401(k)s

WEBVTT
Kind: captions
Language: en

00:00:00.533 --> 00:00:01.700
What I want to do in this video

00:00:01.700 --> 00:00:04.473
is to talk a little bit about 401(k)'s

00:00:04.473 --> 00:00:07.205
which you probably at
minimum have heard of.

00:00:07.205 --> 00:00:10.139
Just from the get-go,
just to put some structure

00:00:10.139 --> 00:00:12.139
in your mind of what this really is

00:00:12.139 --> 00:00:15.136
is it's very similar to a traditional IRA.

00:00:15.136 --> 00:00:27.472
It's very similar to a traditional IRA

00:00:27.472 --> 00:00:29.339
and the ways that they're the same

00:00:29.339 --> 00:00:31.203
is that you defer you taxes.

00:00:31.203 --> 00:00:38.119
You put money in on a tax deferred basis.

00:00:38.119 --> 00:00:38.873
Let me put it this way,

00:00:38.873 --> 00:00:47.945
you put pretax money in.

00:00:47.945 --> 00:00:52.534
The money can grow inside
of either the 401(k) account

00:00:52.534 --> 00:00:57.040
or the traditional IRA account untaxed.

00:00:57.040 --> 00:00:57.929
Let me write that,

00:00:57.929 --> 00:01:09.055
money grows in account untaxed

00:01:09.055 --> 00:01:11.054
and then you can withdraw it,

00:01:11.054 --> 00:01:13.553
you can withdraw the money.

00:01:13.553 --> 00:01:19.470
You can withdraw or start
getting distributions

00:01:19.470 --> 00:01:26.884
from the account after age 59-1/2.

00:01:26.884 --> 00:01:28.721
That's essentially when you're
going to start retiring,

00:01:28.721 --> 00:01:30.390
when you're going to need the money.

00:01:30.390 --> 00:01:34.057
When you withdraw after the age of 59-1/2

00:01:34.057 --> 00:01:43.880
you will then pay income tax.

00:01:43.880 --> 00:01:45.121
This is what people are talking about

00:01:45.121 --> 00:01:47.348
when they talk about deferring taxes.

00:01:47.348 --> 00:01:48.988
You're not getting out of the taxes,

00:01:48.988 --> 00:01:50.521
you're just pushing off the date

00:01:50.521 --> 00:01:52.606
that you're going to
have to pay the taxes.

00:01:52.606 --> 00:01:54.607
For a lot of people this might be useful

00:01:54.607 --> 00:01:56.454
because while you are making money,

00:01:56.454 --> 00:01:58.937
you might be paying at a fairly high

00:01:58.937 --> 00:02:00.395
incremental tax rate

00:02:00.395 --> 00:02:01.688
but then once you're retired

00:02:01.688 --> 00:02:02.787
you have a much lower,

00:02:02.787 --> 00:02:03.857
you'll have a much lower,

00:02:03.857 --> 00:02:08.264
I guess you'll be in a much
lower incremental tax bracket

00:02:08.264 --> 00:02:12.124
and so your total overall
tax bill might be lower.

00:02:12.124 --> 00:02:13.354
Also, maybe something happens

00:02:13.354 --> 00:02:15.791
just in terms of what the government does,

00:02:15.791 --> 00:02:17.520
in terms of how they charge taxes.

00:02:17.520 --> 00:02:19.787
In general, if you had to pay 50 cents

00:02:19.787 --> 00:02:22.191
20 years in the future
versus 50 cents today,

00:02:22.191 --> 00:02:24.187
just present value of money tells you

00:02:24.187 --> 00:02:28.523
that that 50 cents is going
to be worth a lot less

00:02:28.523 --> 00:02:29.353
in the future

00:02:29.353 --> 00:02:32.190
or the present value of it is a lot less.

00:02:32.190 --> 00:02:33.721
That's some reasons to defer.

00:02:33.721 --> 00:02:36.269
Of course, you're not just going to pay

00:02:36.269 --> 00:02:37.728
on what you put in,

00:02:37.728 --> 00:02:40.519
you will then also pay income
tax on what you've put in

00:02:40.519 --> 00:02:42.858
and whatever grew.

00:02:42.858 --> 00:02:52.193
You'll pay income tax on total disbursals.

00:02:52.193 --> 00:02:53.269
In both cases,

00:02:53.269 --> 00:02:54.852
you have to start taking disbursements

00:02:54.852 --> 00:02:57.263
from your account by 70-1/2.

00:02:57.263 --> 00:03:02.800
Penalties, let me write it this way.

00:03:02.800 --> 00:03:11.273
Penalties, if you don't withdraw

00:03:11.273 --> 00:03:15.990
or you don't start withdrawing
some of your funds by 70-1/2.

00:03:15.990 --> 00:03:17.654
There's some special
cases if you're working

00:03:17.654 --> 00:03:19.286
and all these type of things.

00:03:19.286 --> 00:03:23.522
Now, what's happens if you
withdraw before age 59-1/2?

00:03:23.522 --> 00:03:28.252
Before 59-1/2.

00:03:28.252 --> 00:03:30.388
So far, everything I've listed is true

00:03:30.388 --> 00:03:33.789
of both 401(k)'s and traditional IRAs.

00:03:33.789 --> 00:03:45.992
If you withdraw before 59-1/2,
you are taxed on withdrawal.

00:03:45.992 --> 00:03:49.927
On top of that, there's a 10% penalty

00:03:49.927 --> 00:03:56.209
on all the funds you receive. 10% penalty.

00:03:56.209 --> 00:03:57.391
This is what you have to think about

00:03:57.391 --> 00:03:58.624
unless if you just say,

00:03:58.624 --> 00:03:59.725
"Oh, I'm always just going to max out

00:03:59.725 --> 00:04:01.657
"my traditional IRA or 401(k)."

00:04:01.657 --> 00:04:02.721
You got to make sure

00:04:02.721 --> 00:04:05.057
they're not going to want
that money before 59-1/2

00:04:05.057 --> 00:04:08.324
because you might be
facing this 10% withdrawal.

00:04:08.324 --> 00:04:10.327
These are all the cases that are the same.

00:04:10.327 --> 00:04:11.786
The question is why do they both exist?

00:04:11.786 --> 00:04:13.853
Why is there something
called a traditional IRA

00:04:13.853 --> 00:04:15.876
and why is there
something called a 401(k)?

00:04:15.876 --> 00:04:17.391
They both seem like a pretty good way

00:04:17.391 --> 00:04:18.721
for me to defer taxes,

00:04:18.721 --> 00:04:24.459
get earnings on my investment

00:04:24.459 --> 00:04:25.456
in a taxed deferred way

00:04:25.456 --> 00:04:26.989
and then pay it some future date

00:04:26.989 --> 00:04:29.527
and they both force me to make sure

00:04:29.527 --> 00:04:32.264
or they strongly suggest

00:04:32.264 --> 00:04:35.269
that I shouldn't take out
my money before 59-1/2.

00:04:35.269 --> 00:04:36.733
The ways that they're different,

00:04:36.733 --> 00:04:39.046
let's focus on the differences,

00:04:39.046 --> 00:04:47.278
the differences between the 2.

00:04:47.278 --> 00:04:58.930
One is 401(k)'s have a higher limit

00:04:58.930 --> 00:05:01.660
and if you're focused on 2010,

00:05:01.660 --> 00:05:03.527
but these numbers keep changing.

00:05:03.527 --> 00:05:09.329
In 2010 the 401(k) limit is $16,500

00:05:09.329 --> 00:05:11.155
and that's for just what you contribute

00:05:11.155 --> 00:05:15.226
into your 401(k).

00:05:15.226 --> 00:05:18.535
This is for a 401(k).

00:05:18.535 --> 00:05:24.475
While the IRA limit is $5,000.

00:05:24.475 --> 00:05:25.270
This is an IRA.

00:05:25.270 --> 00:05:27.743
One; 401(k), you can just
participate with more money.

00:05:27.743 --> 00:05:28.869
Actually, in both of these cases,

00:05:28.869 --> 00:05:31.203
as you approach your retirement,

00:05:31.203 --> 00:05:32.612
after the age of 50.

00:05:32.612 --> 00:05:34.205
Let me put that in the same thing

00:05:34.205 --> 00:05:35.607
just so we're comprehensive.

00:05:35.607 --> 00:05:36.809
Another similarity is that

00:05:36.809 --> 00:05:45.032
you can accelerate or have higher,

00:05:45.032 --> 00:05:47.739
you could have higher, I guess,

00:05:47.739 --> 00:05:49.741
deposits into your account,

00:05:49.741 --> 00:05:53.136
accelerate after 50.

00:05:53.136 --> 00:05:54.475
Which just means you can put more money

00:05:54.475 --> 00:05:56.802
than these limits that I have right here.

00:05:56.802 --> 00:05:58.537
These are limits before you're 50,

00:05:58.537 --> 00:06:01.333
after 50, between 50 and 59-1/2

00:06:01.333 --> 00:06:02.356
when you can start withdrawing.

00:06:02.356 --> 00:06:03.869
You can put a little
bit more money in that

00:06:03.869 --> 00:06:05.807
and these are constantly moving targets.

00:06:05.807 --> 00:06:08.275
The general idea is that
you can put more money

00:06:08.275 --> 00:06:11.694
inside of a 401(k).

00:06:11.694 --> 00:06:14.361
Now, the other difference is that a 401(k)

00:06:14.361 --> 00:06:17.612
tends to be organized by your employer.

00:06:17.612 --> 00:06:25.782
401(k) organized by employer.

00:06:25.782 --> 00:06:28.532
Just, from your point of
view, that means 2 things,

00:06:28.532 --> 00:06:31.407
One is the employer will often specify

00:06:31.407 --> 00:06:33.538
the potential investments.

00:06:33.538 --> 00:06:40.385
Specifies investments.

00:06:40.385 --> 00:06:44.513
They'll actually run the
401(k) account for you.

00:06:44.513 --> 00:06:46.270
Normally it will be held by someone else

00:06:46.270 --> 00:06:49.427
but it will be for your
company, for company x.

00:06:49.427 --> 00:06:52.424
The company gets to decide
the universe of investments

00:06:52.424 --> 00:06:55.421
that you might be able to invest in.

00:06:55.421 --> 00:06:57.402
The other thing, because
it's run by the employer,

00:06:57.402 --> 00:07:06.539
the employer might match.

00:07:06.539 --> 00:07:08.469
Which means for every dollar you put in,

00:07:08.469 --> 00:07:09.296
they'll put another dollar

00:07:09.296 --> 00:07:10.868
even they might go above matching

00:07:10.868 --> 00:07:12.547
and you could actually go up to,

00:07:12.547 --> 00:07:15.383
I think the current limits
are approaching $50,000

00:07:15.383 --> 00:07:20.216
for the total of the
employee and employer match.

00:07:20.216 --> 00:07:21.586
You can actually get a lot of,

00:07:21.586 --> 00:07:22.516
I guess you could think of it,

00:07:22.516 --> 00:07:24.528
leverage from putting in into a 401(k)

00:07:24.528 --> 00:07:26.528
if you have a very generous employer.

00:07:26.528 --> 00:07:27.843
The other difference,

00:07:27.843 --> 00:07:29.735
this is really a superficial difference

00:07:29.735 --> 00:07:31.723
because it's just what you see,

00:07:31.723 --> 00:07:34.257
is that with the 401(k)
the money will be taken out

00:07:34.257 --> 00:07:36.349
of your paycheck, you will never see it.

00:07:36.349 --> 00:07:44.182
Taken out before paycheck.

00:07:44.182 --> 00:07:47.040
While with a traditional IRA,

00:07:47.040 --> 00:07:48.446
you will take the money,

00:07:48.446 --> 00:07:50.188
invest it into a traditional IRA account

00:07:50.188 --> 00:07:51.650
and when you report your taxes

00:07:51.650 --> 00:07:54.193
it will be reported as a tax deduction

00:07:54.193 --> 00:07:55.718
and so you won't have to pay tax on it.

00:07:55.718 --> 00:07:58.383
Functionally they're the exact same thing.

00:07:58.383 --> 00:08:00.112
When you think about the pros and cons,

00:08:00.112 --> 00:08:03.862
if you have a 401(k), if the
option is available to you,

00:08:03.862 --> 00:08:05.272
it's a pretty good option.

00:08:05.272 --> 00:08:07.246
You're going to have higher limit.

00:08:07.246 --> 00:08:09.530
You're going to have a
higher limit right over here

00:08:09.530 --> 00:08:13.996
and your employer might match it.

00:08:13.996 --> 00:08:14.917
Then the other thing,

00:08:14.917 --> 00:08:16.331
and this doesn't come into plays a lot,

00:08:16.331 --> 00:08:18.575
but there's also the option of borrowing

00:08:18.575 --> 00:08:21.246
from a 401(k) without penalty.

00:08:21.246 --> 00:08:26.783
Borrowing from a 401(k)

00:08:26.783 --> 00:08:30.162
but you have to pay back
interest to the 401(k) account

00:08:30.162 --> 00:08:31.850
if you did that and you cannot do that

00:08:31.850 --> 00:08:34.119
with a traditional IRA.

00:08:34.119 --> 00:08:35.327
Now, when you're looking
at all these you're like,

00:08:35.327 --> 00:08:35.657
"Whoa!

