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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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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 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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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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Table of Contents:
  1. HUMAN RELATIONS:Some Guidelines for Effective Human Relations, Communication has 3meanings
  2. CULTURE AND PERSONALITY:Definition of sub culture, Definition of Personality, Types of Persons
  3. PERSONALITY AND STRESS:Personality, PERSONAL TOOLS TO CONTROL STRESS
  4. PERCEPTION AND INDIVIDUAL BEHAVIOUR:Three concepts of personality, Bias in Perception
  5. PERCEPTION AND GROUP BEHAVIOR:Characteristics of Groups, Individual and Group Behavior
  6. ATTITUDE AND BEHAVIOUR:Types of Attitudes, Steps to turn attitude into action
  7. PERSONAL MOTIVATION AND ACHIEVEMENT:Needs and Motivation, Self-discipline and motivation
  8. SOLVING PROBLEMS SKILLFULLY:Problem solving and cognition, Ways to solve problems
  9. CREATIVITY IN PROBLEM SOLVING:Barriers to creativity, Tips to solve problems creatively
  10. HANDLING PERSONAL ISSUES:Self-Defeating Behaviour, Positive attitude to tackle personal problems
  11. CONFLICT RESOLUTION:WHY SO MUCH CONFLICT EXISTS, TECHNIQUES FOR RESOLVING CONFLICTS
  12. COMMUNICATION AND HUMAN RELATIONS:Process of communication, Improving gender barriers to communication
  13. ORGANIZATIONAL COMMUNICATION:To improve listening skills, Types of organizational communication
  14. UNDERSTANDING COMMUNICATION STYLES:Modeling communication style, Sociability continuum
  15. SELF-ESTEEM:Building process of self-esteem, Self-esteem and public image
  16. BUILDING SELF-CONFIDENCE:The importance of self-confidence and self-efficacy, Balanced Self-Confidence:
  17. BECOMING A LEADER-1:Assessing leadership role, Traits and Characteristics of Effective Leaders
  18. BECOMING A LEADER-II:Theories of leadership, Developing leadership potential
  19. GLOBALIZATION AND CROSS-CULTURAL DIFFERENCES:Religious Values and Bicultural Identities
  20. IMPROVING CROSS-CULTURAL COMPETENCE:Strategies to improve cross-cultural relations, More steps to improve Cultural Relations
  21. BUILDING GOOD RELATIONS WITH MANAGERS:Impressing your manager, Coping with a problem manager
  22. BUILDING GOOD RELATIONS WITH CO-WORKERS:Make Co-workers feel important, Maintain Honest and Open Relationships
  23. BUILDING GOOD RELATIONS WITH CUSTOMERS:Salesperson Represents the Business, Approaching the Customer, Excuses vs. Objections
  24. CHOOSING A CAREER-1:Ten Myths about Choosing a Career, Attitude toward and Perceptions about Myself
  25. CHOOSING A CAREER-II:Choosing a career and developing a portfolio Career, Suggestions for career Preparation
  26. FINDING A JOB:Targeting your job search, The Internet and Résumé Database Services, Extreme Job Hunting
  27. SIGNIFICANCE OF RESUME:Major types of resumes, Electronic Submission of the Résumé
  28. IMPROVING INTERVIEW SKILLS:Successful interview, Knowing the employer or Organization
  29. IMPROVING WORK HABITS-1:Reasons of procrastination, Techniques for Reducing Procrastination
  30. IMPROVING WORK HABITS-2:Developing the proper attitudes and values, Time-management techniques
  31. NEW MODEL OF CAREER ADVANCEMENT:Career portability, HUMAN RELATIONS SELF-ASSESSMENT
  32. TAKING CONTROL OF YOURSELF:Develop Outstanding Interpersonal Skills, Business etiquettes
  33. EXERTING CONTROL ON OUTSIDE ENVIRONMENT:Important communication tip, Exerting control over the outside world
  34. MANAGING PERSONAL FINANCES-1:Your personal financial plan, Steps in budget making
  35. MANAGING PERSONAL FINANCES-2:Basic investment principles, Tolerance for Investment Risks, Types of investments
  36. ACHIEVING HAPPINESS-1:Finding happiness and enhancing your personal life, The key to happiness
  37. ACHIEVING HAPPINESS-2:The Five Principles of Psychological Functioning, Your mind and Happiness
  38. ACHIEVING HAPPINESS-3:Need for intimacy, Working out issues with relationships
  39. APATHY AND ITS REMEDIES:Let us try to understand the various definitions of apathy, Coping strategies for apathy
  40. ENHANCING PERSONAL ETHICS-1:Influence of Culture, Common ethical problems
  41. ENHANCING PERSONAL ETHICS-2:Common ethical problems, Guidelines for Behaving Ethically
  42. HELPING OTHERS GROW:Being a Nurturing, Positive Person, A list of mentoring behaviour, Coaching skills and techniques
  43. REVIEW-I:What is a Human Relation?, Meanings of Communication, Two types of stress, Some personal problem, Communication style
  44. REVIEW-II:Steps to build self-confidence, Globalization, Building Good Relations with Co-workers, Good work habits
  45. REVIEW-III:New model of career advancement, Choosing your investment, Tactics for Dealing with Difficult People