Many people have their own definition for definition of money management. Your everyday many on the street will probably define money management as managing their own finances. Making sure that outgoings do not exceed incoming is of utmost importance to individuals to sustain a healthy and happy lifestyle. The purpose of this article is to tell you about another, darker definition of money management, but, although darker in one sense, this definition of money management can unlock your potential to a much more lucrative future.
Many people depend on financial institutions to buy a house or a new car; they reach out to banks for loans and use those loans to purchase the things they want in their personal life that they can’t afford. There is an astonishing irony here and the link that this has to personal money management. The financial institutions too are practicing money management, but a very different kind of money management.
When a bank or financial institution lends somebody money they are essentially taking a risk. They are taking a risk that the person will default on the loan and never pay the bank back. It is inevitable that some people will default on their loans, so how does the bank make any money in this scenario? They need to make sure that they set the interest rates of their loans such that they do not lose money. Let’s look at an example:
If a bank issues $10,000 loans with an interest rate of 5% over 5 years, they will receive repayments of $11,300. Now, this means that as long as 9 out of 10 people repay the loan in full the bank will not lose money. If they receive 9 repayments and one default, they will make a small profit of $1,700 from the 10 loans. However, in reality, less than 1% of people default on loans, so they make very good profits. This, from a banks perspective is also called money management, and it shows how effective money management can be used to make money, from poor individuals struggling with their own personal money management!
So how can you use money management? You can use effective money management to invest in equity markets or foreign exchange markets as an individual to make money for yourself and live a much more prosperous life. Many forex traders use money management in the same way a bank does when they trade. They make sure that when they win a trade they win much more than when they lose. These traders have undergone very effective forex training to ensure they know exactly how to execute money management and make a profit. The most effective strategy implemented by these traders is price action trading and aspiring individuals can research online just how to implement these techniques and strategies for themselves.
By understanding the other side of money management, it is possible for every single individual to improve their lives and provide a more prosperous, independent and happy lives for themselves and their family.