Analyze the Situation
Where are you currently with your ﬁnances?
Are you spending beyond your means?
Are there ways that you can cut back on spending?
What are you saving each month?
What ﬁnancial goals do you have?
Where do you want to be ﬁnancially in 5 years? 10 years?
One of the ﬁrst steps individuals should take is to create an itemized list of monthly income
Begin with listing any sources of income you may receive.
Next, Determine expenses.
An Individual should break their expenses into categories:
Fixed - A cost that will remain the same each month.
Examples: Rent, car insurance, health insurance
Variable - A cost that will change with use and each month.
Examples: Utility bills, cell phone bills, groceries, gasoline, etc.
Discretionary - Either a ﬁxed or a variable cost that can be avoided without detriment to
Examples: New clothing, new paint for house, decorations, going out to eat, going to the
Analyze and Plan
Compare Income and Expenses
Do you make enough income to cover your monthly expenses?
Are there are expenses that you can reduce in order to have more ﬂexibility with
Determine your goals
Set speciﬁc ﬁnancial goals. Answer questions, such as:
Do you want to save for a large purchase, such as a house or new car?
Do you want to pay off your student loans earlier than required?
Are there smaller, but higher priced items that you are looking to purchase?
Do you want to invest more in your retirement?
Monitor and Adjust
Improve your situation
Attempt to save at least 10% of monthly income.
Attempt to use 20% of monthly income towards debt payments, such as credit
cards and student loans.
Periodically check expenses for ways to reduce expenses.
If rent/mortgage payment is too high, consider renting out space in home.
Consider canceling home phone service if cell phone is suitable for both.
Considering bringing lunch to work rather than going out to eat daily.
Remove expensive movie channels from cable television package.
Monitor your progress and adjust as needed
Investing is putting your money to work for you.
This can be done in many forms:
Mutual Funds (Principles of Investing, 2008)
Gamblers throw money towards something that might bring on a gain in money,
but most often gamblers lose money. Unlike gamblers, investors, with careful
personal ﬁnance analysis and research, commit funds towards an investment that
has a reasonable expectation of proﬁt (Investopedia, 2008)
Types of Investments - Bonds
When purchasing a bond, you are technically lending money (face value) to an
issuer offering the bond with the promise of receiving interest (coupon rate) and
eventually the full value back at a speciﬁed period (maturity).
Since bonds are usually backed by governments, these investments are more safe
and very close to being risk-free (although, nothing is risk-free). Because they carry
such little risk, bonds usually do not provide big returns.
Bonds are known as ﬁxed-income securities because the exact amount of interest
and repayment that you will receive is known.
Bonds are a form of debt ﬁnancing for the issuer.
Types of Bonds
Government Bonds - Issued by country government. Safe if country is stable.
Municipal Bonds - Issued by cities. These bonds are free from federal tax. Slightly
more risky than government bonds.
Corporate Bonds - Issued by companies. Usually more risk involved, but often higher
yield (return) on investment.
Zero-coupon Bonds - A bond that has no interest payments (coupon rate is zero). To
compensate for the lack of interest payments, the bond is purchased at a lower price
than the face value. For instance, a bond valued at $1000 might be offered at $600. At
maturity, $1000 will be paid to the bond holder, therefore earning $400 over the life of
Types of Investments - Stocks
A stock is a share of ownership of the company issuing the stock. It is a claim on
the company’s assets and earnings.
For the issuer of stocks, this investment vehicle is a form of equity ﬁnancing. The
individual purchasing the stock becomes an owner of a portion of the company.
This investment provides the rights to vote at shareholders’ meetings and also to
receive a portion of the proﬁt if the company decides to share it with their owners
Stocks are more risky than bonds; there is no guarantee of income from the
investment. The stock market is volatile and their values change on a daily basis
based on supply and demand of the company stock.
Investing in stocks, there are chances for high returns, but there are also chances
that there will be some or even a total loss of initial investment.
Types of Investments - Mutual Funds
A collection of stocks, bonds and other securities that a group of investors own collectively. Each investor
owns shares, which makes up a percentage of ownership of the fund.
Money can be made in mutual funds through:
Dividends on Stocks and Interest on the bonds.
Capital gains from selling securities that have increased in price.
When the fund holdings increase in price, the investor has the option to sell mutual fund shares.
Mutual funds are good for small investors that do not have time to research every individual stock and bond
in the market. They can contact a representative who will analyze their situation and goals and provide
suggested mutual funds to review.
Mutual funds allow for diversiﬁcation by investing in many assets so that a loss in any one investment is
minimized by any gains in the others. Diversiﬁcation is a way to mitigate investment risk.
Mutual funds allow an investor to sell their shares at anytime and convert to cash. This allows for the investor
to retain liquid assets.
The biggest issue with mutual funds are the costs associated; there are transaction fees and ongoing fees.
Concept of Compounding
Generating earnings on earnings.
