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Mindful About Money
Transcript of Mindful About Money
MINDFUL ABOUT MONEY
By Shannon Wong
What is Investing?
Using your money (capital) to gain profitable returns in the form of interest, dividend, income, or appreciation in capital value.
Good way to use money that you are not going to spend in the next 5-10 years.
Includes mutual funds, stocks, and bonds.
The best way to make your money grow is by saving a little of your income from every paycheck. A few dollars a day really adds up!
The Four D's That Can Make The Average Person Wealthy
1. Debt Control
Assets – Liabilities = Net Worth
(the key measurement of wealth!)
After you reduce your debt by paying off a loan, keep depositing the same amount into your savings/investment accounts. Instead of paying your lender, you will pay yourself and grow your savings.
Liabilities (debts) detract from your net worth, and servicing them each month reduces the amount of money you have to save.
2. Delayed Gratification
What if you have no more than a few dollars to save per day? Will it really mean anything in the long run?
Yes! Every contribution adds up over time – like skipping the daily Starbucks latte. If you save those $5 every day, you’ll have $150 to invest per month. Investing this in the TSX earns 10% annually, and you will be able to keep up with an inflation rate of 2%.
There aren’t any investments that are high return and low risk. What do I invest in?!
4. Dollar Cost Averaging
I have no idea when or how much to start investing! Are there any specific strategies that I should use?!
PRIORITIES FOR YOUR SAVINGS AND INVESTMENTS
1. The Short-Term Goal
-The Emergency Fund-
-Save 6-9 months of your annual income for an emergency, like job loss or vehicle damage or medical emergency.
If you are living with your parents: now is the time to save six months of income!
If you are NOT living with your parents: a more realistic goal is to save 1-3 months of income.
Saving 10% of your monthly income each month will give you an emergency fund of 1 month’s pay at the end of the year.
-The more secure your employment, the less of an emergency fund you need. The less secure your employment, the larger your emergency fund should be.
-Only safe place for this fund is in a high interest savings account at your bank or credit union.
Ensures security of capital and quick access to your funds.
2. The Mid-Term Goal
Place the money you are saving towards these mid-term goals in a high-interest savings account.
Every time you hit $1,000, move these funds to a Guaranteed Investment Certificate (GIC) and a Certificate of Deposit (CD) that mature in 15-18 months.
Repeat until ready to buy home/car!
-Car and Home-
Pros of Investing in GICs and CDs:
-Offer a higher guaranteed interest rate than savings account.
-Safety because your bank-held savings are protected by insurance.
Cons of Investing in GICs and CDs:
-Can’t access your funds until the maturity date.
3. The Long-Term Goal
-If you find yourself with a
little extra savings
each month after making regular contributions to your short and mid-term goals, you can invest them!
-If you aren’t going to access these funds for many years, there are a wide variety of options and
to help you grow your money.
a) Retirement Savings Plan with your employer
-Many employers offer to match your savings with company dollars when you join the company retirement savings plan.
b) Registered Retirement Account
-Take advantage of tax savings by making deposits to this account, and start investing in a well-diversified mutual fund with even just a $50 deposit and $25 contributions.
c) Mutual Funds
-Offer potential for higher return on capital, with higher risk (no guaranteed return, balance may fluctuate greatly over time)
-Professionally managed type of collective investment that pools money from many investors.
-Fund manager’s goal is to grow the portfolio by using a diversified collection of bonds, stocks, and money market instruments.
Advantages of Mutual Funds:
-Open an investment account with minimal initial deposit.
-Make small regular deposits.
-Money is managed professionally.
-Access to many national/international corporations which you would not be able to invest in individually - diversification reduces risk by spreading it over a variety of assets.
-Take advantage of dollar cost averaging and put money to work right away.
What is Budgeting?
Budget: An estimate of income and expenditure for a set period of time.
-Helps you understand where your money is going so you can better allocate your dollars to meet your goals.
-Balance your financial obligations, needs, and wants.
-Provides financial awareness by helping you keep track of where you are both earning and spending your money, making it more difficult to fall into debt.
Saving Towards Goals:
Pay yourself first – you’ll be more likely to save if the first thing you do after receiving your paycheck is transferring the money you want to save directly into accounts used for solely saving.
Include health, disability, and life insurance.
Paying off student loan debt or credit card debt.
Adjusting to your lifestyle, your grocery budget should be between $55 and $90 per week for an adult. That’s $3,120 per year for an adult and half of that for a child.
Mortgage cost, principal, interest cost, property taxes, parking.