00:08:35.657 --> 00:08:37.585
"Why would anyone ever want
to do a traditional IRA?"

00:08:37.585 --> 00:08:38.331
There's a couple of things.

00:08:38.331 --> 00:08:39.268
One; you could do both.

00:08:39.268 --> 00:08:42.247
Or the other thing is
with traditional IRAs

00:08:42.247 --> 00:08:44.410
you have much more flexibility

00:08:44.410 --> 00:08:46.077
on where you want to invest.

00:08:46.077 --> 00:08:48.744
Maybe your company says
you can only invest in us,

00:08:48.744 --> 00:08:50.495
you can only invest in
that company's stock.

00:08:50.495 --> 00:08:55.264
In traditional IRAs you
can invest in anything.

00:08:55.264 --> 00:08:59.264
Hopefully that clarifies
things a bit for you.


Open-ended mutual funds

WEBVTT
Kind: captions
Language: en

00:00:00.606 --> 00:00:02.187
Let's say Pete over here

00:00:02.187 --> 00:00:04.476
thinks that he's a pretty good investor.

00:00:04.476 --> 00:00:06.938
What he does is, he has an idea that says,

00:00:06.938 --> 00:00:08.272
"Look. I'm going to create a corporation

00:00:08.272 --> 00:00:10.472
"and I'm going to get a
bunch of people to contribute

00:00:10.472 --> 00:00:11.802
"money to that corporation.

00:00:11.802 --> 00:00:13.817
"Then I'll manage that money

00:00:13.817 --> 00:00:15.738
"and maybe I'll take a
little fee for myself

00:00:15.738 --> 00:00:18.267
"so that I can maybe hire some analysts

00:00:18.267 --> 00:00:21.139
"or get some computers or
get some office space."

00:00:21.139 --> 00:00:23.264
So what he does is he
sets up a corporation.

00:00:23.264 --> 00:00:28.524
Let's say he sets up a
corporation right over here.

00:00:28.524 --> 00:00:30.000
The way he first sets up the corporation,

00:00:30.000 --> 00:00:31.603
let's say just has 4 shares

00:00:31.603 --> 00:00:33.337
and I'm making the number really small

00:00:33.337 --> 00:00:35.804
just to make the drawing and math easy.

00:00:35.804 --> 00:00:36.919
This wouldn't be realistic.

00:00:36.919 --> 00:00:38.703
Normally it would be
something in the hundreds

00:00:38.703 --> 00:00:40.124
or thousands of shares

00:00:40.124 --> 00:00:41.452
or maybe even more than that.

00:00:41.452 --> 00:00:42.868
Let's say he has 4 shares

00:00:42.868 --> 00:00:44.590
and let's say all of the 4 shares

00:00:44.590 --> 00:00:46.117
are owned by P initially

00:00:46.117 --> 00:00:49.713
just to simplify the explanation.

00:00:49.713 --> 00:00:55.870
He puts in $400 into this corporation.

00:00:55.870 --> 00:00:56.987
Another way to think about it,

00:00:56.987 --> 00:00:59.844
in exchange for him putting
$400 into this corporation

00:00:59.844 --> 00:01:06.715
he gets 4 shares or each
share is worth $100,

00:01:06.715 --> 00:01:09.456
each of these shares right over here.

00:01:09.456 --> 00:01:12.124
What he does is he
registers this corporation.

00:01:12.124 --> 00:01:15.383
I'm talking about a U.S. specific case

00:01:15.383 --> 00:01:17.258
but there's similar types of organizations

00:01:17.258 --> 00:01:18.539
in other countries.

00:01:18.539 --> 00:01:21.316
He registers this
organization right over here

00:01:21.316 --> 00:01:25.540
with the U.S. SEC, Securities
and Exchange Commission.

00:01:25.540 --> 00:01:29.051
He also registers himself with the SEC

00:01:29.051 --> 00:01:31.870
or even better, he registers
a management company

00:01:31.870 --> 00:01:33.384
that he runs with the SEC.

00:01:33.384 --> 00:01:36.119
Let's call it Pete Inc.,

00:01:36.119 --> 00:01:37.705
is a corporation he starts off

00:01:37.705 --> 00:01:40.048
that he also registers with the SEC.

00:01:40.048 --> 00:01:42.717
When he registers with the
SEC he tells them that,

00:01:42.717 --> 00:01:44.618
"Look. This company right over here,

00:01:44.618 --> 00:01:46.049
"we're going to issue more shares,

00:01:46.049 --> 00:01:48.125
"it's for more people to contribute money.

00:01:48.125 --> 00:01:50.716
"I'm going to manage this
money right over here

00:01:50.716 --> 00:01:52.121
"and I'm just going to take a percentage

00:01:52.121 --> 00:01:54.667
"of the total assets under management."

00:01:54.667 --> 00:01:56.399
Sometimes you'll see AUM,

00:01:56.399 --> 00:01:58.616
that just means assets under management.

00:01:58.616 --> 00:02:00.475
That will go to Pete Inc. every year

00:02:00.475 --> 00:02:04.133
for figuring out the best
place to invest this money.

00:02:04.133 --> 00:02:05.805
It's usually on the order of about 1%,

00:02:05.805 --> 00:02:07.538
sometimes a little bit less,

00:02:07.538 --> 00:02:10.278
sometimes a little bit more. 1% per year.

00:02:10.278 --> 00:02:14.696
Right now with only $400 under management

00:02:14.696 --> 00:02:17.540
it would only be about $4 per year.

00:02:17.540 --> 00:02:19.401
Since he registered with the SEC

00:02:19.401 --> 00:02:22.407
he can call himself a mutual fund

00:02:22.407 --> 00:02:25.279
and he can solicit funds from the public.

00:02:25.279 --> 00:02:27.742
It is a mutual fund.

00:02:27.742 --> 00:02:29.868
He has jumped through all of the hoops

00:02:29.868 --> 00:02:31.471
that the SEC sets up for him

00:02:31.471 --> 00:02:35.201
so he can market himself

00:02:35.201 --> 00:02:37.203
as some type of great fund manager.

00:02:37.203 --> 00:02:38.612
We don't know if that's true or not,

00:02:38.612 --> 00:02:44.716
and he can solicit funds from the public.

00:02:44.716 --> 00:02:46.380
We're going to see in future videos

00:02:46.380 --> 00:02:48.219
there are other funds,
especially hedge funds

00:02:48.219 --> 00:02:50.402
that one; they can't market

00:02:50.402 --> 00:02:52.135
and they can't take funds from the public.

00:02:52.135 --> 00:02:53.266
Those can only take funds

00:02:53.266 --> 00:02:56.739
from certain types of
sophisticated investors.

00:02:56.739 --> 00:02:58.060
What happens in Pete's fund

00:02:58.060 --> 00:02:59.969
and this is going to be
an open-ended mutual fund

00:02:59.969 --> 00:03:01.274
that we're showing here

00:03:01.274 --> 00:03:02.734
and most mutual funds are like that.

00:03:02.734 --> 00:03:04.069
Let's say that Sal comes along,

00:03:04.069 --> 00:03:06.799
he likes Pete's marketing
materials and he says,

00:03:06.799 --> 00:03:09.666
"Hey, I want Pete to manage my money too."

00:03:09.666 --> 00:03:13.332
So Sal goes and he gives $100 and says,

00:03:13.332 --> 00:03:14.738
"Pete, give me a share."

00:03:14.738 --> 00:03:17.222
So Pete creates another
share right over here,

00:03:17.222 --> 00:03:20.467
he creates another share
and he gives it to Sal.

00:03:20.467 --> 00:03:24.427
He gets 1 share, that's me. I get 1 share

00:03:24.427 --> 00:03:26.838
and in exchange I gave $100 to the fund.

00:03:26.838 --> 00:03:31.077
Now the fund has $500.

00:03:31.077 --> 00:03:33.441
This is $100 right over here.

00:03:33.441 --> 00:03:35.106
Now Pete's annual fee

00:03:35.106 --> 00:03:38.274
is going to be 1% of this
whole thing or $5 a year.

00:03:38.274 --> 00:03:40.185
If this whole thing grows,

00:03:40.185 --> 00:03:42.130
let's say this whole thing doubles

00:03:42.130 --> 00:03:45.774
from $500, let's say it doubles to $1000

00:03:45.774 --> 00:03:47.871
then that $1000 is essentially split

00:03:47.871 --> 00:03:50.183
amongst these 5 share now.

00:03:50.183 --> 00:03:53.690
All of the people will essentially
have their money doubled

00:03:53.690 --> 00:03:55.770
minus whatever Pete's expenses are.

00:03:55.770 --> 00:03:57.871
Let's say that a year goes by

00:03:57.871 --> 00:04:00.602
and ten even after paying Pete the 1%.

00:04:00.602 --> 00:04:03.493
We had $500 of assets under management.

00:04:03.493 --> 00:04:05.939
This whole assets under
management a year later

00:04:05.939 --> 00:04:10.077
goes to, let's say it goes to $1000.

00:04:10.077 --> 00:04:12.831
Pete either is really good or really lucky

00:04:12.831 --> 00:04:14.536
or a little bit of both.

00:04:14.536 --> 00:04:17.868
It goes to $1000.

00:04:17.868 --> 00:04:19.747
Let me draw it like this.

00:04:19.747 --> 00:04:22.000
Now it is at $1000 and
it still has the same

00:04:22.000 --> 00:04:27.035
5 investors here and I'm lucky
enough to be one of them.

00:04:27.035 --> 00:04:29.088
Here are the 5 investors.

00:04:29.088 --> 00:04:30.498
Let me draw the shares.

00:04:30.498 --> 00:04:37.335
There's 1, 2, 3, 4, 5 shares.

00:04:37.335 --> 00:04:39.467
Now, each of these shares, well,

00:04:39.467 --> 00:04:41.964
this thousand dollars is called the NAV

00:04:41.964 --> 00:04:43.403
or the net asset value.

00:04:43.403 --> 00:04:46.056
Let me give you that piece of terminology,

00:04:46.056 --> 00:04:47.934
just means net asset value.

00:04:47.934 --> 00:04:50.268
There's an NAV per share.

00:04:50.268 --> 00:04:53.883
The NAV per share right over here is $200.

00:04:53.883 --> 00:04:55.202
I just took the total NAV

00:04:55.202 --> 00:04:57.220
and I just divided it by the shares.

00:04:57.220 --> 00:05:00.882
What's special about an
open-ended mutual fund

00:05:00.882 --> 00:05:03.220
is that the close or the end of every day,

00:05:03.220 --> 00:05:06.470
either new shares can
be removed from the fund

00:05:06.470 --> 00:05:08.737
or it could be created before the fund.

00:05:08.737 --> 00:05:10.720
In the first video I showed how

00:05:10.720 --> 00:05:12.135
I wanted to buy into the fund,

00:05:12.135 --> 00:05:13.402
so I bought a share

00:05:13.402 --> 00:05:14.883
and that increased the NAV

00:05:14.883 --> 00:05:16.555
and it also increased
the number of shares.

00:05:16.555 --> 00:05:18.807
He had to create a share for me to buy.

00:05:18.807 --> 00:05:20.970
He didn't sell me a share
that already existed.

00:05:20.970 --> 00:05:22.972
You could imagine, after
this type of a performance

00:05:22.972 --> 00:05:25.072
more people would want to buy shares.

00:05:25.072 --> 00:05:28.135
Now, they would have to
buy in to make things fair

00:05:28.135 --> 00:05:29.970
at $200 per share

00:05:29.970 --> 00:05:32.467
because that's the current NAV per share.

00:05:32.467 --> 00:05:34.550
Let's say that 5 more people

00:05:34.550 --> 00:05:37.275
want to buy in at $200 per share.

00:05:37.275 --> 00:05:40.138
What Pete would do or
what this mutual fund,

00:05:40.138 --> 00:05:42.201
it's not Pete really,
it's the corporation,

00:05:42.201 --> 00:05:46.405
it would create 5 new shares.

00:05:46.405 --> 00:05:50.670
1, 2, 3, 4, 5.

00:05:50.670 --> 00:05:52.204
If there's only one person that day

00:05:52.204 --> 00:05:53.339
it would create 1 share that day.

00:05:53.339 --> 00:05:54.555
If there was 10 people that day

00:05:54.555 --> 00:05:56.267
it would create 10 shares that day

00:05:56.267 --> 00:05:57.268
and it could keep doing this.

00:05:57.268 --> 00:05:59.970
The NAV of each of these are $200.

00:05:59.970 --> 00:06:03.135
It gives these shares
to each of these people

00:06:03.135 --> 00:06:04.943
and they had to contribute $200.

00:06:04.943 --> 00:06:09.740
Essentially it puts
another $1000 into the pool

00:06:09.740 --> 00:06:11.552
that Pete can now manage.

00:06:11.552 --> 00:06:16.538
Now, the total NAV for
the fund is $2000 now

00:06:16.538 --> 00:06:19.265
and Pete will get his 1% management fee

00:06:19.265 --> 00:06:23.002
off of this entire $2000.

00:06:23.002 --> 00:06:28.113
Let's say that we
fast-forward a little bit

00:06:28.113 --> 00:06:31.284
to, let's say Pete starts
having a not so good year.

00:06:31.284 --> 00:06:33.469
Let's say we fast-forward a year past that

00:06:33.469 --> 00:06:38.136
and Pete has a -10% return.

