SMART goals

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- So let's talk a little
bit about SMART goals

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when it comes to your finances.

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And when I say SMART goals,

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I'm not just saying well-thought-out
or intelligent goals,

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although I guess it could be that.

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I'm talking about the acronym,
S-M-A-R-T, SMART goals.

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Now the S stands for specific.

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The M stands for measurable.

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A stands for achievable.

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R stands for realistic.

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And T stands for time-based.

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I think achievable and
realistic are kind of common,

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but then it wouldn't be a fun acronym.

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It would be like SMAT goals or SMRT goals.

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So it's SMART goals,

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which is a little bit easier to remember.

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So what do we mean by SMART goals?

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So for me, it's easy to
think about what it is

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by thinking about what it isn't.

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So let's think about what
a non-SMART goal would be

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when it comes to your finances.

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Let's say you just said,
"I want to be rich."

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That is not a SMART goal.

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That is not specific.

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It is not measurable.

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It might be achievable

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depending on how you
think about what rich is.

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But once again, we don't even know

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'cause you haven't
quantified what that is.

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What does rich mean?

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It may be realistic, but we don't know.

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And the time, you haven't
given any time there.

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So let's see if we can turn that

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into something more of a SMART goal.

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So let's first define
what it means to be rich.

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And let's say you want, by
the time you are 30 years old,

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so I'm putting some time in there,

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you wanna have enough
money for a down payment

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on a pretty nice house.

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Let's say you wanna have
a $100,000 down payment.

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So let's see if that
meets our SMART goals.

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So is it specific?

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I want to save a $100,000
for a down payment on a house

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by the time I am 30 years old.

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That seems specific.

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It's a $100,000 for a
down payment on a house.

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Is it measurable?

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Yes.

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You can see how much money you have saved

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for that down payment.

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How close you are?

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The first year, you saved $10,000,

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you're like, "Wow, I'm 10%
of the way to my goal."

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The second year, I've
saved $20,000, et cetera.

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You can measure how you're getting there.

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Is it achievable, realistic?

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Well, depending on your
financial circumstances,

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that seems doable for a lot of folks

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if they're able to save well

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that they might be able
to save that amount.

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But once again, it depends on your income,

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your lifestyle, your expenses.

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You have to make sure that's realistic.

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For some folks, that might not
be achievable or realistic.

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For other folks, it might be
very achievable and realistic.

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And then is it time-based?

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Well, yes.

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I just said by the time I am 30 years old.

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And you could break that down.

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Let's say you're 25 years
old right now, and you say,

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"Well, then I'm gonna have
to save $20,000 a year

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for the next five years."

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So you could break that bigger SMART goal

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into smaller SMART goals.

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"Okay, this coming year,
I need to save $20,000

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towards my down payment on a house."

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Once again, it's
specific, it's measurable.

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Depending on your scenario, it
may or may not be achievable

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if that $20,000 a year
is just way too much.

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If you're making, let's
say, $40,000 a year,

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you might say, "Okay, that's
still not a SMART goal."

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It's not necessarily
achievable or realistic.

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Maybe you have to moderate
that a little bit.

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Bring it down to five or $10,000.

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In which case, maybe your larger goal,

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you're gonna save $50,000
by the time you're 30.

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Or you'll say, I have to raise
a 100,000 by the time I'm 35.

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What SMART goals allow you to do

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is just one, realize whether
you are achieving them

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and also have goals that are achievable

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in a very clear timeframe.

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So SMART goals are useful in
practically anything you do,

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but especially when it
comes to your finances

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because it's very easy to say,

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"Oh, well, I just wanna do that.

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I wanna be comfortable.

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I wanna have enough money.

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I wanna to be rich."

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Whatever you say.

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But when you just say it

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in these kind of loosey goosey terms,

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it's very hard to know

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whether you're making
progress against those things.

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And because it's hard to know

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whether you're making progress,

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you oftentimes aren't
holding yourself accountable.

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And so SMART goals,

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they're a smart thing to do.


Short, medium and long term financial goals

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- So it's very likely
that you have different

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financial goals over
different amounts of time.

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For example, you likely,
or maybe you should,

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have long term financial goals.

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Long term financial goals are like,

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"I wanna make sure I have
enough money for retirement,

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to be able to retire at a
certain standard of living,"

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or, "I want to ensure that my children,

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or my future children,
that I'm going to be able

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to pay for their college,"
or, "I want to save up

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enough money for a house, or eventually,

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I wanna pay off that house."

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Those would all be long term goals,

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we're talking about many years,
probably over many decades.

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Then you could have medium term goals.

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You could say, let's
say over the next year,

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"I'm hoping to save
$10,000," maybe towards

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a down payment on a house,
or maybe to help you

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purchase a car, or really, just to have

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some rainy day money
in case I lose my job,

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or whatever else might be happening.

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And then you could go all the way down

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to your short term goals.

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Your short term goals
are, "Hey, this month,

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I want to save 10% of my after-tax money,"

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or maybe "I want to save $500,"

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or "I want to spend 10% less on eating out

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than I have the month before."

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Now, it's really important
to have these different

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lengths of goals, or these
different times of your goals.

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And the way I think about
it is your long term goals,

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you shouldn't be changing
them too frequently,

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and I think some of the ones that I listed

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are good long term goals for most people,

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if you want to be able to
retire reasonably well,

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if you wanna help with
your children's education,

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you wanna be able to have
enough money for children,

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or you wanna buy a house.

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Now they might change
if your circumstances

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change dramatically, if you're able to get

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a dramatically better job,
or you were to lose your job,

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or if you get married,
these all could change

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your long term goals pretty dramatically,

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but you're not going to be changing

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your long term goals on a monthly basis.

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Now on the other extreme,
your short term goals

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might change pretty frequently,
although even there,

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you should put some thought into it.

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This month it might be, "Hey, I wanna see

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if I can spend 10% less on eating out,"

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and then the next month
you just wanna maintain

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your new level, your more
frugal level of spending,

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but maybe you have
another short term goal.

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Maybe that month you wanna figure out,

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you wanna be able to
invest your money better.

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Say, "Look, I have money sitting
there in a savings account,

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it's getting, you know, not even at 1%,

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maybe I wanna figure out if I could get

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a higher interest rate,
I wanna figure that out

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by the end of the
month," or maybe you have

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some other types of saving
goal or spending goal.

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So it's useful, 'cause if you
just had a long term goal,

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it's really hard to maybe break that down

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about how that affects you this month.

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What I encourage you to,
definitely have those long term

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goals, but then break it
down, if you have, say,

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"I wanna save money for a
down payment for a house,"

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let's say you wanna save
$50,000 or $100,000,

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over the next, let's say, 10 years,

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you can then break that down on how much

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you need to save per year, that
would be a medium term goal,

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and then based on that,
you have to think about,

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"Well, what should your budget look like

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on a monthly basis?"

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Well, how much money do
you need to bring in,

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how much money can you spend,

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and based on that, you could
set your short term goals,

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and see, "Oh, I'm actually tracking

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towards that long term goal."


Charitable giving

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- So let's talk a little
bit about charitable giving.

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And this one is close to my
heart because I run a nonprofit.

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So why do folks donate to charity?

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Well, you might have your own motivations.

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For most folks, I think
it just feels good.

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They might feel that they
have certain privileges

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in life that other folks don't have

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or they might want to see a disease cured.

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Help educate folks, help
the world in some way.

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And if you haven't tried
it, I encourage you to

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when you donate money

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or you donate some of your time services

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or you donate goods to a
charity and you feel like, hey,

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I'm making the world a little bit better,

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it feels really good.

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Now, some people might be a
little cynical and say, oh

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well they get a tax write off

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whenever they donate money, et cetera.

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But I wanna be very clear,
'cause I've heard that a lot.

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Whenever someone has seen
someone else donate, oh, well

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they're just getting a tax write off.

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In the vast majority of cases

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you do not get more money
back than you donate.

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In most, most cases, if you
say donate a hundred dollars

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that's just going to reduce your income

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by a hundred dollars.

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And let's say your
marginal tax rate is 30% to

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make the math easy, that
means it'll reduce your taxes

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by 30% of that a hundred dollars.

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So if you donate a hundred dollars

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to a not-for-profit to a charity,

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you will get $30 back in
that situation on your taxes

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but you still donated a net $70.

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So when folks are donating,
don't be cynical about it.

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They're definitely giving
more than they're receiving.

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There's some special cases,

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maybe you have a car
that you couldn't sell

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for more than a few hundred dollars.

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And if you donate to a charity

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you might be able to have a slightly

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larger write off than that.

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But in the great majority of cases

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folks are giving more
than they're receiving.

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And what they're really receiving is

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that feeling that they're
doing good for the world.


