It is a red flag 🚩 if someone offers wild guaranteed profit compared to the prevailing interest rates!
So, this query comes so often and I try to explain every time with conviction but seems I am unable to clarify the way it should be so though to write about it here as well.
BEST RETURN ON INVESTMENT?
Just yesterday someone under my YouTube video asked me about a company which is paying 500 AED per month for an investment of 10,000 AED – & they were asking if this profit is good enough? 🤔
First of all, we need to educate ourselves – the calculation of profit rate 📈 or borrowing rate 📉 should always be calculated on annual basis. If a company or institute is quoting the numbers on monthly level, try asking them the quote on annual basis as standard – if they don’t provide the annual numbers than do the maths yourself in order to be the best judge.
In the case I have explained above when someone is offered 500 AED for 10,000 AED investment – the annualized calculations are as below
500 x 12 (months) x 100 / 10,000 = 60% profit
Calculation for 1 year profit rate for such offering!
This is a mind blowing 🤯 profit rate not only for a country like UAE where you hardly get the guaranteed profits of 4% in USD/AED terms, but in a country like Pakistan too where the guaranteed profit rates are touching 16% in PKR terms in this era of high inflation 🆘.
RULE OF THUMB!
Whenever a company or institute offers a profit rate well above the prevailing interest rates in a country it should raise red flag 🚩 in the minds – and the reason is fairly simple! If I own a company and need to raise funds for expansion, I would simply go to bank 🏦 and get the best possible rates rather than paying exorbitant rates to 3rd party / public to raise money which does not make sense as in the case of this company’s offering of 60% while they can easily raise the credit 💵 at 4-6% at max through regular lenders.
This applies the same way for a country like Pakistan where some companies offer profit rates in excess of 30% while the banks can lend at 20%. While these numbers makes sense right now, they can change dramatically depending on the timing of such offering as the interest rates keep on fluctuating based on the inflation numbers for a country.
The rule of thumb to judge any “guaranteed” investment so to say is to find the delta an investment is promising 🤝 against the prevailing interest rates in the country. In case the delta is out of proportion, then the investment is bound to have some sort of risk involved or they are excessively leveraged against something which banks wont lend for or simply they are kind of Ponzi / pyramid 👻 scheme.
This is the reason when we talk about regular profits over long term for options like SARWA or SMARTCROWD (talked about them on my YouTube channel) they wont look as appealing as they should because of industry standard returns! I have discussed both SARWA and SMARTCROWD here in the writeups too.
WHAT ABOUT LOANS?
Similarly, if you even think about taking loan – always calculate the rates on annual basis ✅. A lot of credit card companies & private lenders (made a full video on this too) quote you the rates on monthly basis which is always deceiving – a rate of 4% monthly seems pleasing to ear (when the phrase monthly is mentioned discreetly) compared to 48% annual interest rates when marketed 📣.
I was pleasantly surprised how HSBC announced their their recent rates hike ⬆️ which i documented on twitter as mentioned below. It is very brave of them to disclose the exact annual rates where banks usually quote this on monthly basis.
About Myself
I post 3 videos every week on my YouTube channel on the topics of productivity & personal finance specifically for expats & in general for wider Pakistani community. Besides this, I update this website / blog on weekly basis so do visit regularly for updates – To get value out of the content, please consider subscribing both the YouTube channel and the newsletter.
Many people from the YouTube community wanted me to start 1-1 session which I have been contemplating as well for long time. I have started taking such sessions on booking basis with the following core topics of discussion:
- Productivity
- Personal Finance
- YouTube & Social Media Talks
Price for the session can be confirmed by emailing your details at financewithwali@gmail.com
Disclaimer: I am not a financial advisor and consider these sessions for knowledge sharing and discussion only.
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