00:06:38.136 --> 00:06:41.024
If you started at $2000
and that's when you include

00:06:41.024 --> 00:06:43.405
taking his management fee out.

00:06:43.405 --> 00:06:47.139
You started $2000, you lose 10% in 1 year

00:06:47.139 --> 00:06:49.947
so it goes down to $1800.

00:06:49.947 --> 00:06:51.471
Let me do this in a new color.

00:06:51.471 --> 00:06:54.282
Now he's at $1800.

00:06:54.282 --> 00:06:56.535
It's not completely drawn to scale

00:06:56.535 --> 00:06:58.278
but hopefully you get the idea.

00:06:58.278 --> 00:07:05.249
Now he has at $1800

00:07:05.249 --> 00:07:10.440
but you still have a total of 10 shares.

00:07:10.440 --> 00:07:13.736
Let me do my best to draw the 10 shares.

00:07:13.736 --> 00:07:21.706
I have 1, 2, 3, 4, 5, 6, 7, 8, 9, 10.

00:07:21.706 --> 00:07:23.469
These should be of equal size,

00:07:23.469 --> 00:07:27.549
and now the NAV per share

00:07:27.549 --> 00:07:32.299
is going to be 1800 divided by 10 or $180.

00:07:32.299 --> 00:07:34.879
Let's say that I get a
little bit freaked out

00:07:34.879 --> 00:07:36.548
by this recent performance

00:07:36.548 --> 00:07:38.405
and I have some other
commitments with my money.

00:07:38.405 --> 00:07:42.795
I said, "Pete, you need to
buy a share back for me."

00:07:42.795 --> 00:07:46.472
What Pete does is he
would give me back $180.

00:07:46.472 --> 00:07:51.801
The total NAV would lose
$180, it'd go down $180.

00:07:51.801 --> 00:07:54.021
We would take this out of it.

00:07:54.021 --> 00:07:58.357
1800 - 180 = 1620

00:07:58.357 --> 00:08:02.805
Now it is 1620 and they would
buy back a share for me.

00:08:02.805 --> 00:08:05.279
They would cancel one of the shares.

00:08:05.279 --> 00:08:07.522
Notice, the NAV per share does not change.

00:08:07.522 --> 00:08:09.139
By me redeeming my share,

00:08:09.139 --> 00:08:11.944
it does not change what
happens to everyone else.

00:08:11.944 --> 00:08:15.278
You have 1620 divided by 9 shares,

00:08:15.278 --> 00:08:21.135
that should still get
you to be $180 per share

00:08:21.135 --> 00:08:22.363
if I did my math right.

00:08:22.363 --> 00:08:25.199
1800 - 180 gets you 1620.

00:08:25.199 --> 00:08:28.696
It should still be $180 per share.

00:08:28.696 --> 00:08:30.202
This is the nature of an open-ended fund,

00:08:30.202 --> 00:08:32.275
you can keep creating shares

00:08:32.275 --> 00:08:34.345
and selling them to the
public to raise more money

00:08:34.345 --> 00:08:36.537
or when someone wants their money back,

00:08:36.537 --> 00:08:39.137
you essentially buy the
share back from them,

00:08:39.137 --> 00:08:41.198
give them their money when you buy it back

00:08:41.198 --> 00:08:42.535
and you remove that share.

00:08:42.535 --> 00:08:44.356
So an open-ended fund, really,

00:08:44.356 --> 00:08:45.692
at the close of every trading day

00:08:45.692 --> 00:08:47.535
can keep growing or shrinking.

00:08:47.535 --> 00:08:49.532
It could keep adding
more and more investors

00:08:49.532 --> 00:08:51.868
or their investors can
take their money back.

00:08:51.868 --> 00:08:53.192
What's difficult about this

00:08:53.192 --> 00:08:55.738
from the fund manager's point of view

00:08:55.738 --> 00:08:56.986
is that they have to manage this.

00:08:56.986 --> 00:08:58.329
They have to manage this constant

00:08:58.329 --> 00:09:00.580
buying and selling with the public.

00:09:00.580 --> 00:09:01.861
They have to management the paperwork.

00:09:01.861 --> 00:09:03.001
If you think about it,

00:09:03.001 --> 00:09:05.262
they can't have all of
their money invested

00:09:05.262 --> 00:09:08.261
in relatively [iliqiud] assets

00:09:08.261 --> 00:09:09.266
or even in regular stocks.

00:09:09.266 --> 00:09:10.927
They have to keep some
amount of their money

00:09:10.927 --> 00:09:13.083
and it's usually like 3% to 5%.

00:09:13.083 --> 00:09:15.750
They have to keep some of these $2000

00:09:15.750 --> 00:09:16.860
before he lost my money.

00:09:16.860 --> 00:09:19.160
They have to keep some of it in cash.

00:09:19.160 --> 00:09:20.726
From an investor's point
of view they would say,

00:09:20.726 --> 00:09:22.118
"Well, if I'm good investing

00:09:22.118 --> 00:09:24.850
"I should try to minimize the
amount of cash that I have

00:09:24.850 --> 00:09:26.188
"because I'm not getting return on cash,

00:09:26.188 --> 00:09:27.672
but because it's open-ended.

00:09:27.672 --> 00:09:29.595
Because investors might come by and say,

00:09:29.595 --> 00:09:30.917
"Hey, I want my money."

00:09:30.917 --> 00:09:32.443
You have to have a little bit of cash

00:09:32.443 --> 00:09:34.938
as part of the asset pool

00:09:34.938 --> 00:09:38.938
in order to be able to
buy people's shares back.


Personal bankruptcy - Chapters 7 and 13

WEBVTT
Kind: captions
Language: en

00:00:00.590 --> 00:00:01.819
Narrator: Ever since
people have been lending

00:00:01.819 --> 00:00:03.338
money to each other there has been

00:00:03.338 --> 00:00:04.654
one fundamental problem.

00:00:04.654 --> 00:00:07.151
What happens when someone can't pay back

00:00:07.151 --> 00:00:08.602
their debts?

00:00:08.602 --> 00:00:11.545
(writing) Can't pay back.

00:00:11.545 --> 00:00:13.432
What are you going to do?

00:00:13.432 --> 00:00:16.532
Before I really jump into what we do now

00:00:16.532 --> 00:00:18.426
in our modern society,
let's get a couple of

00:00:18.426 --> 00:00:21.344
the words out of the way
we're going to use a lot.

00:00:21.344 --> 00:00:22.597
These are words that you'll hear a lot

00:00:22.597 --> 00:00:25.596
in the context of debt or
in the context of loans.

00:00:25.596 --> 00:00:30.349
On one side of the transaction
you have the debtor.

00:00:30.349 --> 00:00:32.064
This is essentially the person that

00:00:32.064 --> 00:00:33.605
borrowed the money.

00:00:33.605 --> 00:00:36.768
(writing) Borrowed money.

00:00:36.768 --> 00:00:38.263
And because they borrowed the money,

00:00:38.263 --> 00:00:40.329
they now owe money, so you can either say

00:00:40.329 --> 00:00:43.433
they borrowed the money
or that they owe money.

00:00:43.433 --> 00:00:45.325
(writing) They owe the money.

00:00:45.325 --> 00:00:46.728
On the other side of the transaction

00:00:46.728 --> 00:00:50.466
you have the creditor.

00:00:50.466 --> 00:00:51.673
(writing) creditor.

00:00:51.673 --> 00:00:54.594
This is the entity or
the person that is owed

00:00:54.594 --> 00:00:58.263
the money or they lent
the money to the borrower.

00:00:58.263 --> 00:01:02.091
(writing) They lend the money.

00:01:02.091 --> 00:01:03.670
They lend the money.

00:01:03.670 --> 00:01:04.923
We have our words out of the way,

00:01:04.923 --> 00:01:07.596
but let's go back to our
fundamental question.

00:01:07.596 --> 00:01:10.195
What happens when the debtor can't pay

00:01:10.195 --> 00:01:12.928
the creditor back the
money that they creditor

00:01:12.928 --> 00:01:14.673
is apparently due?

00:01:14.673 --> 00:01:18.453
If we go back through human history

00:01:18.453 --> 00:01:21.056
they've come up with various solutions

00:01:21.056 --> 00:01:23.755
to this problem, we can call it.

00:01:23.755 --> 00:01:26.265
If you go back to ancient Greece,

00:01:26.265 --> 00:01:29.001
(writing) Ancient Greece

00:01:29.001 --> 00:01:31.665
they had a very simple solution to it.

00:01:31.665 --> 00:01:34.570
The debtor, if the debtor
can't pay back their debts

00:01:34.570 --> 00:01:38.803
well then, become a debt
slave to the creditor.

00:01:38.803 --> 00:01:41.645
(writing) They became a debt slave.

00:01:41.645 --> 00:01:44.332
If the creditor needs some gardening done,

00:01:44.332 --> 00:01:46.904
or would like his or her house cleaned

00:01:46.904 --> 00:01:49.232
more regularly, the debtor and actually

00:01:49.232 --> 00:01:51.806
probably the debtors
family would have then

00:01:51.806 --> 00:01:54.726
had to do whatever the
creditor wanted until they

00:01:54.726 --> 00:01:57.866
essentially pay back their
debt through their labor.

00:01:57.866 --> 00:01:59.489
That's how Greece handled it, if you know

00:01:59.489 --> 00:02:01.729
it's kind of shocking to us now,

00:02:01.729 --> 00:02:02.984
but that was their solution.

00:02:02.984 --> 00:02:04.882
You decided to borrow
money, you can't pay it

00:02:04.882 --> 00:02:06.798
anymore, this is what you've got to do.

00:02:06.798 --> 00:02:09.328
Now, if we fast forward a little bit

00:02:09.328 --> 00:02:12.123
to maybe Medieval Europe, this is even

00:02:12.123 --> 00:02:15.719
Charles Dickens' father
was even caught into this

00:02:15.719 --> 00:02:20.858
kind of a bind, but until
the early or mid 1800s

00:02:20.858 --> 00:02:22.985
in Europe and the United
States you had the notion

00:02:22.985 --> 00:02:25.614
of debtors prison.

00:02:25.614 --> 00:02:30.457
(writing) Debtors prison.

00:02:30.457 --> 00:02:33.858
Frankly, when I describe this to you,

00:02:33.858 --> 00:02:35.320
you'll find that it's
even worse in my mind

00:02:35.320 --> 00:02:36.726
then being a debt slave.

00:02:36.726 --> 00:02:39.455
In debtors prison they
would throw you in jail,

00:02:39.455 --> 00:02:42.454
they would throw you ...
they would imprison you,

00:02:42.454 --> 00:02:44.320
that's why it's called debtors prison

00:02:44.320 --> 00:02:46.787
and you're not coming
out until your family

00:02:46.787 --> 00:02:48.986
pays off your debt.

00:02:48.986 --> 00:02:53.127
(writing) your family
or maybe your friends,

00:02:53.127 --> 00:02:56.277
if you have good friends,
pays off your debt.

00:02:56.277 --> 00:02:59.199
(writing) off your debt.

00:02:59.199 --> 00:03:02.595
Just thinking about why
this is especially horrible,

00:03:02.595 --> 00:03:04.520
at least here you had
your chance to work off

00:03:04.520 --> 00:03:05.788
your debt.

00:03:05.788 --> 00:03:10.420
Here if your family either,
in my situation right now,

00:03:10.420 --> 00:03:13.593
if I get thrown in prison
will my 10-month-old son

00:03:13.593 --> 00:03:15.009
be able to pay off my debt?

00:03:15.009 --> 00:03:17.005
No, I'm just going to
rot in prison forever

00:03:17.005 --> 00:03:18.519
or what if my family doesn't like me

00:03:18.519 --> 00:03:20.856
or what if I have no family or friends,

00:03:20.856 --> 00:03:23.253
just for ... I might have owed someone the

00:03:23.253 --> 00:03:25.454
equivalent of now of
$1,000 and because of that

00:03:25.454 --> 00:03:27.255
I could serve a life sentence in prison.

00:03:27.255 --> 00:03:29.745
You could imagine the debtors prison

00:03:29.745 --> 00:03:31.661
could be quite harsh and, actually,

00:03:31.661 --> 00:03:35.004
Charles Dickens' dad
was in debtors prison.

00:03:35.004 --> 00:03:37.734
It can kind of tell you
a little bit about why

00:03:37.734 --> 00:03:39.595
he writes the type of books that he does.

00:03:39.595 --> 00:03:42.065
Anyway, this is the past,
we are now a civilized

00:03:42.065 --> 00:03:44.335
society and hopefully we have a better way

00:03:44.335 --> 00:03:46.936
of dealing with the
situation when a debtor

00:03:46.936 --> 00:03:49.400
owes a creditor money.

00:03:49.400 --> 00:03:51.982
That's the topic of this video.

00:03:51.982 --> 00:03:55.943
Now what we do is something
called bankruptcy.

00:03:55.943 --> 00:03:57.868
Just so you know, the first
versions of bankruptcy

00:03:57.868 --> 00:03:59.534
weren't that different
from debtors prison.

