance for query financial instruments. Sort by date Show all posts

Monday, March 21, 2011

How reverse convertible securities work

The Financial Management Regulatory Authority (FINRA) describes reverse convertibles as short-term, high-yield financial instruments comprise of debt instruments and put options. This means that the reverse convertible bond is only converted if the underlying stocks drop below a certain value. In essence these financial instruments are corporate hedges against loss in market capitalization or a decline in stock value.

Reverse convertible securities are thought to work in favor of the borrower by allowing them an increased measure of financial risk management. This is because this type of debt instrument has the option to be reversed by the issuer of the security.  In other words, reverse convertible securities are financial instruments, usually short-term bonds called notes, that allow lenders to change the actual financial instrument after it has been sold. As the following brief video discusses however, there are drawbacks to financial instruments such as reverse covertible notes such as high fees that have led to arbitration issues in the past.

To illustrate how reverse convertible securities work, XYZ Corporation contracts ABC Underwriting corporation to issue $100,000 in reverse convertible bonds to anyone willing to buy the bonds. If after selling the bonds, XYZ Corporation wished to change the type of debt which implies a change to the terms of debt, then they have the freedom to do so because the financial instrument is a reverse convertible security.

Reverse convertible securities can be used for a number of financial purposes because they are diverse financial instruments linked to credit and debt management. For example, by issuing reverse convertible bonds, a company can increase its debt to credit ratio if the money obtained is not used. Since these types of loans may be more favored by other lenders, the company may then obtain lower cost financing elsewhere and then convert the security to equity.

The Seattle Times called reverse convertible securities a stupid investment in late 2008 because the net affect of owning them was little different to owning stocks affected by the financial crisis even though the initial terms had high interest rates hedged by 'good' stocks. For investors, it is probably a good idea to consider how and why these securities are issued in the first place. In other words, companies may issue reverse convertible securities to manage their own financial risk at the expense of the investor. When financial instruments become complex, in some cases, that may serve as warning to the investor to be aware of increased money losing conditions i.e. financial deception via complexity.

A financial principle that may be ignored with reverse convertible securities is the economic cycle i.e. purchasing reverse convertible securities may be a bad idea during periods of economic contraction, but what if the reverse is true? In such case the investment may at least be less risky. That is to say, if the underlying stock is fundamentally strong, and forecasted to have extended increased profit margins for three or more fiscal quarters, the risk of not obtaining one's complete investment principal back is reduced.

Of course, during economic upcycles, a new risk emerges with reverse convertible securities, namely opportunity cost. The opportunity cost is that bonds are generally not the choice investment during these times because other investments may provide higher yields. In light of this, reverse convertible securities may be considered for higher yielding bond diversification only during periods of economic growth.

Wednesday, February 16, 2011

How to determine the cost basis for tax exempt funds

The cost basis of tax-exempted funds pertains to earnings yields through mutual funds and/or retirement and/or insurance instruments that incur income from tax free investments, Accumulation of earnings that are reinvested within a fund and sale of funds that garner tax exempt dividend income. In other words, yield, ownership and capital gains of tax-exempt funds are subject to different taxation rules and cost basis calculation.

What is a tax-exempt mutual fund?

To illustrate what a tax-exempt fund is, the example of a mutual funds that itself invests tax-exempt financial instruments can be used. Such a fund may invest, trade or reinvest in a number of financial instruments that may yield earnings that are taxable, non-taxable or a combination of both. Such being the case, not all yields through tax-exempt funds may be tax free as this depends on the types of investments within the fund, the management of the assets within the fund, and local, state and federal laws.

Earnings from a tax-exempt fund that themselves are non-taxable and re-invested into the same fund do not increase cost basis but rather market value if the value of the fund stays the same, falls less than the value of the reinvested earnings or rises. This increase in market value is an unrealized capital gain and only become taxable following realization.

Furthermore, while earnings within a tax-exempt fund may be taxable, potential gains made from the sale of the fund are usually not. However, in the case of certain retirement and insurance products, capital gains may either be tax deferred or tax exempt due the tax protection provided within that retirement instrument.

Determining the cost basis for tax-exempt funds is a multi-tiered process involving  the determination of tax exemption, the cost of those tax-exempt funds and the realization, un-realization or re-investment of income earned with a given tax year (www.investopedia.com).

What is cost basis?

Cost basis is a calculation that can be useful in a number of financial scenarios that may benefit an individual, tax payer or business depending on if the cost basis of an asset, investment, capital expenditure, income after cost etc. are favorably valued. A few of the areas in which cost basis can be beneficial in terms of tax exemption are as follows:

• Tax planning for individuals, businesses and non-profit businesses
• Investment valuation in deferred or non-taxable retirement instruments
• Bookkeeping of cost basis of transactional proceeds through non-taxable instruments
• Asset management and cash-flow cost determination
• Preparation of quarterly, annual, personal or business financial documents

The following video clearly explains the concept of cost basis and how it is used:

Determining tax exemption status

There are several types of tax-exempt funds and financial instruments, some of which may have differing yields. The first step in determining cost basis of these funds is to clarify what, how and why certain funds are tax-exempt. The following list of tax-exempt financial instruments illustrate the various type and reasons for tax exemption.

• Tax-exempt mutual fund: Invests wholly or in part, in tax exempt financial instruments
• IRA or retirement plan that incurs income through a tax-exempt fund
• Hedge fund(s) that invests in tax-exempt funds
• Exchange traded funds with tax-exempt earnings
• Insurance policies with cash value from investment in tax-free instruments/funds

While tax exemption on earnings may be a good thing, they are not necessarily more cost effective than other funds if the fees and charges associated with the funds management offset the tax savings and other funds managed by the same company yield a higher after tax return for the same investment risk level.

Calculating cost basis

Cost basis can be calculated in terms of yield and capital investment. Applying cost-basis calculations to both can better determine the quality, value, and opportunity cost of the investment. The following illustrates cost basis calculations based on 1) taxable cost basis of yield, and 2) tax-exempt cost basis of investment.

• Taxable cost basis

Calculating the taxable cost basis of a tax-exempt fund yield cost basis can be determined by taking one's taxable income rate, for example 28% and then using that to determine the pre-tax yield if the fund where taxable (money.cnn.com) For example, Fund A yields an annual not taxable return of 2.88%.

If the earnings were to be taxed at 28% an equivalent taxable yield of 4% would be required to create the same 2.88% return i.e. 2.88%/1-.28=2.88/.72=4%. Alternatively, a funds that's earnings are taxable with a yield that is also 2.88% would have an after tax earnings lower than the tax exempt fund i.e. 2.88% * .28=.8064; 2.88%-.8064=2.07% actual return.

