Art of business

In a free economy, the interaction between those who can supply funds and those who need to borrow money determines the cost of money, which is, in effect, the rate borrowers pay to lenders. For debt, this rate is called interest rate. For equity, it is called cost of equity and consists of the dividends and the capital gains that shareholders expect.

The cost of money is affected by five fundamental factors that influence the rate at which one can borrow on a certain period. In particular
Production opportunities are related with the capacity to turn capital into benefits. For instance, if a company raises capital, the expected rates of return on its production opportunities will determine the expected benefits. If a student borrows money to finance his/her education, the expected benefits are determined by expected higher salaries from future employment. Therefore, the production opportunities are subject to different expected benefits that determine the upper limit on how much borrowers pay to lenders.

Timing of Consumption

Lenders can use their current funds for consumption or saving depending on their expectations. If they expect that future consumption will be higher, they prefer saving today and give up today’s consumption. If they have a strong preference for immediate consumption, it means that they expect that today’s interest rates are higher than future interest rates and therefore, they prefer trading current consumption for future consumption.

Risk

If the expected rate of return on an investment is high, it means that the investment is risky and that investors need to take an extra risk in order to enjoy an extra return. This increases the cost of money.

Inflation

Inflation is another factor that affects the cost of money. For instance, if an investor earns 10 percent on an investment, but inflation causes prices to increase by 20 percent, it means that the investor cannot consume as much as he/she could when the money was originally invested. If expectations were for an inflation rate of 20 percent, then the expected rate of return would also be higher than 10 percent.

Interest Rates

There is a price for each type of capital and these prices change according to supply and demand shift. For instance, short-term interest rates typically rise during market booms and decline during market recessions. This is explained as follows: when the economy is expanding and firms need capital, interest rates increase; when economy is shrinking and firms reduce the demand for credit, interest rates drop.

The interest paid on borrowed assets may be simple, which is calculated on the principal amount or compounded, which is calculated after unpaid interest is added to the balance due. Generally, the nominal interest rate (r) is determined by the risk-free rate (r*), which the rate that would exist on an inflation-free security plus the inflation premium (IP) that, in effect, wears down the purchasing power of consumers and lowers the real rate of return of investments. However, there are also other premiums that affect the interest rate levels such as the default risk premium (DRP) that reflects the possibility that the borrower defaults on debt, the liquidity premium (LP) that reflects the possibility that some securities cannot be liquidated at a reasonable price and the maturity risk premium (MRP) that reflects the fact that some bonds are exposed to a significant risk of price drops.

Overall, the total cost of borrowing money is subject to many factors and not just the interest rate. A variety of monetary and non-monetary costs are involved in the process and should be taken into consideration for determining the real cost of borrowing.

Paris is indeed one of the most beautiful city in the world. There are thousand people out there that want to live there, but it might be very difficult to live there if we are not a France citizen. The only way for us is only visiting there for vacation to enjoy the city. You can stay in hotel Paris. Hotel avignon is a good choice for you if you want to visit Paris. But for people who are already a citizen of France they can buy a house from the Open tour bus paris or luxury real estate.

So we all know that one person sitting in a room uses the same value of electricity as two. And a single hotel room usually costs the same as a double. And a single holidays costs more than a twin share.

Single people still succeed in saving though. They also buy their own cars and their own homes. They create stock portfolios and retirement funds. So what issues are there behind the obvious extra costs from a lower total income?

I believe there are two key issues that singles have to understand and deal with financially.

The first issue is the enormity of everything – a mortgage looks much bigger against one income; the risks look much bigger when the loss of one income is the loss of all income. The fear accompanying this is paralyzing.

The second issue is the lack of appropriate advice and information. Most “singles” finance articles are make a lot of assumptions about the demographic of singles. Many of these articles discuss the value of sharing a house or returning to your parent’s home even if it does seem like a small loss of freedom. Great advice for someone in their early twenties but I can’t imagine anyone giving the same advice to my friends who happen to be married with kids and also in their thirties, regardless of how much easier it would make it for them to save money. A second assumption is often that your marital status will not be ’single’ forever therefore you can expect some financial relief in the future. A nice pep talk but not realistic financial planning.

So let’s look at some simple facts that I believe most singles would benefit from financially -

1. Be realistic about what your income can afford and work towards this. It’s okay to dream big but start your financial plan with your feet planted firmly in reality.
2. Trust mathematical logic – if the sums say you can afford it, trust this. (Although be conservative with your sums!)
3. Protect your income and always have a few back up plans for how you could earn money if your job disappeared. For example, I once had to apply for temp work – everything from answering phones to data entry, each week with a different company. I knew before I started that there was a market and that I had marketable skills so I was prepared. the income wasn’t great but it was better than nothing and kept my fingers out of the piggy-ban while I looked for “real” work again.
3. Know what aspects of your lifestyle you are willing to sacrifice and those you are not. I personally cannot go to live with my parents with save rent money. To me, the money I would save would not be worth the sacrifice of my freedom, independence and dignity. However, I am willing to eat in every night, buy discount groceries and fore go new clothes for an extended period of time if I am saving for something.

Last but not least (the bit that none of us want to hear but really need to) -

4. Don’t base your financial plans on the dream that one day someone will come into your life to share the burden (and maybe bring a fortune with them!). I know most singles have some dream of meeting someone, one day but this needs to be kept well separate from your financial plans. Work out what you can do, on your own, to achieve the lifestyle and financial security that you want and start working towards it. Anything extra that comes along is a bonus.