Tag: Learn

Definition

---

A credit union is a member-owned financial cooperative that provides a range of financial services to its members. It is a non-profit organization that is owned and controlled by its members, who are typically individuals with a common bond, such as working for the same company, living in the same community, or belonging to the same organization.

Credit unions offer many of the same services as banks, including savings accounts, checking accounts, loans, mortgages, and credit cards. However, because they are not-for-profit and owned by their members, they often offer lower fees, better interest rates on savings and loans, and more personalized customer service.

Members of a credit union have a say in the operation of the institution, as they elect a volunteer board of directors from among the membership. This democratic structure allows credit unions to focus on serving the needs of their members rather than maximizing profits for shareholders.

Why do people use credit unions?

---

Many individuals might select a credit union due to its convenience. For example, the presence of numerous branches and ATMs in the area can be an attractive feature. The distinct ownership model of credit unions is another factor that leads people to choose them.

Given that credit unions are owned by their members, they frequently offer lower interest rates on loans and credit cards, along with higher rates on checking or savings accounts in comparison to traditional banks. 

Furthermore, obtaining a loan or credit card at a credit union can sometimes be easier because they may conduct individual evaluations for each situation. Because credit unions are community-focused, they are able to offer more tailored customer service. Some people may appreciate supporting a local nonprofit organization that resonates with their values, which is why they favor using credit unions.

Membership requirements

---

Membership requirements for credit unions can vary widely, as each credit union sets its own criteria. Some of them have more lenient membership requirements and may have broader eligibility than others with a strict system.

One example of a credit union with fairly strict membership requirements is the Navy Federal Credit Union. This credit union serves military service members, veterans, and their families. To be eligible for membership in this credit union, an individual must be a service member, veteran, retiree, or civilian employee of the U.S. Department of Defense, or a family member of someone who falls into one of these categories. Therefore, membership in the Navy Federal Credit Union has fairly strict eligibility restrictions based on military affiliation or familial ties.

In contrast, a credit union with lenient membership requirements could be Alliant Credit Union. This credit union is open to all U.S. residents, and anyone wishing to become a member can do so by making a small donation to a charitable organization and opening a savings account. They also welcome membership through participation in certain charitable organizations. Therefore, Alliant Credit Union has more relaxed membership requirements compared to some other credit unions.

Advantages and disadvantages of credit unions

---

The utilization of credit unions has its pros and cons. One of the primary benefits of credit unions is that they occasionally offer superior service compared to banks. Additionally, they provide lower fees and higher interest rates. Since credit unions are owned by their members, they strive to act in the best interests of their clients, rather than shareholders. This can result in members of the credit union receiving greater benefits. If community support is important to you, then choosing a credit union may be a more effective solution.

The most significant drawback of credit unions is their smaller size compared to banks. Opening an account with a large bank will likely make it easier to find ATMs and branches across the United States. Most credit unions are local organizations, with only a few branches and ATMs in a given area, which makes access to services more difficult. Additionally, credit unions may have a less developed technological infrastructure and typically offer fewer services and products compared to banks.

Pay attention before joining

---

Before joining a credit union, it is important to consider several key aspects. Research the services and benefits offered by the credit union, such as interest rates on savings accounts, loans, and other financial products, ensure that it is financially stable and has a good reputation. It is crucial to compare its terms with those of other financial institutions, such as banks, to choose the most suitable option for your needs. Make sure you meet the membership criteria for the credit union. Membership is typically open to specific groups of people, such as employees of certain companies, residents of specific areas, or members of particular professional organizations. 

You can start by completing an application to confirm your eligibility for membership and become a participant. To do this, you will need to open an account and make a small deposit to validate your membership. Typically, this can be done online or at a local branch. You may be required to provide some identification information, such as a social security number or state ID, as well as proof of meeting the requirements.

You will also need to have a way to fund your account, such as cash for the deposit or the details of your bank account for transferring funds. After completing these steps, you will be able to start opening other accounts or applying for loans.

Accruing is the process of documenting revenue or costs prior to receiving or paying them. This phrase is frequently used in accounting and financial talks.

What is accruing?

---

Accruing is the gradual accumulation of something. The bank account earns interest over time, eventually increasing the balance.

Furthermore, accumulating has a particular accounting connotation. Enterprises can “accrue” revenue or costs under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) by recording them at the time of receipt, even if the money has not yet been spent or received. This is in contrast to cash accounting, which simply accounts for received and paid money.

In general, accruing-based accounting provides a clearer overview of the company’s finances since transactions are recorded at the moment of payment rather than when money is received.

What exactly is the accruing process?

---

According to the accruing approach, revenue, costs, and other changes in the income statement and balance sheet are reported at the time of the transactions that result in these changes, rather than when payment happens.

A bakery, for example, arranges to buy $15,000 worth of flour from a supplier. The money was not transferred, but its value is represented in the bakery’s balance as an accumulated credit of accounts payable. There is also an equivalent debit under the item “Stocks” in the bakery’s accounting.

In the future, the coffee bakery will pay for the flour. The charges may be removed from the company’s accounting now that the money has changed hands.

Accounts payable VS. accrued expenses

---

Accounts payable is a balance-sheet current liability item that indicates the amount that the firm has already committed to paying to its suppliers in the near future. It covers purchases for which invoices have been issued by suppliers and the payment date is known. This account’s entries are not all accruing.

Accrued expenses are income statement items that illustrate what expenses the firm incurred during the reporting period. As a result, accrued expenses are expenses that appear in the report but have not yet been paid. For example, a corporation may have accrued expenses on consumables received but not yet paid for.

A record of accrued expenses, in general, implies a record of accrued accounts payable; if you register an expense for which you still have to pay, you must additionally record the amount of debt (accounts payable). It’s as if they’re on opposing sides of the same coin.

Accrued interest VS. accrued interest on bonds

---

Loan and bond accrual is based on interest, not income and expenditures, globally.

Most bonds only pay interest on a regular basis, usually every six or twelve months. However, interest usually comes at a higher rate.

Bond sellers may precisely assess the price of their bonds by knowing the rate at which interest is accumulating. If the bond holder sells it the day before the payment date, he will not be paid. This means that when a bond is sold, the cumulative interest should be added to the price to account for the interest gained throughout the bond’s ownership.

Likewise, understanding the rate at which interest is accumulated on a loan is crucial for effective accounting when an organization borrows money. 

Businesses that offer goods on credit must keep track of accruing interest for the same reason. They should record interest revenue when it is earned on their customers’ debts, not when they make payments.

How are accruals reflected on the balance sheet?

---

While cash remains unchanged, accruals indicate an upcoming transfer of money and should thus be included in organizations’ balance sheets.

If you have accumulated costs, the debt associated with them is normally recorded in the balance sheet’s current liabilities column. The majority of the enterprise’s accumulated costs should be paid in the near future; however, some may be more long-term in nature. Long-term liabilities are accumulated costs that will not be paid within the year.

When revenue is recognized, it is represented as unbilled earnings on the balance sheet. Unbilled earnings are classified as a current asset since the firm expects to receive cash in the near future and intends to use it for a variety of expenses or critical obligations.

You can also record accruals in other accounts on the balance sheet, which include:

Accounts payable & receivable / Goodwill / Tax liabilities in the future / Future interest costs

Should accumulated expenses be classified as an asset?

---

Accrued costs are a duty, not an asset.

Deferred costs are assets because they reflect money spent on a product or service by the corporation before it uses it. As deferred costs are spent, the corporation decreases its portion of current assets and records the expense.

Definition

The price-to-earnings ratio (P/E ratio) is an essential financial indicator that helps to determine how “expensive” or “cheap” a specific firm is on the stock market. This indicator compares a stock’s current price to its earnings per share, which helps investors decide how much they are prepared to pay for each dollar of profit earned by a company.

What is the P/E ratio?

---

When considering an investment in a company, it is critical to understand how well it makes money. In order to do this, we use the P/E ratio (price-to-earnings ratio), which compares a company’s stock price with its earnings per share over a specific time period, often the previous year. P/E ratios allow us to determine how “expensive” the company’s stock is in terms of its profitability. This indicator may also be used to compare organizations, taking into account the varied number of shares in flow, to provide a more neutral image.

The P/E ratio tells us how “expensive” or “cheap” the shares of a specific firm are in relation to its profitability. For example, a high P/E ratio may imply that investors are prepared to pay a relatively high price for every dollar of profit generated by the company’s shares. On the other hand, a low P/E ratio may imply that the company’s shares are more affordable and cheaper in relation to its profitability.

How to calculate the P/E ratio

---

Simple division is used for calculating the P/E ratio:

P/E ratio = Price of 1 shareProfit per 1 share

Let’s figure out how to determine the ratio of price to earnings (P/E ratio).

The stock prices for publicly traded companies are constantly available on financial websites like Grid Capital, Yahoo Finance, and the Wall Street Journal. However, in order to fully understand how costly stocks are in relation to earnings, the P/E ratio must be considered.

Earnings per share is a key metric that businesses release regularly and annually. It tells you how much profit is accounted for per share. To calculate the P/E ratio, however, we must use yearly earnings per share. This information may be found in the most recent annual income statement of the firm. Please keep in mind that the report may be slightly out of date at the time of use since corporations often publish reports after the end of the fiscal year. In this regard, many investors choose to use profits for the “TTM” (the trailing twelve months). To do this, income data from the previous four quarterly reports must be combined.

Let’s analyze how the P/E ratio is calculated using the example of Apple:

Stock price: the price of Apple shares on August 1, 2023 was $196.45.

Earnings per share: To determine the P/E ratio, you need to take the profit for the last four quarters:

March 2023: $1.52 / December 2022: $1.88 / September 2022: $1.29 / June 2022: $1.2

Total: Earnings per share for the last twelve months = $5.89

P/E ratio: To calculate it, divide the stock price ($196.45) by earnings per share ($5.89), and get a P/E ratio = 33.35.

Keep in mind that all of this data can be found in Apple’s quarterly earnings reports available on their investor relations website.

What does the P/E ratio show?

Unlike simple items like retirement savings or the amount of chocolate in chocolate chip cookies, the P/E ratio has no clear “good” or “bad” connotation. Nothing is as obvious as it appears. However, the business’s P/E ratio reflects how investors find this company. It indicates their expectations for future profits, which may rise, remain constant, or fall.

The low P/E ratio suggests that investors believe the company’s profits will drop in the future. Assume you are an investor looking to invest in a firm that produces and sells cassettes for cassette recorders. It used to be a profitable company, and the shares of a business like this were expensive. However, due to emerging technologies such as CDs and digital music, the popularity of tape recorders has declined over time. Investors may have sold shares of this corporation in fear of a drop in future profits. A drop in the share price would result in a drop in the P/E ratio.

A high P/E ratio, on the other hand, suggests that investors anticipate increased earnings in the future. Assume you are an investor looking into a firm that specializes in the manufacture of electric vehicles. Despite the fact that earnings are currently minimal, this area is rapidly expanding, and investors see promise in the firm. A P/E ratio like this could attract investors who trust in the company’s potential in the electric car sector. Although the profit has not yet been realized, a higher stock price would have resulted in an increase in P/E.

Of course, the P/E ratio should be evaluated with other financial indicators and aspects of the business. It is not the only thing to consider while making an investment choice. It is critical to undertake a thorough study in order to learn about the larger context and make smart investment decisions.

A high or low P/E ratio – what does it mean?