If you invest $25,000 today at 6% (compounded annually), you will
have $26,500 in one year ($25,000 x 1.06). Rather than withdraw the
$1,500 gained from interest, you keep it in there for another year. If
you continue to earn the same rate of 6%, your investment will grow
to $28,090 ($26,500 x 1.06) by the end of the second year.
Basically, your earned money is making money without any effort on
your part. You provide the initial investment and allow time to pass.
An example of compounding earnings over time:
At 25 years old, Pam invested $15,000 at 5.5% (compounded annually), assuming the interest rate
remains the same, at age 50, Pam has $57,200.89 ($15,000 x (1.055^25)).
Sam is Pam’s age, but did not begin investing until age 35. At age 35, Sam invested $15,000 at
5.5% (compounded annually). Assuming that the interest rate remains the same, at age 50, Sam
This is due to the concept of compounding. Money earned on principal can be put to work to
earn more money time and time again. Investors should be prepared to re-invest principal and any
How much money do you need?
What are your speciﬁc investment goals?
Current Financial Position
Make sure personal ﬁnances are in order before beginning investing.
Remember: The shorter the time to retirement, the more conservative you should be with
It is important to analyze your personality. Are you an individual who takes risks in order to have a
bigger reward? Are you afraid of risk and therefore need safe investments?
Prepare for Contradictions
Throughout your investing experiences, you will see many different approaches to creating wealth.
There are a vast amount of ways to reach the same end goal, but to get there, the investor must do
what they are equipped to handle and are prepared for.
Risk Analysis and Management
Invest emergency funds in safe, less risk options
To be safe, make sure that your monthly expenses are covered for 3-6 months before deciding to
invest in risky options.
Less-risk options include savings accounts and bonds.
Once emergency funds are saved, use additional savings in more risky investments, such as mutual
funds and stocks.
Never invest in something that you do not understand.
It is important to do your research before putting money into unknown investments.
Research the issuer of the bond or stock.
Ask Yourself: Are they a stable company? Are they a new company. but projected for
big growth? What do their ﬁnancial statements tell you?
Diversiﬁcation allows the investor to temper the market volatility. Spreading investments into
bonds, stocks and other investment vehicles will help shield the investor from a total loss. If one
asset realizes a loss, the investor can hopefully realize gains on the other assets to balance out the
loss and mitigate the risk.
(Thornburg Investment Management, 2008)
It is important to consider the time in which you will no longer be working, but
will need money for monthly expenses.
Compounding will allow your money to work for itself. Investing early will require
less money to create a larger amount of money.
A 401(k) plan is a contribution plan offered by many employers. It is a retirement
savings plan funded by the employees, but often times, amounts are matched by
the employer. These plans are tax-free until withdrawal. 401(k) plans are self-
directed (allotments can be selected typically from a list of mutual funds) and
portable (can be moved to new company 401(k) plan).
There are annual limits as to how much an individual can contribute to their
(Nieters, et al., 2005)
An annuity is a contract between an individual and an issuer in which the
individual contributes a principal amount and, in return, the issuer guarantees
payments of principal plus interest over time. These payments can be set up as
ﬁxed or variable.
Fixed Annuities - Usually invested in government and high-grade corporate
bonds. These offer a guaranteed rate.
Variable Annuities - Usually invested in an assortment of sub-accounts. The
interest rates are tied to market performance.
Annuities are typically issued by insurance companies, but not considered
Similar to retirement plans because it can be funded in one lump sum or over
time and all the capital grows tax-deferred until withdrawal.
Unlike 401(k) plans, there is no limit on the amount that can be invested in
annuities. (Burgess Wever/Annuity FYI, 2008)
The best route for investing is to save
regularly, keep investment expenses low and
plan on keeping your money and
investments in the market for long term.
Investopedia Investor Simulator
Similar to fantasy sports pools online, this simulator
will give you $100,000 in virtual money to “invest” in
the stock market. It simulates the experience of
trading in the stock market.
Burgess Wever/Annuity FYI. (2008). Annuity deﬁnition. Retrieved October 15, 2008, from
Annuity FYI: http://www.annuityfyi.com/ab1a_what_is_an_annuity.html
Investopedia. (2008). Bond Basics. Retrieved October 15, 2008, from Investopedia - A Forbes
Digital Company: http://www.investopedia.com/university/bonds/
Investopedia. (2008). Investing 101. (Investopedia ULC) Retrieved October 14, 2008, from
Investopedia - A Forbes Digital Company: http://www.investopedia.com/university/
Investopedia. (2008). Mutual Funds. Retrieved October 15, 2008, from Investopedia - A
Forbes Digital Company: http://www.investopedia.com/university/mutualfunds/
Nieters, E., Olson, D. W., Carreiro, R., Lott, C., Kamlet, A., Suranyi, E., et al. (2005, September
30). Retirement Plans: 401(k). Retrieved October 15, 2008, from The Investment FAQ:
Principles of Investing. (2008). Retrieved October 14, 2008, from InvestorGuide.com: http://
Thornburg Investment Management. (2008). What is Diversiﬁcation? Retrieved October 15,
2008, from Thornburg Investment Management - Strategies for Building Real Wealth: