Hi in this presentation, we're going to talk a little bit about a concept I like to call the Path to Financial Security. Now financial security in my words, is the ability of households to manage the ongoing economic needs and to prepare for the future. Now, there's two futures in here though that we're going to think about. The first future is the one that you're planning for, the things that you want to have happened. This includes everything from graduate school, going to college, buying a home, maybe even retiring some day. But, there's another future we also need to consider when we think of what it takes to manage our household ongoing needs and prepare for what's coming. And that's what we don't want to have happen. And that includes things like getting sick. Maybe a losing a loved one. Being unable to work for a meaningful amount of time. That future we also have to plan for in our financial management. In order to do this, this really requires that families and individuals have to know a lot, a lot more than we often think, and engage in prudent action in three main spears in financial resource management. Let's look at those next. We have wealth accumulation, cash and credit management, risk management, and these are all the different things that we can control. but before we delve into those, lets think about the things that we can't control. Economic environment for example. That's going to represent how the economy is doing, how things are going, whether markets are up, whether markets are down, what interest rates are doing. Because that's going to influence the types of choices that we make in our financial decisions, and the choices that are available to us. The other thing to consider too, is that what we don't know can hurt us. So a lack of awareness, for example, not knowing what decisions to make, not knowing the details of different financial management strategies can harm us. And two, if we're not accessing those services, that can be problematic as well. So, if we don't have a bank account, if for example, we don't sign for a 401k plan from an employer when we get a job, these are all things that can pigeonhole us a little bit, in moving forward to financial security. The last one is our preferences and needs. And this is true with a concept we like to Life Cycle Planning. And the simple idea is that as we get older, as our life situations changes, our preferences are going to change. The things we value, the things we want are all going to be different. And the things we need are going to change. Right? Something like having kids. Maybe getting married, moving in together, going to graduate school, getting a job, all of these types of life events are going to shape and influence the choices we make, and the choices we need to make when it comes to financial management. Let's start off by thinking about cash and credit management, though. That's the cornerstone. That's the thing we want to begin with. So we're going to identify a few key things that we want to think about, budgeting for a targeted surplus. That means that we want to make sure that we have the right amount of money left over to preserve liquidity, and that's basically the idea that we need to have enough money on hand at any given time, to meet our ongoing obligations. Think about how we just defined financial security. Liquidity represents the amount of cash on hand, or available cash to us. We want to be efficient in our use of financial services. This means using the right mix of bank accounts, having the right insurance products, so that we have the protections and the services we need, but, we're not paying too much for it. And then we also want to think about things like prudent tax planning. Keeping as much of our money as we legally are entitled to do. Now let's break these down then. The concept that we'll be introducing and talking more and more about throughout this course. Taxes. Number one. Thinking about all the deductions, exemptions, and things that we're going to learn a little bit later on. Household record keeping. Keeping track of the money going in, the money going out. The things we own and the things we owe, our net worth if you will. We use that records to estimate our financial position. Where we are. Thinking about our strengths, our weaknesses, our opportunities that we have, and the threats that we're facing. Compound interest and cash flows. We'll talk a little bit about this, the concept of the time value of money. And we're understand that, the fact that our money grows money, works for us, works against us. Works for us on our savings and investing. Works against us, when we borrow. Hence, credit and borrowing. The thing that of course influences our overall level of wealth and, our overall cash flows. Because whenever you take on debt, it's going to reduce, right, how much wealth you actually have it, it of, offsets that. But also importantly, when you take on debt, you're going to have to pay it back. And, also, our credit behavior has a secondary effect, our reports and our scores associated with our credit, will be used to track and to categorize us in terms of whether or not certain service providers want to work with us, even whether or not employers want to hire us. The next concept you want to think about is building wealth. Now I want to kind of compare and contrast two concepts. We just talked about borrowing for a moment. Borrowing is the idea that I'm taking money from the future, and spending it today. Building wealth is the opposite, taking money today, and pushing it out to the future. We allocate our current resources to future consumption. And we do this, right? That's what we basically define as savings, taking money I could spend today and saying I'm not going to, I'm going to put that aside for later. And when I start letting that money grow and build, at a rate greater than inflation. We can think of that as when we're going to be doing our investing. Now what's really important to know then, is that compound interest works for us on this side. Money will grow at an exponential rate relative to time. The more time we give it, the more profound it's going to compound for us. So, taking a look here again we've identified the idea that this Wealth Accumulation and Cash and Credit management serve as a cornerstone for us right, the building blocks for financial security. There