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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