5 Things to Consider While Selecting a Financial Planner

Unlike someone calling himself a CPA or a physician, just about anyone can call himself a “financial planner” or a “financial advisor” regardless of their educational background and professional experience. Moreover, not all of them are unbiased in their advice and not all of them always act in their clients’ best interests.

To ensure your financial planner is well-qualified in personal finances and impartial in his advice, consider the following five things:

1. Planning Credentials: Having a highly-regarded credential in financial planning, such as Certified Financial Planner (CFP) or Personal Financial Specialist (PFS), confirms that the professional you intend to work with has acquired the education and experience necessary to serve as a financial planner. CFP and PFS credentials are awarded to only those individuals who have met the certification requirements of education and experience in planning for personal finances. In addition, they have to pass the certification examinations and agree adhere to the practice standards and continuing education requirements.

2. Subject Matter Expertise: Financial planners are planning professionals, not necessarily subject matter experts. For example, a financial planner will be skilled in tax analysis and planning,but unlike a Certified Public Account (CPA) or an IRS Enrolled Agent (EA) he might not necessarily be a subject matter expert when it comes to tax rules Similarly,a he could be skilled in chalking out an investment plan, but unlike a Chartered Financial Analyst (CFA) he may not be an authority in the subject of investments. Work with a financial planner who is also a subject matter expert in those areas of personal finance that are important in achieving your financial goals.

3. Client Specialization: Not all financial planners serve all types of clients. Most specialize in serving only certain types of clients with specific profiles. For example, a personal planner may build his expertise and customize his services to serve only those individuals and families who are in certain professions, or a particular stage of life with specific financial goals and net worth. Ask whether the planner specializes in serving only certain types of clients with specific profiles to determine whether he is the right fit for your situation and financial goals.

4. Fee structure: The fee structure largely determines whose interests he serves best – his client’s or his own. A Fee-Only professional charges only fees for their advice whereas a Fee-Based professional not only charges fees but also earns commissions, referral fees and other financial incentives on the products and solutions they recommend for you. Consequently, the advice from a fee-only one is more likely to be unbiased and in your best interests than the advice from a fee-based financial planner. Work with a professional whose fee structure is conflict-free and aligned to benefit you.

5. Availability: He or she should be regularly available, attentive, and accessible to you. Ask the planner how many clients he currently serves and the maximum number of clients he is planning to serve in the future regularly. This clients-to-planner ratio is one of the key factors in assessing your planner’s availability to you in the future. Also, ask which planning activities are typically performed by the planner and which ones are delegated to a para planner or other junior staff members. Lastly, make sure the planner is easily accessible via phone and email during normal business hours.

Once you have shortlisted a few well-qualified and unbiased financial planners in your local area, consult the ones who offer a FREE initial consultation first. During the initial consultation, assess the planner’s availability and any other professional attributes you are seeking in your financial planner.

Having a well-qualified and unbiased financial planner by your side is extremely important in your journey towards your financial goals. When searching for one, consider the planner’s professional credentials, client specialization, subject matter expertise, fee structure, and availability to select the right financial planner for your needs.

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How You Measure Risk Will Affect the Success of Your Retirement

The measure of someone’s Risk Tolerance has changed quite a bit over the past couple of decades from not asking at all to being a litigious foundation in the new DOL Fiduciary Law. When financial advisors (stock brokers at the time) would ask (that’s assuming they did ask and not simply check a box) it was a multiple choice with options such as conservative to moderate to aggressive with maybe a couple of options in between. Back at the turn of the century, the industry added a little more emphasis especially as the population aged on articulating the five or eight multiple choice answers to gauge and to make recommendations based on the client’s comfort level of risk.

Nothing epitomizes this financial planning term than the advent of Target Funds. One core belief is all that is ever saved for something big is that the older you get the less risk you should take. Seems reasonable, but some very bad things happen within the uncertain cloud of reasonableness. However, there is some wisdom in not treading in bumpy waters when you have less time to recover from market corrections. So, what could go wrong with that logic?

Target Funds have their place in retirement plans and 529 plans. An easy access to a hands-off professionally managed account whose embedded promise is to lower the volatility of the portfolio by rebalancing into a higher concentration of fixed income assets while the equities move towards blue chip and dividend oriented stocks. Increasingly safer asset management may prove to be more detrimental to the objective rotating away from loss and straight into a disparaging risk v. reward ratio. Considering the high cost of management embedded in these types of assets, there is no wonder why those institutions love them so much.

Think about this way. As your portfolio gets closer to target date, the less active management is involved in your portfolio. Simply stated there are less costs involved in number and quality of staff, ongoing research and trading fees for the fund which translates to higher profitability for company all the while you are exchanging advisor fees for lower volatility. Bottom line, your net rate of return you receive on the risks you are taking with your portfolio is not in your best interest. But to be fair, we must measure how much do the advisor fees impact the rate of return and we also must measure quantitative amount of risk inherent in every investment.

As a true steward of your money, there is one foundational principle that cannot be disputed, yet it is never discussed. It’s not mandated by the government agencies, compliance officers or financial planning, yet this principle almost always is an integral part of investing. Many companies and financial planning software programs start the process of measuring risk in a portfolio as it compares to the stated tolerance level. With linear statistics, these retirement tools create an ambiguous rating or number system that is supposed to tell you if your portfolio is within or outside of your risk tolerance. This is primitive at best and dangerous at its worst. How the industry measures risk and the process they go about it is backwards and if not understood and corrected, there are going to be a lot of depleting portfolios the next time we have even the slightest market correction.

Let’s first discuss “linear statistics”. If you have ever read a Morningstar Report or looked up a stock on the internet you’ll know them as average rate of return, standard deviation, beta and alpha. We are not going to get too far in the weeds on stats; however, we do need to introduce “geometrical” math. Simply stated it is mathematics that gives a true measurement of how an investment actually performs. As an example, let’s say we start with $100,000 and over 10 years it grows to $150,000. Linear math tells us to divide the gain ($50,000) by the number of years (10) to get the average rate of return to come up with 5%/yr. When stock reports show average rate of return, they take the starting number and subtract that from ending number and divide by whatever term they are reporting. Unfortunately, that is not the true performance of the investment. If we took 5% gain and added it the starting principle, we would have $105,000 but when we add another 5% to the principle amount of $105,000 we will have $110,250 and not simply $110,000. So, if we stretch that over ten years we would have accumulated $162,890. Conclusively, the Compound Annual Growth Rate is a geometric statistic and measures the investment growing at 4.15% annually instead of the reported 5%. This distinction is extremely important when you are considering the costs of financial advice and the amount of overall risk you taking for the net reward you are receiving.

Now, of course we all beta is how an investment is measured in its volatility compared to an index, most notably the S&P 500. The beta is reported as a factor so the number 1 (or 100%) states that the investment will mirror exactly as the market moves where if you are above one your investment will move more than the market and if it is lower than 1 then the investment should move less than market. If you watch your portfolio closely, I am confident that you have had investments that inexplicably moved contrary to its beta where you were expecting great gains when the market turned North but your investment lagged or worse, the market moved down slightly but your investment had a considerable correction. We will explain why that happened a little later in this article. Now, I mentioned alpha, it is a linear statistic that pretty does the same thing as beta but measures itself against other like investments.