are critical pieces going forward. Why is it so important to build wealth then? Is it just because we think we should have more money? [FOREIGN] in fact right? This is a product of changing economic environment. Changing preferences and needs. So number one, for the last several decades we've seen a major shift from companies and agencies helping to support people during retirement through defined benefit pensions to moving over to defined contribution plans. Right? So the idea that we're now responsible for our own. Long-term stability. The other is what we call smoothing consumption. So, the idea, and a simple way to think about this, maintaining a lifestyle. We want to maintain a level of living. And this is because, our resources are going to change over time. For example, someone may take off time for maternity. They may go back to school. They may change jobs, and need a transition period. They might even think about retirement. There's a whole host of things when our overall resources will shift or change, even when we're planning for it. And that idea of savings is something that will smooth that path for us. In addition to those issues, think about the goals that we have. And we're going to spend time on that, of course, throughout this course, thinking about the many common goals that many of us deal with. But, achieving basic financial goals, buying a home, funding education for children, for ourselves. Right? These types of things are all expensive tickets, but if we plan ahead, if we put money aside toward those goals starting now, then when the time comes for it, we're a lot more prepared to take on that responsibility. We may not be paying cash for a home, but we'll have a nice down payment available. To really kind of help reduce us and get us started. In addition, we want to think about having something for a rainy day, and that's what we often call the term is an emergency fund. We'll talk more about the specifics and mechanics of emergency funds in another lesson, but we want to think about one of the important ideas is we need to make sure that when these shocks come up. Car breaks down, someone gets sick, that we have some resources on hand that we can use, to meet that immediate need. Not something we planned for, but something we've got, have to anticipate nonetheless. And most importantly is, we talked about the magic of compound interest. Starting early is absolutely a key thing for this. It's never too early to start saving for the future. Why is that? Well let's take two twin brothers for a moment, Ron and John both aged 21 Ron is going to invest $2,000 year for the next ten years and then he's going to let that money sit until his 55, John is going to wait until his 35 why, why do so other people waiting until they're in their 30s to start saving their stuff to buy and then he's going to invest $2,000 a year until his 55. Whose going to end up with the most money, assuming that they would earn the same rate of return? Well ask yourself this first. Who is investing more money? Ron is investing $2,000 a year for ten years, that's $20,000. John is investing $2,000 a year for 20 years, that's $40,000. So who's going to end up with more? What do you think? Well, actually, Ron is going to, when he starts investing that money, he's going to end up with about $29,954 after ten years. But then he leaves it alone, he lets it sit there, and that's what that magic of compound interest is so great, because the money still grows even though he's not adding to it. And in fact, he has 24 more years of compound to account for. That brings him up to $221,000 by the time he's 55. Not too shabby. Especially for only $20,000 of capital that he put up in his younger years. John, on the other hand, right, waited, was willing to invest more money over the long run but he ends up with $98,939. That's a difference of a $122,000 yet he invested twice as much money. In fact for John actually catch up assuming the same rates of returns,, he would have to increase his $2,000 annual contribution to $4,285 increasing it by over $2,000 just to catch up to his brother. Now that's a pretty profound effect we think about, and why it's so important to start early, when we think about building wealth. So again, money that will not be needed for spending today, should be invested. And we'll be talking about how we use things like stocks, bonds, mutual funds, real estate. And different types of assets that we can choose from, that will help our money grow and outpace inflation over time. Another important thing, though, that I like to point out is, before we start jumping in and getting our feet wet with investing, we begin by knowing and having a plan. And that begins by saying, where do I wannna be. Goal setting, most goals can be formulated as objective statements, and one of the first things we want to teach about in this course is creating a financial objective statement. Financial objective statements can always address some simple things like what is it? When do we need it? How much is it going to cost? We think of these as smart goals, right? Specific, measurable, adaptable, realistic, and time bound. Financial objective statements always include things like a time horizon, when do I need the money? And a dollar amount. This becomes really important to us, because as we begin to start understand the tools of the time value of money. Having that type of understanding of what we need and when, allows us to back out, what do I need to do today to get there? It helps us to understand what the path to that goal, and our financial security, has to look like. So again, we're going to give you a chance throughout the course to think about, what are your goals, what are your situations? What is is you want to have happen. And come up with your own objective statements. Now, what about risk management here? We can pay someone else to assume our risks, right? Well, why is risk management so important? Well, let's think about this for a moment. So far, we've briefly talked about the importance of managing our cash flows so that we don't overspend. And, if we are managing our cash flows well. Then we are saving money for the future. We're building wealth. Now that's terrific, right? So, we've got two of the things that we can directly control, and that are going to be governed by what choices we make. But you can be doing those