Money personalities

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- So let's talk a little bit
about money personalities,

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and take it all with a grain of salt.

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Anytime I see any of
these personality tests

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that try to classify you
in one way or another,

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I'm like, "I'm a complex human being.

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I have many different
facets to my personality."

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But they do end up being helpful

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for just making us reflect
on how we're behaving

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or how we tend to behave at certain times.

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So the general money personalities

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are the saver, the spender, the investor,

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and then someone who's pretty
balanced in all of the above.

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And maybe there's a fifth
category of the avoider.

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Now, the saver, and I
think I fall under this,

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tends to be a little bit frugal.

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They're good at saving money,

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so they bring in more money
than they necessarily spend,

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and that's generally a good thing,

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but it can have some downsides.

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Sometimes the saver doesn't
put as much money as they need

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to enjoy life.

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After all, what is the money
for, at the end of the day?

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Now, related to the saver,

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we could think about the investor,

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which I kind of view as a saver

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who is willing to put their
money to work a little bit more.

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Now, when you put your money to work,

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it often involves a little bit more risk.

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So if you're a pure saver,

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maybe you just like to a
little bit hoard that money,

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but you keep it really, really secure,

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while an investor maybe
takes a little bit more risk,

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which could be a good thing,

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'cause a little bit more risk,

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a little bit more return, potentially,

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but it's also more risk, which
means you might lose some.

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So if you're an investor,

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as long as you're investing prudently,

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it could be a very good thing,

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but you have to be aware of how much risk

00:01:34.680 --> 00:01:35.640
you're actually taking on.

00:01:35.640 --> 00:01:38.190
You might be taking on too much risk.

00:01:38.190 --> 00:01:40.740
Now, the third category is the spender.

00:01:40.740 --> 00:01:42.240
You can imagine what that is.

00:01:42.240 --> 00:01:44.430
I think we've all been in
that mode a little bit.

00:01:44.430 --> 00:01:45.780
But I think you're a classic spender

00:01:45.780 --> 00:01:47.550
if you're kind of living in the moment.

00:01:47.550 --> 00:01:49.290
When you spend, you're not really thinking

00:01:49.290 --> 00:01:52.770
about how much money you
have or what your goals are.

00:01:52.770 --> 00:01:55.380
And spenders can get into
a good bit of trouble,

00:01:55.380 --> 00:01:57.930
out of all of the categories,
probably the most trouble,

00:01:57.930 --> 00:01:59.190
where they can overspend,

00:01:59.190 --> 00:02:00.870
not be able to keep up with their bills.

00:02:00.870 --> 00:02:03.330
And obviously, if you're only
thinking about the moment,

00:02:03.330 --> 00:02:06.870
you might be doing some
harm to your future self.

00:02:06.870 --> 00:02:09.210
And then you have the balancer.

00:02:09.210 --> 00:02:10.500
Now, the balancer, overall,

00:02:10.500 --> 00:02:12.690
sounds like a pretty good category.

00:02:12.690 --> 00:02:15.540
It means that you're
balanced across all of them.

00:02:15.540 --> 00:02:19.200
But even there, you might
wanna make sure that, you know,

00:02:19.200 --> 00:02:22.177
you're not prone to, maybe, indecision.

00:02:22.177 --> 00:02:25.110
"Oh, do I save, do I spend? What do I do?"

00:02:25.110 --> 00:02:27.540
But overall, it sounds
like a pretty good thing.

00:02:27.540 --> 00:02:30.690
Now, avoider is someone
who just doesn't like

00:02:30.690 --> 00:02:32.280
to think about money at all.

00:02:32.280 --> 00:02:34.590
Now, probably, spenders and avoiders

00:02:34.590 --> 00:02:38.100
might have some common characteristics.

00:02:38.100 --> 00:02:39.090
If you're a real spender,

00:02:39.090 --> 00:02:41.550
you might not wanna think
about financial literacy.

00:02:41.550 --> 00:02:43.860
You might wanna avoid thinking
about money altogether.

00:02:43.860 --> 00:02:46.590
And that's what an avoider's
doing, to some degree,

00:02:46.590 --> 00:02:48.180
is to say, "Well, let me
just not think about it.

00:02:48.180 --> 00:02:49.530
Money kinda stresses me out."

00:02:49.530 --> 00:02:52.770
And obviously, avoiders,
similar to spenders,

00:02:52.770 --> 00:02:54.390
when you just live in that moment,

00:02:54.390 --> 00:02:56.610
you can get yourself into
a little bit of trouble.

00:02:56.610 --> 00:02:59.820
So think about what financial
personality you are.

00:02:59.820 --> 00:03:02.820
Maybe you're evolving in
your financial personalities.

00:03:02.820 --> 00:03:04.590
Maybe at different moments of your life,

00:03:04.590 --> 00:03:06.450
and certain dimensions of your life,

00:03:06.450 --> 00:03:09.480
you're more of one or the other.

00:03:09.480 --> 00:03:11.760
I tend to be a spender
when it comes to fruit.

00:03:11.760 --> 00:03:14.730
I tend to be a saver when
it comes to clothing.

00:03:14.730 --> 00:03:15.780
But just think about it.

00:03:15.780 --> 00:03:19.023
It'll give you a nice framework
for how you tend to be.


Sources of income during retirement

WEBVTT
Kind: captions
Language: en

00:00:01.080 --> 00:00:01.913
- Let's talk a little bit

00:00:01.913 --> 00:00:05.220
about sources of income during retirement.

00:00:05.220 --> 00:00:07.650
So we're assuming you're
retired, you're not working,

00:00:07.650 --> 00:00:10.260
so you're not gonna get that income.

00:00:10.260 --> 00:00:11.093
But one of them

00:00:11.093 --> 00:00:13.920
is perhaps just your
straight-up investment income.

00:00:13.920 --> 00:00:15.690
You saved money over time.

00:00:15.690 --> 00:00:18.900
You've invested it in, let's
say, dividend-paying stocks.

00:00:18.900 --> 00:00:20.100
The dividend is income.

00:00:20.100 --> 00:00:21.780
Maybe you have bought rental properties.

00:00:21.780 --> 00:00:24.300
Those rents after paying all the expenses,

00:00:24.300 --> 00:00:27.210
those can be income,
but there's also things

00:00:27.210 --> 00:00:30.210
that are special purpose for retirement.

00:00:30.210 --> 00:00:33.720
Probably most common is social security.

00:00:33.720 --> 00:00:35.670
You pay into social security.

00:00:35.670 --> 00:00:37.950
When you get your paycheck,
you'll see that some of it

00:00:37.950 --> 00:00:40.860
is essentially taken
out for social security.

00:00:40.860 --> 00:00:42.480
And then when you become the age

00:00:42.480 --> 00:00:44.850
when you can start collecting
that social security,

00:00:44.850 --> 00:00:47.250
you get a payout and up to a cap,

00:00:47.250 --> 00:00:50.160
it is related to how much
you have actually paid

00:00:50.160 --> 00:00:51.990
into social security.

00:00:51.990 --> 00:00:54.150
Now, above and beyond social security,

00:00:54.150 --> 00:00:59.010
many employers will have employee
employer sponsored plans.

00:00:59.010 --> 00:01:01.890
And that is money that you pay in.

00:01:01.890 --> 00:01:05.790
And oftentimes the employer
will add some money to that.

00:01:05.790 --> 00:01:07.320
They'll match some percentage

00:01:07.320 --> 00:01:09.420
of what you put into that plan.

00:01:09.420 --> 00:01:13.860
For example, a 401K, and then
you can put money into it

00:01:13.860 --> 00:01:15.690
on a pre-tax basis.

00:01:15.690 --> 00:01:17.010
So what does that mean?

00:01:17.010 --> 00:01:21.660
Normally, let's say you
make an incremental $10,000

00:01:21.660 --> 00:01:25.680
and your marginal tax rate is say, 20%.

00:01:25.680 --> 00:01:27.690
Well, you're going to have to pay $2,000

00:01:27.690 --> 00:01:30.120
of tax on that $10,000.

00:01:30.120 --> 00:01:33.990
But something like a 401K,
you could put that $10,000

00:01:33.990 --> 00:01:38.190
into the plan and not have
to pay taxes on it upfront.

00:01:38.190 --> 00:01:40.200
And then you can invest
it within the plan.

00:01:40.200 --> 00:01:43.080
You can find out different
types of investment vehicles,

00:01:43.080 --> 00:01:45.420
ways to invest that money within the plan.

00:01:45.420 --> 00:01:47.070
There's not unlimited choices,

00:01:47.070 --> 00:01:49.260
but they usually have several
choices within the plan.