00:03:59.534 --> 00:04:01.202
They are actually more
to protect the creditor

00:04:01.202 --> 00:04:03.663
then to protect the
debtor, but now we have

00:04:03.663 --> 00:04:05.870
bankruptcy laws and for
the most part they're

00:04:05.870 --> 00:04:08.004
to prevent this type of
craziness or for someone

00:04:08.004 --> 00:04:09.668
to spend their entire life on kind of this

00:04:09.668 --> 00:04:12.462
wacky debt treadmill.

00:04:12.462 --> 00:04:15.376
Let's talk a little bit about bankruptcy.

00:04:15.376 --> 00:04:17.786
I'm going to focus on bankruptcy as it is

00:04:17.786 --> 00:04:19.541
in the United States.

00:04:19.541 --> 00:04:22.625
Let me write down
bankruptcy in a new color.

00:04:22.625 --> 00:04:28.039
(writing) Bankruptcy, bankruptcy.

00:04:28.039 --> 00:04:30.699
It's going to have a U.S. focus.

00:04:30.699 --> 00:04:31.818
In general I'm going to talk about

00:04:31.818 --> 00:04:33.752
personal bankruptcy,
although a lot of what

00:04:33.752 --> 00:04:35.719
I talk about, on some level,
applies to corporations

00:04:35.719 --> 00:04:36.722
as well.

00:04:36.722 --> 00:04:39.259
I've actually made videos on that as well.

00:04:39.259 --> 00:04:42.260
Let's say I'm just overwhelmed with debt.

00:04:42.260 --> 00:04:45.786
I have $100,000 of credit card loans,

00:04:45.786 --> 00:04:52.009
I have a mortgage to
pay, I have a car lease

00:04:52.009 --> 00:04:53.586
that was a little bit over my head

00:04:53.586 --> 00:04:54.853
what can I do?

00:04:54.853 --> 00:04:57.588
There's a couple of options
in the United States.

00:04:57.588 --> 00:05:00.391
You have Chapter 7, it
seems very complicated,

00:05:00.391 --> 00:05:02.786
these are all different,
literally, chapters of the

00:05:02.786 --> 00:05:04.908
bankruptcy code.

00:05:04.908 --> 00:05:08.058
(writing) You have chapter 7.

00:05:08.058 --> 00:05:11.652
This is called a straight bankruptcy.

00:05:11.652 --> 00:05:14.049
This is literally you
go ... it's not a simple

00:05:14.049 --> 00:05:16.095
procedure, but the gist
of it is you go to the

00:05:16.095 --> 00:05:17.911
bankruptcy courts and
you say look I can't pay

00:05:17.911 --> 00:05:18.887
back my debts.

00:05:18.887 --> 00:05:20.474
What they're going to do
is they're going to take

00:05:20.474 --> 00:05:24.332
my assets and then
whatever there is there,

00:05:24.332 --> 00:05:26.556
they're going to split
it amongst my creditors

00:05:26.556 --> 00:05:28.667
and then after all is said and done,

00:05:28.667 --> 00:05:31.886
I don't owe anyone anything,
although I've lost a lot

00:05:31.886 --> 00:05:32.926
of my assets.

00:05:32.926 --> 00:05:34.113
Some of them are exempt, they let you keep

00:05:34.113 --> 00:05:37.066
things that you need to live
like your pots and pans,

00:05:37.066 --> 00:05:40.328
and maybe one television,
and maybe a suit so that

00:05:40.328 --> 00:05:43.333
you can find a job, but
if I have a bank account,

00:05:43.333 --> 00:05:46.330
I probably don't because
I got so deep into debt.

00:05:46.330 --> 00:05:50.622
But if I have some money,
if I have a nice diamond

00:05:50.622 --> 00:05:53.472
ring or a Rolex watch,
they're going to take that

00:05:53.472 --> 00:05:56.260
from me and the trustee,
the bankruptcy court

00:05:56.260 --> 00:05:58.133
is going to take that from me, sell it

00:05:58.133 --> 00:06:00.328
and then give it to all my creditors,

00:06:00.328 --> 00:06:02.536
but at the end of the day
after all is said and done

00:06:02.536 --> 00:06:05.196
I'll actually be free of all of my debt.

00:06:05.196 --> 00:06:08.888
It's kind of a way to
break from this cycle

00:06:08.888 --> 00:06:12.061
of always owing money
and always just barely

00:06:12.061 --> 00:06:14.549
making it or probably
not making it at all.

00:06:14.549 --> 00:06:16.064
That's a straight bankruptcy.

00:06:16.064 --> 00:06:19.065
I say why doesn't everyone
do that who's under

00:06:19.065 --> 00:06:21.666
a big heavy load of debt,
well one there's a lot of

00:06:21.666 --> 00:06:24.803
rules that make this easy
or not so easy to do,

00:06:24.803 --> 00:06:27.217
but the other thing is it
stays on your credit report

00:06:27.217 --> 00:06:29.398
for 10 years.

00:06:29.398 --> 00:06:34.874
(writing) 10 years on credit report.

00:06:34.874 --> 00:06:36.546
So, you've got to think to yourself,

00:06:36.546 --> 00:06:39.137
am I going to be better
off over the next 10 years

00:06:39.137 --> 00:06:41.207
continuing to pay off my debt?

00:06:41.207 --> 00:06:42.962
If I can pay off my debt,
if I have any chance

00:06:42.962 --> 00:06:45.070
I should probably do
that so that I don't ruin

00:06:45.070 --> 00:06:46.882
my credit for the next 10 years,

00:06:46.882 --> 00:06:48.337
but if it's just a hopeless situation

00:06:48.337 --> 00:06:50.218
I might as well do it.

00:06:50.218 --> 00:06:52.212
Just so you know, this
isn't a cure for everything.

00:06:52.212 --> 00:06:55.007
If you've got ... If
you're sitting on $300,000

00:06:55.007 --> 00:06:58.005
of student loans, I say,
wow, let me just ...

00:06:58.005 --> 00:06:59.796
that's going to take me
more than 10 years to pay

00:06:59.796 --> 00:07:02.880
anyway, let me just declare
Chapter 7 bankruptcy,

00:07:02.880 --> 00:07:05.857
it will be unfortunate to find out that

00:07:05.857 --> 00:07:09.213
student loans cannot be forgiven in

00:07:09.213 --> 00:07:10.883
a Chapter 7 bankruptcy.

00:07:10.883 --> 00:07:13.734
There's a whole set of types of loans,

00:07:13.734 --> 00:07:15.993
or I guess you could say
types of liabilities,

00:07:15.993 --> 00:07:17.403
things you owe to other people that

00:07:17.403 --> 00:07:19.732
cannot be forgiven;
certain types of taxes,

00:07:19.732 --> 00:07:23.268
student loans, child support, those won't

00:07:23.268 --> 00:07:24.340
be forgiven.

00:07:24.340 --> 00:07:26.135
This will definitely
apply to things maybe like

00:07:26.135 --> 00:07:27.541
credit card loans.

00:07:27.541 --> 00:07:29.934
This isn't just a very,
very simple process,

00:07:29.934 --> 00:07:32.003
so any of these things that I talk about

00:07:32.003 --> 00:07:35.002
you definitely want to
consult an expert on your

00:07:35.002 --> 00:07:37.737
particular situation to get
a little bit more detail.

00:07:37.737 --> 00:07:39.196
This is just an overview.

00:07:39.196 --> 00:07:41.210
That's Chapter 7 straight up bankruptcy.

00:07:41.210 --> 00:07:43.936
I don't have what it
takes to keep servicing

00:07:43.936 --> 00:07:46.382
my debt, I want a brand new start.

00:07:46.382 --> 00:07:49.550
Now, the next one, or
the next one you're going

00:07:49.550 --> 00:07:54.068
to hear the most about in
the context of a personal

00:07:54.068 --> 00:07:58.086
bankruptcy is Chapter 13.

00:07:58.086 --> 00:08:01.600
(writing) Chapter 13.

00:08:01.600 --> 00:08:04.980
This is often referred
to as a reorganization.

00:08:04.980 --> 00:08:09.667
(writing) reorganization.

00:08:09.667 --> 00:08:13.224
Here the idea is, look, I have a salary,

00:08:13.224 --> 00:08:16.559
I have a job, but I
just have more debt then

00:08:16.559 --> 00:08:18.000
is imaginable.

00:08:18.000 --> 00:08:20.071
It might not be just because
I've been irresponsible,

00:08:20.071 --> 00:08:22.669
maybe a medical emergency
came up in the family

00:08:22.669 --> 00:08:25.145
or I had some unknown expenses that just

00:08:25.145 --> 00:08:26.606
popped up out of nowhere.

00:08:26.606 --> 00:08:30.893
So, here the situation
is, look Mr. Creditors

00:08:30.893 --> 00:08:33.893
out there, I really do
want to pay you back,

00:08:33.893 --> 00:08:36.941
but what you're asking
for me to do right now

00:08:36.941 --> 00:08:38.313
is just crazy.

00:08:38.313 --> 00:08:39.834
If you ask me to do that I'm just going to

00:08:39.834 --> 00:08:41.334
end up in Chapter 7 eventually,

00:08:41.334 --> 00:08:46.132
so for both my sake, me as the debtor,

00:08:46.132 --> 00:08:48.481
both for my sake and for your sake,

00:08:48.481 --> 00:08:50.800
why don't we come up
with a plan so that I can

00:08:50.800 --> 00:08:52.976
realistically, so that I can realistically

00:08:52.976 --> 00:08:55.533
pay you over the next 3 to 5 years.

00:08:55.533 --> 00:08:58.002
That might involve you saying, hey

00:08:58.002 --> 00:09:01.148
instead of being owed
$50,000 you now owe me

00:09:01.148 --> 00:09:03.549
$40,000 or instead of
the interest being on my

00:09:03.549 --> 00:09:06.188
credit card being 20% a
year, let's change that

00:09:06.188 --> 00:09:07.855
to 10% a year, so there
will be a little bit

00:09:07.855 --> 00:09:09.250
of a negotiation.

00:09:09.250 --> 00:09:11.164
You're going to have
to come up with a plan

00:09:11.164 --> 00:09:12.583
and once you come up with that plan,

00:09:12.583 --> 00:09:15.852
I've got to pay that over
the next 3 to 5 years.

00:09:15.852 --> 00:09:17.664
(writing) 3 to 5 years.

00:09:17.664 --> 00:09:19.519
Once again, you might say
hey that's pretty good,

00:09:19.519 --> 00:09:22.386
if I owe $100,000 in credit card debt

00:09:22.386 --> 00:09:24.999
and I kind of go to my creditors

00:09:24.999 --> 00:09:28.515
and look like a genuine individual

00:09:28.515 --> 00:09:31.294
and make a nice sob story
they're going to lower

00:09:31.294 --> 00:09:33.422
my debt, I'll be better
off then if I didn't do it.

00:09:33.422 --> 00:09:36.203
Here again, there's a penalty to doing it

00:09:36.203 --> 00:09:39.712
and once again it shows
up on your credit report.

00:09:39.712 --> 00:09:42.670
In general, they're going
to come up with a plan

00:09:42.670 --> 00:09:45.483
for you to pay back your
creditors over 3 years

00:09:45.483 --> 00:09:47.755
and then after that it's
going to show up on your

00:09:47.755 --> 00:09:50.315
credit report for another 7 years.

00:09:50.315 --> 00:09:57.618
(writing) 7 years on credit,
on your credit report.

00:09:58.809 --> 00:10:01.042
So in general from the time you file until

00:10:01.042 --> 00:10:03.072
the time it leaves your credit report

00:10:03.072 --> 00:10:06.923
it's going to be 10 years,
just like Chapter 7.

00:10:06.923 --> 00:10:09.664
In either of these situations
these aren't things

00:10:09.664 --> 00:10:11.256
that you want to just jump into

00:10:11.256 --> 00:10:14.839
and think, wow, I've found
an easy out from my debt.

00:10:14.839 --> 00:10:16.502
These are very serious
things that will impact you

00:10:16.502 --> 00:10:21.005
for a reasonable chunk of your life,

00:10:21.005 --> 00:10:22.859
so these aren't just simple things to do.

00:10:22.859 --> 00:10:25.340
They are good to know
about just in case you do

00:10:25.340 --> 00:10:27.728
find yourself a little bit over your head,

00:10:27.728 --> 00:10:29.925
or a little bit underwater
or you know someone

00:10:29.925 --> 00:10:32.465
who's in this situation,
at least it is an out

00:10:32.465 --> 00:10:34.672
where they can feel that,
look, if I do this or that

00:10:34.672 --> 00:10:38.055
then maybe over the next
either 3 years or 10 years

00:10:38.055 --> 00:10:41.223
depending on how you
view it, they can get to

00:10:41.223 --> 00:10:42.796
a new start.

00:10:42.796 --> 00:10:46.085
Just so you have a sense
of how often this occurs,

00:10:46.085 --> 00:10:48.858
I looked this up a little bit earlier.

00:10:48.858 --> 00:10:51.507
In the U.S., in the U.S.,
and as you can imagine

00:10:51.507 --> 00:10:53.003
we're in the middle of a recession now,

00:10:53.003 --> 00:10:55.798
so bankruptcy filings are
going through the roof,

00:10:55.798 --> 00:10:57.590
so let me write this down.

00:10:57.590 --> 00:10:59.751
This is Chapter 7.

00:10:59.751 --> 00:11:04.789
(writing) Chapter 7 and here's Chapter 13.