• Tax-exempt cost basis

Since cost of an investment is also relevant for taxation matters, this original cost basis is also useful in addition to taxable and not-taxable cost basis of yield. Since market prices of tax-exempt funds can vary with fluctuations in market conditions such as bond price movements, interest rates, economic growth rates etc. actual values of funds can vary.

However, cost basis of tax-exempt funds is not based on market value hence the purchase price is usually used in determining cost basis (investopedia.com). There are of course exceptions to this rule of thumb, particularly in the case of reinvestment of capital gains and/or non-taxable dividends into taxable funds. Calculating the tax-exempt basis of such a fund is thus a simple matter of purchase price.

Cost basis adjustment on reapplication of income after unrealized reinvestment of earnings

In situations in which capital gains are realized after realized tax-exempt earnings of tax-exempt funds are reinvested in the same fund within the same or a following tax year, the cost basis of the reinvestment will reflect a higher amount. (investopedia.com) For example, on January 1, Mr. Jones buys 1000 shares of XYZ tax-exempt fund at a price of $27.50/share with a $25.00 commission. The funds are within a non-retirement investment account that consequently is subject to taxable earnings.

If the fund increases in market value by $1.00/share and incurs a non-taxable dividend income of .50 cents /share and Mr. Jones holds the fund until the following year in which he earns another $500.00 non taxable dividend income and a $1000.00 qualified end of year income redistribution. Since the non-taxable earnings were reapplied to the fund through income reinvestment, the cost basis of that investment rises to $27,500 +$2000=$29,500.00. Jones then sells 1071.42 shares (averaged reinvested dividend of 28.00/share) at $28.50 for a price of $30,535.71. Since the cost basis was adjusted up to $29,500 and the fund was held for longer than a year, the tax rate and total taxable income declines.

In summary, cost basis can be calculated on yield, investment and reinvested earnings. Calculating cost basis in terms of yield allow for financial comparison with similar taxable related investments. Moreover, cost basis varies with investment vehicle the tax-exempt is bought through, and the investment status of the fund i.e. original or reinvested capital. Since taxation of funds differ based on what tax free instruments are invested in, earnings on tax-exempt funds may be either partially or completely tax free.

Determining exactly how earnings will be taxable depends on the fund itself, the tax laws within one's state, tax bracket and investment strategy. Additionally, reinvestment of earnings and capital gains can lead to a higher overall cost basis that can be reflected in individual tax calculations. Such increases in cost basis of tax-exempt funds that also reinvest dividends and qualified distributions may consequently be beneficial to lowering taxable income within some tax planning strategies.


1. http://www.investopedia.com/terms/c/costbasis.asp
2. http://www.fairmark.com/mutual/exempt.htm
3. http://money.cnn.com/2004/12/10/pf/expert/ask_expert/index.htm
4. http://www.ehow.com/how_2006650_invest-triple-tax.html
5. http://www.prudential.com/view/page/12608?param=12624

Thursday, August 9, 2012

Types of financial instruments held in offshore accounts

Each offshore jurisdiction has unique financial advantages and disadvantages
Offshore accounts are financial vehicles that defer immediate taxation

Offshore bank accounts provide individuals seeking an alternative investment opportunity or different avenue of financial management to improve their financial planning options. Financial instruments held within expat bank accounts often include products that's value is based on market forces, or pre-determined contracts that offer lower interest rates and  costs. The potential benefits of offshore banking outweigh those of more restrictive banking regulation and policy. This is achievable via a range of products.


Foreign currency of various countries and denominations is held within offshore bank accounts. Money held in offshore accounts for foreign exchange trading also have several benefits. For starters many offshore banking facilities offer enhanced privacy protection, and the ability to pay bills or expenses in foreign currency rather than a domestic one. Some offshore financial institutions even provide accounts able to hold more than one currency or multi-currency accounts. 


Contracts for difference such as currency pairs, equity swaps and similar financial instruments are in effect derivative financial securities. These products provide traders an opportunity to capitalize on price movements without actually having to hold the underlying asset. In some cases these CFDs are purchased using capital leveraging or margin. In other words, a credit account is used in addition to the primary fully funded offshore account.


Funds come in many shapes and sizes, and are either directly managed by offshore banks, or traded with their services. Bond funds, exchange traded funds, and mutual funds are just a few of the fund types that are held within expat bank accounts. Additional funds such as hedge funds, money market funds and fixed income funds are examples of others. These funds are either maintained independently through a trust established at an international bank, or managed with the assistance of financial service professional.


Over the counter securities trading services are available via select offshore financial institutions. These include pink sheets, another term for stocks not traded on larger exchanges. Collateralized debt obligations are another type of OTC exchanged through offshore accounts. Essentially, if it is not traded via a major formal exchange that is regulated by a particular organization, then financial instruments are considered OTCs.


Equities are an asset class within several offshore financial institutions and expat bank accounts. Moreover, stocks that are not over the counter can be traded via accounts at offshore banks. This is because when the offshore bank has a headquarters in the domicile of residence, the trading networks are interlinked enabling offshore securities trading. Stock options or stock derivatives, are also available via some offshore banks.


Certificate of deposits are able to yield as high as eight percent or more at select offshore financial institutions. Specific rates are determined based on deposit amount, location, term and applicable banking policy. These rates are above and beyond some of the best international CD rates available, and this makes these negotiable instruments an attractive investment opportunity. Additionally, offshore banks do not necessarily withhold interest income tax due to differences in regulatory requirements.


Due to the fact offshore accounts are located in foreign jurisdictions, they are not subject to the monetary decisions of other banks in larger jurisdictions. It is for this reason, interest rates on loans from offshore banks are able to be more competitive. For example, offshore bonds that cost less to underwrite are better able to offer higher yields to lenders or investors. Similarly, just as loans are made, debt instruments such as international treasuries, corporate debentures and convertible bonds are also held or purchased within offshore accounts.

The range of financial products made available through offshore accounts is as diverse as the jurisdiction's regulations and banking policies allow. Due to the more liberal banking practices made possible via these financial institutions, more money management opportunities are available to investors and traders seeking investment alternatives with higher yields and potentially higher capital gains. In any case it is important to understand how any offshore investment, deposit or account is protected and to carefully study and discuss the risk and safety of such decisions with a financial professional.