00:01:49.260 --> 00:01:51.780
And then when you're of retirement age,

00:01:51.780 --> 00:01:54.120
you can take it out
and then you pay taxes.

00:01:54.120 --> 00:01:54.953
Now, you might say, well,

00:01:54.953 --> 00:01:56.241
I'm gonna pay taxes one way or the other.

00:01:56.241 --> 00:01:58.200
But when you pay taxes
when you're retired,

00:01:58.200 --> 00:02:01.200
one, you deferred those
taxes by many years,

00:02:01.200 --> 00:02:03.420
usually many, many decades.

00:02:03.420 --> 00:02:05.531
And also when you're retired,

00:02:05.531 --> 00:02:08.610
it's possible that your income is lower

00:02:08.610 --> 00:02:11.040
and so your marginal tax rate is lower.

00:02:11.040 --> 00:02:13.860
And so you might actually
have to pay fewer taxes

00:02:13.860 --> 00:02:15.780
on those same dollars.

00:02:15.780 --> 00:02:17.010
So you have social security,

00:02:17.010 --> 00:02:20.730
you have employer
sponsor plans like 401Ks,

00:02:20.730 --> 00:02:23.490
and then you have
individual retirement plans.

00:02:23.490 --> 00:02:27.120
The most common one is
that what's called an IRA,

00:02:27.120 --> 00:02:29.340
individual retirement account.

00:02:29.340 --> 00:02:31.950
And that's an individual
plan that you usually go

00:02:31.950 --> 00:02:34.020
and get with a bank or
a broker on your own.

00:02:34.020 --> 00:02:35.850
It's not connected to an employer.

00:02:35.850 --> 00:02:37.470
And there's two types.

00:02:37.470 --> 00:02:40.950
There's a traditional IRA
where similar to a 401K,

00:02:40.950 --> 00:02:44.520
you can put money in on a
pre-tax basis up to a cap.

00:02:44.520 --> 00:02:46.710
And 401Ks also have a cap.

00:02:46.710 --> 00:02:49.830
You can invest it without
taxes, and then some future date

00:02:49.830 --> 00:02:51.750
you're going to pay the taxes on it.

00:02:51.750 --> 00:02:53.940
There's also something called a Roth IRA

00:02:53.940 --> 00:02:57.210
which you pay the taxes
upfront, put the money in,

00:02:57.210 --> 00:02:59.130
but then you can invest it tax free.

00:02:59.130 --> 00:03:01.020
And then when you take
it out at retirement,

00:03:01.020 --> 00:03:02.970
you don't have to pay taxes on it.

00:03:02.970 --> 00:03:05.730
So those are the the basic
ways that you're going

00:03:05.730 --> 00:03:08.375
to get income in your retirement.

00:03:08.375 --> 00:03:11.253
So it's good to start
thinking about them early.


Saving and investing

WEBVTT
Kind: captions
Language: en

00:00:00.619 --> 00:00:04.170
- Let's talk a little bit
about saving and investing.

00:00:04.170 --> 00:00:05.520
So I would define saving

00:00:05.520 --> 00:00:08.880
as just any extra money you bring in

00:00:08.880 --> 00:00:11.340
in a given amount of time

00:00:11.340 --> 00:00:13.530
that you haven't spent yet.

00:00:13.530 --> 00:00:15.630
So let's say in a given month,

00:00:15.630 --> 00:00:20.630
you bring in $4,000 and you
spend $3,500 in that month.

00:00:21.810 --> 00:00:25.170
Well, then you would have saved $500.

00:00:25.170 --> 00:00:26.790
Now, that $500,

00:00:26.790 --> 00:00:29.790
there's many different
things you could do with it.

00:00:29.790 --> 00:00:32.400
You could just put it into a bank account,

00:00:32.400 --> 00:00:35.010
you could put into a savings
or a checking account,

00:00:35.010 --> 00:00:37.530
or you could even get a
certificate of deposit.

00:00:37.530 --> 00:00:40.230
And those are all very, very safe things

00:00:40.230 --> 00:00:42.030
to do with your money.

00:00:42.030 --> 00:00:45.420
Assuming that nothing
horrible happens with the bank

00:00:45.420 --> 00:00:47.760
and even if something horrible
did happen with the bank,

00:00:47.760 --> 00:00:49.230
which isn't too likely,

00:00:49.230 --> 00:00:53.670
as long as it's less than
$250,000 per account,

00:00:53.670 --> 00:00:55.380
that money is pretty much,

00:00:55.380 --> 00:00:58.140
you're going to be able
to access it at any time.

00:00:58.140 --> 00:01:01.590
But when you put your money
into something that safe,

00:01:01.590 --> 00:01:03.840
you're not likely to get much of a return.

00:01:03.840 --> 00:01:06.390
You'll be lucky to get even one or 2%

00:01:06.390 --> 00:01:09.540
or even to keep up with inflation.

00:01:09.540 --> 00:01:10.740
But it makes sense to do that,

00:01:10.740 --> 00:01:12.150
because you're gonna
have your money there.

00:01:12.150 --> 00:01:13.140
It's guaranteed,

00:01:13.140 --> 00:01:15.060
and all of us need to
keep some of our money

00:01:15.060 --> 00:01:16.590
in savings and checking account,

00:01:16.590 --> 00:01:21.240
because we might need to use
that money to pay a bill,

00:01:21.240 --> 00:01:24.120
to do whatever in the next few weeks

00:01:24.120 --> 00:01:25.860
or in the next few months.

00:01:25.860 --> 00:01:28.560
Now, investing is when you think about,

00:01:28.560 --> 00:01:29.790
all right, I have this money,

00:01:29.790 --> 00:01:30.623
which for the most part,

00:01:30.623 --> 00:01:32.460
I would have had to have saved already,

00:01:32.460 --> 00:01:34.590
and some of it I want to invest

00:01:34.590 --> 00:01:37.890
in order to get a higher return,

00:01:37.890 --> 00:01:41.070
try to get four or 5%, 10%, 20%.

00:01:41.070 --> 00:01:42.450
I would start getting very suspicious

00:01:42.450 --> 00:01:43.590
if you think you can consistently

00:01:43.590 --> 00:01:47.820
get higher than 10 or 20% of
return, even higher than 10%.

00:01:47.820 --> 00:01:49.710
You're probably having to take on

00:01:49.710 --> 00:01:53.100
a reasonable amount of risk to do that.

00:01:53.100 --> 00:01:54.930
Usually risk and return are related.

00:01:54.930 --> 00:01:57.150
If you could get high
return with low risk,

00:01:57.150 --> 00:01:58.950
everyone would just
pour their money there,

00:01:58.950 --> 00:02:01.230
so you should be a little
bit suspicious of that.

00:02:01.230 --> 00:02:03.330
But what does investing look like?

00:02:03.330 --> 00:02:05.310
Well, at the riskier end of the spectrum,

00:02:05.310 --> 00:02:09.810
it could be, hey, I'm gonna
buy some new startup stock,

00:02:09.810 --> 00:02:12.480
that is stock in a company
that isn't making money,

00:02:12.480 --> 00:02:13.770
but it's growing super fast

00:02:13.770 --> 00:02:15.780
and look at how it stock is moving up.

00:02:15.780 --> 00:02:17.070
That's a little bit speculative.

00:02:17.070 --> 00:02:20.310
That would be high risk,
potentially high return.

00:02:20.310 --> 00:02:21.720
At the other end of the spectrum,

00:02:21.720 --> 00:02:23.910
you could buy government
or corporate bonds

00:02:23.910 --> 00:02:26.040
where you're essentially
lending money to the government

00:02:26.040 --> 00:02:27.420
or to a corporation,

00:02:27.420 --> 00:02:29.583
and there you might get a lower return.

00:02:31.410 --> 00:02:33.323
Maybe you're getting 4%, 5%, 6%,

00:02:34.740 --> 00:02:35.573
which is a lot more

00:02:35.573 --> 00:02:38.160
than you might be getting
in your checking account,

00:02:38.160 --> 00:02:41.400
and the risk there is only if
whoever you're lending it to

00:02:41.400 --> 00:02:42.300
doesn't pay it back.

00:02:42.300 --> 00:02:43.710
And obviously, if you're
lending it to the government,

00:02:43.710 --> 00:02:45.150
there's a very high chance

00:02:45.150 --> 00:02:47.370
that they're going to pay it back.

00:02:47.370 --> 00:02:48.480
So that's how I think about it.

00:02:48.480 --> 00:02:51.510
Saving, just the money
that you're bringing in

00:02:51.510 --> 00:02:53.340
that you're not spending,
you're saving that,

00:02:53.340 --> 00:02:55.260
and then some of that,
you could invest it.

