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Human
Relations MGMT611
VU
Lesson
35
MANAGING
PERSONAL FINANCES-2
Quotation
A
small debt makes a man
your debtor; a large one
makes him your
enemy.
Basic
investment principles
In
order to have happy, satisfied
and financially secure life,
in this lecture you will
learn the investment
principles.
After
the spending plan results in
money left over for
savings and investments, the
person might consider
the
following eight investment principles.
1.
Spend less money than you
earn. The
key to lifelong financial security
and peace of mind is to
spend
less
money than you
earn.
2.
Invest early and steadily to
capitalize on the benefits of compounding.
3.
Keep reinvesting dividends.
4.
Diversify your investments (use
asset allocation). Do not invest all
your savings in one
business.
5.
Maintain a disciplined, long-term approach.
You
must have a goal in your
mind.
6.
Practice contrary investing. To
become wealthy, buy investments
when the demand for them is
very
low
and sell when the demand is
very high.
7.
Invest globally as well as
domestically. Yet
be aware of the risks, such as a
currency devaluation or
political
turmoil.
8.
Pay off debt.
Paying off debt generally
provides an outstanding return on investment.
Choosing
your investment
After
understanding key investment principles, the person is
ready to invest. Investments can be
categorized
into
two basic types:
1.
Lending money (fixed-income
investment)
2.
Owning assets (equity
investment)
Tolerance
for Investment Risks
A
key investment principle is that
return and risk vary inversely. The
greater the risk, the greater
the
potential
return; the lower the risk the smaller
the potential return. A major principle
related to risk taking is
to
decide how much and what
kind of risk you can
tolerate.
For
example, one person might
not be able to tolerate the risk of
missing out on big profits
in the stock
market
by putting money in a savings bank. A
major factor in tolerating investment
risks is that most
people
are risk averse.
Types
of investments
These
are various types of
investments. You may feel
that it is Western thinking
but it is increasingly
applicable
in Pakistani set up. To help
expand the reader's horizon,
eleven types of investments
are
described
here.
1.
Certificates of Deposits.
These
investment vehicles (CDs) require a time commitment
from ten days to upwards of ten
years, but
they
pay high interest.
2.
Money-Market Funds.
Banks
and other financial-service firms
offer relatively high rates
through money-market mutual funds.
Many
sophisticated investors use
these funds as a parking place
for cash between
investments.
3.
Treasury Securities.
The
government offers different types of
secure investments to the public:
treasury bills, treasury
notes,
treasury
bonds, defense savings
certificates, etc.
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Human
Relations MGMT611
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4.
Corporate Bonds.
Corporate
bonds are essentially loans
to businesses, and pay
interest commensurate with
their risk. The
value
of bonds fluctuates with current
interest levels. Junk
bonds offer
a high yield because they
are rated as
having
a high risk. Bonds can
also be purchased through
bond
funds that
are essentially a portfolio of
bonds.
5.
Common Stocks.
Investing
in stocks usually means
buying and selling common
stocks. Most mutual funds invest in
common
stocks.
Stock prices rise and
fall over such tangible
factors as the price of oil,
fluctuations in interest
rates,
and
outbreaks of disease.
6.
Mutual Funds.
In
this type of investment, a group of professionals
invest your money in stocks,
bonds, or other types
of
investments.
Stock mutual funds are one of the
most popular investment vehicles.
Index
funds have
grown
in
favor in recent years. The
fund automatically purchases the
investments that make up a particular
market
index.
7.
Real Estate.
A
starting point in real estate investing
is to be a homeowner. In the long-run, most
homes increase in
value
faster
than inflation, and offer
tax advantages. An investment that is
really a form of business ownership
is
income
property--real estate that
you rent to tenants.
8.
Gold Bullion.
Gold
has long been considered a
sound long-term investment despite
its serious decline in value
in recent
years.
Another caution is that gold
has to be stored safely, and
it pays no dividends or interest. Yet
gold
funds
increase during unstable
economic times.
9.
Coins, Antiques, Paintings, and other
Collectibles.
If
you are looking for an
expensive hobby that might
pay off financially,
collectibles are ideal. A
person
should
have a sound, diversified investment
program before investing money in collectibles.
Collectibles are
speculative.
11.
Life Insurance.
Financial
planning usually includes
some life insurance.
Choosing
the right mix of
investments
A
major investment decision is how to
allocate investments among
interest-bearing accounts
(including
cash),
stocks, and bonds. In
general, young people are in a better
position to take investment risks
than
those
nearing retirement.
A
prevailing rule of thumb is that if
you invest in stocks, subtract
your age from 100,
giving you the about
percentage
that should be in stocks.
Five
diversification strategies with
respect to risk are
(1)
Capital
preservation,
(2)
Income,
(3)
Income
and growth,
(4)
Growth,
(5)
Aggressive
growth.