Image license: US-PDGov

Tuesday, February 15, 2011

The meaning of stocks vs. shares

In a nutshell, not all shares are stocks, but all stocks are shares. Similarly by analogy, not all fruits are apples, but all apples are fruits. To explain further, stocks represent a numerical share of ownership in a company whereas shares represent investment proportion in a wider range of financial instruments such as mutual funds, exchange traded funds, and stocks.

For example, X owns 500 shares of XYX Fund, and 100 shares of EFG corporation in the form of stock. Stocks and shares are both ownership of financial instruments and the two terms are sometimes interchanged for each other, however shares have a wider range of ownership possibilities whereas stocks are definitively more limited to specific financial instruments. Although related, equity, shares and stock are slightly different in meaning as evident below:

Wednesday, February 2, 2011

What is day trading?

Day trading began in 1971 with the advent of the National Association of Securities Dealers Automated Quotations System (NASDAQ). It is the short term holding and selling of financial instruments such as stocks with the intent of financial gain. Day trading seeks to take advantage of short term fluctuations in the price of financial instruments. Some of these instruments include commodities futures, currency, stocks, stock options and exchange traded funds.

Day trading basics

Many financial instruments are bought and sold on exchanges. It is through these exchanges day trading takes place. Examples of exchanges are the Chicago Mercantile Exchange, The New York Stock exchange, the Foreign Exchange and the American Stock exchange. After analyzing a stock or other financial vehicle in addition to various patterns and movements surrounding the financial product, a day trader may decide to purchase some of those stocks. After a relatively short period of time, the day trader will sell the stocks for a profit if his or her analysis and predictions were accurate. According to the following instructional video, a day trader is someone who buys and sells financial securities such as stock, futures and options.

Types of day trading

There are several ways to day trade including arbitrage trading, options trading, stocks and exchange traded fund trading and forex trading.

Arbitrage is the buying of stocks or another financial vehicle on one exchange and then reselling it on another exchange.

Options trading is the agreement of a day trader to buy and/or sell large amounts of stock bought on credit at a fixed priced. This agreement must be fulfilled, settled or carried over within a certain time period of time.

Stock and exchange traded fund (ETF) trading is the buying and selling of these instruments on exchanges such as Nasdaq or the American Stock exchange.

Foreign Exchange Trading (FOREX) is the trading of currencies using one or more of several existing foreign exchanges. Currencies are bought at a fixed price and may be purchased on margin i.e. on credit for a larger volume.

The tools of day trading

Successful day traders often use special tools that allow them to perform what is known as 'technical analysis' of securities. Technical analysis involves the use of specialized numerical, real time, and graphical data to present information to the day trader so that (s)he may more adequately increase the chances of a successful trade. Some examples of day trading tools are the following:

• Day trading charts
• News alerts
• Stock trading systems
• Real time streaming data displays
• Stock analysis reports

Risks and rewards

Day trading is not an exact science and most day traders often incur losses at one point or another. To illustrate this point, one study by the North American Securities Administrators Association reported that 77% of Day traders lost money trading. While the rewards can be steep with margin trading, the risk can be equally steep. Since day trading takes place on short term patterns and quick decisions, it is more likely the day trader has incomplete information on the company (s)he is trading.

This possibility increases the chances of making faulty or less than ideal decisions thereby increasing the risk. Depending on which exchange is used, the risks of day trading can also fluctuate. Exchanges like the FOREX can be highly risky if a large volatility of a currency price occurs. The same is true with options trading as both can be purchased using loaned money making the losses terrible. Day trading wouldn't be practiced if there weren't some winners though. That is to say there are successful day traders out there and it is likely these day traders are very astute in the ways of the market, have significant know how and experience.

To conclude, day trading is a short term investment strategy lasting from minutes to hours and occasionally overnight. The practice of day trading is international and crosses multiple exchanges and financial instruments. Day trading is performed by individuals and large firms alike and often makes use of specialized financial information and analytical tools. The practice of day trading is not a guaranteed success and should therefore be exercised wisely and with caution.


1. http://business.enotes.com/small-business-encyclopedia/day-trading
2. http://daytrading.about.com/
3. http://www.answers.com/topic/arbitrage?cat=biz-fin
4. http://www.stockcharts.com
5. http://www.answers.com/topic/day-trading?cat=biz-fin
6. http://www.thebulltrader.com/

Thursday, February 17, 2011

Estate planning tips for New Jersey residents

New Jersey is a heavily taxed State and its estate tax is not directly linked to the Federal estate tax as of July 1, 2002. (10) This and other State tax regulations can affect estate values and estate derived income considerably. These regulations are contained with New Jersey Statute, Chapter and Case law, notably Title's 3A, 3B and 54 of New Jersey Statute law and Chapter 31 of New Jersey Chapter Law. These laws can be found and read at the New Jersey State Legislature website.

Since there are many estate regulations in New Jersey that can impact the management and value of an estate, a carefully planned estate may be necessary to optimize the estate's value and cost. This article will discuss key aspects of New Jersey estate planning, taxation and regulation. It will also provide tips to consider when planning around New Jersey estate regulations, as there are ways to plan an estate to minimize estate taxes and maximize estate objectives.

New Jersey estate planning considerations

The following section illustrates the potential taxes and noteworthy items that may affect an estate, in addition to estate or estate related requirements that can prolong or limit the receipt of an estate by beneficiaries of that estate. More regulations than can be covered in this article exist pertaining to New Jersey estate planning, however some notable aspects of such regulations are the following.

• $675,000 of a New Jersey estate's value is estate tax free (11)
• New Jersey compliant out of State wills filed in State are accepted (8)
• New Jersey inheritance tax returns are often required (3)
• Estate assets may require property release waivers (3)
• Safety deposit boxes and contents, are not "inventoried" by the State (3)
• Transferred retirement instruments can reduce immediate estate tax
• "Entity structuring" may afford liability protection from creditors (13)

• Inheritance tax 0%-16% (3)
• Estate tax: Determined from information on Federal Estate tax return (4)
• Property tax: Locally determined and based on market asset value (4)
• Income tax 1.4-8.97% (1)
• Gift tax 0% (15)

In light of the above factors, the following techniques may be helpful when planning an estate in New Jersey as clearly an estate tax strategy may be in order when planning a New Jersey estate. As with all estate planning, it can be a good idea to first determine the estate's goals and objectives prior to devising a strategy and putting together estate planning technique to accomplish such.

• To avoid default intestate estate transfer, complete a valid New Jersey will (2)
• A bypass trust may be useful if the estate's value is higher than State estate tax exemption, and will be transferred into two generations. (10)
• Make use of New Jersey's lack of gift tax to pass estate value prior to death
• Receive estate income distributions via annuity rather than lump sum
• Relocate and register real and tangible property to another State if possible
• Transfer non-necessary assets into tax protected financial instruments
• Maximize life insurance death benefits as they are tax-free (3)

Estate planning financial instruments

Several financial instruments and allowances may be beneficial when planning an estate. These instruments or allowances within the law can assist in maximizing exempt estate value, reducing tax, and increasing estate value either through higher retained value from lower management cost or improved estate management techniques. The following is a list of financial instruments and possibilities that may assist in the estate planning process. Since New Jersey is quite particular about estate values and inheritance, the use of specialized estate management tools may be wise.

• Retirement plans such as IRA's can be effective asset protection vehicles (14)
• A/B Trusts: Make use of estate holder and spouse's estate tax exemption (11)
• Life insurance: Cash value may be taxable whereas death benefit is not. (3)
• Asset protection trusts, and/or companies i.e. trust companies (14)
• Marital joint property (14)

Also included in estate planning are the records, especially State specific estate documents. These records or documents may include those listed below, some of which are available and/or viewable at the New Jersey Department of the Treasury, Division of Taxation website. Determining which documents are needed should ideally become apparent during the estate planning process.

The legality and effectiveness of these records can be validated by an attorney, notary, state official etc. Invalid documents and assets that aren't registered in a trusts name may cause an estate to go through probate or similar process, hence the importance of creating valid documents. Listed below are some documents that may be needed in New Jersey.

• Form L-8 and L-9 Real Property tax waiver
• IRS Form 706 required for New Jersey estates over $675,000
• New Jersey estate tax return, form IT-State
• Insurance proceeds, form O-71
• Estate corporation formation certificates and registration documentation

New Jersey estate planning preferences

Listed below are sources that may assist the reader in the New Jersey estate planning process. The information in these sources are referenced in this article. Since the estate planning process is diverse, and potentially complex, many considerations can come into play when planning an estate. For this reason consulting local estate planners trained and familiar with New Jersey estate regulations may be worth the cost and potential headache of not having planned correctly or overseeing certain aspects of the estate planning process.


New Jersey estate planning:
(1) http://www.jerseyestateplanning.com
(2) http://research.lawyers.com/New-Jersey/Estate-Planning-in-New-Jersey.html

New Jersey tax information:
(3) O-10-C - General Information - Inheritance and Estate Tax (paste in internet browser)
(4) http://www.state.nj.us/treasury/taxation/index.shtml
(5) http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_NJ.asp

New Jersey estate laws:
(6) http://law.findlaw.com/state-laws/estate-planning-law/new-jersey/
(7) http://www.megalaw.com/nj/top/njprobate.php
(8) New Jersey State Statute(s)

New Jersey tax forms:
(9) http://www.state.nj.us/treasury/taxation/taxprnt.shtml

Additional New Jersey estate information:
(10) http://www.demaio.com/fs/articles/decouple.htm
(11) http://www.allbusiness.com/government/government-bodies-offices-regional-local/12362447-1.html
(12) http://www.oceancountygov.com/surrogat/guide.htm#a2

New Jersey Estate Law: Chapter 31 of New Jersey Public Laws of 2001, estate tax
(13) http://www.njleg.state.nj.us/2002/Bills/A2500/2302_I1.HTM
New Jersey asset protection:

Wednesday, February 2, 2011

Guide to personal finance: Money mangement tips

 Debt management, budgeting and investing are all important in personal finance
Personal financial management is a multi-tiered process

Personal finance is the managing of individual and/or household monetary circumstances and goals through use of financial instruments, methods and rules. Personal finance can be divided into a number of categories that form a comprehensive financial model that utilizes income, debt management, investment, and financial planning to achieve a more efficient, cost effective and optimal use of personal finances.

Since everybody's financial situation and aims tend to be different, personal finance applies conventional and unconventional money management methods with lifestyle objectives, short-term and long-term plans. Some of the areas of personal finance include the following:

• Budgeting
• Tax planning
• Investing
• Retirement planning
• Financial record keeping
• Cost management
• Estate planning

Thursday, November 1, 2012

How the risk-free interest rate is determined

Investments with little or no risk have a risk-free interest rate
The risk-free rate of interest is often equated with U.S. Treasury security yields

On the surface a risk-free interest rate is perceived to be the rate of return on an a financial allocation that has no financial risk associated with it. However, 'risk' itself is a word that has more depth to its meaning when coupled with financial instruments. This is because risk also includes the influence of variables such as devaluation from inflation, opportunity cost, and issuer default.

Characteristics of risk-free assets

According to Aswath Damodaran of the New York University Stern School of Business, risk-free assets have no variance from the expected rate of return. In other words, what you see is what you get without question; an example of such being guaranteed fixed interest rates. In this sense, risk-free rates do not have to be universal or the same across financial instruments such as savings accounts and government bonds, but do have to possess a strongly assured yield. 

Risk-free interest rates do not include a 'risk premium' or an added amount of interest yield that accounts for the risk associated with investing or depositing money into a financial instrument. For example, a 5 year corporate bond from Company A offers 4.5%, whereas a 5 year bond from Company B offers 5.6% These yields differ with perceived risk as measured in part by credit ratings. These ratings are determined by credit rating agency methodologies such as those used by Moody's

To illustrate 'risk premium' and 'risk-free rate' further, bond issuers with lower credit ratings have more credit risk associated with them, and are not therefore 'risk free'. The risk premium is determined by market forces such as the rate of return  investors are willing to accept for financial instruments  priced at certain levels with specific levels of risk as defined by credit rating and investor valuation(s). The risk free rate is often bench-marked using a shorter-term financial instrument such as 3-month Treasury Bills according to Rutgers University

Risk-free financial instruments and credit rating

Even if an issuer has a very high credit rating and is considered 'risk free', that can change. A recent example of this, and as reported by Reuters, was when the Standard and Poor's Credit Rating Agency lowered of the U.S. Government's credit rating from AAA to AA. These changes are somewhat predictable via rating agency 'outlooks', but for longer-term time horizons, are not always so clear. It is for this reason that a risk-free short-term financial instrument is not actually risk free when longer loan terms exist for the same issuer and instrument. 

What constitutes a risk free rate is not constant, and multiple financial vehicles can be considered to have risk-free rates.  For example, a financial statistics class at The Wharton School of Business considers a 1-month Treasury Bill as being risk free instead of a 3-month. This difference in opinion is further highlighted in a report by the financial consulting firm Value Advisor Associates. Moreover, in the report, both 5 year and 10 year financial instruments are considered acceptable proxies for the risk-free rate due  to factors such as upward sloping 'term-structure' i.e. higher rates of return for longer duration bonds.