---

Consider benchmarks that assist you in determining the size of an asset. It is impossible to identify what is more or less and how to compare things without them.

To determine how “expensive” stocks are in the market, take a stock market index as a benchmark, such as the S&P 500, and then compute the P/E ratio for it. It is feasible to evaluate if a stock’s P/E ratio is high or low by comparing its path to that of the S&P 500 index.

You may also compare P/E to the average in a certain industry. For example, by comparing McDonald’s P/E to the average P/E for fast food firms, you can see how the price of McDonald’s shares compares to other companies in this industry.

If you have to choose between two stocks to invest in, understanding their P/E ratio will help you decide. You will learn which of the equities is more “expensive” in terms of P/E and what investors believe about these firms’ potential profitability.

What to do with negative P/E?

---

It should be noted that if the P/E ratio is negative, this may happen if the firm is losing money and its profits per share are decreasing. A long-term negative P/E ratio could signal the company’s financial issues, which should be checked.

Why does P/E matter?

---

Perhaps you believe that simply looking at the price of shares is sufficient to evaluate their “high cost.” However, this is not always useful, and in this instance, the P/E indicator comes in handy. The share price represents the value of one firm share, but it is also affected by the quantity of shares available. Assume that stocks are comparable to a slice of apple pie. To decide if a pie for $7 or a pie for $10 is better, you must first know the size of each slice.

The P/E ratio estimates the amount of a “piece of pie” by calculating the value of a stock for every dollar of earnings. This enables you to compare different firms’ earnings per dollar of stock value, independent of their overall size or number of shares.

Different approaches for calculating the P/E ratio

---

In our previous example, we estimated profits per share based on last year’s data for the last twelve months for Apple. However, because the P/E ratio indicates how investors see the company’s future, it is occasionally beneficial to compare the stock price to the predicted profits for the next twelve months. This is known as “forward profit”.

To estimate the predicted earnings, you may look at the company’s official profit estimates (not all firms disclose such information) or seek the advice of stock professionals. This gives you an insight into what the firm expects in the future and how investors could view its shares based on these predictions.

Customer service is the process of providing help and advice to people who have purchased or may want to purchase a product or service.

Concept

---

Customer service is the process of helping potential or existing customers to buy or use a product or service. Customer service may be performed by specialized personnel in the course of their daily work. Automated systems, such as computerized telephone directories that route customer calls to the correct department, can also be used for customer service.

Customer service is often the main point of contact an end user or customer has with a company. Companies will look to improve customer service to increase brand loyalty and customer retention.

Why is customer service important and how does it benefit a company?

---

Customer service is important to a company’s success for several reasons.

First, customer service makes it easier for customers to make purchases. If someone is advising customers and answering their questions, it makes it much easier for them to buy a product or service. It’s also a valuable way to stand out from the competition. Good customer service can convince customers to buy from you rather than someone else.

After the purchase is made, customer service makes customers happy and able to use the products they bought. This type of service is also useful for advertising, as companies can turn the fact that they support their products after they have been sold into an advertising campaign. This also encourages repeat orders, as customers who have had a pleasant experience will want to come back for more and possibly tell their friends about it.

Customer service can also reduce negative publicity. If a product breaks, a consumer may discourage their friends from buying that product. If the company provides good support, it may prevent him from telling others not to make the purchase.

What are the requirements to work in customer service?

---

Customer service job requirements vary widely from company to company. But common denominators include: the ability to communicate clearly with the customer and a pleasant demeanor.

Good customer service employees must have strong people skills. This includes empathy, emotional intelligence, and charisma. Customer service employees must be able to relate to people in a natural manner and become a trusted advisor to customers, even if they have never met a customer before. They must be able to determine why the client is seeking services, even if the client does not clearly articulate their needs.

In many cases, clients cannot articulate the problems they are facing or what they need help with. In these cases, the customer service worker must be able to investigate to determine the course of action that will best help the customer.

Customer service work also usually requires communicating with customers via telephone, computer chat, or e-mail. Basic phone and computer skills, including competent typing, spelling, and grammar, are important requirements for customer service jobs.

Customer service workers should also be familiar with the products and services their company provides. This will allow them to answer any questions that their customers may have. Specializing in a specific product or service that a company provides can be valuable, especially if there are several employees with different specialties on the customer service team.

How can employers reduce the cost of customer service?

---

Employers can reduce the cost of customer service in several ways.

Automation

One option is automation. In the past, a person was required to answer the phone and direct calls to the appropriate department. Many companies now use an automated phone system where the customer answers prompts describing the help they need. The program that answers the phone then routes the call to the right people.

Similarly, companies have begun using chatbots to help customers over the Internet. These bots can perform tasks such as checking the status of orders or answering basic questions about products and services. More complex inquiries can be directed to a customer service representative in a chatbot.

As simple as it is – creating good quality products

Another way to reduce customer service costs is to create products that require less customer service. If a company’s products break down less often, its customers won’t need to call for support as often, reducing the need for customer service staff.

Providing self-service support options can also reduce the need for customer service personnel. For example, creating a frequently asked questions page and posting it on a company’s Web site can reduce the number of customer calls with questions that are answered in the FAQ section.

Working on customer service team

Companies can also save on customer service costs by allowing their customer service team to work remotely, as long as the customer service employees are not providing face-to-face service. This reduces office costs by allowing the company to maintain the same size customer service team.

What is the difference between customer service and customer support?

---

The difference between customer service and customer support is small but important. 

Simply put: customer service is the process that builds relationships with customers. 

Customer support is the process that maintains that relationship.

Customer service involves more than just solving a specific problem. It is a communication between a customer and an employee where the employee tries to analyze the customer’s needs and help them maximize the value they get from a product or service. This can be anything from a sales representative advising a customer on the level of service they should purchase, to a cashier asking someone if they had trouble finding something in the store that day.

