Return On Investment – Basics To Financial Management

Return On Investment – Basics To Financial Management

Due to poor financial management, many people find it hard to improve their chances of getting richer. This brings about the need to change many people’s mindset about finance, like how defects have to be fixed in leaking ships. Because of this,, the article was written to provide more knowledge on the field of managing finances well.

In the area of finance, people ought to know 1 single term very well and that is return on investment (ROI). This is because ROI is income that can be taxed the least but is most beneficial to you. For example, in earned income, you are always taxed at the higher tax brackets in income tax whenever you earn more.

However, if you invest in real estate, there is tax incentive called depreciation which looks like loss on financial statements but actually creates phantom deduction to shelter rental income. Also, investors can offset other income with passive loss from property up to $ 25,000 if you or your spouse qualifies as a real estate professional.

Here, people must be able to look at things in the big picture. To make it clearer, this would mean knowing how things relate to and affect the whole and learning how to optimize specific products to maximize the whole instead of thinking micro where you often leave out and remove relationships to the whole.

Here, if you add a hypothetical negative 12% return on 1 of the years within a 30 year investment you make, your investment can easily shrink by 20% and I believe many of the advisers selling investments would not tell you this. Given the proliferation of such lies, it becomes reasonable to know why the rich gets richer while the poor gets poorer.

In addition, answers on micro situations are always dependent on the macro plan and this is clearly seen in the above example about how only looking at returns on savings could have made you lost a benefit for investing somewhere else.

Thus, in any case of financial management, people ought to look at things in a macro perspective because it sometimes can unlock good opportunities for yourself. Here, one example would be a fact on how knowing an investment (ethanol) well can bring you wealth in other investments.

Today, as ethanol demand rises, corn demand will increase as China and US can also make ethanol from corn which is used as food for chicken, beef whose demand rise with higher GDP per capita. Thus, an increase in ethanol demand will increase sugar (used to make ethanol) and corn demand. Here, if an investor knew of this well, he could simply have invested huge amounts of capital into these 3 investments and sit to reap his harvests. Hence, in conclusion, after covering aspects on how to think like an economist, I believe readers can now see the various benefits one can gain from thinking this way. Now, slowly change your mindset to fit this model and I’m sure you will do well financially!

Harris Smith runs the home equity line of credit website. Don’t Miss Out!

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