Personal Finance and 7 Laws of Gold

When it comes to happiness, nonfinancial assets are far more important than money
Good marriage; Family; Friends; Self-fulfilling work; Religious convictions; Hobbies
No matter what our objectives in life, they are easier to achieve if we have less debt and
more wealth.
What could be the biggest factor of whether you will be successful managing your money? A
marshmallow!
Specifically the Marshmallow Test Predictor of delayed gratification
1. Discover Your Comparative Advantage
Like nations, individuals will be able to achieve higher income levels when they specialize.
Sound career decisions making involves more than figuring out those things you do best, it
also is important to discover where your passions lie.
Individuals will always be better off if they are really good at something that is highly valued
by others.
2. Be Entrepreneurial. In a Market Economy, People Get Ahead by Helping Others and
Discovering Better Ways of Doing Things
Entrepreneurs actively pursue discovering better ways of doing things.
Their ability to discover
New products that are highly valued relative to costs,
Cost-Reducing production methods, and
Profitable opportunities that others overlook or pass by
3. Use Budgeting to Help You Save Regularly and Spend Your Money More
Effectively.
If you don't know where you are going, you might wind up someplace else.
- Yogi Berra
Spend less than you make! Spend less than you make! Spend less than you make!
Most financial insecurity today is the consequence of poor saving, lack of budgeting, and
other unwise financial habits.
Consuming less of what you earn or produce today allows you to consume more in the
future.
Step 1. Start Today! If you do not start now, it is unlikely that you will do so later.
Step 2. Set Goals
Short- term goals (less than a year immediate gratification)
Medium- term goals (one to 5 years, gratification in the near future)
Long-term goals (more than five years, gratification over your lifetime)
Step 3: Devise a Plan of Action
Create a personal budget with actual and proposed items to achieve your financial goals
Step 4: Take the Plunge!
Begin consuming less of your discretionary income today and build a savings and
investment program now to meet your financial goals. By doing so, you will
Increase your wealth, live a less stressful, more financially free life, and achieve high
consumption levels in the future.
4. Dont finance anything for longer than its useful life.
Financing makes it possible for you to buy now and pay later.
Purchase on credit only when you are buying revenue generating assets in order to earn
positive net returns.

5. Two Ways to Get More Out of Your Money: Avoid Credit-Card Debt and Consider
Purchasing Used Items.
Credit cards are convenient to use, but can also be seductive and costly method of
borrowing.

U.S. household consumer debt profile:

Average credit card debt: $7327
Average mortgage debt: $156,333
Average student loan debt: $32,953
Common credit card interest rates: 12-30%
Another way to stretch your money is to buy used items
Some things should not be purchased used - socks, tooth brush
Most items will depreciate (decline in value) as soon as they are purchased
Items that lose much value after purchase
Vehicles, furniture, appliances, childrens clothes and toys
Ebay and craigslist make buying slightly used items easier than ever before.
6. Pay into a Savings Account Every Month (Emergency Fund)
Save for the unexpected emergencies that will happen (flat tire, broken refrigerator,
emergency room visit)
Planning for the unexpected will keep you from using your credit card or other high interest
loan
Having an emergency fund will also ease your mind (much less stressful)
7. Put the Power of Compound Interest to Work for You
Compound Interest - Money earning interest, so money earning more money (Money
working for YOU)
The power of compounding:
Example 1:
Example 2:
Invest: $5000
Invest: $5000
Add: $5000
Add: $5000
Compound at 10% for 40 years
Compound at 15% for 40 years
$2,700,000
$11,500,000
8. Diversify - Don't Put all Your Eggs in One Basket
You can reduce your risk through diversification - holding a large number of unrelated
assets.
Owning a group of stocks, bonds, and real estate is much less risky than owning just one
asset.
Don't put all of your assets into one stock (especially your employer)
Types of Savings and Investments
return: is the income from savings or an investment
risk: is the uncertainty that you will receive an expected return
Certificates of Deposit (CDs): are purchased for specific amounts of money at a fixed rate of
interest for a specified period of time ($500-10,000)
Length of time (7 days to several years)
The longer time usually carries a higher interest rate
Insured by the Federal Deposit Insurance Corporation (FIDIC)
Savings Account: offered by bank and pay a higher rate of return than a checking account
(very liquid)
Bonds: loaned money to a company or governmental unit in return the borrower promises to
repay the amount borrowed plus interest.
Corporate bonds: issued by publicly owned companies
Municipal bonds: issued by state or local governments (pay for schools, libraries,
roads, etc.)
US Savings Bonds (Series EE): are purchased for 50% of their face value, which is the
amount the bond is worth when it matures.
Minimum purchase is $25 for a $50 bond
Matures in 8-12 years; Penalized if cashed before 5 years
Real Estate: home ownership is an investment, for homes can rise and fall in value
Average Historical Return on Single Family Houses 5.4%
People can also invest in rental properties and other various forms of real estate
investment
Collectibles: antiques, stamps, gems, precious metals, memorabilia