Customer service employees help with customer service, but are primarily concerned with solving a specific problem. Helping with individual issues is part of customer service but does not cover all aspects of customer service. It is more effective at maintaining relationships than building them, but it can also play a role in building relationships.

Definition:

Free enterprise is a system of commerce in which individuals can form companies and buy and sell competitively in the marketplace without government interference.

What are the characteristics of a free enterprise system?

---

The ability to engage in economic activity in accordance with individual freedom is vital. Private property, economic freedom, economic incentives, competitive markets, and a limited role for government are the characteristics of a free enterprise system.

Private property means that individuals can own and make decisions about the use or sale of land, personal property, and other assets. Individuals control their own property rather than using or leasing property owned by the government.

Economic freedom is the freedom to pursue financial gain. This freedom includes the right to create a business, seek employment with a particular company, quit a job, invest as one sees fit, and engage in any other economic activity.

Economic incentives refer to the ability to make individual financial decisions. People can accept a job, quit a job, move to work in another state, choose a higher paying profession, decide what to buy, and more.

Everyone has their own personal preferences and goals. Some prefer a simple lifestyle, while others prefer luxury. Some like chocolate ice cream and some like strawberry ice cream. A competitive market provides consumers with alternatives rather than multiple copies of the same product. Businesses compete with each other to offer products and services that consumers want in a free enterprise system, rather than the government dictating what can and cannot be sold.

While the free enterprise system should not be subject to unnecessary government interference, this does not mean that it is free of government. Government still has a role in enforcing people’s individual rights to personal and property security. Government also enforces the rules of fair play in the economy by enforcing contracts and making sure that consumers are not cheated. In short, the government acts as an arbiter.

How does free enterprise work?

---

In a free enterprise economy, people engage in economic activity for personal gain. Some see a need, create a business to fulfill that need, others accept a job with the company, others buy the product.

Each stage depends on who is motivated to act and reap the rewards of their efforts. Competition to sell more products, earn the highest wages, and improve personal standards of living drives the activities of each individual involved in free enterprise.

Individual freedom is only tested in cases of disagreement, where the role of government should be that of an arbiter, resolving contract and property disputes to prevent one party from “cheating” to unfairly gain an advantage over another.

Does free enterprise help the rich or the poor?

---

In theory, the free enterprise system allows people of all economic classes to make their best economic choices without interference. A free enterprise system should not punish the poor or help the rich.

Whether or not the free market system is perfect is an important debate in politics and economics. Generally speaking, free market economies have much higher rates of economic growth, with higher levels of prosperity improving the standard of living for both rich and poor.

However, many believe that free markets lead to the exploitation of the poor by the rich. If a free enterprise system is not accompanied by strong consumer protection and a generous social safety net in terms of anti-poverty programs, it is often perceived as unjust.

Is free enterprise the same as the free market?

---

Free enterprise and free market are often used synonymously in everyday discussions.

However, there are differences. Simply put: free enterprise is the act of doing business in a free market, and free markets are the arena in which free enterprise takes place.

How does free enterprise differ from a command economy?

---

Free enterprise is more or less the opposite of a command economy . A command economy is completely controlled and owned by the government, as in communist and totalitarian countries such as Cuba and North Korea, while free enterprise relies on the private sector (private enterprises).

Theoretically, government control in a command economy is aimed at providing citizens with basic necessities. The reason should not be profit for the government or government officials. In practice, however, citizens are usually bypassed and officials become the economic elite.

Which countries have a free enterprise system?

---

As with free market economies, a free enterprise system in pure theoretical form is hard to find. However, many countries have some version of a free enterprise system. The United States is considered the best example of a free enterprise system, but other countries with some version of a free enterprise system include the United Kingdom, Singapore, Switzerland, Australia, and Canada.

It should be noted that a democratic country does not automatically have a free enterprise system. Many democracies have significant government regulation of free enterprise.

Definition

The Rule of 72 is a formula for estimating the time it will take to double or lose half the value of your investment.

What is the rule of 72?

---

The Rule of 72 is a formula that can help you estimate the effect of exponential growth or exponential decline. This calculation is a simplified version of the original logarithmic formula. The Rule of 72 provides a rough estimate of the time it will take to double or halve an investment without the use of a scientific calculator or logarithmic tables. It’s worth remembering that the Rule of 72 doesn’t take into account any fees or taxes that affect your income if you’re calculating growth.

The formula for calculating the time period for doubling your investment using the Rule of 72 is as follows:

72/ Interest Rate = Years to double

History of the Rule of 72

---

The number 72 was first mentioned in 1494 by Italian mathematician Luca Pacioli in his book “Summa de arithmetica geometria, proportioni et proportionalità” (“Summa de arithmetica geometria, proportioni et proportionalità”). Pacioli made an important point: the number 72 can be used to determine the number of years to double your assets.

The Rule of 72 was written almost a century later. It is based on the standard formula for compound interest: A = P (1 + r/n) nt. 

‘A’ is the interest you earned plus your principal (the total of your investments).

‘P’ is the principal or initial investment. 

‘r’ is the interest rate in decimal form. 

‘n’ is the number of compounding periods. 

‘t’ is the time in years.

If we want to double our money, we can substitute A = 2 and P = 1. This leaves us with 2 = 1 ( 1 + r/n) nt.

Assuming that the interest rate increases every year, we can substitute n for 1. We now have 2 = 1 ( 1 + r/1)1*t. We can simplify this equation to 2 = (1 + r)t. Now let’s take the logarithm of both sides to further simplify the equation: ln2 = ln (1 + r )nt.

Then use the rule of degree to reduce the exponent of the degree. ln2 = t * ln (1 + r). The natural logarithm of 2 is approximately 0.693. And for small values of r, ln ( 1 + r ) ≈ r. In other words, we can say that 0.693 ≈ t * r.