two things pretty well, but I will be the first one to tell you that you're only one cat bite away from potential financial catastrophe. Cat bite, what does that have to do with this? Well, I'm going to tell you a story. When my wife was six months pregnant with our first son, she we have a little cat, you can see him in the background Cisco, and Cisco decided one day that he wanted to go out. Now, this was challenging on multiple fronts, A, he's not supposed to go outside, there is a leash law in that particular city but also importantly, we feared for his safety. But nonetheless, Cisco the mischievous cat decided that he wanted to go outside anyways. So he did. He ran of course down and my wife tried to chase him. Went back in the house to get a can of tuna. Whole process took about ten minutes. By the time she got the tuna ready, went to the door, he bolted back into the house. What a wonderful story. However, [SOUND] about ten minutes later, the police came to the door with animal control. In those ten minutes, the Cisco had actually been out of sight, he had been chased into a neighbors house by their little dog. Our neighbor decided that she wanted him out of the house, and wanted to go ahead and pick him up by the scruff of his neck to toss him out the door. Now my cat, of course, did what many cats would have done in that situation. He turned around and promptly bit her on the thumb. Now, we may say well, you know, people shouldn't do that. That's not really the point. The, they then saw this as an opportunity to try and get recompense for her injury. Our insurance company of course, tried to settle the claim initially. But they proceeded to try and sue us for about four and a half years. This led to countless depositions, led to an enormous amount of Court time, led to an enormous amount of Attorney's time and attorney fees. In fact, the attorney bill for those four and a half years, was over $40,000. Now that's a lot of money, and certainly a lot of money to spend on something like defending yourself against a cat fight. Now, why did we not have to pay that out of pocket? We had good homeowners' insurance, but it doesn't stop there. We all know we have to have homeowners' insurance. But what's important to know is that on that policy. You may need to actually have a specific addendum that we'll talk about later that will allow for your cat or dog to also be protected as part of that policy. Without that policy, we would have been responsible for defending ourselves in court. By the way the lawsuit was settled. Four and a half years later for the exact amount the insurance company had offered them in the first place. They never could prove, that the cat fight actually caused any permanent damage to the person's thumb. We didn't think so either, but we were glad we were vindicated in the courts. So the moral of the story is if we don't just need to know the basics. We don't just need to know, oh, you're going to have to have insurance for that. But, you're going to have to read the policy. Because had we not have read the policy we may not have ever realized that our cat was not actually protected as part of that prote, as part of that policy. So, again, one cat bite away. In other words, we've gotta make the right decisions. We've gotta manage our financial resources. The path to financial security is ours for the taking. We can all get there. But it's going to take some work on our part. So we, need to protect all of our resources, not just our cats. We're going to have to protect our income through things like disability insurance, life insurance. To make sure that we leave something for those that were dependent on our income. We've got to protect our wealth, property insurance, casualty insurance, liability insurance. And protecting ourselves, health insurance, is another one, too, making sure that we're taking sound care of our bodies and minds. So, how do we deal with this? This is a lot to take in as I can imagine. We're going to learn strategies and issues, and managing household risks. We're going to talk about some the basic things that we can do, as consumers, to manage those possibilities and deal with the unknown future. The future that we don't know if it's going to happen. But we still need to be aware of. We can avoid risk, we can retain risk. We can't always avoid risk, though, right? In some cases, avoiding risk means avoiding an issue entirely. We can't not go outside, we can't drive. We can retain risks and just say whatever happens, happens. We can reduce risks, right? If we get in the car, putting on a seat belt, having air bags. Or we can transfer risk, or share it, with an insurance company. In the cat bite story, right, the main example that we did was to transfer the risk. We shared it with the insurance company. We paid them a premium, that was our share. We had a deductible, that was our share. The rest of it was their responsibility, and that was the terms of the contract we'd originally signed up for them. So remember, the theme that we're going to talk about this whole course is having a plan. Getting a strategy together that's going to be consistent with your goals, where you want to be, your preferences, right, being respectful of our preferences and needs. The resources that we have. And our family situation. A strategy that meets all of those issues, understands and is respectful of what's happening in the economy, and make sure that we're connected to the right types of resources and services. Can certainly help us get forward on the path to financial security. Key elements of that plan are going to have strategies. Strategies that focus on our goals, but strategies that also help to protect us. We don't always have a goal about making sure our cat bite doesn't get us into trouble, but we do often realize that we don't want any hiccups along the way to interfere with our progress to our goals. Other elements of a sound financial plan, which we'll develop in this course for ourselves is implementation. What type of account do I need? What services? What products? How should I invest my money? And the most important thing to know about any good financial plan it's gotta be flexible, and it's absolutely gotta evolve over time. Remember, the life cycle stages will affect our financial management choices, and the choices that we even have to make, let alone want to make.
