Money management
Encyclopedia
Money management is the process of managing money which includes investment, budgeting, banking and taxes. It is also called investment management.
Money management is a strategic technique employed at making money yield the highest of interest-yielding value for any amount of it spent. Spending money to provide answers to all cravings (regardless of whether they are justifiable or not to be included in budget basket) is a natural human phenomenon. The idea of money management techniques is developed to plummet the amount individual, firm and institutions spends on items that add no significant value to its living standard, long-term portfolios and asset-basins. Warren Buffett
, in one of his documentaries, admonished prospective investors to embrace his highly-esteemed "frugality" ideology. This is the basis of every sound money management formulas. The following are powerful techniques that can be employed in making every expense made to be worth it:
1. cutting your budget on social needs
2. avoid any snob-appealing expense
3. always go for the most cost-effective alternative (establishing small quality-variance bench-mark, if any)
4. increase expenses more on interest bearing item than any other thing
5. establish the expected benefits of every desired expense using the canon of plus/minus/nil to standard of living value system.
These techniques are investment-boosting and portfolio-multiplying.
Money management is used in Investment management
and deals with the question of how much risk
a decision maker should take in situations where uncertainty
is present. More precisely what percentage
or what part of the decision maker's wealth should be put into risk
in order to maximize the decision maker's utility function.
Money management gives practical advice among others for gambling
and for stock trading as well.
Money management can mean gaining greater control over outgoings and incomings, both in personal and business perspective. Greater money management can be achieved by establishing budgets and analysing costs and income etc.
In stock and futures trading, money management plays an important role in every success of a trading system. This is closely related with trading expectancy:
“Expectancy” which is the average amount you can expect to win or lose per dollar at risk. Mathematically:
Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss)
So for example even if a trading system has 60% losing probability and only 40% winning of all trades, using money management a trader can set his average win substantially higher compared to his average loss in order to produce a profitable trading system. If he set his average win at around $400 per trade (this can be done using proper exit strategy) and managing/limiting the losses to around $100 per trade; the expectancy is around:
Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss)
Expectancy = (0.4 x 400) - (0.6 x 100)=$160 - $60 = $100 net average profit per trade (of course commissions are not included in the computations).
Therefore the key to successful money management is maximizing every winning trades and minimizing losses (regardless whether you have winning or losing trading system, such as %Loss probability > %Win probability).
. Several religions follow Mosaic law which proscribed the charging of interest. The Quakers forbade involvement in the slave trade and so started the concept of ethical investment.
Money management is a strategic technique employed at making money yield the highest of interest-yielding value for any amount of it spent. Spending money to provide answers to all cravings (regardless of whether they are justifiable or not to be included in budget basket) is a natural human phenomenon. The idea of money management techniques is developed to plummet the amount individual, firm and institutions spends on items that add no significant value to its living standard, long-term portfolios and asset-basins. Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
, in one of his documentaries, admonished prospective investors to embrace his highly-esteemed "frugality" ideology. This is the basis of every sound money management formulas. The following are powerful techniques that can be employed in making every expense made to be worth it:
1. cutting your budget on social needs
2. avoid any snob-appealing expense
3. always go for the most cost-effective alternative (establishing small quality-variance bench-mark, if any)
4. increase expenses more on interest bearing item than any other thing
5. establish the expected benefits of every desired expense using the canon of plus/minus/nil to standard of living value system.
These techniques are investment-boosting and portfolio-multiplying.
Money management is used in Investment management
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
and deals with the question of how much risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
a decision maker should take in situations where uncertainty
Uncertainty
Uncertainty is a term used in subtly different ways in a number of fields, including physics, philosophy, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science...
is present. More precisely what percentage
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...
or what part of the decision maker's wealth should be put into risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
in order to maximize the decision maker's utility function.
Money management gives practical advice among others for gambling
Gambling
Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods...
and for stock trading as well.
Money management can mean gaining greater control over outgoings and incomings, both in personal and business perspective. Greater money management can be achieved by establishing budgets and analysing costs and income etc.
In stock and futures trading, money management plays an important role in every success of a trading system. This is closely related with trading expectancy:
“Expectancy” which is the average amount you can expect to win or lose per dollar at risk. Mathematically:
Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss)
So for example even if a trading system has 60% losing probability and only 40% winning of all trades, using money management a trader can set his average win substantially higher compared to his average loss in order to produce a profitable trading system. If he set his average win at around $400 per trade (this can be done using proper exit strategy) and managing/limiting the losses to around $100 per trade; the expectancy is around:
Expectancy = (Trading system Winning probability * Average Win) – (Trading system losing probability * Average Loss)
Expectancy = (0.4 x 400) - (0.6 x 100)=$160 - $60 = $100 net average profit per trade (of course commissions are not included in the computations).
Therefore the key to successful money management is maximizing every winning trades and minimizing losses (regardless whether you have winning or losing trading system, such as %Loss probability > %Win probability).
Ethical principles
Ethical or religious principles may be used to determine or guide the way in which money is invested. Christians tend to follow the Biblical scriptureBiblical money management
Biblical money managagement is the use of Biblical scripture to provide advice, guidance and principles for money management.Jesus spoke more about money and material possessions than he did about other topics such as prayer and so there are many parables about them in the New Testament such as the...
. Several religions follow Mosaic law which proscribed the charging of interest. The Quakers forbade involvement in the slave trade and so started the concept of ethical investment.
Further reading
External links
- http://www.stock-trading.me/2008/07/the-principles-of-money-management-in-stock-trading/ The Principles of Money Management in Stock Trading.
- http://www.mint.com/ Mint.com - Free online money management tool.
- https://www.clearcheckbook.com/ Clearcheckbook.com - Free online checkbook management tool.