The last linear measurement, standard deviation is used primarily to show how much your investment can go up or down from zero. The higher the variance, the more it goes up or down over a certain period of time. Now, most of your retirement tools, risk assessment calculators use these statistical data to create a picture for the overall likelihood of success during your retirement years. These software programs look over the past 10 – 20 years of your current portfolio to quantitatively measure the average rate of return, the variance and the beta to let you know if you are on the right track. There are several problems with utilizing this strategy. First, who’s portfolio looks the same as it did 10 years ago? 5 years ago? Last month? Secondly, aren’t we supposed to change our portfolio to less Risk as we get older? Lastly, since when is it necessary to carry a lot of Risk to garner a good rate of return? One question I like to ask our clients and students, if you were going to lose 1% off an investment, would you like it priced at $600/share or $5/share? Yet, the standard deviation for Google is 0.66 per Morningstar, but when you consider its price, the standard deviation is over 34.

A couple in their mid-50’s, diagnosed by a financial advisor as Moderately Aggressive and even gave them a Risk Tolerance score of 78. They were comfortable with that amount of volatility in their investment portfolio which means that any given 6 month period the portfolio can go down 12% if they know that the upswing is closer to 18%. Let’s consider the investments and understand why this linear approach can be devastating to this couple’s retirement success. It is possible that the basket of stocks, whether its individually held or through ‘packaged’ products (mutual funds, ETF’s etc.) is heading South. These types of retirement risk analysis programs are all built on one premise and that is the markets, over time, always go up. That is empirically wrong. Population size always goes up; inflation always goes up and these two factors alone have more to do with market appreciation than the number of buyers over sellers. Besides, there have plenty of examples where ‘time’ has gone on for years and who can afford that during retirement years?

Another factor that is not implicated throughout this analysis is cash-flow. As they are calculating your Risk assessment against linear data, they are also figuring out your experience to quantify your risk tolerance. Now part of your experience has much to do with your 401k where you continually add money to your retirement account. Having a consistent injection of money and not having to lean on those assets, even with a market correction, softens the experience. As you are adding money, when there is a downturn you are buying more shares at a cheaper price so when the market appreciates you have more of a bounce. So, for your retirement, you must adjust your comfort level of risk because a 10% correction in the market doesn’t necessarily mean a buying opportunity. To fully understand your true risk score, we will need to take a geometric look at volatility and how we can utilize it to your advantage.

Let’s consider our couple’s portfolio. They were given a Risk Tolerance Score of 78, Moderately Aggressive. From those parameters, this couple along with their financial advisor and the compliance department will create, manage and balance a portfolio that assimilates the appropriate variance. What everyone reacts to however, is when the portfolio goes down too much. Usually the financial advisor will state that there is no way to control the market, the market will come back and that this portfolio fit within their guidelines of risk. So, why did it go outside of their risk score? Sometimes, to get certain transactions through compliance, the financial advisor will slide the risk tolerance a little higher than your comfort level, but that’s an ethics question and we are not here for that. More than likely, the reason is that the assets bought or managed did not look at the geometric data that should have shown there was much more embedded risk than the linear statistics reported.

A group of stocks with historically low volatility bought at the wrong time will have a much higher risk exposure. Isn’t it more accurate to say we know that market goes up and down but over time we expect that our risk will be rewarded with a proportionate rate of return? Your portfolio could have many stocks that either have a negative slope, could be bought at the ceiling with little history of pushing past or has more momentum to trade underneath its mean than above it. Your true risk should be measured in how likely you are to make money on an investment than lose money in the short term than over 10 or 20 years. A geometric assessment apportions a measurement for each holding would permit a precise allocation of investments essentially lowering the risk and allowing greater opportunity for appreciation because it would show when there is more danger to capital loss than gain.

You can’t forget the price. The adage “Buy Low, Sell High” seems to go by the wayside when it comes to risk assessment calculations. The markets have gone up continually for almost 7 years so no one needs to pay attention to the fact that they might be paying too much for an investment because it seems, prices just go higher. Another financial planning foundational principle is Opportunity Risk. This is where you chose one course of action when you could have chosen another where there was ample opportunity for a better result. Since we have time, taxes, fees and inflation as a constant adversary against the success of a portfolio, it seems that it would be imperative to understand the fluidity of risk assessment and how dynamic the levels of risk are in your portfolio.

A geometric measurement of a stock’s current price compared to its slope; compound annual growth rate; mean; highest price points; lowest price points; how many times the price has go through the ceiling and the floor and by how much; and how long a stock stays above it median or below it. Stock prices are like driving a car. As you are approaching a stop sign, you apply the brakes. As a stock is nearing the lowest price, it more than likely will slow down before getting to the stop sign. There is less risk as the price is getting closer to the floor, especially if there is a positive slope (positive trend line). Conversely, the closer a stock price gets to its peak the higher amount of risk becomes evident. If understand where the price is along the trend line, the overall momentum and how often it is not contained within its own variance we can ascertain a clearer, up-to-the-minute risk assessment for each holding and the overall portfolio. As you calculate the needed compounded annual growth rate, a fluid risk assessment of your holdings would allow to dictate how much dynamic risk you need to take throughout your retirement. As you can see in this graph, even a stock with low volatility can have a high-risk score and the last thing you would want is to believe you have a conservative portfolio when you don’t.

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Advantages of Collecting Rent Online

Due to very fast Wi-Fi and mobile apps available these days, people can go online to pay their bills and schedule their appointments. Renters also use such technology to pay on time and manage their funds. Handling payments from wherever you are (with no annoying paper checks) is the new standard. So, property owners like you should consider accepting online rent payment. It is beneficial to both your business and renters – it saves time, reduces costs, improves cash flow and is more convenient. There are five major advantages your property management business could profit from in letting your residents pay their rent online. Let’s see:

Reasons for Collecting Rent Online

Controls management costs

Collecting rent online reduces property management expenses. This allows you to cut down on operation costs, and lets property management fees remain low, which is definitely an advantage for property owners.

Improves customer service

Instead of collecting and processing paper checks, your team can spend more time focusing on their marketing efforts and improving the relations with the residents.

Lessens past due accounts

Since there are different online payment options – such as PaypPal, eCheck and credit card – there will be a considerable reduction in late payments. In addition, mobile alerts that remind the residents that the rent is due, or when the due date is drawing near, usually prompts an immediate payment when your system is mobile device optimized.

Adds more security

Paying rent online gets rid of the risks involved with cash payments. Moreover, your insurance company is more likely to reduce your coverage when you do not maintain cash on-site.

Makes dispute resolutions easier and makes an audit track

Online rent payments generate a digital paper trail. If ever a resident claims that he/she paid online, you can check the system at once to confirm or refute the claim. With a fully incorporated property management software package, you can update owner statements, evaluate late fees and automatically trail split payments. The processing of rent payments and owner disbursements are more secure since sensitive personal info is never compromised. Your accounting group can just click to get a snapshot of those who have or have not paid to allow well-informed financial resolutions.

Expectations of Residents when it comes to Online Rent Payment Portals

According to past surveys, residents often expect a lot from online payment options. Besides being accessible 24/7, they expect them to:

be user-friendly and simple to navigate;
come with itemized monthly statements that separate additional fees from services;
provide different payment options, such as credit and debit cards;
allow automated recurring payments;
not have any processing fees, particularly if residents are required to make online payments.
There are renters who still opt to pay their rent in the form of paper checks every first day of the month. However, in the last few years, it has been observed that more people are becoming comfortable with online transactions. In case you do not offer such options of paying rent online, perhaps it is about time to take it into consideration.

It’s about time to start and collect rent online, as you can see. Your tenants will be happy to pay rent online as well because they will save time and hassle.