00:02:55.260 --> 00:02:56.490
But when you start to invest,

00:02:56.490 --> 00:02:57.930
you're going for a higher return,

00:02:57.930 --> 00:03:00.453
but you're also taking on higher risk.


Financial institutions and markets

WEBVTT
Kind: captions
Language: en

00:00:01.290 --> 00:00:03.750
- So let's talk a little bit
about financial institutions.

00:00:03.750 --> 00:00:06.750
There are many different types
of financial institutions,

00:00:06.750 --> 00:00:08.250
but probably the most basic one

00:00:08.250 --> 00:00:09.810
that almost everyone encounters

00:00:09.810 --> 00:00:11.970
at some point in their life is a bank.

00:00:11.970 --> 00:00:14.160
And a bank, at the most basic level,

00:00:14.160 --> 00:00:15.960
there's many things that a bank can do,

00:00:15.960 --> 00:00:18.270
but it's a place where you
can deposit your money,

00:00:18.270 --> 00:00:19.920
arguably for safekeeping,

00:00:19.920 --> 00:00:22.290
and a place where you
can access it easily,

00:00:22.290 --> 00:00:23.940
and maybe you're going to be able

00:00:23.940 --> 00:00:25.800
to get a little bit of interest on it.

00:00:25.800 --> 00:00:27.720
And so think about what
the world would be like

00:00:27.720 --> 00:00:29.490
if you did not have banks.

00:00:29.490 --> 00:00:31.470
You would probably put your money,

00:00:31.470 --> 00:00:34.320
stuff it into your mattress,
put it in a vault someplace.

00:00:34.320 --> 00:00:36.450
One, it could be a little bit scary

00:00:36.450 --> 00:00:37.920
if someone were to break into your house,

00:00:37.920 --> 00:00:39.420
and I think more people
would break into houses

00:00:39.420 --> 00:00:40.253
if they knew that people

00:00:40.253 --> 00:00:42.630
were stuffing money into their mattress.

00:00:42.630 --> 00:00:45.060
But even more than that,
if you were to then go make

00:00:45.060 --> 00:00:46.530
a big purchase of some kind,

00:00:46.530 --> 00:00:48.990
instead of handing someone your debit card

00:00:48.990 --> 00:00:51.120
or being able to do it
in an electronic way,

00:00:51.120 --> 00:00:53.160
you would have to take all the cash there,

00:00:53.160 --> 00:00:55.860
which by itself could be a security issue,

00:00:55.860 --> 00:00:58.470
and frankly, it'll be hard
to keep track of all of that.

00:00:58.470 --> 00:01:01.650
And so modern banks, you're
able to make your deposits.

00:01:01.650 --> 00:01:04.530
The money is accessible with a debit card.

00:01:04.530 --> 00:01:07.710
You can log online, use the various apps

00:01:07.710 --> 00:01:11.680
and see what your different
transactions have been, how much

00:01:14.070 --> 00:01:17.550
and what your balances
are wherever you are

00:01:17.550 --> 00:01:18.600
many times in the world.

00:01:18.600 --> 00:01:21.510
I was just out of the country,
and with my debit card,

00:01:21.510 --> 00:01:23.550
I was able to go and get cash.

00:01:23.550 --> 00:01:24.990
I was able to buy things.

00:01:24.990 --> 00:01:28.740
I didn't have to take all of
that cash with me on a plane.

00:01:28.740 --> 00:01:30.180
Now, the other thing that banks do

00:01:30.180 --> 00:01:31.140
is they'll give you interest,

00:01:31.140 --> 00:01:34.140
and the way that they are
able to create that interest

00:01:34.140 --> 00:01:38.160
is they take a large fraction
of the money that's deposited

00:01:38.160 --> 00:01:41.040
and then they will lend
it out to other folks.

00:01:41.040 --> 00:01:44.400
Now, if you have less than $250,000

00:01:44.400 --> 00:01:48.750
per person per account type
in a US bank, that's insured,

00:01:48.750 --> 00:01:50.550
so you can feel pretty confident

00:01:50.550 --> 00:01:52.530
that you put that money in there,

00:01:52.530 --> 00:01:54.750
if you need that money,
you'll be able to take it out.

00:01:54.750 --> 00:01:56.460
So you don't have to worry too much

00:01:56.460 --> 00:01:58.200
about that dimension of it.

00:01:58.200 --> 00:02:00.300
And once again, by putting it in the bank

00:02:00.300 --> 00:02:02.820
versus having it stuffed in your mattress,

00:02:02.820 --> 00:02:04.590
you're gonna be able to
get some interest on it

00:02:04.590 --> 00:02:06.840
and be able to access things very easily.

00:02:06.840 --> 00:02:08.730
Now, there are other
financial institutions.

00:02:08.730 --> 00:02:10.080
There's things like insurance companies.

00:02:10.080 --> 00:02:12.870
We talk a lot about
insurance in this course.

00:02:12.870 --> 00:02:14.190
And in order to get insurance,

00:02:14.190 --> 00:02:16.110
you need someone to take
the other side of it.

00:02:16.110 --> 00:02:18.780
So you need someone to
pay a certain premium,

00:02:18.780 --> 00:02:21.457
a certain amount per month
or per year to agree that,

00:02:21.457 --> 00:02:24.810
"Hey, we got your back if the
bad thing were to happen."

00:02:24.810 --> 00:02:27.060
And not just anyone can
start an insurance company

00:02:27.060 --> 00:02:28.140
or a bank for that matter.

00:02:28.140 --> 00:02:30.630
They're heavily regulated
because the government,

00:02:30.630 --> 00:02:33.930
we all wanna make sure
that these other groups,

00:02:33.930 --> 00:02:34.890
these other institutions,

00:02:34.890 --> 00:02:36.630
are going to be there
for you when you need it.

00:02:36.630 --> 00:02:38.490
When you go to a bank and you
say, "I want my money back,"

00:02:38.490 --> 00:02:40.590
they better give you your money back.

00:02:40.590 --> 00:02:41.737
If you go to an insurance company and say,

00:02:41.737 --> 00:02:42.967
"Hey, look, my car got totaled.

00:02:42.967 --> 00:02:43.830
"I need the money back,"

00:02:43.830 --> 00:02:46.500
you better hope that that
insurance company is there

00:02:46.500 --> 00:02:49.110
and that they're going to
be good for your money.

00:02:49.110 --> 00:02:51.360
Now, there's many other types
of financial institutions,

00:02:51.360 --> 00:02:52.320
and some of 'em are connected

00:02:52.320 --> 00:02:54.810
or parts of insurance companies or banks.

00:02:54.810 --> 00:02:56.850
You could have things like brokerages.

00:02:56.850 --> 00:03:01.080
These are folks who help
broker transactions.

00:03:01.080 --> 00:03:02.790
Oftentimes it's a stock brokerage.

00:03:02.790 --> 00:03:05.160
They're helping, if
someone is buying a stock,

00:03:05.160 --> 00:03:07.770
that means that someone
else is selling that stock,

00:03:07.770 --> 00:03:09.300
and a few times it's the actual company

00:03:09.300 --> 00:03:11.490
that's selling the stock, but
usually you're just buying it

00:03:11.490 --> 00:03:14.250
from somebody else out
there in the stock market.

00:03:14.250 --> 00:03:15.960
So you need the brokers

00:03:15.960 --> 00:03:17.970
who help facilitate that transaction.

00:03:17.970 --> 00:03:21.000
You have the stock markets
themselves that obviously help

00:03:21.000 --> 00:03:24.570
or in a even more direct
way, I should say,

00:03:24.570 --> 00:03:27.450
help make those
transactions happen as well.

00:03:27.450 --> 00:03:28.800
So I could go on and on and on.

00:03:28.800 --> 00:03:30.030
We could spend hours talking

00:03:30.030 --> 00:03:32.790
about all the different types
of financial institutions,

00:03:32.790 --> 00:03:35.010
but it's important to realize
when you're using your money

00:03:35.010 --> 00:03:37.020
or when you're interfacing
with any of these,

00:03:37.020 --> 00:03:39.540
you're like, okay, what
does this organization do?

00:03:39.540 --> 00:03:41.370
What am I really getting out of it?

00:03:41.370 --> 00:03:42.960
What are they providing for me?

00:03:42.960 --> 00:03:44.460
And then what are the risks involved

00:03:44.460 --> 00:03:46.020
and what are they getting out of it?

00:03:46.020 --> 00:03:47.280
How do they make their money,

00:03:47.280 --> 00:03:49.860
and is that something that I
think is a reasonable thing

00:03:49.860 --> 00:03:52.050
for them to do given the services

00:03:52.050 --> 00:03:53.500
that they're providing to me?


Saving and investing

WEBVTT
Kind: captions
Language: en

00:00:00.617 --> 00:00:03.963
- Let's talk a little bit
about saving and investing.

