![\"Compounding](\"https:\/\/i0.wp.com\/aayushbhaskar.com\/wp-content\/uploads\/2022\/07\/Compounding-Effect.png?resize=700%2C320&ssl=1\")
<\/p>\nWith so many attractive credit offers and expensive products on the market, a consumer is impulsively making bad financial decisions.<\/p>\n
In such cases, it is nearly impossible to change this habit because of peer pressure and the urge to grab every offer.<\/p>\n
However, you can improve this by following the right mindset and you can achieve that with suitable mental models.<\/p>\n
Here are some of the most effective mental models that can help you make the right financial decisions.<\/p>\n
In layman’s language, mental models are nothing but a representation of how something works. As the perception of people about the world is different, mental models help in understanding how a person perceives the world in his complex mind.<\/p>\n
Furthermore, mental models help us to make better and faster decisions and can be of great help while making financial decisions. Yet, as mental models are unique in themselves, we cannot say they are foolproof or completely failsafe.<\/p>\n
They are not always accurate or practical, but can assist in making better decisions with complete information. You can use mental models even when the circumstances get really challenging. They always stay on course and hence can be highly beneficial if used properly.<\/p>\n
Just as there are scientific principles for scientific theories, mental models serve as an excellent base for financial decisions. Thus, they play a fundamental role in decision-making.<\/p>\n
For example, for an entrepreneur, mental models provide a framework for how to go ahead in the business venture by making sound decisions for the growth of the business.<\/p>\n
Similarly, for a trader, making proper financial decisions at the right time could happen only if correct mental models are being put to use.<\/p>\n
Financial decisions can be very crucial at times and thus, they must be taken very carefully. Whether personal or corporate finance, you need to allocate them efficiently to prevent financial loss or instability.<\/p>\n
You need to stay alert and deploy a suitable mental model to make the right financial decisions at the most appropriate time.<\/p>\n
Below is the list of 5 highly effective Mental Models that can assist you to make the right financial decisions. Check them out:<\/p>\n
<\/p>\n
Compounding can be simply described as the process of adding up interest on initial interest. This process goes on invariably till the initial amount invested<\/a> reaches its maturity.<\/p>\n Due to compounding, not just the initial amount invested, but also the interest accrued on the principal generates earnings in the long run. This process goes on continuously, helping you make profits from the principal amount and from every preceding accrued compound interest.<\/p>\n For example,<\/p>\n Principal amount = Rs. 100, ROI = 10% p.a, Period = 10 years<\/p>\n At the end of Year 1 = Accrued interest on the principal is Rs.10 (10% p.a on Rs.100)<\/p>\n So, the amount invested after year one becomes<\/p>\n Principal + Year 1 interest = 100 + 10 = 110<\/p>\n At the end of Year 2 = Accrued interest is Rs.11 [10% p.a on Rs.110 (Rs.100 + Rs.10)<\/p>\n At the end of Year 3 = Accrued interest is Rs.12.1 [10% p.a on Rs.121 (Rs.100 + Rs.10 + Rs.11) And so on\u2026. In this way, the power of compounding helps in the growth of your wealth over time.<\/p>\n While making financial decisions, you must focus on hidden costs<\/a> and not just the direct costs. Opportunity cost is popularly defined as the cost pertaining to the forgone opportunity.<\/p>\n We can even say that whatever we do, there’s an opportunity cost for everything. Opportunity costs come into the picture when there are various alternatives to choose from. In the case of just a single alternative, there is no opportunity cost.<\/p>\n Yet, whenever a person thinks of investing and parking their finances, he or comes across numerous alternatives. In such scenarios, the amount lost by investing in alternative ‘A’ instead of alternative ‘B’ can be called the opportunity cost.<\/p>\n The opportunity cost is a critical mental model that helps to ensure that the optimum use of one’s limited and scarce financial resources is made for your own advantage.<\/p>\n Net present value is nothing but the worth of money today that will mature in the future. Thus, it is a name given to the present value of the money that will mature in the future. It is a fundamental mental model that helps you decide which project you should choose.<\/p>\n2. Opportunity Costs<\/h3>\n
![\"Opportunity](\"https:\/\/i0.wp.com\/aayushbhaskar.com\/wp-content\/uploads\/2022\/07\/Opportunity-Cost-.png?resize=700%2C388&ssl=1\")
<\/p>\n3. Net Present Value<\/h3>\n
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