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How To Turn Your Negative Cash Statement Into A Positive Cash Statement

Speaking of cash statements – it is not an impossible task to turn it from negative to positive. There are few tips that you always need to keep in mind to control your cash flow. One of the most important things is to cut down all your unwanted expenses. Cash management is not a difficult task, but it just requires you to focus on all your financial goals.

Look into your monthly budget – To get started, it is a wise decision to have a look into all possible monthly expenses before you sort out your list. Focus on your top ten options from the list and narrow down as it is certain that one or two from the list may not be important expenses. This is one effective way that can help you save some amount of money by the end of the month.

Cutting down unwanted expenses also means that you have to ditch some of your leisure habits. Some of these habits can force you to spend unnecessary money every day.

Working on your budget also means that you have to try and follow it strictly. One of the main benefits of planning your budget is that it helps you get familiar with your total income and expenditures. Your budget should only include expenses that are very much important and cannot be avoided. It’s all about your needs verses all your wants and desires. Before you spend any money you need to keep in mind that unnecessary expenses will leave you broke by the end of each month.

Automobiles are one the luxury gadgets that can force you to invest a big amount of money every day. If possible it is always advisable to try and make less use of your private vehicle. Apart from this, it is also wise to try and invest some amount of your income on insurance policies.

Investment plans that do not require much investment can also be one of the best ways to help you save some money every month. An unused room in your house certainly is a good investment if you can try and rent it out to someone. A vacant room can certainly be considered as one of the best sources of income that can help you save money every month to pay your electricity and maintenance bills.

Apart from your unused room, you can also try and rent out your automobile for few days in the month. This will help you collect money for fuelling your vehicle for your use. Although this is a good factor but it may also mean that you need to regularly invest some money in its maintenance. If you are used to going to your office in your car then you can try and rent out a seat to someone in exchange for some money.

Many people also try and generate additional income by renting out their homes for other service providers in your locality. Always keep in mind that if you are looking around for generating a positive cash statement, you always have unlimited opportunities that does not require you to invest big money.

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Best Tips to Avoid Squandering Your Inheritance

When you receive an inheritance, it is important to figure out what will you do with that money. If you do not plan properly on how to spend that money, it will slip out of your hand within no time. If you have already got the cash, or you are about to inherit the money, here are some five tips for using it properly.

Don’t Rush Your Decision

People generally do not allow the money for a cooling-off period, after receiving the cash. This is one of the worst mistakes that people usually do. They are always in a hurry of spending the money without thinking twice. You can save the money either in a money market account or savings for at least two months in order to plan your options. You can also put the money into a short-term deposit for saving it, because you have to pay penalty if you withdraw it before time.

Assess Where You Are

If you analyse your present financial situation, you can get an idea about your future move. You can plan to start a college fund for your children, add the money to your retirement savings or keep it as an emergency fund. Make a goal in life, so that you can achieve it with the help of your inheritance.

Be Realistic About Your Inheritance

A sudden chunk of money will you lead to towards a changed lifestyle. The things like a new car or a luxury vacation that you could not afford before will now seem to be very tempting. You have to be careful to control your temptation and save your money for future needs.

Establish Boundaries

It is evident that when you receive an inheritance, many people come with a try to have a share in the money. Bank or financial sales people may call you so that you invest your money in their products. You may also be asked to make a huge donation by any charitable organisation. So, it is very important to set boundaries and prepare yourself for saying no to the people.

Be Proactive

You may need some professional help to figure out how to save your inheritance. It is absolutely fine to hire a financial advisor, but do not make your decision solely as per his guidance. In the end, it will be you who will take the final decision. Do some research and set your goals before taking professional’s help.

Thus, though an inheritance is like a blessing to you, but along with it comes responsibility. Plan properly to make sure that your money lasts for a longer time.

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10 Ways To Teach Kids About Money

Did your parents teach you about money when you were growing up? Did they emphasize the value of having good credit and how to live within your means? Did they teach you how to buy groceries, put money aside for emergencies, and pay yourself first? What are some ways that you can pass this knowledge on to your own kids?

Here are 10 ways to teach kids about money.

1. Bring your kids to the bank and the ATM when you deposit and with draw money. Get them familiar with how the banking system works.

2. Explain to them that the money they earn is usually electronically deposited into their bank account and that it is important to pay themselves first, ten percent of the amount deposited. This ten percent is then automatically put into some sort of savings account. The rest of the money is reserved for living expenses.

3. Talk to them about paying rent or a mortgage, spending money on food, fuel for the car, car expenses, TV expenses, electricity, heating etc. Explain the importance of turning off lights when they leave a room.

4. Teach them to delay instant gratification by saving for the item they want. They will appreciate and value it more when they acquire it.

5. Teach them what it means by depreciation. Explain that when a new car is driven off of a lot that it instantly loses value. Would it not be more prudent to purchase an older car for them to use as their first car. Explain what it means by getting value for their dollar.

6. Teach them how to cook from scratch. Not only will they eat better but they will save a lot of money by not eating in restaurants.

7. Teach them how to properly use credit cards. If they have a balance on a credit card they must pay off the credit card in full each month. They may opt to purchase credit cards that they put a limited amount of money on it instead of carrying cash in their pockets.

8. Teach them to only purchase items they want on sale. Regularly bring them to thrift shops to buy items that they need. Have them celebrate whenever they acquire something 50-75% off the regular price.

9. Teach them about the magic about compound interest! This one tip may make them millionaires by the time they retire!

10. Teach them to take courses on how to invest of their money. As they get older have them find a mentor that has achieved what they want to achieve financially and have them do what he or she did. Remember, one of the most important skills they can learn is how to handle their own money.

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Why the Germans Do Not Prefer Electronic Payments

The world of payments is rapidly moving towards the digital options. However, still several customers use cash and they finalized their transactions by using actual cash.

Industry experts are predicting that cash will be obsolete in a few coming years. However, there is a European country which is following a totally opposite trend. In Germany, the use of physical cash is more than any other country in the world. According to a research conducted by Federal Reserve, the people of Germany use cash in 82 percent of their financial transactions. 13 percent of these transactions are executed by using debt cards while only 2 percent of the transactions are carried out using credit cards. Germans keep more cash in their wallets as compared to the amount carried by people in other countries. On average, each German keeps $123 in his wallet. As per the research, the average amount kept in the wallet by Germans is almost double as compared to the quantity of cash kept by people in other countries. Americans keep $74 in their wallets, on average, while the people of Netherland carries $51.

The people of Germany not only like to pay in cash but also, they want complete freedom to do so. A recommendation to limit the use of cash faced extreme opposition from consumers and political experts. According to Guardian’s report, there was a ban imposed in Germany on making any payment via cash which has worth more than 5 thousand pounds. The purpose of this ban was aimed at stopping money laundering and the use of cash to support terrorist activities. Such bans are commonly imposed in other countries of European Union but in Germany, this suggestion faced strong criticism by the majority of the political groups.

According to Guardian, the head of Germany’s Central Bank, Jens Weidmann said while talking to the journalist of Germany’s newspaper named “The Bild” that if Germans get the impression that the use of cash is going to be gradually restricted in the country, it can prove to be actually fatal.

Even the newspaper was also against this suggestion. In February 2016, the newspaper published an open letter and urged the readers to sign it and send it to the finance minister.

The commitment of German people with the use of actual cash is so strong that most of the people are storing the cash in their houses. As per Wall Street Journal, the majority of Germans are withdrawing their money from banks and storing it in the safes inside their houses. This trend is so intense that a vault making company reported 25 percent increase sales increase in the first half of the year 2016. Several other such companies are delivering their maximum production in order to meet the increased demand of vaults.