00:00:05.400 --> 00:00:08.250
So one theme that you'll
hear me talk a lot about

00:00:08.250 --> 00:00:10.350
is how important it is to save.

00:00:10.350 --> 00:00:12.360
One, it's a sign that
you're living sustainably,

00:00:12.360 --> 00:00:15.630
that you're spending less
money than you're bringing in.

00:00:15.630 --> 00:00:18.540
And it also allows you to build a cushion

00:00:18.540 --> 00:00:20.880
if anything bad were to happen,
if you were to lose your job

00:00:20.880 --> 00:00:23.430
or there's some medical
expenses that are unforeseen

00:00:23.430 --> 00:00:26.100
or whatever it might be,
having that extra cushion

00:00:26.100 --> 00:00:27.810
is going to be really, really helpful.

00:00:27.810 --> 00:00:29.324
Really helpful.

00:00:29.324 --> 00:00:31.080
It's gonna lower your stress
level in a lot of ways.

00:00:31.080 --> 00:00:33.450
The other valuable thing
about savings is it allows you

00:00:33.450 --> 00:00:35.580
to do certain things
that you wouldn't be able

00:00:35.580 --> 00:00:37.242
to do if you didn't have it.

00:00:37.242 --> 00:00:38.550
For example, put a down payment on a car

00:00:38.550 --> 00:00:40.950
or buy a car outright or put
a down payment on a house.

00:00:40.950 --> 00:00:43.900
You need to save your
money in order to do it.

00:00:43.900 --> 00:00:45.990
And that last category of buying
a down payment on a house,

00:00:45.990 --> 00:00:48.570
one, it might allow you to
live in the house that you want

00:00:48.570 --> 00:00:51.300
but you can also view that as
you're making an investment.

00:00:51.300 --> 00:00:55.063
You're buying a real asset in real estate.

00:00:55.063 --> 00:00:57.900
And not only is by buying that asset

00:00:57.900 --> 00:01:00.030
you will save on rent in the future

00:01:00.030 --> 00:01:02.220
but the house itself might appreciate.

00:01:02.220 --> 00:01:05.760
And so savings allows you to also invest.

00:01:05.760 --> 00:01:06.780
Obviously you could buy a house,

00:01:06.780 --> 00:01:09.660
you could buy rental properties,
other forms of real estate.

00:01:09.660 --> 00:01:12.840
You could buy stocks and bonds.

00:01:12.840 --> 00:01:15.750
Bonds you're essentially
lending money to some group.

00:01:15.750 --> 00:01:17.970
You could buy Treasury
bills, Treasury bonds.

00:01:17.970 --> 00:01:19.860
That's essentially lending money

00:01:19.860 --> 00:01:22.470
to the US federal government.

00:01:22.470 --> 00:01:24.840
You'll get better interest
on that than if you just

00:01:24.840 --> 00:01:27.180
kept your money in a
checking or savings account.

00:01:27.180 --> 00:01:29.190
And a lot better interest than
if you just put your money,

00:01:29.190 --> 00:01:32.490
stuffed it in the mattress
where you'll get no interest.

00:01:32.490 --> 00:01:34.860
But if you wanna take on more
risk you could buy stocks.

00:01:34.860 --> 00:01:37.653
Stocks are you're buying
shares of a company.

00:01:38.659 --> 00:01:39.492
And a lot of folks will say,

00:01:39.492 --> 00:01:41.070
"Oh, you'll get better return there."

00:01:41.070 --> 00:01:42.390
But there's also more risk there.

00:01:42.390 --> 00:01:45.000
Stocks can go up and
down pretty dramatically

00:01:45.000 --> 00:01:47.416
depending on what's
happening with the economy,

00:01:47.416 --> 00:01:50.190
depending on how people
are valuing these things.

00:01:50.190 --> 00:01:53.130
But the bottom line is
savings is a great start.

00:01:53.130 --> 00:01:55.470
It builds a cushion and then
you can use those savings

00:01:55.470 --> 00:01:57.810
and you can think about how
you might want to invest it.

00:01:57.810 --> 00:02:00.660
When you invest, you should never think

00:02:00.660 --> 00:02:02.970
that you're gonna get a high
return without any risk.

00:02:02.970 --> 00:02:04.950
There's usually a bit of a catch there.

00:02:04.950 --> 00:02:08.040
But investing is a way that
if you invest prudently,

00:02:08.040 --> 00:02:10.650
you should over time hopefully bring in

00:02:10.650 --> 00:02:12.480
more money than you are putting in.

00:02:12.480 --> 00:02:14.400
And so one way to think
about that is you're taking

00:02:14.400 --> 00:02:17.430
your savings and you're getting
your money to work for you,

00:02:17.430 --> 00:02:20.070
for your money to create
income that you yourself

00:02:20.070 --> 00:02:22.290
don't even have to work
in order to produce.

00:02:22.290 --> 00:02:25.244
So if you save enough money
and you keep investing it

00:02:25.244 --> 00:02:28.620
in thoughtful ways that aren't too risky,

00:02:28.620 --> 00:02:31.440
that money will grow and
eventually might be able

00:02:31.440 --> 00:02:33.660
to create more income
than you can on your own.

00:02:33.660 --> 00:02:36.203
So it's a pretty good place
to be if you can get there.


Why plan for retirement

WEBVTT
Kind: captions
Language: en

00:00:01.290 --> 00:00:03.660
- So let's think a little
bit about retirement.

00:00:03.660 --> 00:00:05.490
And I know some of y'all
who are younger, like, hey,

00:00:05.490 --> 00:00:07.230
I'm just trying to figure out
what to do with my own life.

00:00:07.230 --> 00:00:10.110
Why am I already thinking
about my life when I am

00:00:10.110 --> 00:00:13.140
in my 60s or 70s or even later?

00:00:13.140 --> 00:00:15.231
The first thing I'll tell you,

00:00:15.231 --> 00:00:18.300
life will go by faster than you suspect.

00:00:18.300 --> 00:00:20.850
I'm not at retirement yet,
but I'm about halfway.

00:00:20.850 --> 00:00:23.790
And that, that first
half went awfully fast.

00:00:23.790 --> 00:00:25.500
And, but the more importantly

00:00:25.500 --> 00:00:27.240
the earlier you start thinking about it,

00:00:27.240 --> 00:00:29.370
the more likely you're
going to be in a situation

00:00:29.370 --> 00:00:32.160
that's a good situation
when you get to retirement.

00:00:32.160 --> 00:00:34.440
So the whole principle is when you're

00:00:34.440 --> 00:00:37.530
in your 60s or 70s, you
might not wanna work.

00:00:37.530 --> 00:00:39.510
You might want to see
the world a little bit.

00:00:39.510 --> 00:00:41.640
You might wanna spend
more time with your family

00:00:41.640 --> 00:00:43.890
or you might not be in a position to work.

00:00:43.890 --> 00:00:46.290
Your health might start
going in certain ways.

00:00:46.290 --> 00:00:49.680
And so you want to have
a cushion to live off of.

00:00:49.680 --> 00:00:54.150
Now, one consideration is, is
that people are living longer

00:00:54.150 --> 00:00:56.520
and longer and longer,
which is a good thing.

00:00:56.520 --> 00:00:59.850
But in the old days when
the life expectancy was 65

00:00:59.850 --> 00:01:03.210
or 70 and people retired
at 65, well then on average

00:01:03.210 --> 00:01:04.200
they only had to think about, well

00:01:04.200 --> 00:01:05.250
how am I gonna live for that?

00:01:05.250 --> 00:01:07.920
How am I gonna support
myself for those five years?

00:01:07.920 --> 00:01:10.200
But now folks are living
into their 80s, 90s

00:01:10.200 --> 00:01:12.240
and even beyond as healthcare gets better.

00:01:12.240 --> 00:01:14.550
And so now if, if you're fortunate

00:01:14.550 --> 00:01:16.800
your retirement might be decades

00:01:16.800 --> 00:01:20.070
it might be 20, 30 years or longer.

00:01:20.070 --> 00:01:21.600
Now that's a double-edged sword

00:01:21.600 --> 00:01:23.790
because healthcare is getting better

00:01:23.790 --> 00:01:26.580
but healthcare is also
very, very expensive.

00:01:26.580 --> 00:01:28.590
And so you need to think,
how do you pay for that?

00:01:28.590 --> 00:01:30.840
You might have to think
about things like inflation.

00:01:30.840 --> 00:01:34.020
Everything is getting
more expensive over time.

00:01:34.020 --> 00:01:36.510
Some of you might say, hey,
there's government programs

00:01:36.510 --> 00:01:38.460
there's government healthcare.

