Advanced financial planning Essay Example | Topics and Well Written Essays - 3250 words

Advanced financial planning - Essay Example Everyone has heard this word and knows about it. It simply means that money fetches money. The rate at which it fetches is known as interest. The rate is measured in percentage. Surely, higher the rate, larger the benefit flows to you. Understanding Effective and Nominal Interest Rates.Let us understand the difference between actual and nominal interest rate. Supposing your credit card company charges you interest of 2.5% per month. That means that nominal interest per year is 30 percent; however, effective interest rate is something else and can be calculated as,Effective interest rate= (1+ i/n)n -1 (Effective and Nominal†¦)Where, i is nominal interest per year and n is number of periods of compounding. In our case, i=30% or 0.30 and n=12 Effective interest rate= (1+0.3/12)12 -1= (1.025)12 -1 =1.378-1=37.8% It means that though the company informs you about charging 30 percent nominal interest; in real terms, they are charging you at the rate of 37.8 percent.Compounding: This i s also known by most but understood and grasped by few. Compounding of the money is the most fascinating phenomena that bring enormous benefit to you. Do you know that the compounding has a very important dimension in terms of time? Effect of the money fetching money increases manifold when it works for a longer time.The biggest hurdle that haunts most of the people in the life when they start investment is its smallness. Every big thing initially starts small. The time, energy, and efforts put at the beginning do not seem to justify small returns that any business or investment may offer. People get first thought in the mind "For such a small return should I devote my time and spare the money, which otherwise can better be utilized to get more enjoyment in life." Quick answer surfaces, "Sacrifices are manifold compared to the benefits." The thought of this kind wins over the future benefits that may accrue after a few years. Thus, the person tends to postpone a small but a significant beginning, which is capable of transforming his or her fortune. This issue has to be understood thoroughly before it really happens with you stopping your small beginning for big gains in the future. The point to be noted here is that every tycoon or for that matter every big investor always starts small-- as small as you can ever think of but with the passage of time and their perseverance they become big. I am reminded of an ancient story, which I cannot r esist sharing with you. Once there lived a painter who fell upon such tough times that he was unable to earn