Before You Invest Joan Koonce, Ph.D., AFC SM Associate Professor and Extension Financial Management...

Before You Invest

Joan Koonce, Ph.D., AFCJoan Koonce, Ph.D., AFCSMSM

Associate Professor and Associate Professor and Extension Financial Extension Financial

Management SpecialistManagement Specialist

Money Mistakes Quiz

• Take the Money Mistakes Quiz.

• You will be given money

based on the number of

items you get correct.

Question

• Are you disappointed in the amount of money you were given for your correct responses?

• Why or why not?

Investment Philosophy

EVERY PENNY COUNTS!!

The Magic of the Compounding Penny

• If you saved .01 per day for 30 years, you will have $690.33 @ 10% and $1, 068.18 @ 12%.◦ Your total investment will be $109.50 over 30

years (.30-.31 per month and $3.65 per year).

• If you saved .12 per day for 30 years, you will have $8,283.98 @ 10% and $12, 818.20 @ 12%.◦ Your total investment will be $1,314 over 30

years ($3.60-$3.72 per month and $43.80 per year).

Saving or Investing?

• What does it all mean?

• Are they different?

Saving or Investing

• Savings◦ Set money aside so that it isn’t spent◦ Used for short-term goals◦ Highly liquid◦ Relatively safe◦ Lower earnings potential◦ No sales charges and

low or no fees

Saving or Investing

• Investing◦ Used for long-term

goals◦ Highly illiquid◦ Less safety◦ Greater earnings

potential◦ Sales charges and fees

Being Prepared

• Lack of preparation leads to:◦ Frustration.

• Frustration leads to:◦ Inability to save

consistently.◦ Having to sell investments

to cover routine expenses.

Before You Begin Your Investment Program

• To get more from your investment dollars, follow these steps.◦ Set financial goals◦ Manage cash flow◦ Examine current financial situation◦ Prepare for emergencies◦ Eliminate debt◦ Manage risks◦ Buy adequate insurance◦ Learn the lingo

Set Financial Goals

• What do you want to achieve?

• How much will it cost?

• How long will it take?

Manage Cash Flow

• Cash flow management deals with how you spend and save the money that you earn now and in the future.

• Managing cash flow requires you to examine your:◦ Past.◦ Present.◦ Future.

Examine Current Financial Situation

• Why is it important to examine your financial situation?

• Involves an examination of your:◦ Assets.◦ Liabilities.◦ Net worth.

Prepare for Emergencies

• Money set aside in a fairly liquid account• Should be a category in your spending plan• Emergency fund should

consist of 3 to 6 monthsof expenses

• Example: A person with

expenses of $3,000 per

month will need: ◦ $9,000-$18,000

Manage Risks

• Protect assets against risk

• Risk management strategies◦ Avoid risk◦ Retain or accept risk◦ Reduce risk or control loss◦ Transfer or share risk

Eliminate Debt

• May not be realistic to eliminate all debt

• Eliminate credit card and/or other high interest debt

• Debt elimination as a savings goal

Buy Adequate Insurance

• Insure the risk of large financial losses.

• Without adequate insurance, you will have to:◦ Use credit.◦ Deplete your emergency

savings.◦ Liquidate your assets.

Learn the Lingo

• Compounding• Diversification• Dollar-cost averaging• Leverage• Yield or rate of return• Investment income and capital gains• Risk tolerance and risk capacity• Time horizon• Risk/return tradeoff

Risk/Return Tradeoff Pyramid

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