Pay no interest; no regulated market, possible liquidity problems

Average Historical Return (75 years)
Large Company Stocks
10.4%
Small Company Stocks
12.6%
Long-term Corporate Bonds
5.9%
Long-term Government Bonds 5.3%
U.S. Treasury Bills
3.7%
Inflation
3.0%
9. Indexed Equity funds Can Help You Beat the Experts without Taking Excessive
Risk.
For most people, the best chance of being successful in the stock market is investing in
index equity funds.
A S&P 500 Index fund out performs 85-98% of actively managed funds.
Mutual Funds: invests the pooled money of shareholders in various types of investments
A fund manager buys and sells securities for the funds shareholders
Values rise and fall
Benefits (diversification, professional management, convenience)
Mutual funds may buy bonds, stocks or both
More than 8000 mutual funds available
Stock Index Funds
Unique type of fund that copies the performance of a stock index
Standard & Poor 500 (S&P 500)
http://en.wikipedia.org/wiki/List_of_S%26P_500_companies
Dow Jones Industrial Average (DJIA)
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
Wilshire 5000
http://web.wilshire.com/Indexes/W5000.pdf
Average return of the S&P 500 - About 10%
http://financeandinvestments.blogspot.com/2014/02/historical-annual-returns-for-s-500.html
10. Invest in Stocks for Long-Run Objectives, but As the Need for Money
Approaches, Increase the Proportion of Bonds.
The long term return of stocks is about twice that of bonds, but bonds are more stable over
shorter periods of time.
As need for money approaches, increase the proportion of bonds and/or cash
11. Beware of Investment Schemes Promising High Returns with Little or No Risk
If it looks too good to be true, it probably is
Deal only with parties that have a reputation to protect
Never purchase an investment solicited by telephone or email
Do not allow yourself to be forced into a decision
Do not allow friendship to influence an investment decision
If high-pressure marketing is involved, grab your checkbook and run

12. Teach Your Children How to Earn Money and Spend it Wisely.
Those who develop the habits of working diligently, setting goals and achieving them,
and avoiding the temptations of instant gratification by considering the future
consequences of current choices are typically more successful in all walks of life than
those who don't.
Teach young people responsibility by helping them understand that money is earned
(costs and tradeoffs)
Any large cost provides an excellent opportunity to teach your children important
lessons in personal finance.
Financial Markets - Stock Market Exchanges

Place where individuals and firms enter into contracts to buy or sell a specific product
(stock, bond,, orange juice futures)
Provides a meeting place for buyers and sellers where prices are determined
New York Stock Market (NYSE)
Oldest, most established exchange; usually large companies are listed
The NASDAQ Stock Exchange (NASDAQ) Computer-based; many technology and
biotechnology companies are exchanged
American Stock Exchange (AMEX) Specializes in futures contracts (buying something at a
fixed price at a future date) (more risky)
How Securities Are Bought and Sold
1. Open a brokerage account (E-trade; Scottrade; Fidelity)
2. Research your company (buy what you know)
3. Obtain your companys ticker symbol (Coca Cola - KO; Google - GOOG)
4. Number of shares (Divide how much you plan to invest by price of the company)
Richest Man in Babylon
Law 1: Start thy purse to fattening (Save Money!) Just save money. All the investing
advice in the world wont do you any good if you dont have any saved money to invest.
Average US saving rate: Varies by year and business cycle = -1%-4%
Why People Save and Invest
Freedom; Emergencies, (illness, unemployment, accidents); financial goals (car,
college, house);
Financially secure retirement
Law 2: Control thy expenditures
(Spend less than you make!)
Examples:
Don't use a credit card to pay for things you don't have the $ to purchase
Drop HBO, Showtime, Starz and add Netflix
Buy a good reliable used car instead of a new one
Law 3: Make thy gold multiply (Invest in assets that go up in value)
Compound interest - Money earning interest, so money earning more money (Money
working for YOU)
Yes: Businesses (Stocks); Bonds; Real Estate
No: Clothes; Cars
Law 4: Guard thy treasures from loss
(Have insurance to protect yourself, your family, and your assets)
Health Insurance - protects against costly medical bills
Property Insurance - protects your property (car / house)
Life Insurance - protects your family if you cannot support them
Disability Insurance - protect you and your family if you are injured and cannot
perform your job
Law 5: Make thy dwelling a profitable investment (Own your own house)
Home prices have gone up an average of 5.4% each year
Law 6: Insure a future income (Invest when you are young, so you have $ money
later in life)
Investing small sums when you are young add up to big sums later
This law enables you to quit working if you choose.
Compound Calculator http://www.moneychimp.com/calculator/compound_interest_calculator.htm
Law 7: Increase thy ability to earn
(Get an education! Study to become wiser and gain more skills)
By increasing your education, you will increase your future income

You will become more valuable (and increase your income) when you increase your skills