It is a good book! Thanks Simon!
Finally, I have got some time to finish reading this book although I still have one mid-term exam tmr.
I am familiar with the concepts in the first half of the book. It just points out how the time value of money and inflation affect the purchasing power, cash flow, asset & liability concepts. For the wise use of credit card, I think it is kind of a common concept that credit card charge super high interest rate, sometimes I just don’t understand why people can have loads of credit card loans. I am never stupid enough to just pay for the minimum payment. Every time I check the date and the amount carefully and pay in full. Besides, I also check how many points I have accumulated which allow me to get other benefits. Once I use the credit card, I always remind myself of paying back later and make sure that I have enough cash flow to support that amount. Still, many people just fall into the traps with no reason…really miserable but serve them right…
The book shows why back set the credit card minimum payment at $50 or 3% of the total amount and interest rate below 30%, the time for repayment is crucial here. ( very interesting)
It gives me some insights by using different tools to borrow and manage money. Frankly speaking, I believe getting the loans for investment (especially engaging in the stock market> margin) is a good idea for someone who is well- equipped with financial skills. But for the general public, conservatively speaking, it is more important to control the cost well since borrowing money may risk their current assets if they have limited financial knowledge.
These days I have come across the foreign exchange theory, international parity conditions in my auditing lessons. The book also mentions some concepts of them. When I learn more and more, I realize finance world is much more complicated than I can imagine…it seems that I can never finish my learning and it is very hard to link the academic stuffs (which are the conceptual frameworks) to the reality because there are always discrepancies between the theories and the real world. The theories are derived from lots of assumptions which the real world doesn’t hold. Even you can link them; it doesn’t mean that you can earn a lot because you just know how things happen. The predication part is the hardest of all. If there were some rules/theories that allow everyone to earn a lot, there would be no professors in the school. ( or if there is really a rule, that guy will not tell anybody) Finance professors are good at all academic stuffs, but they are still professors. That why I always tell myself and my students > earning money is not as easy as a piece of cake. So why bother to learn these stuffs then? I am always optimistic, maybe I cannot earn a lot, but still, I can earn more than someone who knows nothing and at least I won’t be deceived by the others.
The main concepts of the whole book:
-the return of using those borrowed money for investment ( not for consumption) should be enough to cover the cost ( interest) and also the inflation rate
- Consumption by using the return of your investment but not your principal
Implications of the book:
- Think critically, compare and read the terms in the contract clearly when trying to get a loan
Points to note ( for my reference only)
http://www.bankrate.com
http://www.creditcards.com (credit card calculator)
- Inflation in home country > depreciation of home country
- Mortgage interest > tax reduction ( max. 100000 each year per person for 10 years), enjoy more if only one person in a couple claims that he/she own the property ( for self-living purpose only)
- The longer the time, the higher the interest rate risk
- P- x% , P=prime rate (最優惠利率)
-be aware of the transaction cost (e.g. handling charge )besides interest rate
-other tools: 稅務貸款 ( enjoy lower interest rate), 保單借貸 ( may risk your future return of your insurance contract), 押鋪 ‘’九出十三歸’’, credit union
- Simple interest (flat rate : interest doesn’t decrease with the principal> more interest to be paid
- Compound interest > interest decreases with the principal
-the more frequent you pay, the less interest that you pay
-Modiglianai-Miller theorem>
Rate of Return (earning) = rate of Return from asset + (rate of Return from asset- borrowing interest rate) (debit amount/principal) (1- tax rate)
if rate of return from asset > borrowing interest and Debit amount > principal , then rate of return (earning) grows
-loans > IPOs (capital gain / dividend received >pay handling fee and interest)
-Triangle arbitrage > forward contract? Almost impossible> lower interest rate outweighs the gain in foreign exchange rate
If no forward contract? Exchange rate risk!
- 70% mortgage >>>then price of the property drops larger than 30% > negative equity負資產 (c.f. 50% mortgage > drop > 50%)
- Transferred from Fixed rate ( you expect the interest rate will rise initially) to floating rate > interest penalty
- Shorten the repayment period > interest penalty ( since bank can earn less interest than before)
- 按揭
- 與存款對減的樓按組合 ( suitable for someone who is unable to yield higher return on the deposit )> same interest rate of your deposit account and you pay to bank> the interest you pay to the bank based on (the mortgage loan- your deposit) but max 50% of your mortgage loan….the exceeding deposit > paid according to current account interest rate
- The lower the prime rate, the higher the interest rate risk ( so also consider the trend of how prime rate goes besides the low prime rate)
- Mortgage, margin> leverage effect> magnify the rate of return and loss
Factors affecting the value of property:
- Demand and supply of land and property in the future
- Macroeconomics
- Interest rate
- Government policy
- Growth rate of salary
- Purchasing power of the buyer
Reasons of inflation:
1. Demand pulls
2. Central bank decreases interest rate
3. Increase supply of currency
4. Increase in government expenditures
5. Cost pushes
- wage increases since a lack of labour
- cost of production increases
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