Why do Germans Prefer Cash?

Despite the fact that electronic payments have made the things extremely easy for the people, why Germans still prefer physical cash over electronic payment? One reason for this is the security. Germans believe that payments via physical cash are more safe and reliable as compared to electronic payments.

To cater these issues, it is recommended that such a payment partner should be chosen which is compliant with the standards of data security. Moreover, the payment processor chosen by German people should accept several payment options. Online traders can only accept electronic modes of payment, but if Germans are provided with multiple payment options, they can easily choose the one which is best suited to their needs and expectations.

According to the Wall Street Journal, another reason behind German’s hesitation regarding the electronic payment is inflation. Because of the negative interest rate implemented by the European Central Bank, the Germans have to pay for making the deposit into the bank. Furthermore, the history of hyperinflation also made the people of Germany reluctant towards the use of online payments.

Because of the fact that the payment systems continue to get more and more advanced, it is expected that with the passage of time, the Germans will also move towards electronic payments, especially, when they have to make international payments. Business companies have to work hard in order to reach German people, but these companies shouldn’t give up.

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Funding Your Retirement With After-Tax Dollars

Funding your retirement account can be achieved with either pre-tax, tax-deductible contributions, or after-tax contributions that allow you to withdraw tax-free money when you retire. It’s possible to participate simultaneously in pre-tax and after-tax retirement plans, if it’s permitted by your tax-deductible retirement plan and with the advice of your financial adviser or accountant. Those who are able to maintain both types of accounts benefit from tax-saving advantages at both ends of the spectrum.

Several studies show that about one-third of Americans aged 50-65 have no retirement savings whatsoever. Fewer than 20% feel confident that they’ll have enough money to live comfortably throughout the retirement years.

Those numbers are discouraging and I will speculate that women, who live longer and typically earn less money than men, are at a particular financial disadvantage. Poverty in our senior years is often a concern for women. While it’s become increasingly difficult to save money in America, it is imperative that each of us, and especially women, do our best to fund retirement, using either pre-tax or after-tax earnings.

The Individual 401K, or SOLO 401K, allows you to give yourself a “salary deferral” of maximum $18,000 and those aged 50 and older can utilize the $6000 “catch-up” contribution feature, which allows a maximum contribution of $54,000 in tax-deductible dollars in 2016.

After-tax dollars fund the Roth Retirement Account, or ROTH 401K. When you are ready to access the account, you will draw down tax-free money. The 2016 annual maximum annual contribution is $18,000 plus the “catch up” $6,000 for those age 50 or older. High earners appreciate this plan, as there is no annual income limit for participants.

It is permissible to use the salary-deferred portion of your SOLO 401K to make ROTH 401K contributions. Profit sharing SOLO 401K contributions are NOT eligible to be applied to a ROTH 401K, since they are made pre-tax, they’re tax-deductible and you cannot commingle the two.

While ROTH 401K contributions are not tax-deductible, withdrawals made after age 59 1/2 are tax-free if five years have passed since your first contribution (known as the 5 year rule).

Another after-tax retirement plan is the ROTH IRA. There are income limitations associated: in 2016, $132,000 for singles and $194,000 for married couples. The annual contribution limit is $5,500 and $6,500 for those age 50 and older. Your ROTH IRA may be held in tandem with your SEP, SIMPLE, or traditional IRA.

You may participate in a ROTH IRA at any age, if you continue to earn taxable income. There is no mandatory distribution age, a feature that might benefit cash-flow planning. Furthermore, a working spouse can contribute to a ROTH IRA on behalf of the non-working spouse.

An individual or couple might choose a ROTH retirement plan when there are insufficient deductions to itemize at tax time, thus negating the tax benefit of other retirement plans. ROTH, paid with after-tax dollars, gives account holders the benefit of tax-free income during retirement. Affluent Entrepreneurs who need to minimize taxes during retirement may benefit from the ROTH.

President Obama, by way of the Department of the Treasury, gives us the newest self-funded retirement account option, myRA. The plan is a ROTH IRA re-designed as a starter retirement account to encourage the process. There are no fees associated with opening a myRA account and participants can decide how much to contribute each year, according to budget. Automatic monthly or weekly contribution withdrawals can be set up through a bank account or salary paycheck.

If participants must withdraw money from the account, there is no financial penalty to pay and no additional taxes due. myRA is funded with after-tax income and strictly speaking, contributions are not tax-deductible. However, some low-income participants may qualify for a tax credit of 10% – 50% of their annual contribution.

The maximum annual myRA contribution is $5,500 and $6,500 for those age 50 or older. The maximum amount that can be held in a myRA account is $15,000. Once that limit has been reached (or before, if one decides), the fund must be rolled into a traditional retirement account.

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Best in Class Finance Functions For Police Forces

Police funding has risen by £4.8 billion and 77 per cent (39 per cent in real terms) since 1997. However the days where forces have enjoyed such levels of funding are over.

Chief Constables and senior management recognize that the annual cycle of looking for efficiencies year-on-year is not sustainable, and will not address the cash shortfall in years to come.
Facing slower funding growth and real cash deficits in their budgets, the Police Service must adopt innovative strategies which generate the productivity and efficiency gains needed to deliver high quality policing to the public.

The step-change in performance required to meet this challenge will only be achieved if the police service fully embraces effective resource management and makes efficient and productive use of its technology, partnerships and people.

The finance function has an essential role to play in addressing these challenges and supporting Forces’ objectives economically and efficiently.


Police Forces tend to nurture a divisional and departmental culture rather than a corporate one, with individual procurement activities that do not exploit economies of scale. This is in part the result of over a decade of devolving functions from the center to the.divisions.

In order to reduce costs, improve efficiency and mitigate against the threat of “top down” mandatory, centrally-driven initiatives, Police Forces need to set up a corporate back office and induce behavioral change. This change must involve compliance with a corporate culture rather than a series of silos running through the organization.

Developing a Best in Class Finance Function

Traditionally finance functions within Police Forces have focused on transactional processing with only limited support for management information and business decision support. With a renewed focus on efficiencies, there is now a pressing need for finance departments to transform in order to add greater value to the force but with minimal costs.

1) Aligning to Force Strategy

As Police Forces need finance to function, it is imperative that finance and operations are closely aligned. This collaboration can be very powerful and help deliver significant improvements to a Force, but in order to achieve this model, there are many barriers to overcome. Finance Directors must look at whether their Force is ready for this collaboration, but more importantly, they must consider whether the Force itself can survive without it.

Finance requires a clear vision that centers around its role as a balanced business partner. However to achieve this vision a huge effort is required from the bottom up to understand the significant complexity in underlying systems and processes and to devise a way forward that can work for that particular organization.

The success of any change management program is dependent on its execution. Change is difficult and costly to execute correctly, and often, Police Forces lack the relevant experience to achieve such change. Although finance directors are required to hold appropriate professional qualifications (as opposed to being former police officers as was the case a few years ago) many have progressed within the Public Sector with limited opportunities for learning from and interaction with best in class methodologies. In addition cultural issues around self-preservation can present barriers to change.

Whilst it is relatively easy to get the message of finance transformation across, securing commitment to embark on bold change can be tough. Business cases often lack the quality required to drive through change and even where they are of exceptional quality senior police officers often lack the commercial awareness to trust them.