Hydro, heat, water.
Phone, internet, cable fees. These can easily get out of control so make sure that you are getting good value for your user fees.
Cost of vehicle, gas, insurance, regular maintenance.
Clothing, health care, and grooming:
Costs of personal care – savvy shoppers can find saving opportunities here.
One’s disposable income can be spent on these items after purchasing necessities.
Questions to ask yourself before going after your wants:
1. Do you have a well-balanced approach to budgeting?
2. Are you saving money each month for your mid- and long-term goals?
3. Are you meeting all of your needs with enough left over to meet your wants?
4. Are there costs that are preventing you from enjoying life?
Keeping Track of Your Budget
-Using a Cash Flow Statement-
A financial statement that accounts for how much cash moves in and out of your accounts each month and where you are spending your money.
Write up a monthly cash flow statement to summarize your income sources and expenditures.
Take control and enjoy a balanced budget.
Examine your income and expenses to see where you can make changes to better meet your goals.
Organize these expenditures into Financial Obligations, Needs, and Wants.
WHAT TYPE OF INVESTOR ARE YOU?
1a, 3, 6a, 7a: GEEK INVESTOR
1b, 3, 5, 6b: CAUTIOUS INVESTOR
1c, 2, 4, 6c: EMOTIONAL INVESTOR
The Geek Investor:
Stickler for details and data.
May forget to take personal situation and goals into account before making investment decision.
Afflicted with "analysis paralysis".
Limit yourself to a few reliable sources.
Make a list of pros and cons.
Give yourself a deadline.
Work with a financial planner who can help you distance yourself from your daily transactions and focus on your long-term spending and saving habits.
The Cautious Investor:
Prefers GIC's and CD's for long-term investing goals despite low returns.
Misses out on growth opportunities.
Less stressful approach, but you need to save more money to achieve the same results as other risk-taking investors.
Diversification & Dollar Cost Averaging
Seelct a prudent diversified fund with a track record of results that exceed those of GIC's and CD's.
Review strategies at least once a year to avoid falling into a routine of outdated and unsuccessful investment strategies.
The Emotional Investor
Reactionary, often making impulsive decisions based on present situations and forgetting to look at long term goals.
"I am too young to think about saving for retirement" or "I am healthy so I don't need an emergency fund"
Most likely to buy high and sell low.
Have a solid financial plan: creating two lists for short-term and long-term goals and setting up a savings account for each.
Set up automatic deposits for each account.
Have a savings account for emergencies without debit card access.
A financial planner may help you prevent making impulsive changes to investments and asset allocations to keep you on track towards your goals.
High returns always come with higher risk, and less risky investments yield lower returns. Diversify your portfolio and invest in a wide variety of assets to reduce your risk by counteracting investments that have more variable yields with ones that are stable and predictable.
Dollar cost averaging (DCA) is an investment strategy that takes the form of investing equal amounts regularly over specific time periods. More shares are purchased when prices are low and fewer shares are purchased when prices are high. This gives newer investors a lower average cost per share of the investment.
Decide the amount of money invested each time, frequency, and time horizon.
Studies show that the best time horizon for the stock market to balance risk and return is 6-12 months.
You are a financial advisor. A new client, Bob, has walked into your office and you ask him a few questions to create a client profile:
4th year university student, studying theatre at York University.
Little to no previous investing experience or knowledge and is highly financially dependent on parents.
Has invested a few thousands dollars in the stock market but has lost money as he gets extremely stressed out by even small fluctuations in the market.
Be a Financial Advisor?
Explain to Bob what investing really means, using the words
, and make sure to detail what form the returns can come in.
Investing is using
to gain profitable
in the form of
interest, dividend, income, or appreciation in capital value.
What are the
of that Bob should pay follow to attain wealth?
Debt Control, Delayed Gratification, Diversification, and Dollar Cost Averaging
short term goal
should he immediately start saving for?
- 6 to 9 months of your annual income for this fund as a buffer in case of unexpected situations like job loss, vehicle damage, or health problems.
must Bob balance in his
? Briefly explain what these three things include.
(insurance, loan payments),
(food, shelter, clothing to an extent), and
(other non-necessities that just improve the quality of life).
What kind of
does Bob have? Explain using details from his
, and offer some
Emotional Investor. He is still
on his parents and is
by the volatility of the stock market. He seems like he would make
based on his emotional state. He needs a
solid financial plan
, and accounts dedicated to different term goals. A
could help Bob prevent making impulsive changes to investments and keep him on track towards his goal of becoming financially independent.