We can multiply both parts by 100 to use the interest rate as a whole number rather than a decimal. So we have 69.3 ≈ t * r (where r is the interest rate). Finally, to define t as the number of years it would take to double our investment, we can divide by 100r to get 69.3 / r ≈ t (where r is the interest).

Since 69.3 is a number that is difficult to divide by, statisticians and investors have agreed to use the next closest integer with many divisible multipliers, 72. So 72 divided by the interest rate (expressed as a percentage) gives you the approximate time (number of years) it will take to double your investment.

What does the rule of 72 show?

---

People like to see their money grow – especially as their investments double. Since most people can’t figure out the formula for doubling their assets without a calculator, Rule 72 is a useful inference to give a rough estimate of when an investment will double.

An important difference in this rule is that it does not use simple interest (the amount of the original investment multiplied by the interest rate multiplied by time). Rule 72 uses compound interest (the interest on your initial investment plus the interest earned on your previous interest). In other words, the rule of 72 assumes that every time an investment earns interest, you reinvest it. 

How do you calculate the number of years using the rule of 72?

---

The Rule of 72, unlike deriving the 72 formula itself, requires only division, no math. To estimate the doubling time of almost any investment, you need to divide 72 by the annual growth rate. You have to remember to use the whole number of the interest rate in the formula, not a percentage or decimal fraction.

For example, let’s say you have a $3 investment with a fixed interest rate of 6% per year. 72 divided by 3 equals 26. Thus, it will take 26 years for your $3 to grow to $6.

The rule of 72 can also tell you the declining value of an investment. For example, if inflation is 6%, 72 divided by 6 tells you that in about 12 (72/6) years, your money will be worth about half its current value. On the other hand, if inflation drops to 4%, your money will lose half its value in 18 years (72/4).

Rule 69 vs. rule 70 vs. rule 72

---

To calculate the number of years for deposits with annualized interest rates, Rule 72 works best.

Rule 70, on the other hand, is better suited for semi-annual interest accrual. Let’s look at this with an example. Let’s say you have an investment that has an interest rate of 8% and accrues interest semi-annually (or biannually).

Under the rule of 72, you would get 72/8 = 9 years. If you count by rule 70, you get 70/8 = 8.75 years.

Rule 69 gives more accurate results if you calculate continuously (in which case you reinvest the interest continuously and as often as possible), such as monthly or daily. 

Consider all three rules for an investment that has an interest rate of 2% per day.

Under rule 72, you will double your money in 36 years (72/2 = 36).

According to rule 70, you will double your money in about 35 years (70/2 = 35).

But rule 69 says you will double your money in 34.5 years (69/2 = 34.5).

Definition

Macroeconomics is a key discipline within economics that focuses on the full analysis of an economy at the national, continental, or even global levels.

What is Macroeconomics?

---

Macroeconomics is a field of economics that focuses on the overall health of an economy by examining key indicators such as unemployment, inflation, interest rates, and GDP. It differs from the investigation of individual customers or businesses, which is the domain of microeconomics. Instead, it is concerned with the overall picture.

Macroeconomics seeks to understand the aggregate influence of all consumers’ and enterprises’ actions in an economy. It aims to identify the key economic factors. Macroeconomic knowledge of what drives the economy ahead may help governments, firms, banks, and other stakeholders make better decisions.

Why is Macroeconomics significant?

---

Macroeconomics seeks to explain economic cycles and the causes of an economy’s development or stagnation. It also seeks to understand the basic dynamics that shape the economy. Understanding the economic trajectory may help political authorities, corporations, financial institutions, and other players make sound decisions.

Macroeconomics gives a comprehensive view of the economy, which is helpful in forecasting market movements. It is essentially impossible to understand the broad economic outlook by evaluating specific portions of the economy.

The Evolution of Macroeconomics

---

In reaction to the 1930s Great Depression, modern macroeconomics took root. Economists’ past reliance on microeconomic approaches proved insufficient in understanding the crises that enveloped the world’s main economies.

Microeconomics is concerned with the finer elements of the economy. The Great Depression, on the other hand, had a far-reaching impact on the whole economy, not just one or two sectors. Economists required a new way to assess the entire economic environment.

Norwegian economist Ragnar Frisch coined the word “macroeconomics” in literature in 1933. Nonetheless, in the 1930s, it was the British economist John Maynard Keynes who popularized the use of macroeconomics to explain large-scale occurrences. With his 1936 book, “The General Theory of Employment, Interest, and Money,” Keynes established himself as the first of the great macroeconomists. His views attempted to explain the underlying causes of the Great Depression and suggest solutions.

Macroeconomics vs. Microeconomics

Macroeconomics studies the overall economy, whereas microeconomics examines certain aspects of it. For example, macroeconomists track overall production across all sectors of a country’s economy, but microeconomists may concentrate primarily on the performance of a single firm or sector.

Macroeconomic Research Areas

---

Macroeconomics is an important subject of study for investigating a wide variety of critical aspects that influence an economy. Among the many areas of macroeconomic research are:

Global Trade: The flow of products and services between countries may either help or hurt a country’s economy.

Legislation: Macroeconomics helps us evaluate if specific industry regulations have an impact on economic development or benefit the economy by fostering safe working conditions and a healthy environment.

Outcomes for Minority Groups: Macroeconomics may track the successes and setbacks of groups of people who have traditionally encountered occupational discrimination. As these groups become more active in the economy, the general economy improves.

Unemployment and Labor Market Growth: The status of the workforce is a critical driver of the economy’s health.

Fiscal Policy: The style and distribution of government expenditures can have an impact on the economy. For example, in the 1930s, the United States printed more money to stimulate a sluggish economy.

