Investments and Personal Money Management

Four Money Management Philosophies

Pay Yourself First, Save What Is Left, Spend First, Invest Wisely

Pay Yourself First

Save before spending; correct practice

Save What Is Left

Spend first, then save whatever remains; poor practice

Spend First

Uses income before saving; often leads to little or no savings; poor practice

Invest Wisely

Research investments before investing, diversify, and understand the risks; good practice

Money Management Cycle

Income, Set Financial Goals, Pay Yourself First (Savings), Budget Expenses, Spend Wisely, Invest, Monitor and Evaluate, Adjust Budget, Repeat

Karen's Money Management Mistakes

Saved what was left, spent before saving, invested without research, had no emergency fund

Karen's Better Practices

Save first, build an emergency fund, research investments, diversify investments, match investments to financial goals

Savings Account

Risk: Very Low; Return: Very Low

Time Deposit

Risk: Low; Return: Low to Moderate; guaranteed if held until maturity; provides predictable returns

Treasury Bills

Risk: Very Low; Return: Low; government-backed

Common Stocks

Risk: High; Potential Return: High; returns are uncertain because prices fluctuate

Risk-Return Principle

Higher risk means higher potential return; lower risk means lower potential return

Stocks (Comparison)

Risk: High; Potential Return: High; returns and prices depend on market performance

Time Deposit (Comparison)

Risk: Low; Potential Return: Low but predictable; guaranteed interest if held until maturity

Reduce investment risk: Research

Research the company before investing

Reduce investment risk: Diversify

Diversify investments

Reduce investment risk: Goals

Match investments to financial goals

Reduce investment risk: Understand

Understand the risks involved

Reduce investment risk: Recommendations

Avoid investing based only on recommendations

Reduce investment risk: Long term

Invest for the long term