Image license:  US-PDGov

Monday, July 1, 2013

5 advantages of insurance products in retirement planning

Life insurance products are not limited by rules affecting IRAs and 401(K)s
Life insurance affords retirement planners several important benefits
Insurance companies are specialists in retirement planning; if there were no advantages of owning insurance instruments, the chances of the industry prospering for as long as it has would be lower. When considering the purchase of insurance products, an objective assessment of the financial security, planning options and monetary advantages they offer helps with decision.

Several perks exist when owning one or more insurance related contracts such as long-term care insurance, life insurance and annuity contracts. Moreover, since some of these features are not necessarily available from other financial businesses, this makes the careful use of insurance instruments a significant part of financial planning. Some of the advantages of owning insurance products are as follows:

Tax benefits

When insurance premiums are payed for with after-tax dollars, the cash value that accrues in some financial instrument is still taxable following withdrawal per Americans For Fair Taxation, a not-for-profit organization that advocates fair taxation. However, insurance benefits, which are different from cash value, are not taxable provided that premiums are paid with after-tax dollars.

Creditor protection

An important aspect of insurance products is creditor protection. This means in the event of bankruptcy, garnishment or debt collection, funds within insurance products are safe from liquidation. This is a substantial benefit that offers insured persons financial security not available via other financial instruments such as some types of brokerage accounts, bonds and certificates of deposit.

Guaranteed income

Another useful benefit of insurance products such as annuities is guaranteed income. For instance, a deferred annuity with a fixed income guarantee is contractually obliged to pay the annuity owner a specific amount of income at a pre-determined time and on a periodic basis. This type of financial instrument is sometimes a good option for individuals seeking to supplement income from Social Security.

No required distribution age

Unlike financial instruments such as 401(k)s and Individual Retirement Accounts, some insurance products do not have required minimum distributions or RMDs upon reaching a specific age. For those persons seeking to grow the value of their annuity via continued premium payments, this is a significant advantage.

No maximum contribution

In addition to no required minimum distribution age, insurance instruments such as annuities do not necessarily have limits on how much can be deposited into them each year. For individuals with extra money looking to boost financial security, this can be an attractive financial planning option.

In today's world choosing from a multitude of financial products can be confusing when planning for retirement. Even with all the positive aspects of insurance products, caution is often warranted when making financial decisions. To illustrate, depending on licensure requirements and state laws, insurance agents may or may not have a fiduciary responsibility to pursue their clients' best interest. For this reason, being aware of what insurance products have to offer in relation to their actual cost and financial planning goals is an act of due diligence that prospective insurers would be wise to carryout independently.

  Image license: PD; Виталий Смолыгин

Friday, February 4, 2011

The problem with variable annuities

Variable annuities are financial instruments sold by insurance companies that have come under significant scrutiny within the financial community for being exploitative of unknowing and/or misguided consumers and recipients of financial advice.

In principal, variable annuities have several advantages including no limits on tax deferred retirement savings, management by experienced financial institutions, a substantial range of investment options, beneficiary guarantees, different pay out options, and protection from potential lawsuits. Despite all these benefits of variable annuities, problems still persist, most notably annuity exploitation, financial risks and additional costs.

Annuity exploitation

The primary problem with annuities is the associated fees, commissions and costs. Annuities can earn an insurance underwriter between 5-10% in commission making the front end costs significantly high in addition to potential pressure to buy variable annuities from sales persons. Additionally fees associated with variable annuities are typically higher than some other forms of retirement savings.

Due to the significantly high commissions insurance agents can receive from the sale of variable annuities, financial advice may be skewed in favor of variable annuities. This unbalanced financial advice has the potential to not meet individual client needs and may be more geared toward earning commissions than providing proper professional financial advice. In other words, the high commissions earned through sale of variable annuities can lead to annuity exploitation or bad practice. Misunderstanding is sometimes at the root of annuity exploitation. The following presentation points out what is worth understanding before purchasing an annuity:

Financial risks

The increase in costs and added pressure to purchase annuities may warrant second thought despite all the benefits typically associated with annuities. For example, if the return on investment on an annuity averages 9%, but the annual operations and maintenance expenses are 3-4% the total return is not much higher than a certificate of deposit or Treasury Inflation Protected Securities (TIPS). A summary of the financial risks associated with variable annuities is provided below:

• Money held in an annuity is not FDIC insured
• Costs may outweigh benefits
• Hidden fees such as underlying mutual fund fees
• 5-10% commissions
• Potential to affect financial advise negatively
• Higher annual fees than other financial instruments
• Value of an annuity can fluctuate with market conditions

The risk associated with annuity may be worth considering when retirement planning and/or purchasing financial instruments through an insurance provider. Furthermore, since variable annuities are not federally insured, diversifying risk among a number of financial instruments may be advisable if one does choose to enter into a variable annuity agreements.

Peace of mind risks

The cost to piece of mind may not suit one's individual risk tolerance when purchasing variable annuities. This is so not only because of the lack of federal insurance, but also due to the connection of variable annuities with market conditions i.e. if an economy enters into a recession and a significant portion of an annuities investment is in the stock market, the annuity could decline in value to the point of negative returns. These potential negative returns may in turn trigger additional maintenance and/or management fees making the annuity an uncomfortable investment for some individuals.

For the above reason, assessing risk tolerance and investment goals is key in determining which variable annuity if any is right. If an insurance underwriter is unwilling, or unable to discuss these goals with risk of losing the potential sale of a variable annuity, that insurance package may not be worthwhile. Annuities can be structured during the accumulation phase to be less risky by choosing monetary allocations to go into safer investments such as bond funds, however such allocations may yield little if any return after fees and annual reductions.

Additional risks and costs

In addition to the financial risks and risks to peace of mind illustrated above additional costs and risks also exist. These additional risks and costs have to do with the credibility and financial reputation of the variable annuity provider as well as a host of other potential charges that may be unclear at the time of purchase. Some of these further risks are listed below:

• Surrender charges
• Underwriter solvency
• Extra feature costs
• Insurance provider risk charges

To elaborate on the above points, surrender charges are costs incurred from withdrawing funds from a variable annuity before the phase out period ends. Surrender charges are an early withdrawal penalty charged by the insurance provider. Extra feature costs and insurance provider risk charges include enhanced benefits that are not standard with the variable annuity and extra premiums that serve as insurance to the insurance company. Annuity fees are discussed further by the annuities specialist in the video below.