00:11:04.789 --> 00:11:06.524
If you're wondering what
are all the Chapters

00:11:06.524 --> 00:11:08.989
in between, there's a Chapter 12 which is

00:11:08.989 --> 00:11:12.334
essentially Chapter 13
for farmers and fishermen,

00:11:12.334 --> 00:11:14.391
they get a few more benefits
than the rest of us get,

00:11:14.391 --> 00:11:16.062
just because we want to promote,

00:11:16.062 --> 00:11:18.388
I guess people who produce food.

00:11:18.388 --> 00:11:21.053
Then there is Chapter
11 which is essentially

00:11:21.053 --> 00:11:23.789
business reorganization,
it can apply to some

00:11:23.789 --> 00:11:26.853
individuals who are essentially big shots,

00:11:26.853 --> 00:11:29.670
their personal portfolios of assets

00:11:29.670 --> 00:11:32.000
and liabilities look
a lot like a business,

00:11:32.000 --> 00:11:34.257
so for them Chapter 11
will be more appropriate

00:11:34.257 --> 00:11:35.592
than Chapter 13.

00:11:35.592 --> 00:11:37.796
Those are kind of the two other Chapters.

00:11:37.796 --> 00:11:40.105
From a personal bankruptcy point of view,

00:11:40.105 --> 00:11:43.017
Chapter 7 and Chapter
13 is what most people

00:11:43.017 --> 00:11:44.430
concern themselves with.

00:11:44.430 --> 00:11:46.653
Now just to give you
the numbers of how often

00:11:46.653 --> 00:11:49.386
this is occurring, just
if you find yourself

00:11:49.386 --> 00:11:51.062
in this circumstance,
just so you know that

00:11:51.062 --> 00:11:53.589
you're not necessarily
alone and also just to see

00:11:53.589 --> 00:11:55.898
that they really are increasing right now.

00:11:55.898 --> 00:12:00.244
(writing) 2007, 2008, 2009.

00:12:00.467 --> 00:12:04.470
Chapter 7 filings in the
United States in 2007,

00:12:04.470 --> 00:12:10.257
413,000, in 2008 it went up to 560,000.

00:12:10.257 --> 00:12:12.877
This is a more than a 25% increase.

00:12:12.877 --> 00:12:18.327
Then in 2009 819,000
filings, essentially double

00:12:18.327 --> 00:12:22.870
of the number of Chapter
7 filings in 2007.

00:12:22.870 --> 00:12:28.546
If you look at Chapter
13, in 2007 we had 277,000

00:12:28.546 --> 00:12:31.811
filings, so for every 2
Chapter 7's there looks like

00:12:31.811 --> 00:12:33.765
there's about ... well
for every 4 there's about

00:12:33.765 --> 00:12:35.006
3 of these.

00:12:35.006 --> 00:12:40.933
Then we have 334,000 in
2008 and then 370,000

00:12:40.933 --> 00:12:42.261
in 2009.

00:12:42.261 --> 00:12:44.129
You can see that the
Chapter 7 ones are ...

00:12:44.129 --> 00:12:45.503
I mean they are both
increasing really fast,

00:12:45.503 --> 00:12:47.596
but Chapter 7 is even more dramatic.

00:12:47.596 --> 00:12:49.597
You can imagine because
in a situation where

00:12:49.597 --> 00:12:52.827
people don't have jobs,
Chapter 13 really isn't

00:12:52.827 --> 00:12:55.332
that viable of an option,
they really have to

00:12:55.332 --> 00:12:57.831
do something like Chapter 7.

00:12:57.831 --> 00:12:59.827
Anyway, hopefully you found that useful

00:12:59.827 --> 00:13:03.651
and you know a little
bit about bankruptcy now.


Relationship between bond prices and interest rates

WEBVTT
Kind: captions
Language: en

00:00:00.318 --> 00:00:01.670
Voiceover: What I want to do in this video

00:00:01.670 --> 00:00:05.019
is to give a not-too-math-y explanation

00:00:05.019 --> 00:00:09.684
of why bond prices move

00:00:09.684 --> 00:00:13.367
in the opposite direction
as interest rates,

00:00:13.367 --> 00:00:16.933
so bond prices versus interest rates.

00:00:17.367 --> 00:00:21.701
To start off, I'll just start
with a fairly simple bond,

00:00:21.701 --> 00:00:24.033
one that does pay a coupon,

00:00:24.033 --> 00:00:25.233
and we'll just talk a little bit about

00:00:25.233 --> 00:00:26.900
what you'd be willing to pay for that bond

00:00:26.900 --> 00:00:28.966
if interest rates moved up or down.

00:00:28.966 --> 00:00:32.546
Let's start with a bond from some company.

00:00:32.546 --> 00:00:34.800
Let me just write this down.

00:00:35.253 --> 00:00:39.767
This could be company A.

00:00:39.767 --> 00:00:41.166
It doesn't just have to be from a company.

00:00:41.166 --> 00:00:42.566
It could be from a municipality

00:00:42.566 --> 00:00:44.833
or it could be from the U.S. government.

00:00:44.833 --> 00:00:48.566
Let's say it's a bond for $1,000.

00:00:48.566 --> 00:00:53.333
Let's say it has a two-year maturity,

00:00:55.368 --> 00:00:58.435
and let's say that it has a 10% coupon,

00:00:58.681 --> 00:01:01.266
10% coupon

00:01:01.653 --> 00:01:04.100
paid semi-annually,

00:01:04.100 --> 00:01:09.733
so this is semi-annual payments.

00:01:10.100 --> 00:01:12.654
If we just draw the diagram for this,

00:01:12.654 --> 00:01:13.654
obviously I ran out of space

00:01:13.654 --> 00:01:15.506
on the actual bond certificate,

00:01:15.506 --> 00:01:18.966
but let's draw a diagram of
the payments for this bond.

00:01:18.966 --> 00:01:20.167
This is today.

00:01:20.167 --> 00:01:22.066
Let me do it in a different color.

00:01:22.463 --> 00:01:23.500
That's today.

00:01:23.500 --> 00:01:25.868
Let me draw a little timeline right here.

00:01:26.202 --> 00:01:29.509
This is two years in the
future when the bond matures,

00:01:29.509 --> 00:01:32.433
so that is 24 months in the future.

00:01:32.433 --> 00:01:34.756
Halfway is 12 months,

00:01:35.186 --> 00:01:37.335
then this is 18 months,

00:01:37.335 --> 00:01:40.101
and this right here is six months.

00:01:40.101 --> 00:01:41.500
We went over a little bit of this

00:01:41.500 --> 00:01:43.966
in the introduction to bond video,

00:01:43.966 --> 00:01:46.695
but it's a 10% coupon paid semi-annually,

00:01:46.695 --> 00:01:51.079
so it will pay us 10% of
the par value per year,

00:01:51.079 --> 00:01:53.701
but it's going to break it up
into two six-month payments.

00:01:53.701 --> 00:01:56.900
10% of $1,000 is $100,

00:01:56.900 --> 00:02:01.133
so they're going to give
us $50 every six months.

00:02:01.500 --> 00:02:04.033
They're going to give
half of our 10% coupon

00:02:04.033 --> 00:02:04.900
every six months,

00:02:04.900 --> 00:02:07.734
so we're going to get $50 here,

00:02:07.951 --> 00:02:10.400
$50 here,

00:02:10.566 --> 00:02:11.982
these are going to be our coupon payments,

00:02:11.982 --> 00:02:13.532
$50 there,

00:02:13.532 --> 00:02:16.366
and then finally, at two
years, we'll get $50,

00:02:16.366 --> 00:02:18.940
and we'll also get the
par value of our bond,

00:02:18.940 --> 00:02:21.812
and we'll also get $1,000.

00:02:22.118 --> 00:02:26.901
We'll get $1,000 plus
$50 24 months from today.

00:02:26.901 --> 00:02:29.033
Now, the day that this,

00:02:29.033 --> 00:02:30.817
let's say this is today
that we're talking about

00:02:30.817 --> 00:02:32.366
the bond is issued,

00:02:32.366 --> 00:02:33.688
and you look at that and
you say, you know what?

00:02:33.688 --> 00:02:35.634
For a company like company A,

00:02:35.634 --> 00:02:37.387
for this risk profile,

00:02:37.387 --> 00:02:39.366
given where interest rates are right now,

00:02:39.366 --> 00:02:43.034
I think a 10% coupon
is just about perfect.

00:02:43.034 --> 00:02:45.634
So a 10% coupon is just about perfect,

00:02:45.634 --> 00:02:46.367
so you say, you know what?

00:02:46.367 --> 00:02:49.634
I think I will pay $1,000 for it.

00:02:49.634 --> 00:02:51.767
So the price of the bond,

00:02:51.767 --> 00:02:53.500
the price of that bond

00:02:53.500 --> 00:02:57.166
right when it gets issued
or on day zero, if you will,

00:02:57.166 --> 00:02:59.236
you'll be willing to pay $1,000 for it

00:02:59.236 --> 00:03:01.902
because you say, look, I'm
getting roughly 10% a year,

00:03:01.902 --> 00:03:02.966
and then I get my money back.

00:03:02.966 --> 00:03:05.535
10% is a good interest rate
for that level of risk.

00:03:05.566 --> 00:03:09.966
Now, let's say that the moment
after you buy that bond,

00:03:09.966 --> 00:03:11.367
just to make things a little bit ...

00:03:11.367 --> 00:03:14.034
Obviously, interest rates
don't move this quickly,

00:03:14.034 --> 00:03:15.900
but let's say the moment
after you buy that bond,

00:03:15.900 --> 00:03:17.566
or maybe to be a little
bit more realistic,

00:03:17.566 --> 00:03:19.100
let's say the very next day,

00:03:19.100 --> 00:03:21.200
interest rates go up.

00:03:21.700 --> 00:03:23.300
If interest rates go up,

00:03:23.300 --> 00:03:25.268
let me do this in a new color.

00:03:26.366 --> 00:03:28.000
Let's say that interest,

00:03:29.300 --> 00:03:33.199
interest rates go up,

00:03:33.234 --> 00:03:34.768
and let's say they go up in such a way

00:03:34.768 --> 00:03:36.433
that now that they've moved up

00:03:36.433 --> 00:03:38.833
for this type of a company,

00:03:38.833 --> 00:03:40.100
for this type of risk,

00:03:40.100 --> 00:03:43.833
you could go out in the
market and get 15% coupon.

00:03:43.833 --> 00:03:45.835
So let's say for this type of risk,

00:03:45.835 --> 00:03:52.600
you would now expect a 15% interest rate.

00:03:54.429 --> 00:03:55.819
Obviously for something less risky,

00:03:55.819 --> 00:03:57.434
you would expect less interest.

00:03:57.434 --> 00:03:59.301
For a company just like company,

00:03:59.301 --> 00:04:01.234
you would now expect a 15% interest rate.

00:04:01.234 --> 00:04:03.300
Interest rates have gone up.

00:04:03.300 --> 00:04:04.701
Now, let's say you need cash

00:04:04.701 --> 00:04:06.700
and you come to me and you say,

00:04:06.700 --> 00:04:09.102
"Hey, Sal, are you willing to buy

00:04:09.102 --> 00:04:10.500
"this certificate off of me?

00:04:10.500 --> 00:04:12.035
"I need some cash.

00:04:12.035 --> 00:04:13.367
"I need some liquidity.

00:04:13.367 --> 00:04:15.433
"I can't wait for the two years

00:04:15.433 --> 00:04:17.238
"for me to get my money back.

00:04:17.238 --> 00:04:21.266
"How much are you willing
to pay for this bond?"

00:04:21.301 --> 00:04:22.633
I'll say, you know what?

00:04:22.956 --> 00:04:25.766
I'm going to pay you less than $1,000

00:04:25.766 --> 00:04:29.300
because this bond is only giving me 10%.

00:04:29.300 --> 00:04:31.442
I'm expecting 15%,

00:04:31.442 --> 00:04:34.166
so I want to pay something
less than $1,000,

00:04:34.166 --> 00:04:36.968
that after I do all of the
fancy math in my spreadsheet,

00:04:36.968 --> 00:04:39.968
it will come out to be 15%,

00:04:39.968 --> 00:04:41.234
so I'm going to pay,

00:04:41.234 --> 00:04:42.400
so the price,

00:04:43.653 --> 00:04:45.704
so in this situation,
the price will go down.

00:04:45.704 --> 00:04:47.567
I'll actually do the
math with a simpler bond

00:04:47.567 --> 00:04:49.776
than one that pays
coupons right after this,

00:04:49.776 --> 00:04:51.166
but I just want to give
the intuitive sense.

00:04:51.166 --> 00:04:52.500
If interest rates go up,

00:04:52.500 --> 00:04:53.967
someone willing to buy that bond,

00:04:53.967 --> 00:04:56.168
they'll say, "Gee, this
only gives a 10% coupon.

00:04:56.168 --> 00:04:59.433
"That's not the 15% coupon I
can get on the open market.

00:04:59.433 --> 00:05:02.433
"I'm going to pay less
than $1,000 for this bond."

00:05:02.433 --> 00:05:06.100
So the price will go down.

00:05:06.100 --> 00:05:07.568
Or you could just essentially say

00:05:07.568 --> 00:05:11.068
that the bond would be
trading at a discount to par.

