Personal Finance Chapter 13

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Key Concepts
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Investment Programs Safety, Risk, Income, Growth & Liquidity Factors Asset Allocation & Investments Alternatives Sources of Financial Information (risk reduction, investment returns)
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Establishing Investment Program
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Performing a Financial Check Up: work to balance budget, pay off high interest credit card debt first, start an emergency fund (3-9 months of living expenses), access to cash for extreme emergencies (line of credit: pre-approved short-term loan and cash advance on credit card)
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8 Steps to managing a financial crisis
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-Establish a Larger than Usual Emergency Fund -Know What You Owe -Reduce Spending -Pay off Credit Cards -Apply for a Line of Credit -Notify Credit Companies & Lenders if you are unable to make payments -Monitor Value of Investment & Retirement Accounts -Consider Converting Investments to Cash
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Getting the money needed to start an investment program
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How badly do you want to achieve your investment goals? -Willing to Sacrifice Purchases ? Elective Savings Programs -Payroll Deduction, Electronic Transfer Extra Efforts to save in one or two Specific Months
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Investment Safety and Risk
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Safety = Minimal Risk of Loss Risk = Uncertainty about Outcome Investments Range: Very Safe to Very Risky The Potential Return should be directly related to the Risk Speculative Investments = High Risk
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Level 1 Financial Security
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Cash, CDs, money-market mutual funds, and US gov bonds
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Level 2 Safety and Income
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US securities selected corporate and municipal bonds, income stocks, and conservative mutual funds
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Level 3 Growth
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Growth stocks, growth-oriented mutual funds, and rental property
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Level 4 Speculation
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Speculative stocks, options, commodities, and high-risk investments
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Capital Gain=
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Investment Ending Value – Investment initial value
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Investment Income=
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Intrest or Dividends Paid on Investment
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Total $ Return=
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Capital Gain + Investment Income
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Rate of Return=
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Total $ Return/Investment Initial Values
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Inflation Risk
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Erodes Value
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Intrest Rate Risk
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Bond Price Falls
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Business Failure Risk
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Bad Management or Products Result in Lower Value
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Market Risk
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Prices fluctuate due to behaviors of investors
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Global Investment Risk
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Currency changes affect return on investment
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Variance
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Risk
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Safest Investments
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Predictable but lower income (savings accounts, certificates of deposit, US savings bonds, US treasury bills)
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Riskier Investments
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Higher Potential Income (municipal bonds, corporate bonds, preferred stocks, common stocks, real estate rental property)
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Investment Growth
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investment expected to increase in value
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Investment Liquidity
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Ability to buy or sell investment quickly (without impacting value substantially, savings account very liquid, real estate not very liquid)
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Asset Allocation
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Process of placing assets among several types of investments Lessens Risk (diversification)
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Time Factor (of asset allocation)
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longer time invested, better the opportunity for higher returns
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Age (of asset allocation)
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type and style of investments changes with age
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Stock (Equity)
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-Equity Capital provided by stockholders who buy shares of company stock -Stockholders=owners -Corporations Not Legally Required to Repay $ From Selling Stock -Can Pay Dividends -Instead, Retain All or Part of Earnings -Two basic types of stock (common and preferred)
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Bond
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Loan to a corporation, federal government, or municipality
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Bondholders receive:
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intrest payments and principal repaid at maturity (1-30 years)
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Bondholders keep bond until…
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maturity
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Bondholders can sell bonds to other investors before…
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maturity
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Mutual Funds
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-Investor $ Pooled -Invested by mutual fund manager -investors buy shares in fund -adds diversification (reduces risk) -funds range from low to high speculative -match goals with fund objective -fees vary widely among funds
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Safety
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Minimal risk or loss
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Risk
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Uncertainty about outcome
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Investments Range
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vary safe to very risky
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Speculative Investments
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High Risk
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Real Estate Goal
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Buy Property, Sell at Profit
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Rule of Real Estate
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Location, Location, Location
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Typical speculative investments
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Antiques & Collectibles Call & Put Options Derivatives Commodities Coins & Stamps Precious Metals
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Personal Plan for Investing
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1. Establish Realistic Goals 2. Determine Goal Amount 3. Specify Amount Available to Invest 4. List Investments to Evaluate 5. Evaluate Risk and Potential Return for Each 6. Reduce Possible Investments to a Smaller Number 7. Choose at least Two Different Investments 8. Evaluate Investment Program Regularly
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Your Role in the Investment Process
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1. Evaluate Potential Investments 2. Monitor Value of Investments 3. Keep Accurate & Current Records 4. Seek Assistance of a Financial Planner -Can Help With Items 1-3 -You are Still Key Responsible Party 5. Consider Tax Consequences -Especially when Selling Investments

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