Green Businesses: Renewable energy and climate change are now hot themes. Macroeconomics may demonstrate the overall economic impact of environmental policies and investments.

Philosophies and Schools of Thought in Macroeconomics

---

There has never been agreement among economists throughout the world on the best way to manage an economy. Different perspectives exist throughout time, location, and the political spectrum. However, you may come across the following notable schools of macroeconomic thought:

Keynesianism in Economics

This hypothesis, named after British economist John Maynard Keynes, properly characterized the Great Depression and its long-term implications. Countries should have enacted economic measures targeted at rejuvenating the economy, according to this idea.

Monetarism

Popularized by economist Milton Friedman, monetarism emphasizes a country’s money supply and the proper quantity of money in use. Monetarists believe that governments should control economic development by increasing or decreasing the money supply. For example, in the late 2000s, the United States put more money into circulation to stimulate its stagnant economy.

Classical

Classical economists share the viewpoint of economist and philosopher Adam Smith, who thought that the financial market could reach general equilibrium without government interference. Classical economists oppose government economic initiatives, although their macroeconomic theory allows for modest involvement on occasion.

Austrian

Austrian economic theory was developed by a group of eminent Austrian economists. Its supporters believe in the free market and believe that an economy should run without government interference, especially amid a financial crisis.

Marxism

Marxist economic theory holds that the financial sector should be strictly regulated by the government. Marxists think that centralized authority protects the interests of the working class better than capitalist firm owners.

Behavioral economics studies the decision-making processes of market players rather than advocating macroeconomic policy. They want to know why highly knowledgeable investors, for example, occasionally make illogical judgments.

Macroeconomic Constraints

---

Macroeconomics is concerned with the whole economy rather than individual market actors. As a result, it is not always beneficial to comprehend the activities of particular customers, investors, or businesses.

Another drawback of modern macroeconomics is the inability to predict future economic activity reliably. Economists frequently rely on computerized macroeconomic models to forecast the economy’s future trajectory. However, due to the large number of continually changing factors, building exact computer models of macroeconomics that correctly reflect real-life situations is a difficult challenge.

The national debt, also known as public debt, is the total amount owed to creditors by a country.

What Does National Debt Represent?

---

Debt may take many forms, ranging from credit card bills and vehicle loans to mortgages and the $5 you owe to a buddy. Debt is typically the result of expenditure surpassing income for both individuals and businesses.

So, how can a country build its national debt? It’s comparable to how people and businesses accumulate debt. National debt increases when a country’s yearly expenditures exceed its annual revenue, although other variables influence governments differently than regular borrowers.

Each country has an annual budget that includes funds for defense, infrastructure, social programs, and other things. Taxes and other types of national income, such as custom costs, are the primary sources of budget support. They do not, however, always cover the entire country’s annual expenses.

Governments issue bonds, also known as Treasury securities or Treasury bonds, to cover income shortfalls and maintain a continuous and predictable source of budget funding. The national debt is the total outstanding value of all Treasury bonds issued by the government.

What is the Amount of US National Debt?

---

The current national debt of the United States is $33.69 trillion, according to the US Department of the Treasury. It is a substantial sum, amounting to nearly $94,000 per individual.

Ordinary people, on the other hand, are not required to repay their portion of the national debt. Debt payment consumes a set amount of the annual budget.

There’s a real-time representation of the national debt, known as the “National Debt Clock.” This iconic digital billboard, located in New York City, provides a visual and constantly updating display of the current national debt.

The United States Congress sets a limit on the amount of debt the government can incur, known as the “debt ceiling.” When the debt approaches this limit, it sparks debates and potential government shutdowns. These situations can have far-reaching consequences for financial markets and the economy.

National Debt vs. Budget Deficit

---

A budget deficit happens when a country’s yearly budget spending exceed its total annual income. National debt, on the other hand, is the total outstanding value of all government-issued Treasury bonds.

In the United States, Congress is in charge of approving the federal government’s yearly budget. The Treasury, which reports to the White House and is part of the executive branch, collects taxes, gets other income, and sells US Treasury securities, often known as Treasury bonds.

The US budget deficit arises when the yearly budget approved by Congress exceeds the Treasury’s collection of taxes and other income. A budget surplus occurs when income surpasses spending.

The Treasury sells bonds on a regular basis to fund the budget. It issues many forms of debt securities with varying durations and maturity periods, but they are all government liabilities. Investors anticipate monthly interest payments and the repayment of the principal amount when the securities mature.

The US national debt is the total value of all outstanding Treasury bonds. Because the Treasury sells bonds regardless of budget fluctuations, the link between national debt and budget deficit is partly indirect.

What is the Debt-to-GDP Ratio?

---

The Gross Domestic Product (GDP) of a country is the total value of all products and services generated in that country in a given year.

The debt-to-GDP ratio is computed by dividing a country’s total national debt by its total GDP over a year.

Total National Debt / GDP = Debt-to-GDP Ratio

The US national debt is $33.69 trillion, and the US GDP is $26.24 trillion. By dividing the former by the latter, we obtain a debt-to-GDP ratio of 128.6% for the United States. 

While this may appear to be a high debt-to-GDP ratio, it is not the highest in the world. Japan now has the highest debt-to-GDP ratio.

Definition:
A subsidiary is a company owned by another company, which is referred to as a parent company or a holding company.

Understanding the concept

---

Subsidiaries are typically companies owned by a larger organization called a parent or holding company. The parent company has a controlling stake in the subsidiary. If a subsidiary is wholly owned by a larger company, it is called a wholly owned subsidiary. Usually, a subsidiary retains legal and financial independence, but is subject to significant control by the parent company. By acquiring several subsidiaries, the parent company can become a conglomerate.

Example:

Since 2015, the largest subsidiary of Alphabet Inc is Google. This allows Google to focus on Internet-related business, and the Alphabet Inc. Holding company to develop other business areas.

