Personal Finance Chapter 13

Flashcard maker : Lily Taylor
Key Concepts
Investment Programs
Safety, Risk, Income, Growth & Liquidity Factors
Asset Allocation & Investments Alternatives
Sources of Financial Information (risk reduction, investment returns)
Establishing Investment Program
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)
8 Steps to managing a financial crisis
-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
Getting the money needed to start an investment program
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

Investment Safety and Risk
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
Level 1 Financial Security
Cash, CDs, money-market mutual funds, and US gov bonds
Level 2 Safety and Income
US securities selected corporate and municipal bonds, income stocks, and conservative mutual funds
Level 3 Growth
Growth stocks, growth-oriented mutual funds, and rental property
Level 4 Speculation
Speculative stocks, options, commodities, and high-risk investments
Capital Gain=
Investment Ending Value – Investment initial value
Investment Income=
Intrest or Dividends Paid on Investment
Total $ Return=
Capital Gain + Investment Income
Rate of Return=
Total $ Return/Investment Initial Values
Inflation Risk
Erodes Value
Intrest Rate Risk
Bond Price Falls
Business Failure Risk
Bad Management or Products Result in Lower Value
Market Risk
Prices fluctuate due to behaviors of investors
Global Investment Risk
Currency changes affect return on investment
Safest Investments
Predictable but lower income (savings accounts, certificates of deposit, US savings bonds, US treasury bills)
Riskier Investments
Higher Potential Income (municipal bonds, corporate bonds, preferred stocks, common stocks, real estate rental property)
Investment Growth
investment expected to increase in value
Investment Liquidity
Ability to buy or sell investment quickly (without impacting value substantially, savings account very liquid, real estate not very liquid)
Asset Allocation
Process of placing assets among several types of investments

Lessens Risk (diversification)

Time Factor (of asset allocation)
longer time invested, better the opportunity for higher returns
Age (of asset allocation)
type and style of investments changes with age
Stock (Equity)
-Equity Capital provided by stockholders who buy shares of company stock
-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)
Loan to a corporation, federal government, or municipality
Bondholders receive:
intrest payments and principal repaid at maturity (1-30 years)
Bondholders keep bond until…
Bondholders can sell bonds to other investors before…
Mutual Funds
-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
Minimal risk or loss
Uncertainty about outcome
Investments Range
vary safe to very risky
Speculative Investments
High Risk
Real Estate Goal
Buy Property, Sell at Profit
Rule of Real Estate
Location, Location, Location
Typical speculative investments
Antiques & Collectibles
Call & Put Options
Coins & Stamps
Precious Metals
Personal Plan for Investing
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
Your Role in the Investment Process
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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