When purchasing a variable annuity it can be advisable to take the time necessary in considering all the benefits and disadvantages of the annuity. The assessment of an annuity may include determining the quality of the insurance company, understanding the fine print and all the potential costs and existing costs and deciding if the annuity and investment products available within the annuity are suitable for one's investment, and retirement goals in addition to individual risk levels. Insurance providers may be swayed into exploiting the annuity service option when providing financial planning services and thus it can be a good idea to be aware of this possibility when reviewing or meeting with an annuity specialist.

When familiarizing with variable annuities, asking questions and researching until one is completely ready to make a decision may be the wisest way to approach the financial instrument. These beneficial features may ideally be weighed and factored into one's financial goals, comfort levels, future income requirements, and wishes for beneficiaries.

The information and sources provided in this article can assist individuals in the process of financial planning for future and/or retirement needs determine how to go about assessing variable annuities in addition to acclimating those individuals with the potential risks associated with the purchase of variable annuities.


1. http://www.smartmoney.com/retirement/investing/index.cfm?story=wrongannuities
2. http://www.massmutual.com/mmfg/products/insure/annuity/article_variablefaq.html
3. http://www.sec.gov/investor/pubs/varannty.htm

Tuesday, November 1, 2011

Financial instruments and accounts that provide protection from creditors

Creditors are limited by laws that protect consumers even if those consumers are late on their bills or are sued for liability compensation. Examples of these laws are state statutes of limitations, and federal credit protection laws such as the Consumer Credit Protection Act.

Despite consumer protection from creditors, these laws do not necessarily protect individuals from liens or seizing of assets by the Internal Revenue Service (IRS) or from specific court rulings.  Having said that, several types of financial instruments and accounts protect consumers from creditors allowing an opportunity to keep retirement savings safe from difficult financial situations. Another term closely linked to creditor protection is asset protection planning. This concept, and its relevance to creditor protection is discussed below.

Financial instruments that offer creditor protection



Homesteads are a type of property rather than a financial instrument, but they can also provide financial safety from creditors. Moreover, in some cases the homestead exemption provides asset protection for land 160 acres or less in size. Not all states allow the homestead exemption, so be sure to verify applicable laws before buying property for this purpose.


Attorneys at Law Unrah, Turner, Burke and Frees appeal to cost effective insurance solutions to asset protection. Namely, auto, and homeowners insurance are able to protect assets from liability lawsuits for less than asset protection insurance and in terms of creditor claims, term life insurance also provides more cost effective financial security. However, it is probably a good idea to keep in mind life insurance financial protection is limited. For example, although Title 11 of the U.S. Code does protect assets from creditors, the focus is beneficiaries or dependents and not owners.


Trusts are a type of legal entity used in estate planning and are often considered financial instruments used to protect assets. Cornell University Law School  describes Trusts as right to property via a fiduciary relationship i.e. not ownership but retention of rights of ownership. Several types of trusts exist, and an irrevocable asset protection trust combined with a limited liability corporation provides enhanced asset protection. Several kinds of Trusts can be used for protection according to the Law Office of Janet Brewer. Moreover, of those discussed are Qualified personal residence trusts, irrevocable life insurance trusts and inter-vivos qualified terminable interest property trusts.


Individual Retirement Accounts or IRAs are another financial instrument that protect consumers from creditors. However, according to the New York Times,  in the event of bankruptcy, funds in an IRA are only protected up to one million dollars with the exception of rollovers from corporate retirement plans. The New York Times also refers to difference in state law exemption amounts for non-bankruptcy lawsuit protection. In other words, how much monetary protection provided by an IRA varies between states for creditor claims not associated with a bankruptcy filing. 


Defined contribution plans such as 401(k)s and 403(b)s are protected by the Employee Retirement Income Security Act (ERISA). However, these types of accounts are not necessarily protected against Qualified Domestic Relations Orders (QDROs) which are judicial claims against retirement assets during events such as divorce proceedings. Moreover, according to the Wall Street Journal, a kind of 401(k) called the Solo 401(k) is not protected from creditors in every states.

Tuesday, March 1, 2011

The benefits of credit derivatives

Credit derivatives are exactly what the name implies i.e. derived from credit. In other words the financial instruments such as collateralized bonds are created from a credit instrument such as commercial credit or commercial loans. To illustrate, ABC company takes out a loan for project development from XYZ bank. XYZ bank has several such loan agreements with several companies. XYZ then decides it needs more capital to make more loans so it creates additional bank products such as bonds, that are collateralized by the commercial loans to ABC and other companies. These bonds are an example of credit derivatives since their value is based on the commercial loans.

Types of credit derivatives

Several types of credit derivatives exist, each with it's own purpose, core product, and rules of exchange. The reason derivatives have become more refined over time is because they tend to improve the efficiency of the originators business operations which in turn provides incentive for their creation. A few examples of derivatives are given below:

• Commodities derivatives: Financial instruments that's value is based on commodity value
• Corporate Bonds: Ex-Bundled loans in the form of an actively traded bond
• Credit Derivative Swaps: Ex- Exchanging of derivatives for insurance and/or another derivative.
• Credit Derivative Futures: Obligations to purchase credit derivatives at a future date with optional physical delivery.
• Credit Derivative Forwards: Similar to futures with less regulation and physical delivery

Wednesday, February 23, 2011

Estate planning tips for Nevada residents

Nevada is an estate friendly State because of its lack of State income, estate and inheritance tax. (4) Additionally, Nevada affords individuals more privacy regarding disclosure of income and asset information. Moreover, Nevada's economic infrastructure and wealth regulatory laws may provide reason for planning an estate in Nevada. This article will discuss estate planning in terms of reducing taxes, protecting assets, expediting estate management after death and estate asset allocation.

• Reduce taxation
• Protecting Nevada Estates and expediting their management
• Nevada estate asset management

Reducing estate taxes in Nevada

There are two good ways to reduce taxation on estates, first lower the taxable value of the estate and second shelter income and assets in the estate in safe financial instruments, policies and/or accounts. In Nevada several options are currently available to estate owners to lower their taxes or the taxes on descendents who inherit the estate. Even though inherited assets are not necessarily taxable by the State of Nevada, they may be by the U.S. Federal Government making the use of tax protected financial instruments less redundant than might be expected.