Selecting
the right portfolio depends
somewhat on emotional factors, as
revealed by behavioral
economics.
One
example is that most
investors are loss averse.
Procrastination also influences investing,
especially the
delay
of planning.
Relative
Return of Stocks and
Bonds
During
the last few years, large-company
stocks have returned about 20 percent
annually, and corporate
bonds
about 12-15 percent. Not
all stocks and bonds
yield the returns just mentioned.
Mutual funds help
lower
the risk of achieving poor
returns.
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Human
Relations MGMT611
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Human
Relations Self
Assessment
Are
You Too Far in
Debt?
1.
Is an increasing percentage of your
income being spent to
pay
debts?
2.
Do use credit to buy many of
the things you bought in
the past for
cash?
3.
Are you paying bills
with money targeted for
something else?
4.
Have you taken out
loans to consolidate your
debts or asked
for
extensions
on existing loans to reduce
monthly payments?
5.
Does your checkbook balance
get lower by the
month?
6.
Do you pay the minimum
amount due on your charge
accounts
each
month?
7.
Do you get dunning notices
repeatedly (letters
demanding
payments)
from your
creditors?
1.
Are you threatened with
repossession of your car or
cancellation
of
your credit cards or with
other legal
action?
2.
Have you been drawing on
your savings to pay regular
bills that
you
used to pay out of your
paycheck?
3.
Do you depend on extra
income, such as overtime and
part-time
work,
to get to the end of the
month?
4.
Do you take out new
installment loans before old
ones are paid
off?
5.
Is your total savings less
than three months' take-home
pay?
6.
Is your total installment
credit (not counting
mortgage) more than
20
percent of your take-home pay?
7.
Do you become horrorstruck when
you look at your credit
card
bills?
8.
Has a credit card company rejected
your application in the
past
two
years?
If
your answer is yes to two or more of the
above questions,
financial
councilors
would advise you to declare
war on some of your
debts.
Source:
DuBrin,
Andrew J. `Human Relations: Career
and Personal Success',
Pearson Prentice Hall,
2005.
Managing
and preventing debt
Dealing
with debt is an important component of
managing personal finances
because the vast majority
of
people
enter into debt at some time
in their life.
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Relations MGMT611
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A.
Managing Credit Wisely
Many
people need help managing debt.
Paying back debt helps a
person establish a credit record.
Good
credit
is also important because
prospective landlords and employers
carefully consider an applicant's
creditworthiness.
Consider these
guidelines:
1.
Recognize
the difference between good debt and
bad debt.
2.
Prepare
a monthly spending plan to assess
how much debt to assume. (A rule of
thumb is for
debt
payments
not to exceed 15 to 20 percent of
monthly take-home pay, not
including a home
mortgage.)
3.
Stick
to one major credit card and
only one store
card.
4.
Review
carefully whether you can handle credit
extensions.
5.
Consider
a home equity loan for major
purchases.
6.
Reduce
the principal on loans with
each payment.
7.
Save
something each month, even
as you are paying off
debt.
8.
If
unable to pay your bills,
talk to your creditors
immediately.
9.
Choose
personal bankruptcy as a last desperate
option.
B.
Working Your Way Out of
Debt
Most
people must assertively attack
their debts to improve their
general well-being. A recommended
technique
for reducing debt is to
concentrate
on one bill at a time. You
first pay off your
smallest debt
with
a variable payment and then
concentrate on your next-smallest
variable-payment debt.
A
more conventional approach to
reducing debt is to apply any
money available for debt
repayment to the
loan
bearing the highest interest. If
you are having problems getting
out of debt, the problem could be
that
you
are spending too
much.
C.
Staying Out of Debt (spend
what you have)
Making
purchases with cash, check,
or debit cards prevents
borrowing. Staying out of debt is
often difficult
because
the debtor has deep-rooted problems
that prompt him or her to
use credit. Among these
problems
are;
perceiving material objects as a way of
gaining status, and purchasing
goods and services to
relieve
depression.
Net
worth and retiring rich
Preparing
an annual net worth report
A
potentially uplifting strategy of
managing personal finances is to
chart one's yearly financial
status. You
can
accomplish this by annually evaluating your
net
worth, the difference
between your assets
and
liabilities.
It is best to include mostly liquid
assets--those
that can be converted to cash
relatively quickly.
How
to retire rich
To
retire rich, start early and begin a
savings or investment plan that is
set aside for retirement
only. Yet
most
Pakistani workers do not
seem to start saving until
mid age or later. Your retirement funds
should be
divided
among stocks, bonds, short-term
notes and cash, and
perhaps real estate. People
generally need
about
75 percent of pre-retirement incomes to
live comfortably during
retirement.
References:
Dubrin,
A.J. (2005). Human Relations:
Career and Personal Success.
Upper Saddle River, New
Jersey,
07458.
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