00:01:38.460 --> 00:01:40.320
You have things like Medicare,

00:01:40.320 --> 00:01:43.140
you have social security
that you're paying into,

00:01:43.140 --> 00:01:45.180
but you really don't know when you retire

00:01:45.180 --> 00:01:47.730
in 30, 40, 50, 60 years

00:01:47.730 --> 00:01:49.710
whether those programs
are going to be the same.

00:01:49.710 --> 00:01:52.530
And to what degree are
those programs able to

00:01:52.530 --> 00:01:54.690
actually help support you?

00:01:54.690 --> 00:01:58.290
So saving for retirement is
a very, very important thing.

00:01:58.290 --> 00:01:59.850
But some of the core principles

00:01:59.850 --> 00:02:02.700
that we talk about saving generally apply.

00:02:02.700 --> 00:02:05.220
So you should try to
live below your means,

00:02:05.220 --> 00:02:07.320
spend less than you bring in.

00:02:07.320 --> 00:02:08.850
You have that savings.

00:02:08.850 --> 00:02:11.790
Now, some of that savings
could be for things that are

00:02:11.790 --> 00:02:12.960
in the short term.

00:02:12.960 --> 00:02:13.920
It could be a safety net

00:02:13.920 --> 00:02:16.110
in case you lose your
job, in case you fall ill,

00:02:16.110 --> 00:02:19.440
in case you have some unforeseen expenses.

00:02:19.440 --> 00:02:22.680
It could also be for buying
a house or buying a car.

00:02:22.680 --> 00:02:24.690
And it could also be for investment.

00:02:24.690 --> 00:02:28.215
And if you start saving
and you invest now, one,

00:02:28.215 --> 00:02:30.930
if that investment's not
something that you want to

00:02:30.930 --> 00:02:34.830
touch for 30, 40, 50 years,
you could probably deal

00:02:34.830 --> 00:02:36.750
with a little bit of ups
and downs, what's often

00:02:36.750 --> 00:02:38.790
called volatility, a
little bit of that risk.

00:02:38.790 --> 00:02:42.180
And so if you invest it over
many, many years, whether it's

00:02:42.180 --> 00:02:44.100
in something a little
bit riskier like stocks

00:02:44.100 --> 00:02:47.400
or something safer like
bonds, that interest

00:02:47.400 --> 00:02:50.880
that compounds year after
year, it will become a

00:02:50.880 --> 00:02:54.150
significant addition to
whatever you directly save

00:02:54.150 --> 00:02:55.350
over the coming decades.

00:02:56.220 --> 00:02:58.980
I encourage you to watch
videos on Khan Academy about

00:02:58.980 --> 00:03:01.620
the power of compounding
interest and things like that.

00:03:01.620 --> 00:03:02.820
But it is a lot.

00:03:02.820 --> 00:03:04.980
If you save a hundred dollars
when you're in your twenties

00:03:04.980 --> 00:03:08.760
and it compounds at four
or five, 6% per year

00:03:08.760 --> 00:03:11.580
that will be a lot more than
a hundred dollars when you get

00:03:11.580 --> 00:03:13.800
into your fifties, sixties and seventies.

00:03:13.800 --> 00:03:15.450
So start thinking about retirement.

00:03:15.450 --> 00:03:16.380
It's never too early.

00:03:16.380 --> 00:03:18.690
And you know, worst case
you think about retirement

00:03:18.690 --> 00:03:20.310
you start saving up for it.

00:03:20.310 --> 00:03:22.890
That money that you're saving
up can be used for many, many,

00:03:22.890 --> 00:03:25.200
many different purposes depending
on how you're saving it.

00:03:25.200 --> 00:03:27.210
You also have things
like retirement accounts

00:03:27.210 --> 00:03:30.180
like 401Ks and IRAs, which
we'll talk about later

00:03:30.180 --> 00:03:31.920
which allow you to save

00:03:31.920 --> 00:03:34.800
for retirement in a
very tax efficient way.

00:03:34.800 --> 00:03:37.550
So we'll talk about that in
more depth in other videos.


What is risk and return?

WEBVTT
Kind: captions
Language: en

00:00:01.590 --> 00:00:04.740
- So probably the main thing
you'll hear when you talk

00:00:04.740 --> 00:00:07.260
about investing is what
is the return that you got

00:00:07.260 --> 00:00:08.160
on your investment?

00:00:08.160 --> 00:00:10.380
And return on investment is oftentimes

00:00:10.380 --> 00:00:11.850
people will say ROI,

00:00:11.850 --> 00:00:14.100
and there's a lot of different
ways of calculating it,

00:00:14.100 --> 00:00:15.510
but maybe the most basic ways,

00:00:15.510 --> 00:00:17.400
think about if you put a hundred dollars

00:00:17.400 --> 00:00:18.960
into an investment this year

00:00:18.960 --> 00:00:22.350
and then next year you got back $110.

00:00:22.350 --> 00:00:24.300
So you got a $10 return

00:00:24.300 --> 00:00:27.090
on top of your $100 that you invested.

00:00:27.090 --> 00:00:30.660
People would say that
you got a 10% annual ROI

00:00:30.660 --> 00:00:34.170
or 10% return on investment annually.

00:00:34.170 --> 00:00:36.450
Now, it can get more complicated depending

00:00:36.450 --> 00:00:38.790
on what type of an investment it is

00:00:38.790 --> 00:00:41.700
and how it pays you out
over time, et cetera.

00:00:41.700 --> 00:00:44.880
But ROI is a really good
thing to think about.

00:00:44.880 --> 00:00:48.187
Any investment you make,
generally speaking, you might say,

00:00:48.187 --> 00:00:51.720
"All right, if there's one
thing that gives me a 20% ROI

00:00:51.720 --> 00:00:53.100
or return on investment, that's better

00:00:53.100 --> 00:00:56.040
than something that gives me a 10% ROI."

00:00:56.040 --> 00:00:59.730
And if in terms of risk,
they're similar, the same,

00:00:59.730 --> 00:01:02.400
then that might very well be the case.

00:01:02.400 --> 00:01:03.233
But it turns out

00:01:03.233 --> 00:01:06.870
that there's usually a trade-off
between risk and return.

00:01:06.870 --> 00:01:09.600
You're usually not going
to get a higher return

00:01:09.600 --> 00:01:12.120
for something that is equally as risky.

00:01:12.120 --> 00:01:14.760
If that were the case, everyone
would invest in that thing

00:01:14.760 --> 00:01:17.880
and not the thing that's
giving the lower return.

00:01:17.880 --> 00:01:19.620
And so to just give an example

00:01:19.620 --> 00:01:21.330
of how you see that in the real world,

00:01:21.330 --> 00:01:24.570
you can think of very,
very, very safe investments.

00:01:24.570 --> 00:01:26.280
For example, if you just have your money

00:01:26.280 --> 00:01:28.590
in a savings or checking account

00:01:28.590 --> 00:01:32.850
you might get low single
digits, 1, 2, 3% on your money

00:01:32.850 --> 00:01:34.800
depending on where interest rates are,

00:01:34.800 --> 00:01:35.970
which doesn't feel like a lot,

00:01:35.970 --> 00:01:38.160
but it's very, very, very safe.

00:01:38.160 --> 00:01:41.130
If it's less than $250,000 per person,

00:01:41.130 --> 00:01:42.600
per account type,

00:01:42.600 --> 00:01:45.750
well, then you are pretty much guaranteed

00:01:45.750 --> 00:01:47.340
to get your money back.

00:01:47.340 --> 00:01:50.700
So low risk and arguably low return.

00:01:50.700 --> 00:01:53.520
If you're to go slightly higher risk,

00:01:53.520 --> 00:01:56.340
you could do something like
lend to the federal government.

00:01:56.340 --> 00:01:59.130
You lend to the federal government
by buying treasury bonds

00:01:59.130 --> 00:02:02.190
and treasury bills,
oftentimes T bills for short.

00:02:02.190 --> 00:02:04.080
Now those are pretty much guaranteed

00:02:04.080 --> 00:02:05.400
to pay you what they say

00:02:05.400 --> 00:02:07.292
they're going to pay you.

00:02:07.292 --> 00:02:08.190
So you say, "Okay, why do I
get slightly higher interest

00:02:08.190 --> 00:02:10.200
for that than I get on
my checking account?"

00:02:10.200 --> 00:02:12.360
Well, it's a little bit less convenient

00:02:12.360 --> 00:02:15.090
if you need your money right that second.

00:02:15.090 --> 00:02:17.670
Yes, you could sell those
treasury bills or treasury bonds,

00:02:17.670 --> 00:02:19.320
but those prices do fluctuate.