• Nevada trusts' income are State tax free
• Life insurance policy distributions are tax free
• Inherited assets are not taxed by the State, but may be taxed by the Federal Government
• Not all investments outside a trust or insurance policy are taxable ex- Tax free mutual funds
• Individual Retirement Accounts can be transferred to Beneficiary Retirement Accounts

Protecting Nevada estates and expediting their management

After dying one or more of the following parties may become involved in the estate's management: Estate executors, trustees, beneficiaries, family, accountants, lawyers and government officials. Depending on the clarity and complexity of the estate, and matters surrounding the estate, it's management after death may be simple and short or lengthy and complicated. Some steps may be taken in advance to help relieve potential problems regarding re-distribution and allocation of estate assets. A few such steps are listed below:

• Keep beneficiaries up to date on accounts, policies and property
• Maintain legal and State applicable Will, and Power of Attorney
• Place and record assets as trust rather than individual owned
• Transfer assets as gifts prior to transfer of the estate
• Utilize both tax-free and creditor secure financial instruments

Asset management of Nevada estates

Increasing the value of an estate in Nevada can include present and after tax values. To increase the after tax value involves some of the aforementioned tax techniques. However, increasing present value of an estate is also financially important. Estate wealth building techniques vary on the asset base of the estate's portfolio and the allocation and redistribution of assets within such. However, some techniques can be applied with or without estate specific assets in mind.

• Make use of the $1 million federal gift tax exemption and annual tax exempt gift amounts
• Assess value of gifts given under 0% Nevada State gift tax
• Transfer assets to spouse to avoid 'unlimited martial deduction'
• Increase size of life insurance policy value
• Optimize Roth IRA contributions
• Invest in tax free financial vehicles
• Allocate portfolio assets in accordance with financial goals
• Consult a financial planner, estate accountant or estate lawyer if necessary

Additional financial Instruments of interest may include the following when estate planning in Nevada. These items help protect estate assets from creditors and/or taxes making them worth consideration when managing an estate portfolio.

• Nevada Asset Protection Trust
• Trust owned life insurance policy
• IRA transferable to a Beneficiary IRA
• Generation Skipping Trust

That said Nevada may assess tax on both real and personal property making expensive housing and automobiles within an estate subject to taxation if not legally protected from such. Considering this, a highly liquid portfolio or one that minimizes taxable ownership of property may be worth consideration.

Estate planning in Nevada may be worthwhile given the nature of the State's economic and regulatory structure. These regulations limit taxes on estates but do tax property that is not tax sheltered. Protecting assets in an estate from creditors and costs is an important part of estate planning in addition to building the wealth of the estate through use of sound portfolio management. The content presented in this article is not intended to replace the advice of a financial planner, accountant or lawyer certified or licensed to practice in the State of Nevada or otherwise. The subject matter of this article is for informational purposes only and is to be used or not used at the reader's own discretion.

Nevada and general estate information resources consulted:

1. "Money Central"; http://articles.moneycentral.msn.com/RetirementandWills/InvestForRetirement/WhatToDoWhenYouInheritMoney.aspx
2. "Investopedia"; http://www.investopedia.com/articles/pf/05/EstateTaxPhaseOut.asp
3. "Bankrate"; http://www.bankrate.com/brm/itax/edit/state/profiles/state_tax_Nev.asp
4. "Pacific Life"; http://www.pacificlife.com/Channel/Educational+Information/Life+Insurance+Concepts/Maximizing+Life+Insurance+Benefits.htm
5. "State of Nevada"; http://tax.state.nv.us/DOAS_MAIN.htm

Friday, February 4, 2011

Wealth accumulation: How to save a million dollars

Millions of people have already saved a million or more dollars. According to the website of U.S. Senator's Bernie Sanders of Vermont, in 2009 7.8 million people were millionaires in the United States despite the economic environment. The characteristics of these people have, that would be millionaires don't have add clues to how to save a million dollars. If it were easy to save a million dollars, many more would have already done it, but how to save a million is not really a secret at all.

Perhaps the most important thing to know about saving is living within your means. Suze Orman offers two more tips about saving the the video below:

Return on Investment (ROI)

Money is a resource like oil, labor and time. When money sits idly by doing nothing or isn't optimized for efficiency that resource incurs opportunity costs, becomes subject to inflationary pressure and lowers potential income. Making proper use of money such as through astute business and financial decision making can lead to returns on investment well into the double or even triple digits.

Compounding, and capital gains

Financial principles are the concepts behind economic thinking and day to day finance. Understanding principles like leveraged hedging, business cycle, capital appreciation, and compounding are stepping stones to implementing them in one's financial plan. Financial plans don't have to be complicated, and simple often is better, but either way a financial plan that correctly employs financial methods that work is essential to save a million dollars. Using a savings calculator helps determine a time line and rate of return for specific financial goals.

Assets minus liabilities

Net worth is a financial concept that claims what goes out should be less than what comes in. If at any level this is not the case, saving a million dollars will likely not be possible in any conventional sense. The formula for net worth is easy to understand but hard to do, but is a way to save a million dollars.

Vocational decisions

According to the U.S. Bureau of Labor Statistics, surgeons, engineers, scientists, lawyers and pilots all receive over $100K per year. Saving 50 percent of this amount every year without any ROI or compounding will save a million dollars after 20 years. Some millionaires may work hard toward their goal and simply earned their way to wealth through a high paying job or lucrative business.

Financial instruments

A wide variety of financial instruments and methods exist to become wealth. When used correctly becoming a millionaire is only a matter of time, skill and know how. From annuities to zaitech, a wide range of investment and asset allocation methods exist that have made many millionaires. Keep in mind some financial instruments do involve considerable risk.

Tax protection

Paying unnecessary taxes is a way to slow down wealth accumulation. To save a million dollars tax strategy can come in handy, and a number of legal tax shelters and financial techniques exist to reduce taxes thereby decreasing money paid out. For example, deferring unneeded income to future dates lowers taxes in the present.

Use a financial plan

Sticking to a financial plan provides a good way to save a million dollars. For example, $999 USD that is added to by $99 per month for 60 years at 7% is equal to $1,031,070.37 with compounding once a year. If this interest accumulates and is contributed to within a traditional retirement account, tax will not have to be paid on it until withdrawal. Naturally, acquiring a high interest rate in as short a time period as possible is the challenge when using a savings method like this.

Knowing how to save a million dollars isn't necessarily difficult, implementing the steps that allow one to save a million dollars does require financial discipline, skill and usually effort. Limitations on people's income, high cost of living, financial obligations and unforeseen expenses can all drill holes into an otherwise solid financial plan. Overcoming these obstacles by utilizing one or more of the above steps will increase one's probability of saving a million dollars.

