What is Investing?
Investing is the outlaying of money in order to earn a future financial return.
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Why is Investing Important?
Everyone needs money for two basic purposes: to pay for everyday things like food and transportation, and to pay for major things like a car or house, or for education and retirement expenses. You should save for short-term goals and expenses, but you need to invest for long-term goals. While savings accounts are good places to save for short-term needs such as family vacations or emergencies, you usually won't earn as much on types of savings accounts aswith some other types of investments. Sound investing can help you generate money to meet long-term needs and goals.
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Purpose of This Seminar
This seminar is designed to provide you with a strong working knowledge of financial planning and investments. By the end of the program you will be able to make more informed money management decisions, which, hopefully, will enable to you reach your financial goals quickly and with less uncertainty. In short, while this seminar is an introduction to some basic financial principles, it is really a tool to put you in control of your financial future, and help you realize your future financial dreams.
Our goals here today are to explore:
- Defining and Prioritizing Your Financial Goals
- Matching Investments to Your Goals, including...
- Stocks
- Bonds
- Cash Equivalents
- Portfolio Management
- Credit Use
- Tracking Progress
Since you may be new to the topic of investment, we have provided definitions at the bottom of many of these pages. Take a few minutes to read through the definitions.
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Why Plan
These are several goals we're probably all aiming for, purposes like:
- Making Ends Meet: We do that by improving cash flow and using debt and credit sources well.
- Keeping Our Family Safe: This is accomplished by protecting against the unexpected, such as, loss of income, medical needs, accidents and death.
- Sending Our Children to College: We have to plan for meeting future college expenses.
- Retiring Worry-Free: Ensuring a comfortable retirement requires long term planning. Passing Our
- Assets On: Preserving your wishes and your estate for your heirs is the final step.
The simple fact is, we are far more likely to reach these goals if we have a financial plan.
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Prioritize Your Financial Goals
Even well-defined goals are not enough. You need to prioritize those goals. Prioritization is not just the list of importance to you, but the order in which you need to address these goals in order to meet them.
For example, it might be most important to you that you have enough money to enjoy a comfortable retirement -- without ever being a burden to your children. And that goal might include having a substantial retirement nest egg and sufficient life, disability and health care insurance to provide for almost any contingency. But, some of you may be well on your way to realizing your retirement goal. You've probably been working for a number of years, have been contributing to your employer's 401(k) plan, making faithful IRA contributions and perhaps have health and life insurance through your employer.
Your most immediate, unfunded priority might be the education of your children. This is often a top priority with families because college expenses are a big ticket item that comes up fast - 18 years at best, and in many cases, people put off seriously saving for college until their children are in grade school. That leaves many people with less than 10 years to fund their contribution to their children's college education.
So, a priority list might include this, again, highlighted on the screen in red:
- Paying for college is my first priority. I have fewer years to accomplish this goal than saving for retirement
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Match Your Investments To Your Goals
To accomplish our financial objectives, we must pick investments that have the financial features we need. Depending on our goals, we might need:
- Liquidity, in which case we should consider cash equivalent investments,
- Fixed Rate of Return, in which case we should consider bonds, or
- Growth, in which case we should consider stocks.
Chances are we'll need a combination of features, in which case we'll need a portfolio with some of each of these investment types.
Let's start by reviewing investment types...
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Keep Some Money Liquid
All of these investments...
Passbook savings accounts
Treasury Bills
Certificates of Deposit - commonly known as CDs
Money Market Funds
…are all considered "cash equivalent." That means that they are very "liquid" investments - they can easily be sold for cash.
It is important to have some money saved in a cash-equivalent investment. Having money on hand is important for everyday living. It is recommended that you have as
much as six months' worth of income saved in a cash-equivalent account to act as a financial cushion against unexpected financial need, such as loss of job, need for major durable goods, unexpected (and uncovered) medical expense or disability. Cash-equivalent investments are also well-suited for short-term financial goals where you can not take the risk of a financial loss. For example, if you are planning to purchase a new home, you might invest your down payment in a short term CD so that when you find the right home, you have easy access to your funds and you can be assured that you'll have enough for the down payment.
While these investments are less risky and very liquid, the trade-off is their low interest or dividend payments. "Cash equivalent" investments usually pay a rate of return just slightly over the rate of inflation. They are not very suitable for longer-term goals or accumulating assets.
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