00:05:11.169 --> 00:05:18.634
Bond would trade at a discount,

00:05:18.634 --> 00:05:24.000
at a discount to par.

00:05:24.234 --> 00:05:25.573
Now, let's say the opposite happens.

00:05:25.573 --> 00:05:28.139
Let's say that interest rates go down.

00:05:28.168 --> 00:05:31.534
Let's say that we're in a
situation where interest rates,

00:05:32.566 --> 00:05:35.907
interest rates go down.

00:05:35.907 --> 00:05:38.833
So now, for this type
of risk like company A,

00:05:38.833 --> 00:05:40.833
people expect 5%.

00:05:41.002 --> 00:05:44.800
People expect 5% rate.

00:05:45.233 --> 00:05:48.100
So how much could you sell this bond for?

00:05:48.100 --> 00:05:50.239
If you were there and if I had to just go

00:05:50.239 --> 00:05:52.166
to companies issuing their bonds,

00:05:52.166 --> 00:05:54.300
I would have to pay $1,000,

00:05:54.300 --> 00:05:55.566
or roughly $1,000,

00:05:55.566 --> 00:05:59.033
for a bond that only gives me a 5% coupon,

00:05:59.033 --> 00:05:59.903
roughly, give or take.

00:05:59.903 --> 00:06:01.233
I'm not being precise with the math.

00:06:01.233 --> 00:06:03.100
I really just want to
give you the gist of it.

00:06:03.100 --> 00:06:06.633
So I would pay $1,000 for
something giving a 5% coupon now.

00:06:06.633 --> 00:06:08.719
This thing is giving me a 10% coupon,

00:06:08.719 --> 00:06:09.967
so it's clearly better,

00:06:09.967 --> 00:06:12.200
so now, the price would go up.

00:06:12.367 --> 00:06:20.933
So now, I would pay more than par.

00:06:21.366 --> 00:06:24.466
Or, you would say that this
bond is trading at a premium,

00:06:25.034 --> 00:06:27.199
a premium to par.

00:06:30.566 --> 00:06:32.033
So at least in the gut sense,

00:06:32.033 --> 00:06:33.702
when interest rates went up,

00:06:33.702 --> 00:06:36.243
people expect more from the bond.

00:06:36.243 --> 00:06:37.633
This bond isn't giving more,

00:06:37.633 --> 00:06:39.502
so the price will go down.

00:06:39.502 --> 00:06:41.633
Likewise, if interest rates go down,

00:06:41.633 --> 00:06:43.766
this bond is getting
more than what people's

00:06:43.766 --> 00:06:45.100
expectations are,

00:06:45.100 --> 00:06:47.702
so people are willing to
pay more for that bond.

00:06:47.702 --> 00:06:49.302
Now let's actually do it with an actual,

00:06:49.302 --> 00:06:50.367
let's actually do the math

00:06:50.367 --> 00:06:51.768
to figure out the actual price

00:06:51.768 --> 00:06:52.833
that someone,

00:06:52.833 --> 00:06:55.568
a rational person would be
willing to pay for a bond

00:06:55.568 --> 00:06:57.714
given what happens to interest rates.

00:06:57.714 --> 00:06:58.567
And to do this,

00:06:58.567 --> 00:07:00.567
I'm going to do what's
called a zero-coupon bond.

00:07:00.567 --> 00:07:02.711
I'm going to show you zero-coupon bond.

00:07:02.711 --> 00:07:04.166
Actually, the math is much simpler on this

00:07:04.166 --> 00:07:05.033
because you don't have to do it

00:07:05.033 --> 00:07:06.633
for all of the different coupons.

00:07:06.633 --> 00:07:08.103
You just have to look
at the final payment.

00:07:08.103 --> 00:07:09.633
So a zero-coupon bond

00:07:09.633 --> 00:07:14.833
is literally a bond
that just agrees to pay

00:07:14.833 --> 00:07:17.233
the holder of the bond

00:07:17.233 --> 00:07:18.301
the face value,

00:07:18.301 --> 00:07:19.833
so let's say the face value,

00:07:19.833 --> 00:07:24.366
the par value is $1,000
two years from today,

00:07:24.366 --> 00:07:29.166
two years from today.

00:07:29.166 --> 00:07:30.300
There is no coupon.

00:07:30.300 --> 00:07:32.578
So if I were to draw a payout diagram,

00:07:32.578 --> 00:07:34.638
it would just look like this.

00:07:35.344 --> 00:07:36.233
This is today.

00:07:36.233 --> 00:07:37.050
This is one year.

00:07:37.050 --> 00:07:37.900
This is two years.

00:07:37.900 --> 00:07:42.200
You just get $1,000.

00:07:42.366 --> 00:07:45.166
Now let's say on day one,

00:07:45.166 --> 00:07:47.302
interest rates for a
company like company A,

00:07:47.302 --> 00:07:49.506
this is company A's bonds,

00:07:49.506 --> 00:07:52.533
so this is starting off, so day one,

00:07:52.900 --> 00:07:54.669
day one.

00:07:54.900 --> 00:07:57.900
Let's say people's expectations
for this type of bond

00:07:57.900 --> 00:08:04.933
is they want 10% per year interest.

00:08:05.900 --> 00:08:08.768
So given that, how much
would they be willing to pay

00:08:08.768 --> 00:08:10.768
for something that's
going to pay them back

00:08:10.768 --> 00:08:13.700
$1,000 in two years?

00:08:13.700 --> 00:08:15.909
The way to think about
it is let's P in this ...

00:08:15.909 --> 00:08:17.433
I'm going to do a little bit of math now,

00:08:17.433 --> 00:08:19.946
but hopefully it won't be too bad.

00:08:20.099 --> 00:08:21.700
Let's say P is the price

00:08:21.700 --> 00:08:24.070
that someone is willing to pay for a bond.

00:08:24.233 --> 00:08:25.566
So whatever price that is,

00:08:25.566 --> 00:08:28.634
if you compound it by 10% for two years,

00:08:28.634 --> 00:08:31.167
so I do 1.10,

00:08:31.167 --> 00:08:32.500
that's one plus 10%,

00:08:32.500 --> 00:08:33.700
so after one year,

00:08:33.700 --> 00:08:34.966
if I compound it by 10%,

00:08:34.966 --> 00:08:36.500
it will be P times this,

00:08:36.500 --> 00:08:38.100
and then after another year,

00:08:38.100 --> 00:08:40.933
I'll multiply it by 1.10 again.

00:08:40.966 --> 00:08:44.967
This, essentially, is how much
I should get after two years

00:08:44.967 --> 00:08:48.033
if I'm getting 10% on my initial payment

00:08:48.033 --> 00:08:50.518
or the initial amount that
I'm paying for my bond.

00:08:50.518 --> 00:08:52.467
This should be equal to,

00:08:52.835 --> 00:08:56.000
this should be equal to the $1,000.

00:08:56.166 --> 00:08:58.333
Let me just be very clear here.

00:08:58.633 --> 00:09:02.566
P is what someone who expects 10% per year

00:09:02.566 --> 00:09:03.700
for this type of risk

00:09:03.700 --> 00:09:06.166
would be willing to pay for this bond.

00:09:06.166 --> 00:09:09.766
So when you compound their
payment by 10% for two years,

00:09:09.766 --> 00:09:12.200
that should be equal to $1,000.

00:09:12.300 --> 00:09:15.000
If you do the math here, you get

00:09:15.033 --> 00:09:21.766
P times 1.1 squared is equal to 1,000,

00:09:21.766 --> 00:09:27.712
or P is equal to 1,000
divided by 1.1 squared.

00:09:27.712 --> 00:09:29.433
Another way to think about it is

00:09:29.433 --> 00:09:32.033
the price that someone
would be willing to pay

00:09:32.033 --> 00:09:34.367
if they expect a 10% return

00:09:34.367 --> 00:09:38.167
is the present value
of $1,000 in two years

00:09:38.167 --> 00:09:40.233
discounted by 10%.

00:09:40.233 --> 00:09:43.700
This is 1.10, or one plus 10%.

00:09:43.700 --> 00:09:46.333
So what is this number right here?

00:09:46.633 --> 00:09:48.268
Let's get a calculator out.

00:09:49.373 --> 00:09:51.200
Let's get the calculator out.

00:09:51.367 --> 00:09:59.268
If we have 1,000 divided by 1.1 squared,

00:09:59.833 --> 00:10:03.100
that's equal to $826 and ...

00:10:03.100 --> 00:10:04.233
well, I'll just round down,

00:10:04.233 --> 00:10:06.200
$826.

00:10:07.500 --> 00:10:10.466
So this is $826.

00:10:10.767 --> 00:10:14.366
So if you were to pay
$826 today for this bond

00:10:14.366 --> 00:10:16.166
and in two years, that company

00:10:16.166 --> 00:10:18.500
would give you back $1,000,

00:10:18.500 --> 00:10:19.966
you will have essentially have gotten

00:10:19.966 --> 00:10:24.734
a 10% annual compounded
interest rate on your money.

00:10:25.033 --> 00:10:27.766
Now, what happens if the
interest rate goes up,

00:10:27.766 --> 00:10:29.600
let's say, the very next day?

00:10:30.366 --> 00:10:32.033
And I'm not going to be very specific.

00:10:32.033 --> 00:10:34.367
I'm going to assume it's
always two years out.

00:10:34.367 --> 00:10:35.901
It's one day less, but
that's not going to change

00:10:35.901 --> 00:10:37.500
the math dramatically.

00:10:37.500 --> 00:10:39.033
Let's say it's the very next second

00:10:39.033 --> 00:10:40.771
that interest rates were to go up.

00:10:40.771 --> 00:10:43.066
Let's say second one,

00:10:43.169 --> 00:10:45.166
so it doesn't affect our
math in any dramatic way.

00:10:45.166 --> 00:10:47.610
Let's say interest rates go up.

00:10:47.634 --> 00:10:49.267
So now all of a sudden,

00:10:49.300 --> 00:10:52.099
so interest, people expect more.

00:10:52.099 --> 00:10:53.301
Interest goes up.

00:10:53.301 --> 00:10:57.300
The new expectation is
to have a 15% return

00:10:57.300 --> 00:11:01.435
on a loan to a company like company A,

00:11:01.435 --> 00:11:03.834
so now what's the price
we're willing to pay?

00:11:03.834 --> 00:11:05.734
We'll use the same formula.

00:11:05.834 --> 00:11:10.767
The price is going to be
equal to $1,000 divided by,

00:11:10.767 --> 00:11:12.766
instead of discounting it by 10%,

00:11:12.766 --> 00:11:15.233
we're going to discount
it by 15% over two years,

00:11:15.233 --> 00:11:20.933
so one plus 15% compounded over two years.

00:11:21.702 --> 00:11:23.266
We bring out the calculator.

00:11:24.690 --> 00:11:26.368
We bring out the calculator,
and I think you have a sense

00:11:26.368 --> 00:11:28.669
we have a larger number
now in the denominator,

00:11:28.669 --> 00:11:29.966
so the price is going to go down.

00:11:29.966 --> 00:11:31.500
Let's actually calculate the math.

00:11:31.500 --> 00:11:38.966
$1,000 divided by 1.15 squared

00:11:38.966 --> 00:11:42.700
is equal to $756, give
or take a little bit.

00:11:42.700 --> 00:11:45.838
So now, the price has gone down.

00:11:45.838 --> 00:11:49.264
The price is now $756.

00:11:49.264 --> 00:11:50.833
This is how much someone is willing to pay

00:11:50.833 --> 00:11:53.033
in order for them to get a 15% return

00:11:53.033 --> 00:11:55.033
and get $1,000 in two years,

00:11:55.033 --> 00:11:56.767
or get $1,000 in two years and essentially

00:11:56.767 --> 00:11:59.801
for it to be a 15% return.

00:11:59.966 --> 00:12:02.048
Now, just to finish up the argument,

00:12:02.048 --> 00:12:04.933
what happens if interest rates go down?

00:12:05.101 --> 00:12:06.867
Let's say interest,

00:12:08.033 --> 00:12:11.900
the expected interest rate on
this type of risk goes down,

00:12:11.900 --> 00:12:14.100
and let's say it's now 5%.

00:12:14.100 --> 00:12:17.933
What is someone willing to
pay for this zero-coupon bond?

00:12:18.166 --> 00:12:23.433
The price is, if you compound
it two years by 1.05,

00:12:23.433 --> 00:12:24.500
that should be equal to 1,000,

00:12:24.500 --> 00:12:26.653
or the price is equal to 1,000

00:12:26.653 --> 00:12:31.933
divided by two years of compounding at 5%.

00:12:31.969 --> 00:12:34.068
You get the calculator out again.

00:12:34.367 --> 00:12:41.966
We get $1,000 divided by 1.05 squared

00:12:41.966 --> 00:12:44.966
is equal to $907.

00:12:44.966 --> 00:12:47.434
So all of a sudden, we're willing to pay,

00:12:47.649 --> 00:12:51.114
price is now $907.

00:12:51.114 --> 00:12:54.367
You see mathematically when
interest rates went up,

00:12:54.367 --> 00:12:58.701
the price of the bond
went from $826 to $756.

00:12:58.701 --> 00:13:01.033
The price went down.

00:13:01.033 --> 00:13:03.166
When interest rates went down,

00:13:03.166 --> 00:13:05.233
the price went up.

00:13:05.233 --> 00:13:06.433
I think it makes sense.

00:13:06.433 --> 00:13:07.766
The more you expect,

00:13:07.766 --> 00:13:09.500
the higher return you expect,

00:13:09.500 --> 00:13:12.233
the less you're willing
to pay for that bond.

00:13:12.233 --> 00:13:14.600
Anyway, hopefully you found that helpful.


Roth IRAs

WEBVTT
Kind: captions
Language: en

00:00:00.598 --> 00:00:02.869
What I want to do in this
video is to give you the gist

00:00:02.869 --> 00:00:09.472
of what the Roth IRA is all about.

00:00:09.472 --> 00:00:13.138
Just to get an idea of why
it's called the Roth IRA,

00:00:13.138 --> 00:00:15.360
it's named after William Roth,

00:00:15.360 --> 00:00:18.805
the late senator from Delaware.

00:00:18.805 --> 00:00:20.140
He helped, I guess,

00:00:20.140 --> 00:00:23.536
you could say shepherd
this legislation in 1997

00:00:23.536 --> 00:00:25.010
when it was first passed

00:00:25.010 --> 00:00:27.472
so they named the IRA after him.

00:00:27.472 --> 00:00:32.202
William Roth from Delaware.

00:00:32.202 --> 00:00:33.472
That's where the word comes from.

00:00:33.472 --> 00:00:37.067
It's a special type of
individual retirement account.

00:00:37.067 --> 00:00:39.135
Why did they go to the
trouble of creating a new one?

00:00:39.135 --> 00:00:42.406
Let's think about what
a traditional IRA does

00:00:42.406 --> 00:00:47.538
and then I'll talk about why a
Roth IRA could be interesting

00:00:47.538 --> 00:00:48.539
or it's a little bit different

00:00:48.539 --> 00:00:50.449
or what could be beneficial

00:00:50.449 --> 00:00:53.029
and then we'll actually
see it in an example.

00:00:53.029 --> 00:00:57.204
The first question is what
happens when you put money

00:00:57.204 --> 00:00:59.535
into a traditional or a Roth IRA?

00:00:59.535 --> 00:01:01.074
In the traditional IRA video

00:01:01.074 --> 00:01:05.176
you saw that it's tax deferred.

00:01:05.176 --> 00:01:08.413
That if you were to put
$5,000 in your traditional IRA

00:01:08.413 --> 00:01:10.411
you are not taxed on that money.

00:01:10.411 --> 00:01:15.460
In the Roth IRA it is not deferred

00:01:15.460 --> 00:01:20.664
so you would actually
pay taxes on that $5,000.

00:01:20.664 --> 00:01:22.131
Immediately you're saying,"Hey gee.

00:01:22.131 --> 00:01:23.992
"This doesn't seem like
that great of a thing.

00:01:23.992 --> 00:01:24.995
"Why would I ever use it?

00:01:24.995 --> 00:01:27.019
"I have to pay taxes on
the money I've put in."

00:01:27.019 --> 00:01:28.605
This is the interesting thing.

00:01:28.605 --> 00:01:34.128
In both situations, as long
as your investments stay in

00:01:34.128 --> 00:01:37.659
either traditional or Roth accounts

00:01:37.659 --> 00:01:52.598
earnings are not taxed while in account.

00:01:52.598 --> 00:01:55.955
This is true for both of them.

00:01:55.955 --> 00:01:57.062
But you're still going to say, "Hey Sal.

00:01:57.062 --> 00:01:58.858
"The traditional still looks a lot better.

00:01:58.858 --> 00:02:02.400
"I had to pay taxes on the
Roth right from the get-go.

00:02:02.400 --> 00:02:03.721
"I didn't have to pay
it on the traditional.

00:02:03.721 --> 00:02:05.794
"Then they can both grow

00:02:05.794 --> 00:02:07.655
"and I can buy and sell my stocks

00:02:07.655 --> 00:02:09.123
"or invest in mutual funds

00:02:09.123 --> 00:02:10.526
"or whatever I do inside of them.

00:02:10.526 --> 00:02:11.671
"I don't pay taxes.

00:02:11.671 --> 00:02:13.593
"The traditional still looks better."

00:02:13.593 --> 00:02:15.336
Now, the interesting thing is what happens

00:02:15.336 --> 00:02:16.795
when you withdraw the money?

00:02:16.795 --> 00:02:19.085
There's a lot of special circumstances

00:02:19.085 --> 00:02:22.008
on when a withdrawal is qualified or not.

00:02:22.008 --> 00:02:23.326
I'm not going to know the details

00:02:23.326 --> 00:02:24.808
I really just want to give you the essence

00:02:24.808 --> 00:02:27.059
of why the Roth is interesting.

00:02:27.059 --> 00:02:33.036
Let's say you're over 59-1/2 years old

00:02:33.036 --> 00:02:34.105
and in the Roth.

00:02:34.105 --> 00:02:35.535
Your money has been there
for more than 5 years,

00:02:35.535 --> 00:02:36.533
it's been seasoned.

00:02:36.533 --> 00:02:38.133
I'm not going to go into
all of the particulars.

00:02:38.133 --> 00:02:41.354
The traditional IRA when you withdraw,

00:02:42.169 --> 00:02:48.532
let's say we're older than 59-1/2 for both

00:02:48.532 --> 00:02:55.165
and then we do a withdrawal.

00:02:55.165 --> 00:02:58.630
In the traditional IRA
you have to pay taxes.

00:02:58.630 --> 00:03:01.130
You pay taxes, you're taxed.

00:03:01.130 --> 00:03:08.876
Ordinary income tax.

00:03:08.876 --> 00:03:16.165
While in the Roth IRA no taxes. Not taxed.

00:03:16.165 --> 00:03:17.796
We saw in the traditional IRA video

00:03:17.796 --> 00:03:19.065
that this has to be pretty good

00:03:19.065 --> 00:03:21.130
when you're older than 59-1/2.

00:03:21.130 --> 00:03:22.462
You might be retired.

00:03:22.462 --> 00:03:24.129
You might be in a lower tax bracket.

00:03:24.129 --> 00:03:25.959
You're going to pay lower taxes on it

00:03:25.959 --> 00:03:28.211
and it's been deferred
for however many years

00:03:28.211 --> 00:03:29.993
your IRA has been in existence.

00:03:29.993 --> 00:03:31.796
This is especially interesting

00:03:31.796 --> 00:03:34.728
because over here you paid tax

00:03:34.728 --> 00:03:37.332
just on the original
amount that you've put in

00:03:37.332 --> 00:03:39.928
and then you'll allow that
original amount to grow

00:03:39.928 --> 00:03:41.593
over many, many, many years

00:03:41.593 --> 00:03:44.065
and then all of a sudden
you're not taxed at all.

00:03:44.065 --> 00:03:47.291
That, all of a sudden, becomes
a little bit interesting.

00:03:47.291 --> 00:03:49.933
This seems like a pretty
good thing to have.

00:03:49.933 --> 00:03:51.378
We're going to actually
play with the numbers

00:03:51.378 --> 00:03:53.707
to see how they workout.

00:03:53.707 --> 00:03:56.397
Now, the other interesting
thing about the Roth

00:03:56.397 --> 00:04:07.622
is if you early withdrawal.

00:04:07.622 --> 00:04:12.628
For a traditional IRA you pay 10% penalty

00:04:12.628 --> 00:04:16.960
on the withdrawal plus you get taxed.

00:04:16.960 --> 00:04:18.402
Plus taxes.

00:04:18.402 --> 00:04:22.066
On the Roth IRA if you're just
taking the original amount

00:04:22.066 --> 00:04:23.002
you've put in

00:04:23.002 --> 00:04:24.596
and I'll do this with a numerical example.

00:04:24.596 --> 00:04:26.872
If you're just taking
out your principal amount

00:04:26.872 --> 00:04:31.207
no taxes or penalty on the principal.

00:04:31.207 --> 00:04:49.887
No taxes or penalty on principal.

00:04:49.887 --> 00:04:51.198
And you would only have to pay

00:04:51.198 --> 00:04:53.728
even if it's a non-qualified withdrawal.

00:04:53.728 --> 00:04:56.335
There's all these special
circumstances, what's qualified

00:04:56.335 --> 00:04:57.749
and I'm not going to go to the details.

00:04:57.749 --> 00:05:04.805
You would only have to pay the 10% penalty

00:05:04.805 --> 00:05:11.462
and taxes on earnings.

00:05:11.462 --> 00:05:12.526
One of the main reasons

00:05:12.526 --> 00:05:13.662
why I'm not going in
all the details is one:

00:05:13.662 --> 00:05:15.195
It would make the video
a little confusing,

00:05:15.195 --> 00:05:17.616
but also, the government
is constantly changing

00:05:17.616 --> 00:05:18.613
the details.

00:05:18.613 --> 00:05:20.467
I want you to be able to watch this video

00:05:20.467 --> 00:05:22.609
as many years in the
future and not to be dated

00:05:22.609 --> 00:05:24.531
so I don't want to go into
all of the different things

00:05:24.531 --> 00:05:26.359
that the government is
changing from year to year.

00:05:26.359 --> 00:05:28.109
Let's just do a very basic example

00:05:28.109 --> 00:05:30.695
just to get the sense of things.

00:05:30.695 --> 00:05:37.732
Let's look at at a traditional IRA

00:05:37.732 --> 00:05:40.335
and then we have a Roth.

00:05:40.335 --> 00:05:41.878
Let me write IRA just to be clear

00:05:41.878 --> 00:05:48.214
that we're talking about an
IRA in both circumstances.

00:05:48.214 --> 00:05:49.932
Let's say my original income amount,

00:05:49.932 --> 00:05:51.996
let's say I've made more than $5,000.

00:05:51.996 --> 00:05:54.296
I'll just use $5,000 as my example

00:05:54.296 --> 00:05:55.396
and I'll also make another note.

00:05:55.396 --> 00:05:58.469
Roth IRA is subject to more limitations

00:05:58.469 --> 00:06:00.336
in terms of your total overall income

00:06:00.336 --> 00:06:01.637
and that's also changing.

00:06:01.637 --> 00:06:03.400
I don't want to be
specific on the numbers.

00:06:03.400 --> 00:06:05.062
You could look that up.

00:06:05.062 --> 00:06:08.128
There are ways that you can
transfer traditional IRAs

00:06:08.128 --> 00:06:09.934
into Roth IRAs.

00:06:09.934 --> 00:06:11.805
That's a little bit of a loophole

00:06:11.805 --> 00:06:13.971
on being able to get around
some of those restrictions.

00:06:13.971 --> 00:06:16.062
But anyway, I won't go
into the details just yet.

00:06:16.062 --> 00:06:17.402
Just remember, Roth IRA,

00:06:17.402 --> 00:06:19.201
there are some more limitations

00:06:19.201 --> 00:06:22.266
on whether or not you
can put things into it.

00:06:22.266 --> 00:06:25.186
If you're tricky you might
be able to get around them.

00:06:25.186 --> 00:06:28.537
Let's say you have $5,000.

00:06:28.537 --> 00:06:30.774
And just so you know, the limits on IRA

00:06:30.774 --> 00:06:32.667
is they apply to Roth or traditional

00:06:32.667 --> 00:06:34.794
or any combination of the two.

00:06:34.794 --> 00:06:37.742
If you're starting with $5,000,

00:06:37.742 --> 00:06:43.206
so in the traditional IRA
you have 0 taxes initially.

00:06:43.206 --> 00:06:45.807
In your Roth IRA initially,

00:06:45.807 --> 00:06:49.398
let's say you have a 32% tax bracket

00:06:49.398 --> 00:06:51.201
just like in the previous video.

00:06:51.201 --> 00:06:56.196
32% of tax bracket.

00:06:56.196 --> 00:07:03.737
Then you'll pay 32% on
$5,000, 32% on $5,000.

00:07:03.737 --> 00:07:11.578
That's .32 x $5,000. That's $1,600.

00:07:11.578 --> 00:07:17.074
You're going to pay $1,600 in taxes.

00:07:17.074 --> 00:07:19.508
Your amount in the account,

00:07:19.508 --> 00:07:26.388
in your account, your principal,

00:07:26.388 --> 00:07:28.660
in your traditional IRA

00:07:28.660 --> 00:07:31.271
and maybe I should write it out here.

00:07:31.271 --> 00:07:37.399
Starting with that $5,000 your principal

00:07:37.399 --> 00:07:42.136
is going to be $5,000 here.

00:07:42.136 --> 00:07:45.939
You have to take 1,600 out for taxes

00:07:45.939 --> 00:07:55.869
so it's only going to
be $3,400 right there.

00:07:55.869 --> 00:07:58.201
Let's say in either situation

00:07:58.201 --> 00:08:01.467
you were to take that,
invest it in some stocks

00:08:01.467 --> 00:08:08.801
and then 5 years later it doubles.

00:08:08.801 --> 00:08:11.690
Let's say at some future point it doubles

00:08:11.690 --> 00:08:14.133
and you sell those stocks.

00:08:14.133 --> 00:08:17.401
That becomes $10,000 in your account there

00:08:17.401 --> 00:08:20.995
and then this, you invest
it in stocks and it doubles.