Friday, August 10, 2012

Pros and cons of online securities trading

Successful and experienced online securities traders acquire wealth
Financial strategies assist with online securities trading

The ability to utilize expertise and resources to acquire capital gains is essential to the success of individual traders of financial instruments. In this sense it is the responsibility of traders to discern between poor and prosperous techniques and strategy. Numerous drawbacks befall even the best and most talented of industry experts. However, once a trader becomes experienced, knowledgeable, and refined in his or her practices, avoiding the financial pitfalls associated with online securities transactions becomes more possible.


A key factor that draws millions of people to online securities trading is the substantial opportunity to increase personal wealth. Monetary gains on well implemented trades often yield returns far above more conservative forms of money management such as federal treasury bonds. The potential to earn hundreds, thousands and even millions is possible via online securities trading and via several financial instruments such as spread betting on currency pairs.


A key benefit of trading financial instruments online is the acquisition of tactical knowledge and ability to implement learned trading strategy. Using brokerage tools helps develop awareness of the affects of market forces such as volume and economic events on asset prices. Furthermore, the trading process and simulations help acclimate brokerage account holders with the best trading mechanisms to use at specific times. For instance, in intraday arbitrage, knowing when to buy or sell using limit orders vs market orders and all or nothing trades, is important, if not essential to a well implemented transaction.


Another important benefit of securities trading is the value provided by online brokers. For example, discount brokers that only charge transaction fees and exclude commissions via self-directed accounts often only cost pennies on the dollar. Moreover, the larger the transaction amount is, the smaller the proportional cost associated with that trade becomes. In addition, a wide range of complementary digital tools such as a spread betting demo account assist traders learn how to make the most of their money.


Online securities trading is risky. The financial products are not typically insured and market volatility has a dramatic affect on the price of securities. When combined with leverage or margin, capital losses are multiplied and substantially lower asset worth if prices go the wrong direction. Reducing risk exposure entails locating financial instruments that have higher yield for the least amount of risk. Ideal risk management also involves allocating assets in such a way that overall portfolio yield rises despite any capital losses on riskier assets. To further illustrate the risks associated with online securities trading, the eHow video below discusses investment techniques that affect risk.


There is a significant learning curve associated with online securities trading. If trading platforms are simplified, they do not necessarily make up for a lack of market knowledge and experience. Moreover, most digital brokerage services provide glossaries, demonstration accounts and tutorials precisely because there is a level of complexity involved with the trading process. Not being fully aware of the pitfalls of online trading such as failing to use a stop-loss order, or using too much leverage on risky buy order makes it that much easier to make a small, but costly error.

Image license: US-PDGov

Monday, February 14, 2011

How financial planning calculators can help you budget

Financial planning calculators
Financial calculators help add accuracy to financial planning
Financial planning calculators can help you budget because they accurately assist in the process of evaluating and reorganizing finances when used correctly.

The benefits of financial calculators include being able to compare and balance numbers such as amortization schedules, net interest margin, debt to income ratio and other personal financial variables that are helpful when budgeting.

No matter how simple or complex your financial situation, financial calculators can help you with it.

Financial calculators help you budget when the following steps are implemented. These steps from start to finish illustrate a process by which budgeting with financial calculators takes place. The last two steps are the more difficult of the five because they are more involved and may require acclimation. Even though the process of using a financial calculator in a budget may seem like a chore, once you learn how to do it the first time it becomes easier and faster thereafter.

• Be aware of the different types of financial calculators
• Know what financial calculators do
• Locate financial calculators for use
• How to use the financial calculator
• Incorporate financial calculations into budget

What financial calculators do

Financial calculators address a wide range of financial matters relevant to financial planning such as debt management and maintaining personal cash flow. There are a number of financial calculators that can be used for varying financial functions; these functions include financial planning, and budgeting for and within financial planning.

The different types of financial calculators include hand held calculators, calculator software applications and online calculator applications. There are several functions these calculators may possess, some of which may be incorporated into one calculator and in other cases individual calculators. Examples of financial calculators are listed below:

• Texas Instruments BA II Plus financial calculator
• Hewlett Packard (HP) 17BII+ Financial Calculator
Bloomberg financial calculators
Financial calculators at financial calculators.com
BankRate online financial calculators

How to use financial calculators

Define your financial objective

Knowing specifically what you want your budget to do can help you decide which financial calculator(s) are the best choice. Since everyone's unique financial situation involves different assets, income, and expenses the right financial calculators to use can differ. Some example objectives are listed below:

• Finding out how much to lower debt and/or increase credit
• Assessing the option to retain or refinance a mortgage
• Determining the difference in net returns between investments
• Knowing how to properly valuate an asset
• Forecasting future values of savings plans

Choose the right financial calculators 

After defining a financial objective it should become more clear which financial calculator(s) are most appropriate. Sometimes all that is needed is a simple calculator with basic functions such as multiplication, division, addition and subtraction. For example, an amortization calculator would be helpful in assessing mortgage refinance options.

Implement and analyze calculations

The results of financial calculations give you a picture of what happens to your finances when certain actions are taken. When the results match your financial goals then the financial calculator has helped you achieve that objective. For example, when determining the difference between two investments the future value function on a financial calculator indicates saving less money per month for investment B leads to the same net value as investment A. If your goal is to do more with less, the financial calculator has assisted with your financial intention.

Incorporating financial calculations into budgets

Each budget requires different calculations that are defined by financial goals. Sometimes the only financial calculations needed may be adding up expenses and subtracting them from income to make sure the former is less than the latter. Other times multiple sets of calculations may be utilized to arrive at numerous financial assessments. For example, when retirement planning several functions are considered including age, savings, annual savings contributions, annuity income requirements, inflationary considerations etc. This type of budgeting involves present financial decisions for the future.

Another example of a budget that makes use of financial calculators is in examining the financial benefit of a fuel efficient vehicle or energy efficient appliance purchase. Moreover, how many years does it take for the purchase to generate budget cost savings and does that future gain offset the present cost in terms of alternative financial decisions such as an investment, and operating cost of existing equipment. In this case the financial calculations involved would include financial planning with budget forecasting under two or more sets of present budgets.

The number of budgeting possibilities for which financial calculators are used is dependent upon the complexity of the budget. To further illustrate, budget efficiency may make use of interest and cost related calculators whereas budget assessment may make use of ratio or percentage calculations.

In other words, budgeting can have stages such as organization,  assessment and  re-organization that each involve different monetary calculations such as personal cash flow balancing, asset management, and multi-cost and variable calculations. For example, mortgage calculations that simultaneously incorporate interest, payment, and time or investment budget calculations that weigh risk against margin requirements and premiums.

Image license: Jorge Franganillo, CC BY 2.0