2) Supporting Force Decisions

Many Finance Directors are keen to develop their finance functions. The challenge they face is convincing the rest of the Force that the finance function can add value – by devoting more time and effort to financial analysis and providing senior management with the tools to understand the financial implications of major strategic decisions.

Maintaining Financial Controls and Managing Risk

Sarbanes Oxley, International Financial Reporting Standards (IFRS), Basel II and Individual Capital Assessments (ICA) have all put financial controls and reporting under the spotlight in the private sector. This in turn is increasing the spotlight on financial controls in the public sector.

A ‘Best in Class’ Police Force finance function will not just have the minimum controls to meet the regulatory requirements but will evaluate how the legislation and regulations that the finance function are required to comply with, can be leveraged to provide value to the organization. Providing strategic information that will enable the force to meet its objectives is a key task for a leading finance function.

3) Value to the Force

The drive for development over the last decade or so, has moved decision making to the Divisions and has led to an increase in costs in the finance function. Through utilizing a number of initiatives in a program of transformation, a Force can leverage up to 40% of savings on the cost of finance together with improving the responsiveness of finance teams and the quality of financial information. These initiatives include:


By centralizing the finance function, a Police Force can create centers of excellence where industry best practice can be developed and shared. This will not only re-empower the department, creating greater independence and objectivity in assessing projects and performance, but also lead to more consistent management information and a higher degree of control. A Police Force can also develop a business partner group to act as strategic liaisons to departments and divisions. The business partners would, for example, advise on how the departmental and divisional commanders can meet the budget in future months instead of merely advising that the budget has been missed for the previous month.

With the mundane number crunching being performed in a shared service center, finance professionals will find they now have time to act as business partners to divisions and departments and focus on the strategic issues.

The cultural impact on the departments and divisional commanders should not be underestimated. Commanders will be concerned that:

o Their budgets will be centralized
o Workloads would increase
o There will be limited access to finance individuals
o There will not be on site support

However, if the centralized shared service center is designed appropriately none of the above should apply. In fact from centralization under a best practice model, leaders should accrue the following benefits:

o Strategic advice provided by business partners
o Increased flexibility
o Improved management information
o Faster transactions
o Reduced number of unresolved queries
o Greater clarity on service and cost of provision
o Forum for finance to be strategically aligned to the needs of the Force

A Force that moves from a de-centralized to a centralized system should try and ensure that the finance function does not lose touch with the Chief Constable and Divisional Commanders. Forces need to have a robust business case for finance transformation combined with a governance structure that spans operational, tactical and strategic requirements. There is a risk that potential benefits of implementing such a change may not be realized if the program is not carefully managed. Investment is needed to create a successful centralized finance function. Typically the future potential benefits of greater visibility and control, consistent processes, standardized management information, economies of scale, long-term cost savings and an empowered group of proud finance professionals, should outweigh those initial costs.

To reduce the commercial, operational and capability risks, the finance functions can be completely outsourced or partially outsourced to third parties. This will provide guaranteed cost benefits and may provide the opportunity to leverage relationships with vendors that provide best practice processes.

Process Efficiencies

Typically for Police Forces the focus on development has developed a silo based culture with disparate processes. As a result significant opportunities exist for standardization and simplification of processes which provide scalability, reduce manual effort and deliver business benefit. From simply rationalizing processes, a force can typically accrue a 40% reduction in the number of processes. An example of this is the use of electronic bank statements instead of using the manual bank statement for bank reconciliation and accounts receivable processes. This would save considerable effort that is involved in analyzing the data, moving the data onto different spreadsheet and inputting the data into the financial systems.

Organizations that possess a silo operating model tend to have significant inefficiencies and duplication in their processes, for example in HR and Payroll. This is largely due to the teams involved meeting their own goals but not aligning to the corporate objectives of an organization. Police Forces have a number of independent teams that are reliant on one another for data with finance in departments, divisions and headquarters sending and receiving information from each other as well as from the rest of the Force. The silo model leads to ineffective data being received by the teams that then have to carry out additional work to obtain the information required.

Whilst the argument for development has been well made in the context of moving decision making closer to operational service delivery, the added cost in terms of resources, duplication and misaligned processes has rarely featured in the debate. In the current financial climate these costs need to be recognized.


Within transactional processes, a leading finance function will set up targets for staff members on a daily basis. This target setting is an element of the metric based culture that leading finance functions develop. If the appropriate metrics of productivity and quality are applied and when these targets are challenging but not impossible, this is proven to result in improvements to productivity and quality.

A ‘Best in Class’ finance function in Police Forces will have a service focused culture, with the primary objectives of providing a high level of satisfaction for its customers (departments, divisions, employees & suppliers). A ‘Best in Class’ finance function will measure customer satisfaction on a timely basis through a metric based approach. This will be combined with a team wide focus on process improvement, with process owners, that will not necessarily be the team leads, owning force-wide improvement to each of the finance processes.

Organizational Improvements

Organizational structures within Police Forces are typically made up of supervisors leading teams of one to four team members. Through centralizing and consolidating the finance function, an opportunity exists to increase the span of control to best practice levels of 6 to 8 team members to one team lead / supervisor. By adjusting the organizational structure and increasing the span of control, Police Forces can accrue significant cashable benefit from a reduction in the number of team leads and team leads can accrue better management experience from managing larger teams.

Technology Enabled Improvements

There are a significant number of technology improvements that a Police Force could implement to help develop a ‘Best in Class’ finance function.

These include:

A) Scanning and workflow

Through adopting a scanning and workflow solution to replace manual processes, improved visibility, transparency and efficiencies can be reaped.

B) Call logging, tracking and workflow tool

Police Forces generally have a number of individuals responding to internal and supplier queries. These queries are neither logged nor tracked. The consequence of this is dual:

o Queries consume considerable effort within a particular finance team. There is a high risk of duplicated effort from the lack of logging of queries. For example, a query could be responded to for 30 minutes by person A in the finance team. Due to this query not being logged, if the individual that raised the query called up again and spoke to a different person then just for one additional question, this could take up to 20 minutes to ensure that the background was appropriately explained.

o Queries can have numerous interfaces with the business. An unresolved query can be responded against by up to four separate teams with considerable delay in providing a clear answer for the supplier.

The implementation of a call logging, tracking and workflow tool to document, measure and close internal and supplier queries combined with the set up of a central queries team, would significantly reduce the effort involved in responding to queries within the finance departments and divisions, as well as within the actual divisions and departments, and procurement.

C) Database solution

Throughout finance departments there are a significant number of spreadsheets utilized prior to input into the financial system. There is a tendency to transfer information manually from one spreadsheet to another to meet the needs of different teams.

Replacing the spreadsheets with a database solution would rationalize the number of inputs and lead to effort savings for the front line Police Officers as well as Police Staff.

D) Customize reports

In obtaining management information from the financial systems, police staff run a series of reports, import these into excel, use lookups to match the data and implement pivots to illustrate the data as required. There is significant manual effort that is involved in carrying out this work. Through customizing reports the outputs from the financial system can be set up to provide the data in the formats required through the click of a button. This would have the benefit of reduced effort and improved motivation for team members that previously carried out these mundane tasks.

In designing, procuring and implementing new technology enabling tools, a Police Force will face a number of challenges including investment approval; IT capacity; capability; and procurement.

These challenges can be mitigated through partnering with a third party service company with whom the investment can be shared, the skills can be provided and the procurement cycle can be minimized.


It is clear that cultural, process and technology change is required if police forces are to deliver both sustainable efficiencies and high quality services. In an environment where for the first time forces face real cash deficits and face having to reduce police officer and support staff numbers whilst maintaining current performance levels the current finance delivery models requires new thinking.

