savings

Investing basics

Difficult to consistently pick winning stock

Way to wealth is systematically investing over time, never too late to begin investing, the sooner the better

Investing $1200 per year beginning at age 20 until age 65 , at an 8% annual rate of return, would total

$463,807

65-20=45

N=45, l/Y= 8%, pv=0, pmt-1200, compute FV

5 more years= $688,524

If you wait till 40 to begin, would need $6078 per year to reach $688.524

N=30, i/y= 8%, pv=0, FV=688524, compute pmt

How to begin investing

If you have any credit card debt, pay it off

Max out company retirement plan contributions

Open a Roth IRA

Open an investment/ savings/ brokerage account

Factors affecting historical returns

The reason for the narrowing of the returns gap between stocks and bonds over the last 30 years is two fold

Interest rates were at historical highs during the first part of the 1980s as inflation continued to be a problem. bond yields were high

Investors left equity markets and dollars poured into bonds, raising total return due to increased demand for these instruments even though rates were at historical Lowe's

Investor psychology

May not behave rationally when making financial decisions

Pitfalls: loss aversion, market timing, keep losers too long I selling winners too fast overconfidence, recency bias, anchoring

Advice for investors

Assess risk tolerance

Diversity

Asset allocation mix depends on risk tolerance and life cycle stage

Stocks outperform bonds over long run

Diversified portfolio of stocks and bonds may be best way to navigate a sound financial course

Roth IRA

Tax free growth potential

Investments: potential earnings grow tax free

Contributions: made with after tax dollars and not tax deductible

Traditional Ira

Tax deferred growth potential

Investments! Potential earnings grow tax deferred

Contributions: made with after tax dollars, tax deductibles if you meet income requirements

Pay taxes when you withdraw

Budget

Written record of the money that flows in and out of your household every month

Why budget

First step to financial success

Controlling everyday finances will allow you to do more of things you want to do

Balancing income and expenses

Start budgeting now, don’t wait until you’re financially on your feet to begin

Budgeting is simply balancing your income vs your expenses

How to start budgeting

Write down everything you spend money on and anytime you receive money

Creating a personal budget

Track your expenses

Figure out amount of money you’re spending

What do you have to spend

What are you spending that is not a necessity

Two types of expenses

Essential- have to have in order to live

Non-essential expenses- don’t have to have in order to live

Essential fixed expenses

Mortgage or rent, car insurance, car payments, taxes, school loans

Essential variable expenses

Car maintenance, gas, food, electricity, phone bill

Non essential expenses

Books

Movies

Video games

Concert tickets

Others

How to save

Pay yourself first

Use automatic transfers

Use payroll deduction

Take advantage of employers retirement plan

Why do budgets fail

Negative attitude

Lack of motivation

Unrealistic expectations