Goals For This Session
To review investing prerequisites To learn key investing concepts To discuss strategies for finding money to invest 1
Basic Building Blocks of Successful Financial Management
2
Cash Management
Budgeting Financial record keeping Maximize the amount of interest earned Complete annual financial checkup, including net worth and cash flow Review and revise periodically
3
Emergency Cash Reserve
Money for unexpected expenses
3 to 6 months living expenses Amount depends on situation Money can be sub-divided
4
Risk Management
Protect against catastrophic financial losses Purchase comprehensive insurance coverage if needed Evaluate current policies and be a smart consumer
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Tax Management
Pay only what you owe
Use tax laws to your financial advantage As tax laws change, adjust financial strategies
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$MART Financial Goals
$ M A R T
SPECIFIC MEASURABLE, MUTUAL ATTAINABLE RELEVANT, REALISTIC TIME-LINE, TRADE-OFFS
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Credit Management
Avoid overuse of credit
Lower the total amount of debt Shorten the term of debt Reduce interest and finance charges
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Home Ownership
Think of buying a home as purchasing shelter Not as an investment that will rapidly appreciate Home equity is an asset
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Investments
Begin investing after a firm foundation is laid Develop investing strategies to accomplish specific financial goals
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Children’s Education
Start early Make an estimate of the cost Develop a plan for accomplishing goal Consider tax implications Explore other ways to pay for education
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Retirement Planning
AGAIN -
Start early Make an estimate retirement needs Develop plan for accomplishing goal Consider tax implications
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Estate Planning
The prize for successfully managing finances throughout your lifetime is the opportunity to pass assets on to loved ones or favorite causes at the end of your life
13
Key Investing Concepts
Difference between saving and investing Risk tolerance Risk versus rate of return Impact of time on money accumulation Asset allocation Personal factors that affect investing decisions 14
The Difference Between Savings and Investing
Savings:
– Money held in a short-term cash assets – Money used for emergencies and specific purchases
Investing:
– Money used to increase net worth
and achieve long-term financial goals
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Savings $
Investment $
Kept in safe, low-risk vehicles Liquid Yield low returns Used for shortterm goals
Involve risk Value can go up and down in short time periods Offer potential for growth
Used for mid-& longterm goals
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Investment Return
Total return
– Profit (or loss) on an investment
• Income PLUS capital gain or loss • $8.50 + $4.50 = $13 per share
Rate of return (%)
– Profit (or loss) on an investment
• Return ÷ price of security • $3 ÷ $24 = .125 or 12.5%
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Compound Annual Rate of Return 1925-2003
Large Company Stocks…….…….10.2% Small Company Stocks…………..12.1% Government Bonds………….……..5.5% Treasury Bills……………………….3.8% Inflation………………………………3.1%
Source: Ibbotson Associates
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Risk
Associated with all investments because the future value of investments is never certain.
Caused by:
– Inflation – Business failure Changes in economy Interest rate changes
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Risk and Return Are Related
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Techniques to Offset Risk:
Diversification
– Putting your money, “your eggs,” into several baskets (assets)
Dollar Cost Averaging
– Investing regular amounts at regular intervals regardless of price
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Impact of Time and Rate of Return on Money Accumulation
To grow the largest sum of money you need:
– Maximum time – A high rate of return – Tax advantages – A generous pot of money – Frequent compounding of interest
WHY???
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Asset Allocation
The ratio of stocks, bonds and cash assets in your portfolio
Conservative
S C S
Moderate
C
Aggressive
C B
B B
S
The most important determinant of overall investment success
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Factors Affecting Asset Allocation Decisions
Investment goals and return needs Risk tolerance Time horizon Time & skill to manage portfolio Tax situation
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Investing Action You Can Take Today
Review your financial holdings and obligations. Calculate your net worth. Read investment pubs Sign up for financial classes Set short and long-term financial goals. Seek assistance if you are short on time or skill
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Finding Money To Invest
70% of Americans live “paycheck to paycheck”
Americans are not saving much money
26
Review Your Financial Status
Do you have 3-6 months income in an emergency fund? Do you save regularly? Do you know how much you need to save to reach your goals? Do you save to buy major items instead of using credit?
27
Review Your Financial Status
When you use credit, do you pay as large a down payment as possible? Do you save at least 10% of your disposable income?
Do you know how much you need to save for retirement?
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Strategies for Saving Money to Invest
Establish savings plan Needs vs wants Pay yourself first Save bonus/coupon money Continue loan repayments
Collect loose change Save lunch money Shop for sale prices Plan a “Nothing Week” Avoid paying credit charges
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Breaking Habits = $$ to Invest 6 Easy Steps
1. Identify habit, frequency, and cost
2. Make decision to change
3. Act immediately
4. Share your plan 5. Stick with your plan to change 6. Celebrate your success
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Step 1 Identify Habits, Frequency, & Cost
Where’s the Money?
Think of habits you might be able to adjust (hair care, soft drinks, cigarettes, …
Frequency of habit
Calculate total cost for a year
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Step 2 Make a Decision to Change
Look for alternative ways to spend your money Take control of your money Choose another way to spend your money
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Step 3 Act Immediately
Write down new behavior
Start within 24 hours The sooner you begin a new behavior, the sooner it will become a 33 habit
START
TODAY
Step 4 Share Your Plan
Tell others about your plan Provides opportunity for support Increases your determination to succeed Family must work together
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Step 5 Stick With Your Plan
This is a critical step Stay focused Takes 30 days for a new behavior to become a habit Will serve you well Set an example for your children
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Step 6 Celebrate Your Success
Let others know of your success Enjoy the fruits of your savings Continue with your new behaviors Watch pennies grow into dollars
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Other Strategies
Be a comparison shopper Investigate untapped strategies
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More Strategies To Stretch Your Money...
Adopt the two-week rule
Avoid unnecessary waste Become a coupon clipper
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Next Three Class Sessions: Characteristics of Specific Investment Products
Equity Investments (e.g., stock)
Fixed-Income Investments (e.g., bonds)
Mutual Funds
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