00:02:19.320 --> 00:02:22.920
So you're only guaranteed to
get the money plus the interest

00:02:22.920 --> 00:02:26.880
if you hold it all the way to however long

00:02:26.880 --> 00:02:29.190
that treasury bond or
treasury bill was for.

00:02:29.190 --> 00:02:30.900
It might be for one year, two years,

00:02:30.900 --> 00:02:33.450
or 10 years or whatever it is.

00:02:33.450 --> 00:02:34.920
And so there's a certain risk,

00:02:34.920 --> 00:02:36.900
not just for the price fluctuations,

00:02:36.900 --> 00:02:39.690
but also how accessible is that money,

00:02:39.690 --> 00:02:41.400
for example, in that
checking or savings account?

00:02:41.400 --> 00:02:42.330
If you want that money,

00:02:42.330 --> 00:02:44.040
you can usually get it within a business,

00:02:44.040 --> 00:02:46.560
within a working day,
usually in a matter of hours.

00:02:46.560 --> 00:02:48.090
If you have a treasury
bond or treasury bill,

00:02:48.090 --> 00:02:49.680
it's a little bit more complicated

00:02:49.680 --> 00:02:52.350
and you're going to have more
of those price fluctuations.

00:02:52.350 --> 00:02:55.020
Now, if you wanted to go up
the risk and return ladder

00:02:55.020 --> 00:02:57.570
a little bit more, well, you
could lend to other entities.

00:02:57.570 --> 00:02:59.790
You could lend to big, safe companies.

00:02:59.790 --> 00:03:01.320
They will pay you higher interest

00:03:01.320 --> 00:03:02.700
than the federal government will.

00:03:02.700 --> 00:03:04.230
But there's a little bit more risk

00:03:04.230 --> 00:03:06.270
that they might not pay that loan back.

00:03:06.270 --> 00:03:07.320
Maybe they go outta business,

00:03:07.320 --> 00:03:09.120
maybe something dramatically negative

00:03:09.120 --> 00:03:10.230
happens to their business.

00:03:10.230 --> 00:03:13.530
And what you'll generally see
as you go to rescuer, sorry,

00:03:13.530 --> 00:03:16.440
if you go to riskier and riskier companies

00:03:16.440 --> 00:03:18.630
they're going to pay
higher and higher interest

00:03:18.630 --> 00:03:20.160
on their bonds.

00:03:20.160 --> 00:03:22.020
And if you look at the stock market

00:03:22.020 --> 00:03:24.270
where you're actually buying a share,

00:03:24.270 --> 00:03:26.797
when you buy a stock where you're buying

00:03:26.797 --> 00:03:27.630
a piece of the company,

00:03:27.630 --> 00:03:28.980
you'll normally see that the companies

00:03:28.980 --> 00:03:30.820
that feel pretty risky,

00:03:30.820 --> 00:03:33.660
you might feel like they
could have a higher return,

00:03:33.660 --> 00:03:36.330
but they could also have a
much higher loss as well.

00:03:36.330 --> 00:03:39.360
While companies that are
safer, generally speaking,

00:03:39.360 --> 00:03:44.360
you would expect to have lower
risk and also lower return.

00:03:44.490 --> 00:03:46.380
So it's important to think

00:03:46.380 --> 00:03:48.690
about return on investment
when you make an investment.

00:03:48.690 --> 00:03:51.060
And it's very, very, very, very important

00:03:51.060 --> 00:03:52.500
to think about risk.

00:03:52.500 --> 00:03:53.700
I can't stress this enough,

00:03:53.700 --> 00:03:55.080
how many people I've
explained they're like,

00:03:55.080 --> 00:03:58.770
oh, I have a 30%
guaranteed ROI investment.

00:03:58.770 --> 00:04:00.510
I'm like, okay, someone's lying to you.

00:04:00.510 --> 00:04:03.600
Because if it was 30% ROI guaranteed

00:04:03.600 --> 00:04:05.700
you would have all of the
major investment funds

00:04:05.700 --> 00:04:07.800
in the world just investing in that.

00:04:07.800 --> 00:04:12.210
Why would they let little
old Sal invest or you, uncle,

00:04:12.210 --> 00:04:13.920
why would they let you invest in that

00:04:13.920 --> 00:04:16.020
if it was really 30% guaranteed?

00:04:16.020 --> 00:04:17.340
I would be very skeptical

00:04:17.340 --> 00:04:19.560
of people who say something like that.

00:04:19.560 --> 00:04:20.820
There's usually a risk

00:04:20.820 --> 00:04:23.250
that that person isn't thinking about,

00:04:23.250 --> 00:04:26.430
or that return is in some
ways shady or fabricated,

00:04:26.430 --> 00:04:27.540
which also makes me feel

00:04:27.540 --> 00:04:29.850
that that whole proposition
is even riskier.

00:04:29.850 --> 00:04:32.610
So there are definitely ways

00:04:32.610 --> 00:04:34.950
that you can get 10, 20, 30% return,

00:04:34.950 --> 00:04:38.490
but it's usually associated
with a decent dose of risk.

00:04:38.490 --> 00:04:39.990
And when you go into something like that,

00:04:39.990 --> 00:04:41.550
also think about the worst case scenario.

00:04:41.550 --> 00:04:43.590
It's easy to dream about,

00:04:43.590 --> 00:04:44.490
I'm making all the money,

00:04:44.490 --> 00:04:45.420
but think about what would happen

00:04:45.420 --> 00:04:49.013
if you lost 30% or 50%
or 80% of your money?

00:04:49.013 --> 00:04:50.670
How would you feel then?

00:04:50.670 --> 00:04:53.073
And then invest accordingly.


Introduction to life insurance

WEBVTT
Kind: captions
Language: en

00:00:00.780 --> 00:00:01.740
- So let's talk a little bit

00:00:01.740 --> 00:00:04.230
about what's probably not
your favorite subject.

00:00:04.230 --> 00:00:07.170
It's definitely not
mine, and that is death.

00:00:07.170 --> 00:00:09.810
And it's not something
a lot of us think about.

00:00:09.810 --> 00:00:11.340
And I remember when I was a kid

00:00:11.340 --> 00:00:14.910
and I used to see these ads
on TV for life insurance,

00:00:14.910 --> 00:00:16.440
and it used to boggle my mind.

00:00:16.440 --> 00:00:18.007
I used to say, "Why would,

00:00:18.007 --> 00:00:19.597
"I don't even wanna think
about life insurance,

00:00:19.597 --> 00:00:22.717
"and if I'm dead, well,
you know, who cares?

00:00:22.717 --> 00:00:24.967
"You know, I won't need the money anymore.

00:00:24.967 --> 00:00:26.730
"Who are they gonna pay, et cetera?"

00:00:26.730 --> 00:00:30.360
And then I got married, I had kids,

00:00:30.360 --> 00:00:34.020
and I completely got why
life insurance matters.

00:00:34.020 --> 00:00:37.080
Because once you have
other people in your life

00:00:37.080 --> 00:00:39.213
that you might be helping support,

00:00:40.320 --> 00:00:41.670
then you do start to wonder,

00:00:41.670 --> 00:00:43.657
if you care about them, you wonder,

00:00:43.657 --> 00:00:45.277
"Well, what if something
were to happen to me?

00:00:45.277 --> 00:00:46.710
"What if I were to die?"

00:00:46.710 --> 00:00:48.060
We would have our loss of income.

00:00:48.060 --> 00:00:48.990
They might have other things

00:00:48.990 --> 00:00:51.360
that they might have to
do above and beyond that,

00:00:51.360 --> 00:00:52.830
because maybe I'm helping out at home

00:00:52.830 --> 00:00:54.480
and you're gonna need
more support at home,

00:00:54.480 --> 00:00:56.970
so you're gonna have even
more costs at the same time

00:00:56.970 --> 00:00:58.740
that you have loss of income.

00:00:58.740 --> 00:01:00.630
You might have a mortgage to pay,

00:01:00.630 --> 00:01:02.130
and the last thing you want your family

00:01:02.130 --> 00:01:03.360
to have to deal with if you die

00:01:03.360 --> 00:01:07.140
is not only they're hopefully
grieving for you a little bit,

00:01:07.140 --> 00:01:08.640
but they're also having to move

00:01:08.640 --> 00:01:10.380
or they can't pay their house

00:01:10.380 --> 00:01:12.780
or they're gonna have to
change their standard of living

00:01:12.780 --> 00:01:14.310
in a significant way.

00:01:14.310 --> 00:01:19.050
So, as soon as I had kids, I
got a life insurance policy.

00:01:19.050 --> 00:01:22.650
Now, the basic idea of life
insurance is you pay a premium,

00:01:22.650 --> 00:01:24.990
you pay a certain amount every year,

00:01:24.990 --> 00:01:29.310
and if you were to die, then
the life insurance company

00:01:29.310 --> 00:01:32.460
will pay whoever you
say is the beneficiary.