A subsidiary company arises when a holding company acquires more than half of the shares of a given company. A subsidiary may have multiple owners, but it has only one parent company. A fully controlled parent company is called a “wholly owned subsidiary”. Subsidiaries may also be parent companies of other subsidiaries, and such a structure may have several levels of subsidiaries. Large corporations can have subsidiaries both at the national level and internationally to carry out activities in different countries.

For example, Microsoft Corporation owns several subsidiaries around the world, including Microsoft de Argentina S.A. in Argentina and Microsoft Deutschland GmbH in Germany.

What is the purpose of the subsidiary?

---

A subsidiary is a means to achieve the goals of the parent company. The subsidiary has the following objectives:

1. Using tax advantages
The parent company can use the profits of one subsidiary to compensate for the losses of another, which reduces the total taxable income. It is also possible to create a subsidiary in another state or country with a more favorable tax system.

2. Optimization of operations
A subsidiary located in a particular country or region can manage day-to-day operations more efficiently than a parent company located elsewhere.

3. Reduction of liability
The transfer of ownership and management of assets to a subsidiary allows the parent company to retain limited liability associated with these assets. In the field of commercial real estate, it is common practice to create a limited liability subsidiary (LLC) by the parent company in order to acquire and manage large assets, such as warehouses for storing products or office buildings in the city center.

4. Specific assets
Some subsidiaries can be acquired to obtain specific assets, avoiding the need to repeat their successful formula.

How does the subsidiary work?

---

For the operation of a subsidiary, it is necessary that the parent company owns more than half of the shares of the subsidiary and controls its activities. If the ownership share is less than half, the company is considered to be associated or affiliated. It is important to know that the financial statements of a subsidiary company differ from those of an associated company.

When creating a subsidiary, it is recommended to contact a state accountant with experience in transferring assets and knowledge of the tax code. The assets and liabilities of the parent company are usually separated from the subsidiary, which protects against creditors’ claims.

How is a subsidiary created?

---

The process begins with approval by the current management of the parent company. Then a vote must be held, and if a majority of votes support the creation of a subsidiary, the director draws up the decision in writing. For a subsidiary, you can choose one of the two most common types of commercial organizations – a corporation or an LLC.

Different states may have different rules and requirements for the registration and organizational structure of an LLC, so you need to contact a Certified Public Accountant (CPA) and consult the State Chancellery website to get more information about the requirements for your state.

How does the subsidiary function?

---

The subsidiary often receives a controlling stake from the parent company, which thus provides the start-up capital. This capital is necessary to start the company’s operations.

The parent company usually defines in the charter of the subsidiary the rules of its internal management and its role as the owner. All changes in the charter require the approval of the parent company.

After the election and creation of the board of directors of the subsidiary, the parent company no longer interferes in its activities and the board can function as an independent organization.

The financial statements of the subsidiary are maintained separately from the financial statements of the parent company. However, the subsidiary’s balance sheet and profit and loss statements are often combined together with the parent company’s reports.

Why is a subsidiary being created?

The creation of a subsidiary company allows you to combine the benefits for the parent company. The parent company can control the subsidiary, protect its interests and have separate financial statements. In addition, the consolidation of accounting books makes it possible to compensate for profits with losses and reduce income taxes.

A subsidiary may also provide the parent company with advantages in the form of orderly operations and competitive advantages at the expense of its property, equipment or research and development department. In addition, the subsidiary provides tax benefits and protection from creditors and lawsuits.

What are the advantages and disadvantages of a subsidiary?

---

One of the notable advantages of subsidiaries is the ability to keep the parent company and the subsidiary as separate entities. This means that the parent company is not legally responsible for the obligations and debts of the subsidiary. Instead, the liability of the parent company is limited to the initial capital, which is exchanged for equity and a controlling stake in the company.

Due to this, the assets of the parent company are usually protected from creditors, provided that there is a clear distinction between the operations of the parent company and the operations of the subsidiary. Such prudent investments allow the parent company to use other growth opportunities.

However, there are some disadvantages. Large-scale organizations, including subsidiaries, require a significant amount of documentation and are subject to bureaucracy. To truly separate these two organizations, each board of directors must act independently. This can delay the decision-making process and the implementation of actions.

What is the difference between a subsidiary and other structures of the company?

---

Below are a few common terms that have a similar meaning, but differ from the subsidiary:

Affiliate/Associate
A firm is considered affiliated when the parent company has a controlling stake. However, the subsidiary has full ownership of the parent company.

DBA
Unlike a subsidiary, a DBA is not a separate company. It’s really the same company, just operating under a different name. (Doing Business As)

Branch
A branch or division refers to a part of the company that does not operate in the main office. A subsidiary is a separate company.

Sister company
All sister companies are subsidiaries, but not all subsidiaries are sister companies. A sister company is related to another subsidiary because they both have the same parent company. However, a parent company can only have one subsidiary, in which case the subsidiary does not have its own sister companies.

Holding company
A holding company is a term that refers to a parent company, not a subsidiary. The holding company has enough shares to control the subsidiary(stocks), but it does not participate in its daily activities.

For many homeowners, their property is not just a place to hang their hats; it’s also a valuable financial asset that can be leveraged to meet various financial goals. One way to unlock the potential of homeownership is through a Home Equity Line of Credit (HELOC).

This financial tool has gained popularity in recent years, offering homeowners a flexible way to tap into the equity they’ve built up in their homes. In this article, we’ll explore what a HELOC is, how it works, and the benefits and considerations associated with this financial option.

What is a HELOC?

---

A Home Equity Line of Credit (HELOC) is a revolving credit line that allows homeowners to borrow against the equity in their homes. Home equity is the difference between the market value of a property and the outstanding mortgage balance.

