Capital management refers to the proper, wise use of funds that have been acquired through some means. The two most common ways of acquiring capital are through inheritance or hard work. When a person inherits significant wealth, he is obligated to manage his money prudently so as not to squander it away on frivolous purchases but rather to utilize it thoughtfully and achieve financial stability.
When someone has worked hard for years and managed to save up enough money to live comfortably, he is also faced with this same challenge of prudently managing his capital. Without wise guidance, even significant sums of money can be depleted quickly by poor spending habits (e.g., overpaying for rent, buying expensive cars, spending excessive amounts on entertainment, etc.).
Holland has recently implemented capital management techniques in response to the current financial crisis. The Dutch people are well-known for their frugal living and handling of money. Many people believe that this practice has contributed to Holland’s strong economy over the years. While still not out of the recession, the Dutch are much better off than other countries within its region.
Budgeting is a vital capital management technique that everyone should use, whether you are inheriting wealth or have earned it through your hard work. For budgeting, delineate all income and expenses for a given period (e.g., one month). Allocate every cent so that no money is wasted on buying frivolous items. Make sure to set aside reasonable amounts for savings and savings goals. Once the budget has been created, stick to it! If there isn’t enough money in the account to cover unforeseen expenditures, stop spending immediately until more income can be made or saved up.
Another aspect of capital management is risk management. When investments are made, there is always a certain level of risk involved. Of course, when investing money in securities (e.g., bonds), the risk is low; however, the risk is much greater in risky investments (e.g., in non-government backed securities). The best way to manage risk is through diversification- investing different amounts into various securities that are not correlated with one another.
This technique has nothing to do with finances per se. Still, it should be mentioned because having adequate insurance coverage for your family can help you sleep better at night, as you know they are protected if something happens to you financially. Ensure all critical expenditures are covered by insurance- e.g., life insurance, medical/dental insurance, homeowners insurance, auto insurance.
Taxes and Deductions
Not everyone agrees on what deductions they should be allowed to claim on their tax forms. Even though no specific techniques can be included here, it is beneficial for individuals looking to manage their finances wisely. Capital gains tax should be an essential consideration for any individual interested in particular securities. The capital gains tax ranges between 15% and 18%. Therefore, it is best to sell or liquidate securities at the end of the year.
Life Cycle Investment
This technique involves investing money in different accounts throughout different stages of life (e.g., young adulthood, middle age, retirement). It makes the most sense because a person’s income rises with time, and their finances become more stable as he ages. While this technique may sound straightforward enough, it takes a lot of skill to navigate effectively through each stage of life. The hard part is not exhausting funds too soon or losing out on opportunities to earn additional money due to having one’s money tied up in investments that aren’t quite generating enough income.
There is a strong correlation between the returns on an investment and its risk; however, you must remember that not all investments within one’s own country will produce earning potentials equivalent to those of overseas markets. That being said, capital management involving international investment can be very beneficial as long as good research has been done beforehand (i.e., make sure you choose the right foreign market for your specific needs). This type of investment may include investing money through bonds, mutual funds, or even physical assets such as real estate. If you’re interested in investing money in one of these, you could try here