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Isabella BedoyaPersonal Finance Final ReviewSample “Need to Know:” Many individuals’ retirement accounts plummeted 35% from March 2007 through summer 2009. Ups and downs since. Dec.12 (12:30-2:30) Third test/Final exam on Chapters 11-16 Investment: commitment f funds to achievement of long term goals• Key to long-term financial successPurpose of investment: to make money• Importance of investing: building wealth and security• Inflation has affected investments• Salaries don’t keep up with inflation• People live longer, money has to last longerPreparations of Investment• Stable life: budget under control, loans paid off, long term residence• Net worth: what you own, what you owe, have a monthly budget• Regular Savings: be a saver before you become an investor, have an emergency fund• No credit card debt: hardest part for people, interests paid on credit cards is money down the drain that can’t be made back through investments• Employer sponsored retirement plan : have tax advantages, it is a form of investment, retirement plans are the biggest investments most people haveFour steps in investing:1. Setting goals/developing an investment attitudea. Important factor affecting goals: current incomeIsabella Bedoyab. Realistic goal for college students is to save up $1,000 dollars and then invest themc. Ask yourself these questions:i. What do I really want?1. Learn to prioritizeii. How much money will it take to get there?iii. How much money do I have or will have?iv. How long will it take to get the money?v. How much risk can I take?vi. Am I willing to give up things I want now to live better in the future?vii. Given my circumstances, what can I realistically expect?2. Assessing risk and return a. Evaluation revolves around three questions:i. How long do you plan to invest?1. Investment horizon – how long do you eed to save or invest to get something that you want2. How far is retirement away from youii. What amount of expected return are you aiming for?iii. How do you feel about risk?b. Expected returns: anticipated future returnsc. Current income: money received from an investmentd. Capital gains: income that results from an increase in the value of an investmente. Capital losses: lost income resulting from a decrease in the value of an investmentf. Return: total income from an investmentg. Total return: annual return on an investment including appreciation and dividends or intersth. Yield: return on a capital investment, typically bondsi. Current yield: annual interest on a bond, actual rate of returnj. Investment risk: uncertainty over an investments actual return3. Selecting investments and allocating assetsa. Asset allocation: target mix of different types of investmentb. Diversity: putting money into different types of investmentsc. Portfolio: combined holdings to increase diversification and to reduce risk, once established they should be managed and revisedi. Active portfolio management involves buying and sellingd. Investment Ladder – as you move up the ladder more risk may be encountered but also the possibility of getting a higher rate returni. Step 1: security (at the bottom of the ladder)1. Safest step, money is most secure2. Cash, CDs, gov. savings bonds, insurance, retirement plans, money market funds, savings account, US treasury securityii. Step 2: Safety and Income1. Preffered stocks, corporate bonds, gov and municipal bonds, savings bonds, utility stocks, some REITS (real estate investment trusts)iii. Step 3: growthIsabella Bedoya1. Growth stocks, growth mutual funds, raw land, real estate, convertible bondsiv. Step 4: speculation1. Options, commodities, junk bonds, penny stocks, collectibles, metals, gems, future contracts4. Managing investmentsa. How much should be invested?b. How long investments should be held?i. Short and long term strategies include buy and hold and more activityii. Long term strategy involves keeping investments for many yearsiii. Short term strategies: performance of individual investments often leads to changels1. Ex. Stock or mutual fund that loses money or remains stagnant over a period of time should be sold and replaced with an investment with more potentialc. Who should be involved in investment decisions and processing buy and holds?i. 80,000 registered stockbrokers in USAii. Besides selecting your investment, you also have to elect the broker, firm or institution you will use to buy or selld. Asset allocation modelTypes of investments:• Savings: accumulate funds in a risk-free conservative manner based on interest over time• Stocks, bonds, mutual funds, money markets: o Stocks: ownership in a corporation represented by shareso Bonds: investments involving lending money to organizationso Dividends: distributions of money from a corporation or government to investorsIsabella Bedoyao Mutual funds: groups of stocks, bonds r other securities managed by an investment companyo Money market: you end money to an organization and they offer security and liquidity• Real estateo General rule: real estate increases in value and you will make a profit but there are no guaranteeso Location and timing of transactions are importanto Less liquid, less readily turned into cash• Social securityo Varies amongst individualso Lifetime checks for those in retiremento Built-in inflation protection• Company pensionso Company pensions provide monthly checks at retiremento No built-in inflation protection• Large holdingso Less commono Execs and family owners of companies may have a lot of money tied p in a company stock• Your own businesso Owning a business is riskyo If business s successful it is a great investment• Anticipated inheritance• Precious metals and collectibleso Buy from reputable dealers• Annuitieso Contracts bought from life insurance companieso Company insures a series of periodic paymentsTransaction costs involved in investing• Keep investment costs (fees) to a minimum• Transaction cost: charges for buying and selling securitiesInvesting strategies and terms• Risk and investmento Aware of first risk but not of any following riskso Two kinds of investment risk: risk of losing money by being too aggressive or risk of losing money by being too conservative• Tradeoffs between risk and returno Realized return: actual return on investment• Tax shelterso Tax free/tax exempt: no taxesIsabella Bedoyao Tax sheltered: no taxes are charged on profits until a later date• Dollar


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FSU COA 4131 - Personal Finance Final Review

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