Over time, as homeowners make mortgage payments and their property’s value appreciates, they build up equity. A HELOC enables them to access a portion of this equity as a loan that can be used for various purposes.

How does HELOC work in steps?

---

A Home Equity Line of Credit (HELOC) operates in several steps, allowing homeowners to access funds based on the equity they have in their homes. Here’s a step-by-step breakdown of how a typical HELOC works:

1. Access to funds

Before applying for a HELOC, homeowners must assess their eligibility. Lenders consider factors such as credit score, loan-to-value ratio, and income to determine if you qualify for a HELOC.

2. Repayment Terms

Homeowners submit an application to a lender offering HELOCs. The lender will review the application and supporting documents, such as income verification and property appraisals.

Once approved, the lender will specify the terms of the HELOC, including the credit limit and interest rate.

3. Draw Period

The HELOC typically consists of two main periods: the draw period and the repayment period. During the draw period (which typically lasts 5-10 years), homeowners can access funds from the HELOC up to the approved credit limit.

Borrowers can choose how and when to use the funds. They can write checks, use a credit card linked to the HELOC, or make electronic transfers from the HELOC account.

4. Borrowing Funds

Homeowners can borrow funds from the HELOC as needed, up to the credit limit, just like using a credit card or taking a cash advance. Interest is only paid on the outstanding balance, and the minimum monthly payment often covers the interest charges during the draw period.

5. Repayment Period

After the draw period, the repayment period begins, typically lasting 10-20 years. During this period, homeowners must repay both the principal and interest on the outstanding balance. Monthly payments are typically higher during the repayment period compared to the draw period.

6. Variable Interest Rates

HELOCs typically have variable interest rates, which means the interest rate can fluctuate over time. The rate is often tied to a financial benchmark, such as the prime rate. Your monthly payments can vary based on changes in the interest rate.

7. Closing the HELOC

Once the repayment period is complete, and you’ve paid off the outstanding balance, the HELOC is considered closed. Homeowners can also choose to close the HELOC before the end of the repayment period, if desired.

8. Potential Renewal

Some HELOCs may offer options for renewal, allowing homeowners to access funds again after the initial draw and repayment periods are completed. Renewal terms may vary by lender.

Benefits of a HELOC

---

Flexibility

HELOCs offer immense flexibility for homeowners. You can use the funds for various purposes, such as home renovations, debt consolidation, education expenses, or unexpected medical bills.

Lower Interest Rates

HELOCs often have lower interest rates compared to credit cards or personal loans, making them an attractive option for borrowing.

Interest Deductibility

In some cases, the interest paid on a HELOC may be tax-deductible if the funds are used for qualified home improvements. However, tax laws and deductions can change, so it’s essential to consult a tax advisor.

Access to Equity

HELOCs allow homeowners to access a portion of their home equity without having to sell their property, providing a financial safety net.

Considerations Before Getting a HELOC

---

As with any secured loan, there’s a risk of losing your home if you can’t make the payments. Careful consideration is needed when using a HELOC.

The interest rate on a HELOC can change, which may result in fluctuating monthly payments. Consider how rising rates could impact your budget.

It’s crucial to understand the repayment terms and ensure you can make the required payments during the draw and repayment periods.

Like any financial product, HELOCs come with closing costs and fees, which can add to the overall cost of borrowing.

With the convenience of a revolving credit line, it’s essential to maintain financial discipline and avoid over-borrowing, which can lead to financial stress.

Difference Between a Home Equity Line of Credit (HELOC) and a Home Equity Loan

---

Both HELOCs and home equity loans are financial products that allow homeowners to access the equity they’ve built in their homes, but they differ in terms of how you receive the funds and how you repay them:

Access to Funds

A Home Equity Line of Credit provides a revolving line of credit, much like a credit card. You can borrow and repay as needed during the draw period, which is typically 5-10 years.

A home equity loan provides a lump sum of money upfront. You receive the entire loan amount at once.

Repayment Terms

HELOC: During the draw period, you typically make interest-only payments. After the draw period, you enter the repayment period and must repay both the principal and interest over a set number of years.

Home Equity Loan: With a home equity loan, you start making both principal and interest payments right away. The repayment term is typically fixed, and the loan is amortized over a specified number of years.

Interest Rates

HELOC: HELOCs often come with variable interest rates, which can fluctuate over time. The interest rate is usually tied to a benchmark, like the prime rate.

Home Equity Loan: Home equity loans typically have fixed interest rates, providing predictability in your monthly payments.

How to Calculate Home Equity

---

To calculate your home equity, follow these steps:

Determine Your Property’s Market Value: You can get an estimate of your home’s current market value by hiring a professional appraiser or using online tools, consulting a local real estate agent, or checking recent sales of comparable properties in your neighborhood.

Calculate Your Outstanding Mortgage Balance: Contact your mortgage lender or check your mortgage statement to find out your remaining mortgage balance.

Subtract the Mortgage Balance from the Market Value: Subtract the outstanding mortgage balance from the estimated market value. The result is your home equity.

Mathematically, the formula for calculating home equity is:

Home Equity=Market Value of the Property−Outstanding Mortgage BalanceHome Equity=Market Value of the Property−Outstanding Mortgage Balance

For example, if your home is estimated to be worth $300,000, and you have an outstanding mortgage balance of $200,000, your home equity would be $100,000.

Conclusion

---

In conclusion, a Home Equity Line of Credit (HELOC) can be a valuable financial tool for homeowners, offering flexibility and potential benefits. However, it’s important to carefully assess your financial situation, needs, and risk tolerance before applying for a HELOC.

Consulting with a financial advisor or mortgage specialist can help you make an informed decision on whether a HELOC is the right choice for you. When used responsibly, a HELOC can unlock the financial potential of your home and help you achieve various personal and financial goals.