While there a number of barriers to be overcome in achieving a best in class finance function, it won’t be long before such a decision becomes mandatory. Those who are ahead of the curve will inevitably find themselves in a stronger position.

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Finance, Credit, Investments – Economical Categories

Scientific works in the theories of finances and credit, according to the specification of the research object, are characterized to be many-sided and many-leveled.

The definition of totality of the economical relations formed in the process of formation, distribution and usage of finances, as money sources is widely spread. For example, in “the general theory of finances” there are two definitions of finances:

1) “…Finances reflect economical relations, formation of the funds of money sources, in the process of distribution and redistribution of national receipts according to the distribution and usage”. This definition is given relatively to the conditions of Capitalism, when cash-commodity relations gain universal character;

2) “Finances represent the formation of centralized ad decentralized money sources, economical relations relatively with the distribution and usage, which serve for fulfillment of the state functions and obligations and also provision of the conditions of the widened further production”. This definition is brought without showing the environment of its action. We share partly such explanation of finances and think expedient to make some specification.

First, finances overcome the bounds of distribution and redistribution service of the national income, though it is a basic foundation of finances. Also, formation and usage of the depreciation fund which is the part of financial domain, belongs not to the distribution and redistribution of the national income (of newly formed value during a year), but to the distribution of already developed value.

This latest first appears to be a part of value of main industrial funds, later it is moved to the cost price of a ready product (that is to the value too) and after its realization, and it is set the depression fund. Its source is taken into account before hand as a depression kind in the consistence of the ready products cost price.

Second, main goal of finances is much wider then “fulfillment of the state functions and obligations and provision of conditions for the widened further production”. Finances exist on the state level and also on the manufactures and branches’ level too, and in such conditions, when the most part of the manufactures are not state.

V. M. Rodionova has a different position about this subject: “real formation of the financial resources begins on the stage of distribution, when the value is realized and concrete economical forms of the realized value are separated from the consistence of the profit”. V. M. Rodionova makes an accent of finances, as distributing relations, when D. S. Moliakov underlines industrial foundation of finances. Though both of them give quite substantiate discussion of finances, as a system of formation, distribution and usage of the funds of money sources, that comes out of the following definition of the finances: “financial cash relations, which forms in the process of distribution and redistribution of the partial value of the national wealth and total social product, is related with the subjects of the economy and formation and usage of the state cash incomes and savings in the widened further production, in the material stimulation of the workers for satisfaction of the society social and other requests”.

In the manuals of the political economy we meet with the following definitions of finances:
“Finances of the socialistic state represent economical (cash) relations, with the help of which, in the way of planned distribution of the incomes and savings the funds of money sources of the state and socialistic manufactures are formed for guaranteeing the growth of the production, rising the material and cultural level of the people and for satisfying other general society requests”.
“The system of creation and usage of necessary funds of cash resources for guarantying socialistic widened further production represent exactly the finances of the socialistic society. And the totality of economical relations arisen between state, manufactures and organizations, branches, regions and separate citizen according to the movement of cash funds make financial relations”.
As we’ve seen, definitions of finances made by financiers and political economists do not differ greatly.
In every discussed position there are:

1) expression of essence and phenomenon in the definition of finances;

2) the definition of finances, as the system of the creation and usage of funds of cash sources on the level of phenomenon.

3) Distribution of finances as social product and the value of national income, definition of the distributions planned character, main goals of the economy and economical relations, for servicing of which it is used.

If refuse the preposition “socialistic” in the definition of finances, we may say, that it still keeps actuality. We meet with such traditional definitions of finances, without an adjective “socialistic”, in the modern economical literature. We may give such an elucidation: “finances represent cash resources of production and usage, also cash relations appeared in the process of distributing values of formed economical product and national wealth for formation and further production of the cash incomes and savings of the economical subjects and state, rewarding of the workers and satisfaction of the social requests”. in this elucidation of finances like D. S. Moliakov and V. M. Rodionov’s definitions, following the traditional inheritance, we meet with the widening of the financial foundation. They concern “distribution and redistribution of the value of created economical product, also the partial distribution of the value of national wealth”. This latest is very actual, relatively to the process of privatization and the transition to privacy and is periodically used in practice in different countries, for example, Great Britain and France.

“Finances – are cash sources, financial resources, their creation and movement, distribution and redistribution, usage, also economical relations, which are conditioned by intercalculations between the economical subjects, movement of cash sources, money circulation and usage”.
“Finances are the system of economical relations, which are connected with firm creation, distribution and usage of financial resources”.

We meet with absolutely innovational definitions of finances in Z. Body and R. Merton’s basis manuals. “Finance – it is the science about how the people lead spending `the deficit cash resources and incomes in the definite period of time. The financial decisions are characterized by the expenses and incomes which are 1) separated in time, and 2) as a rule, it is impossible to take them into account beforehand neither by those who get decisions nor any other person” . “Financial theory consists of numbers of the conceptions… which learns systematically the subjects of distribution of the cash resources relatively to the time factor; it also considers quantitative models, with the help of which the estimation, putting into practice and realization of the alternative variants of every financial decisions take place” .

These basic conceptions and quantitative models are used at every level of getting financial decisions, but in the latest definition of finances, we meet with the following doctrine of the financial foundation: main function of the finances is in the satisfaction of the people’s requests; the subjects of economical activities of any kind (firms, also state organs of every level) are directed towards fulfilling this basic function.

For the goals of our monograph, it is important to compare well-known definitions about finances, credit and investment, to decide how and how much it is possible to integrate the finances, investments and credit into the one total part.

Some researcher thing that credit is the consisting part of finances, if it is discussed from the position of essence and category. The other, more numerous group proves, that an economical category of credit exists parallel to the economical category of finances, by which it underlines impossibility of the credit’s existence in the consistence of finances.

N. K. Kuchukova underlined the independence of the category of credit and notes that it is only its “characteristic feature the turned movement of the value, which is not related with transmission of the loan opportunities together with the owners’ rights”.

N. D. Barkovski replies that functioning of money created an economical basis for apportioning finances and credit as an independent category and gave rise to the credit and financial relations. He noticed the Gnoseological roots of science in money and credit, as the science about finances has business with the research of such economical relations, which lean upon cash flow and credit.
Let’s discuss the most spread definitions of credit. in the modern publications credit appeared to be “luckier”, then finances. For example, we meet with the following definition of credit in the finance-economical dictionary: “credit is the loan in the form of cash and commodity with the conditions of returning, usually, by paying percent. Credit represents a form of movement of the loan capital and expresses economical relations between the creditor and borrower”.

This is the traditional definition of credit. In the earlier dictionary of the economy we read: “credit is the system of economical relations, which is formed while the transmission of cash and material means into the temporal usage, as a rule under the conditions of returning and paying percent”.
In the manual of the political economy published under reduction of V. A. Medvedev the following definition is given: “credit, as an economical category, expresses the created relations between the society, labour collective and workers during formation and usage of the loan funds, under the terms of paying present and returning, during transmission of sources for the temporal usage and accumulation”.

Credit is discussed in the following way in the earlier education-methodological manuals of political economy: “credit is the system of money relations, which is created in the process of using and mobilization of temporarily free cash means of the state budget, unions, manufactures, organizations and population. Credit has an objective character. It is used for providing widened further production of the state and other needs. Credit differs from finances by the returning character, while financing of manufactures and organizations by the state is fulfilled without this condition”.

We meet with the following definition if “the course of economy”: “credit is an economical category, which represents relations, while the separate industrial organizations or persons transmit money means to each-other for temporal usage under the conditions of returning. Creation of credit is conditioned by a historical process of fulfilling the economical and money relations, the form of which is the money relation”.

Following scientists give slightly different definitions of credit:
“Credit – is a loan in the form of money or commodity, which is given to the borrower by a creditor under the conditions of returning and paying the percentage rate by the borrower”.
Credit is giving the temporally free money sources or commodity as a debt for the defined terms by the price of fixed percentage. Thus, a credit is the loan in the form of money or commodity. In the process of this loan’s movement, a definite relations are formed between a creditor (the loan is given by a juridical of physical person, who gives certain cash as a debt) and the debtor.
Combining every definition named above, we come to an idea, that credit is giving money capital of commodity as a debt, for certain terms and material provision under the price of firm percentage rate. It expresses definite economical relations between the participants of the process of capital formation. Necessity of the credit relations is conditioned, from one side, by gathering solid quantity of temporarily free money sources, and from the second side, existence of requests of them.

Though, at the same time we must distinguish two resembling concepts: loan and credit. Loan is characterized by:

o Here, the discussion may touch upon transmission of money and also things form one side (loaner) to another (borrower): a)under the owning of the borrower and, at the same time, b) under the conditions of returning same amount or same quantity and quality of the things;

o The loaning of money may bear no interest;

o Any person may take part in it.
With the difference with loan, credit, which is somehow a private occasion of the loan, represents:

o One side (loaner) gives to the second one (borrower) only money, and _ for temporal usage;

o It may not bear no interest (if the assignment doesn’t foresee something);

o In it creditor is not any person, but a credit organization (at the first place, banks).
So, a credit is the bank credit. To our mind, it is not correct to use “credit” and “loan” as the synonyms.
Banking crediting is the union of relations between bank (as a creditor) and its borrower. These relations touch upon:

a) Giving a certain amount of money to the borrower for definite purpose (though, we meet with the so-called free credits, aims and objects of crediting are not appointed in the assignment);

b) Its opportune returning;

c) Getting percentage rate from the borrower for using the sources under his/her disposal.
The essential foundation of the credit essence and its important element is existence of trust between the two sides (in Latin “credo”, from which comes the word “credit”, means “trust”).
From the position of circulation of money forms (in the abstraction, historical process of formation economical relations and social budget and banking systems expressed by them) comparing different definitions of finances and credit, the paradox conclusion appears: credit is the private occasion of finances. And truly, from the position of movement of the money forms, finances represent the process of formation and usage of the funds of cash means. Very often such movements are fulfilled without returning, but sometimes, it is possible to give loans from the budget for the investment projects of other needs. Also, when a manufacture or corporations use their cash funds and we mean the finances of industrial subject, such usage may be realized as inside the manufacture or corporation (there is no subject about returning or not returning of the usage), so gratis under conditions of returning. This latest is called commercial form because of transmitting the sources to others, but even in this occasion, it is the element of financial system of the manufacture and corporation.

From the point of cash means movement, main character of credit is the process of formation and usage of the funds of cash means under the conditions of returning and, as a rule, taking the value-percentage. If gating the credit value doesn’t take place (even in the exceptional occasions), according to the movement form, credit becomes a private occasion of finances, as from the net financial funds (consequently from the state budget) the loans which bear no interests may be used. If gating credit value takes place, by the appearance form, credit is discussed to be financial modification.

From the historical point of view, finances (especially in the sort of the state budget) and credit (beginning with usury, later commercial and banking) were developing differently for considering credit to be the part of finances. Though, from the genetic-historical point of view, previous loaners, before giving loan, needed gathering the permanent capital not returning, that is the net financial foundation. The banks analogously needed concentration of the important own capital for influxing the consumers’ means and for getting higher percentage rate under the conditions of returning. Herewith, exactly on the financial basis, in the sort of financial fund (which later partially becomes loan fund) part of the bank capital appears to be the reservation (insurance) part of the fund, which by nature is financial and not loan. So notwithstanding the essential distinctions between finances and credit form the genetic-historical point of view, credit appears to be formed from finances and represent their modification.

From the essential position of expressing economical relations of finances and credit, we meet with cardinal distinctions between these two categories. Which mostly expressed by the distinction of the movement forms notwithstanding they are returnable or not. Finances express relations in the aspects of distribution and redistribution of social product and part of the national wealth. Credit expresses distribution of the appropriate value only in the section of percentage given for loan, while according to the loan itself, a only a temporal distribution of money sources takes place.
Herewith, there is a lot of common between the finances and credit as from the essential point of view, so according to the form of movement. At the same time, there is a significant distinction between finances and credit as in the essence, so in the form too. According to this, there must be a kind of generally economical category, which will consider finances and credit as a total unity, and in the bounds of this category itself, the separation of the specific essence of the finances and credit would take place.

Funding of the cash means is common to the researched economical categories. It takes place in any separate system of finances and credit, which have been touched upon during the analyses of defining finances and credit. Word combination “funding of the cash sources (fund formation)” reflects and defines exactly essence and form of economical category of more general character, those of finances and credit categories. Though in the in economical texts and practice, it is very uncomfortable to use a termini, which consists of three words. Also, “unloading” with an information hardens greatly its influxing into the circulation even in the conditions of its strict substantiation and thoroughness.
In the discussing context we consider:

1) wide and narrow understanding of economical category of the finances;

2) discussing finances in narrow understanding under general traditional meaning;

3) discussing finances, as funding of the cash means, in wide understanding, which concerns finances – in narrow meaning and credit – in complete meaning.
Termini “funding” and its equivalent “fund formation” are used by us as the purposeful structuring of cash means, which is based on two poles – accumulation of money sources (gathering) and its usage for definite purpose in the way of financing and crediting.
We have established a new termini – “finance-investment sphere” (FIS). Analyses about interrelation of finances and credit made by us give us an opportunity of proving, that in the given termini, the word “financial” is used with the meaning of funding cash sources, its purposeful structuring. In this process we consider at the same time financial, credit and investments’ economical categories.

Let’s sum up middle results of discussing new concept – “finance-investment sphere” and discuss its investment consisting parts.

The concept “investments” was brought into the native economical science from the West. In the Soviet economical science they for a long time used in the place “investments” the termini “capital placement”, which expressed the usage of the industrial factors in the sphere of real industrial activities during realization of capital projects. From one glance, this termini in its concept is identical to the “investments”, consequently it is possible to use them as synonyms. Though the termini “investments” and “investing” have the advantage towards the termini “capital placement” from linguistic and philological points of view, because they are expressed with one word. This is not only economical and comfortable in the process of working with the termini “investment” itself, but also it gives an opportunity of termini formation. More concretely: “investment process”, “investment domain”, “finance-investment sphere” – all these termini are much more acceptable.
Changing native economical termini with foreign ones is purposeful, if it really matters (by keeping parallel usage of the native termini for the inheritance). Though we must not change native economical termini into foreign ones all together, when by ordinal traditional language easy to explain private and narrow concrete processes and elements get their own termini. The “movement” of these termini is approved in the narrow professional bounds, but their “spitting out” into the economical science may turn economical language into the tangled slang.

Let’s discuss termini – “investment” and “capital placement’s” usage in the economical literature.
Investments are placement of funds into the main and circulation capital for the purpose of getting profit. “Investments in material assets – are the placements of funds into the mobile and real estate (land, buildings, furniture and so on). Investments in financial assets are the placements of funds into the securities bank accounts and other financial instruments”.