00:08:20.995 --> 00:08:27.548
This becomes $7,800 in
your account right here.

00:08:27.548 --> 00:08:31.467
This is 5 years into the future.

00:08:31.467 --> 00:08:35.734
I'm just picking that into the future.

00:08:35.734 --> 00:08:41.267
Let's say we're still not
59-1/2 years old just yet.

00:08:41.267 --> 00:08:43.667
Now, we could just continue to leave

00:08:43.667 --> 00:08:46.533
either of these amounts in our account

00:08:46.533 --> 00:08:47.933
until we're 59-1/2.

00:08:47.933 --> 00:08:50.341
Let's say we have some type of need,

00:08:50.341 --> 00:08:54.932
we need to give a loan to our
brother-in-law or something.

00:08:54.932 --> 00:08:57.878
We really want to have
access to this money.

00:08:57.878 --> 00:09:00.403
Let's look at the situation
where we withdraw.

00:09:00.403 --> 00:09:04.134
If we were to withdraw,

00:09:04.134 --> 00:09:05.573
let's think of a couple of situations.

00:09:05.573 --> 00:09:10.812
If we were to withdraw $3,400.

00:09:10.812 --> 00:09:13.932
Let's say that exactly what
my brother-in-law needs

00:09:13.932 --> 00:09:15.204
just right now.

00:09:15.204 --> 00:09:17.267
If we were to withdraw $3,400

00:09:17.267 --> 00:09:20.094
in the traditional IRA sense,

00:09:20.094 --> 00:09:22.760
in the traditional IRA case.

00:09:22.760 --> 00:09:27.265
We take out $3,400. We're
going to have to do 2 things:

00:09:27.265 --> 00:09:29.673
First, we're going to
have to pay taxes on it.

00:09:29.673 --> 00:09:31.673
We're going to have to pay 32% of that

00:09:31.673 --> 00:09:33.733
assuming we're still in
the same tax bracket.

00:09:33.733 --> 00:09:42.349
$3,400 x .32 is equal to,

00:09:42.349 --> 00:09:48.520
we're going to have pay $1,088 in taxes.

00:09:48.520 --> 00:09:54.120
We're going to have to
pay $1,088 in taxes.

00:09:54.120 --> 00:09:55.799
We're also going to have to pay a penalty

00:09:55.799 --> 00:09:58.369
on this entire amount, on the $3,400.

00:09:58.369 --> 00:10:00.863
We're also going to
have to pay 10% penalty,

00:10:00.863 --> 00:10:05.466
$340 penalty.

00:10:05.466 --> 00:10:08.405
We're going to be left with
after paying all of these,

00:10:08.405 --> 00:10:11.916
let me get the calculator
out and let's see,

00:10:11.916 --> 00:10:15.207
the calculator right there.

00:10:15.207 --> 00:10:16.780
We're going to be left with

00:10:16.780 --> 00:10:27.890
3,400 - 1,088 - $340 = $1,972.

00:10:27.890 --> 00:10:31.984
We're left with $1,972.

00:10:31.984 --> 00:10:33.578
In the Roth IRA,

00:10:33.578 --> 00:10:35.282
when you needed that money all of a sudden

00:10:35.282 --> 00:10:37.282
and you decided to withdraw it early

00:10:37.282 --> 00:10:39.777
and we're only taking out $3,400.

00:10:39.777 --> 00:10:43.247
We're taking the amount that
was our original principal.

00:10:43.247 --> 00:10:45.781
In the Roth IRA we get the $3,400

00:10:45.781 --> 00:10:47.312
because that was our original amount

00:10:47.312 --> 00:10:51.987
and we pay no taxes or penalties.

00:10:51.987 --> 00:10:54.362
At any point in time on the Roth IRA

00:10:54.362 --> 00:10:56.985
you can always take your principal out.

00:10:56.985 --> 00:10:58.528
In the other types of IRAs

00:10:58.528 --> 00:11:00.609
not only will you have to pay taxes on it,

00:11:00.609 --> 00:11:03.614
you're also going to have to
pay a penalty on top of that.

00:11:03.614 --> 00:11:07.196
The Roth IRA, one of
the very positive things

00:11:07.196 --> 00:11:09.050
is it gives you a lot of flexibility.

00:11:09.050 --> 00:11:12.850
Now, let's say you needed
to withdraw, I don't know,

00:11:12.850 --> 00:11:19.186
let's say you needed to withdraw $4,000.

00:11:19.186 --> 00:11:23.789
This is another scenario, $4,000
at this same point in time.

00:11:23.789 --> 00:11:27.100
Within the traditional IRA scenario,

00:11:27.100 --> 00:11:29.682
once again, you're
going to have to pay 32%

00:11:29.682 --> 00:11:31.933
of that in taxes. You're
going to have to pay

00:11:31.933 --> 00:11:38.681
4,000 x 32% in taxes

00:11:38.681 --> 00:11:40.272
and you're also going to have to pay

00:11:40.272 --> 00:11:45.230
+ $400 penalty.

00:11:45.230 --> 00:11:48.623
In the Roth IRA case, you pay nothing.

00:11:48.623 --> 00:11:52.071
You get the original
principal you have put in,

00:11:52.071 --> 00:11:55.665
that was your original amount, $3,400.

00:11:55.665 --> 00:11:57.290
In all of this, I'm assuming

00:11:57.290 --> 00:12:01.201
that we're not 59-1/2 years old just yet.

00:12:01.201 --> 00:12:03.050
In the Roth situation,

00:12:03.050 --> 00:12:07.344
you get the $3,400 free and
clear, tax and penalty free.

00:12:07.344 --> 00:12:16.088
But the other $600, you're
going to have to pay 32% taxes

00:12:16.088 --> 00:12:17.587
or whatever your tax bracket is

00:12:17.587 --> 00:12:20.518
and then you're also
going to have to pay $60,

00:12:20.518 --> 00:12:23.758
a 10% penalty on just
the earnings portion.

00:12:23.758 --> 00:12:25.512
Remember, 3,400 was your principal,

00:12:25.512 --> 00:12:29.115
then if you want to take
4,000 out, the 600 extra,

00:12:29.115 --> 00:12:30.384
that stuff that you earned.

00:12:30.384 --> 00:12:32.846
That stuff that was
grown from the principal.

00:12:32.846 --> 00:12:35.913
You're going to have to pay
plus another $60 penalty.

00:12:35.913 --> 00:12:38.981
But it's still a much better
situation if you do the math

00:12:38.981 --> 00:12:40.016
than this one here.

00:12:40.016 --> 00:12:42.114
In general, if you
think, if you're not sure

00:12:42.114 --> 00:12:43.846
whether you're going to need that money

00:12:43.846 --> 00:12:44.780
before you retire,

00:12:44.780 --> 00:12:47.180
the Roth gives you a lot more flexibility.

00:12:47.180 --> 00:12:50.494
Now, let's go all the way to retirement.

00:12:50.494 --> 00:12:51.993
Let's go all the way to retirement.

00:12:51.993 --> 00:12:54.995
Let's say we didn't
ever withdrew any money.

00:12:54.995 --> 00:12:57.595
We invest it in another stock

00:12:57.595 --> 00:12:59.597
and so we go 10 years later.

00:12:59.597 --> 00:13:03.904
We never withdrew any money.

00:13:03.904 --> 00:13:05.823
We're just going to look at
the retirement situation.

00:13:05.823 --> 00:13:09.597
We go to our stock and we
sell it, our new stock.

00:13:09.597 --> 00:13:16.171
We get the 20,00 there,
here we get $15,600.

00:13:16.171 --> 00:13:17.729
Of course, in both of these situations

00:13:17.729 --> 00:13:19.996
its great that we're able
to buy and sell stocks

00:13:19.996 --> 00:13:21.529
inside of these retirement accounts

00:13:21.529 --> 00:13:22.831
and not pay taxes.

00:13:22.831 --> 00:13:24.661
If these were not sitting
in retirement accounts

00:13:24.661 --> 00:13:26.798
every time we bought and sold the stocks

00:13:26.798 --> 00:13:29.264
we would have to pay capital gains tax

00:13:29.264 --> 00:13:31.530
and you saw that in the previous video.

00:13:31.530 --> 00:13:33.534
Now, now that we are over,

00:13:33.534 --> 00:13:38.571
let's say we're 60 years old.

00:13:38.571 --> 00:13:42.661
We can now withdraw our
money from either situation.

00:13:42.661 --> 00:13:44.154
There's some other stipulations,

00:13:44.154 --> 00:13:45.409
your money has to be seized

00:13:45.409 --> 00:13:47.202
and has to be sitting
there for 5 years and all

00:13:47.202 --> 00:13:48.404
but I won't go into the details.

00:13:48.404 --> 00:13:50.865
Let's see what happens
when we withdraw the money.

00:13:50.865 --> 00:13:55.158
Let's say we have a 25% tax bracket now.

00:13:55.158 --> 00:13:57.399
25% tax bracket.

00:13:57.399 --> 00:14:00.670
We're retiree, we're earning
a little bit less money,

00:14:00.670 --> 00:14:01.993
we are in a lower tax bracket.

00:14:01.993 --> 00:14:03.659
In this situation we're going to pay,

00:14:03.659 --> 00:14:06.730
when we withdraw it from a traditional IRA

00:14:06.730 --> 00:14:15.529
we are going to pay 25% in
taxes which is $5,000 in taxes

00:14:15.529 --> 00:14:19.596
and we are going to be left
with $15,000 for ourselves

00:14:19.596 --> 00:14:22.731
to spend in our retirement years.

00:14:22.731 --> 00:14:25.729
In the Roth IRA situation,

00:14:25.729 --> 00:14:28.559
once we're over 60 years
old our tax bracket

00:14:28.559 --> 00:14:29.736
doesn't matter.

00:14:29.736 --> 00:14:38.664
We just get the money,
$15,600 free and clear.

00:14:38.664 --> 00:14:40.639
If you think about it in either situation,

00:14:40.639 --> 00:14:42.136
when we withdrew early,

00:14:42.136 --> 00:14:44.932
the Roth IRA was much more forgiving

00:14:44.932 --> 00:14:47.144
especially if we withdraw
less than the amount

00:14:47.144 --> 00:14:49.861
that we originally put in, $3,400.

00:14:49.861 --> 00:14:52.264
The Roth IRA does not tax us

00:14:52.264 --> 00:14:53.389
or give us penalties.

00:14:53.389 --> 00:14:55.472
It only does that on any
money that we earned,

00:14:55.472 --> 00:14:58.193
any money in excess of the $3,400.

00:14:58.193 --> 00:15:02.226
The traditional IRA
taxes us and penalizes us

00:15:02.226 --> 00:15:05.037
on everything.

00:15:05.037 --> 00:15:06.620
Even when we go into the future, remember,

00:15:06.620 --> 00:15:09.768
in the traditional IRA

00:15:09.768 --> 00:15:11.197
we didn't pay any taxes to begin with

00:15:11.197 --> 00:15:14.337
but we had to pay taxes to end with.

00:15:14.337 --> 00:15:16.500
When we paid taxes in the end,

00:15:16.500 --> 00:15:18.668
we're paying taxes not just
on what we've put in initially

00:15:18.668 --> 00:15:22.123
we're also paying taxes on all of
our cumulative earnings, right?

00:15:22.123 --> 00:15:23.591
We originally put in 5,000,

00:15:23.591 --> 00:15:25.531
now we're paying taxes on 20,000.

00:15:25.531 --> 00:15:28.259
We're going to only end up with $15,000

00:15:28.259 --> 00:15:33.119
while in the Roth IRA we
don't pay taxes on anything.

00:15:33.119 --> 00:15:36.457
In return for being willing
to pay our taxes front loaded

00:15:36.457 --> 00:15:37.662
to pay them in the beginning,

00:15:37.662 --> 00:15:40.626
we'll never have to
pay taxes on that money

00:15:40.626 --> 00:15:42.542
or on any of the earnings

00:15:42.542 --> 00:15:43.457
that that money makes.

00:15:43.457 --> 00:15:45.623
Now, I fixed the numbers
here to make them close.

00:15:45.623 --> 00:15:48.366
Depending on your tax
bracket before and after

00:15:48.366 --> 00:15:51.457
or how much growth you
actually see in your earnings,

00:15:51.457 --> 00:15:53.210
one maybe better than the other.

00:15:53.210 --> 00:15:54.591
But these are important considerations.

00:15:54.591 --> 00:15:57.957
I just want to let you
know the pros and cons.

00:15:57.957 --> 00:15:59.957
The Roth IRA tends to be better

00:15:59.957 --> 00:16:01.953
in terms of giving you this flexibility

00:16:01.953 --> 00:16:05.286
and not worrying to pay taxes at the end.

00:16:05.286 --> 00:16:06.662
There's one other thing,

00:16:06.662 --> 00:16:08.591
this is depending on how you view life,

00:16:08.591 --> 00:16:09.662
it might be a minor thing.

00:16:09.662 --> 00:16:12.796
In the traditional IRA, when you're 70-1/2

00:16:12.796 --> 00:16:17.685
they force withdrawal

00:16:17.685 --> 00:16:20.546
and then of course you have to
start paying taxes on things.

00:16:20.546 --> 00:16:25.733
In a Roth IRA, there's no age limit.

00:16:25.733 --> 00:16:29.733
That's another consideration
you might want to take into.