We don’t meet with the termini “investments” in the earlier economical dictionary, but we meet the combined termini “investment policy” – the union of the industrial decisions, which guarantee main directions of the capital investments, the activities of their concentration in the determinant suburbs, on which the reaching of planned rates of development of the society production is depended, balancing and effectiveness, getting more and more production and profit of the national income for every lost Ruble”. For today, in the most actual definitions, the capital investments are bounded only by financial means, when not only financial, but also the investment of natural, material-technical and informational resources takes place. Labour resources take an actual place in the investment process. They themselves fulfill this or that investment process.

A positive side of the discussed definitions is that they connect investment policy and capital placements (investments):

– economical development according to the key directions to the concentration;

– providing high rates of economical growth;

– raising an economical effectiveness, which is expressed:

a) by growing the throw off of the production and national income for every lost Ruble;

b) by fulfilling the branch structure of the investments;

c) by improving their technological structure;

d) by optimization of their further production structure.

Compared with such definition of the investments (capital placement) the definition of investments in the dictionary attaching the “Economics” seems to be unimproved: “investments – the expenses of gathering production and industrial means and increasing material reserve”. In this definition current expenses (production expenses) are mixed with the investment (capital) expense. Also, not the investment expenses but (though the investments are followed by the appropriate expenses) exactly advancing. It differs from the expenses by that the means (means) are put by returning the advanced values, also, under the conditions of growth, to which the concept-advanced capital is corresponding. the advancing may be realized in the money, natural-material and informational forms.

Except the termini “investments”, there are two more termini related with the investment. They are shown below.

“Human capital investment” – any activity provided for rising the workers labour productivity (in the way of growing their qualification and developing their abilities); at the expenses of improving the workers’ education, health and raising the mobility of the working forces”. It is very useful to use the mentioned termini, though it needs one correction: the human capital investments do not concern only workers, but also the servants, representatives of every kind of labour.
“Investment commodity, capital goods – a capital.”

In the official manuals of political economy of the reformation time the capital investments are discussed as “expenses for creating new main funds and widening, reconstruction and renewing the active ones”. In this definition the investments (capital placements) during separation of the forms (types) of further production of the main funds are bounded only by main funds (without increases of the circulation funds and insurance reserves):

a) creating new ones;

b) widening;

c) reconstruction;

d) renewing.

Also, the concept of the industrial gathering appears, at the expenses of widening of basic, circulation funds and also insurance reserves takes place”.

You’ll meet below the definitions of investments from “the course of economy”: the investments are called “placements of fund into the basic capital (basic means of production), reserves, also other economical objects and processes, which request long-termed influxing of material and cash means. “According to the division of capital into physical and money forms, the investments too must be divided into material and cash investments”.

They apportion investment commodity, to which belong industrial and nonindustrial building objects, vehicles purposed for changing or widened technical park and the furniture, increasing reserves and others.

“They call the total investments of production an investment product, which is directed towards keeping and increasing the basic capital (basic means) and reserve. Total investments consist of two parts. One of them is called the depreciation; it represents important investment resources for compensation of renewal till the level of before industrial usage, wearing out and repairing of the basic means. Second consisting part of the total investments is represented by net investments – capital investments for the purpose of increasing basic means”. Depreciation is not a compensation resource of wearing the basic funds out, but it is the purposeful financial source of such resources.
Human capital investment is “a specific kind of investments, mostly in education and health protection”.

“Real investments are the investments in the economical branches and also, they are kinds of economical activities, which provide influxing the increases of real capital, that is increasing material values of the industrial means”. We can agree with such definition with one specification that material and nonmaterial values too belong to the real capital (wealth), consequently science-researching experimental-construction results, various information, education of he workers and others. Such service as organization of the excitable games, also the service of redistribution social wealth from one private person to another (except charity).

“Financial investments represent placement of funds into the shares, obligations, promissory notes, other securities and instruments. Such investments, of course, do not give increases of the real material capital, but they help getting profit, consequently at the expenses of changing the course of the securities in the time of speculation, or distinguishing the course in different places of sell and purchasing”. We share wholly such definition, hence it follows that financial investments (if it is not followed by real investments as a result) do not increase real material wealth and real nonmaterial wealth. According to this context, the expression below is very important: “we must distinguish financial investments, which represent placement of the funds in the ways of selling and purchasing the securities for the purpose of getting profit and financial investments, which become cash and real, moved to real physical capital.”

In the “economical course” quoted before long and short-termed investments are separated. Recognizing the existence of the bounds between them, the authors ascribe short-termed investments to “one month or more” investments. If we get such conditioned criteria, that we can call the investments which overcome the terms of some months, long-termed ones, which is very doubtful and we don’t agree with it. A long-termed character of the fund placement is a significant feature of the investments (short-term doesn’t combine with the concept of investments). Principally, it would be better to point out quick compensative, middle termed compensative and long-termed compensative investments:

– less then 6 months – quick compensative;

– from 6 months up to the year and a half – middle termed compensative;

– more then the year and a half – long termed compensative.

We stopped at the definition of the investments in the capital work “economical course” for the special purpose, as, in it the author tried to discuss the concept of investments systemically and quite completely, herewith the book is published just now.

We’ll return to the discussion the definition economical category of “investments” in different publications in the following chapter. The definitions given here are quite enough for having a notion of the level of lighting up the given category in the economical literature.
What conclusions may be made according the definition of the mentioned economical category in the published works, except the made notions and specifications?

There is quite deeply, concretely and thoroughly defined the concept of “investments”, different definitions in the economical literature; but mostly in every works about the investments discussed by us until now, there is not opened the essence of investments as an economical category. In every monograph , even if it has a title investment, as an economical category , there is given only the definition, concept of investments. But, as the Academician Vasil Chantladze explains, “a concept is a discussion, which proves something about the distinguishing feature of the researched object. A concept out of much essential characteristic features represents only one, and essential in it is only – definition”.

But the categories are much wider; it is “a key, the most fundamental concept of every science”. Economical categories theoretically represent real, objectively existed productive relations. A category is the defining of occasions of existed characters, connections, relations of the objective world. Generally, any educational process is fulfilled by the categories, which give opportunities for dividing the processes and occasions semantically, for expressing the definitions of a subject and realize their specific peculiarities and economical relations of a material world.
Our goal is exactly to substantiate investments – as an economical category and also, as a financial category in the narrow understanding.

Here we apply for another manual thesis made by the academician Vasil Chantladze: “every financial relation is an economical one and every financial category is and economical one, but not every economical relation and economical category is financial relation and financial category”.
In the process of defining the investments, it is important to take in mind the sides of resources, expenses and incomes, because investment, from one side, is the result of the manufacture’s activity, and, from another one, – a part of income, which, in this case, is not used for usage.
Another occasion: it is advisable to discuss investments in two aspects: as a category of reserve and flow, which will reflect exactly the connection between “placement of funds” and “investments”.

As we’ve mentioned above, not long ago, in the well-known Soviet literature the concepts of “the placement of funds” and “investments” were accepted to be the synonyms and concerned to be investment of sources for further production of the main funds and formation of the turnover funds. We meet with such understanding of the concept of “investment” (here, they separate three types of the investment expenses: investments in the basic capital of investments, investments in the house building and investments in the reserves) in the modern economical publications and it is mostly used on the macro level during a statistical analyze of economical processes. In this concrete occasion investment is the category of reserve.

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