00:01:32.460 --> 00:01:35.160
It's oftentimes someone's
partner or your children

00:01:35.160 --> 00:01:37.110
or some other family
member, usually people

00:01:37.110 --> 00:01:40.590
that you're already helping
support in some way.

00:01:40.590 --> 00:01:43.440
And when I thought about how
much life insurance I needed,

00:01:43.440 --> 00:01:46.050
I remember I first got it
when my first child was born,

00:01:46.050 --> 00:01:49.590
I think I was 32 years old at the time.

00:01:49.590 --> 00:01:51.340
I said, "Well, we have a mortgage."

00:01:52.230 --> 00:01:53.640
At the time we only had one kid.

00:01:53.640 --> 00:01:54.960
I want him to be able to go to college

00:01:54.960 --> 00:01:56.460
if something were to happen to me.

00:01:56.460 --> 00:01:59.034
So I got a policy that was large enough

00:01:59.034 --> 00:02:03.000
that would be able to pay
off the rest of our mortgage,

00:02:03.000 --> 00:02:06.120
pay for his college
education, and then maybe

00:02:06.120 --> 00:02:09.420
have a little bit extra to
help my wife support her

00:02:09.420 --> 00:02:12.660
if she needed extra help
with whatever it might be,

00:02:12.660 --> 00:02:14.730
and so that's how I thought about it.

00:02:14.730 --> 00:02:17.130
More recently, I got
another health insurance,

00:02:17.130 --> 00:02:19.500
sorry, I got another life insurance policy

00:02:19.500 --> 00:02:20.580
with that same idea.

00:02:20.580 --> 00:02:21.780
I now have three kids.

00:02:21.780 --> 00:02:23.040
I want all of them, I wanna be able

00:02:23.040 --> 00:02:25.380
to afford for all of
them to go to college.

00:02:25.380 --> 00:02:29.190
I want all of, you know, I
want my wife and other folks

00:02:29.190 --> 00:02:32.640
in my family that I take care
of to still be taken care of

00:02:32.640 --> 00:02:35.430
if I were to lose my income,

00:02:35.430 --> 00:02:37.350
so, or by dying.

00:02:37.350 --> 00:02:39.120
There's other ways for
insuring loss of income

00:02:39.120 --> 00:02:41.640
for other reasons, but this is by dying.

00:02:41.640 --> 00:02:45.390
Now, there's a couple of
different life insurance flavors

00:02:45.390 --> 00:02:46.223
that you can get.

00:02:46.223 --> 00:02:48.540
The biggest distinction is term life

00:02:48.540 --> 00:02:50.700
versus whole life policy.

00:02:50.700 --> 00:02:52.200
Now, term life insurance

00:02:52.200 --> 00:02:53.970
only covers a certain number of years.

00:02:53.970 --> 00:02:57.480
You can get a term life policy
for say 10 years or 20 years,

00:02:57.480 --> 00:03:01.110
while a whole life policy will
cover the rest of your life.

00:03:01.110 --> 00:03:01.943
You might be saying,

00:03:01.943 --> 00:03:03.817
"Well, why would I ever want a term life

00:03:03.817 --> 00:03:05.310
"when I could get one that's whole life."

00:03:05.310 --> 00:03:07.080
Well, it turns out that a term life policy

00:03:07.080 --> 00:03:09.690
is usually cheaper, and why is that?

00:03:09.690 --> 00:03:12.750
Well, if you're say 32
years old like I was

00:03:12.750 --> 00:03:15.090
and you got a 10-year term policy

00:03:15.090 --> 00:03:17.197
'cause you're just like,
"Okay, over the next 10 years,

00:03:17.197 --> 00:03:19.170
"my family's gonna need
help paying the mortgage,"

00:03:19.170 --> 00:03:20.003
or whatever it might be.

00:03:20.003 --> 00:03:21.150
Or let's say over the next 20 years,

00:03:21.150 --> 00:03:22.807
if you get a 20-year term,

00:03:22.807 --> 00:03:26.377
"That could help cover my
family through college,

00:03:26.377 --> 00:03:27.937
"through the mortgage, et cetera,

00:03:27.937 --> 00:03:30.487
"and then after that, my kids
are going to be on their own.

00:03:30.487 --> 00:03:32.010
"They might not need it as much."

00:03:32.010 --> 00:03:33.990
And from an insurance
company's point of view,

00:03:33.990 --> 00:03:36.360
if you look at a 32-year-old
who's in good health,

00:03:36.360 --> 00:03:39.060
and they say the probability of them dying

00:03:39.060 --> 00:03:43.320
in the next 20 years, by the
time they're 52, is fairly low.

00:03:43.320 --> 00:03:46.770
So we can give them a pretty low premium.

00:03:46.770 --> 00:03:51.770
So I didn't have to
pay that much per year.

00:03:52.200 --> 00:03:54.960
Now, if you've got a whole life
policy back when you're 32,

00:03:54.960 --> 00:03:55.927
the insurance company's gonna say,

00:03:55.927 --> 00:03:58.747
"Well, Sal's gonna die eventually,

00:03:58.747 --> 00:04:00.607
"and it's just a matter
of is he gonna die sooner

00:04:00.607 --> 00:04:02.400
"or is he gonna die later?"

00:04:02.400 --> 00:04:04.710
And so they price it accordingly

00:04:04.710 --> 00:04:08.580
so that even if when they
pay it out, you know,

00:04:08.580 --> 00:04:11.130
maybe you're 80 or 90
years old when you die,

00:04:11.130 --> 00:04:13.590
but that payout is still
probably going to be less

00:04:13.590 --> 00:04:16.560
than the amount that you
put in over the years,

00:04:16.560 --> 00:04:20.280
especially if you last 'til
70 or 80 or or 90 years old,

00:04:20.280 --> 00:04:21.750
because not only are they taking

00:04:21.750 --> 00:04:23.010
those premiums you're giving them,

00:04:23.010 --> 00:04:24.840
but the insurance company is investing it

00:04:24.840 --> 00:04:27.120
so they're also getting, they're getting

00:04:27.120 --> 00:04:28.890
the returns on that premium.

00:04:28.890 --> 00:04:29.910
So they do the numbers,

00:04:29.910 --> 00:04:32.040
they do the statistics
to see, okay, if someone,

00:04:32.040 --> 00:04:35.790
let's say the average life
expectancy is 75 or 80 years old.

00:04:35.790 --> 00:04:38.130
If they paid this premium
all the way to that

00:04:38.130 --> 00:04:40.170
and were able to invest that premium,

00:04:40.170 --> 00:04:42.840
are we going to get more
money than we have to pay out?

00:04:42.840 --> 00:04:44.340
But they're still probably going to ask

00:04:44.340 --> 00:04:46.200
for more money for a whole life policy

00:04:46.200 --> 00:04:47.370
'cause they have to do that.

00:04:47.370 --> 00:04:49.320
In fact, almost always
they'll ask more money

00:04:49.320 --> 00:04:52.715
for a whole life policy
than for a term policy.

00:04:52.715 --> 00:04:57.715
So you have to decide, what
are you trying to de-risk?

00:04:57.930 --> 00:04:59.820
What are you trying to cover?

00:04:59.820 --> 00:05:01.290
And then act accordingly.

00:05:01.290 --> 00:05:04.950
And one of the things that's
a little bit depressing

00:05:04.950 --> 00:05:08.580
as you get older is I
had gotten at the time

00:05:08.580 --> 00:05:10.447
a 10-year term policy 'cause I was like,

00:05:10.447 --> 00:05:11.520
"Oh, that'll cover my family."

00:05:11.520 --> 00:05:13.473
And then once I turned 42

00:05:13.473 --> 00:05:16.800
and I wanted to get
another 10-year policy,

00:05:16.800 --> 00:05:18.900
well, then it was a lot more expensive.

00:05:18.900 --> 00:05:21.030
And the reason why it was
a lot more expensive is,

00:05:21.030 --> 00:05:23.130
well, the probability of a 42-year-old

00:05:23.130 --> 00:05:25.170
dying in the next 10
years is a good bit higher

00:05:25.170 --> 00:05:27.150
than the probability of a 32-year-old

00:05:27.150 --> 00:05:29.190
dying in the next 10 years.

00:05:29.190 --> 00:05:31.740
Now, there's also this
notion about insurability,

00:05:31.740 --> 00:05:33.330
because they're not just
gonna look at your age.

00:05:33.330 --> 00:05:34.260
They're gonna look at your health,

00:05:34.260 --> 00:05:35.700
they're gonna look at your lifestyle.

00:05:35.700 --> 00:05:38.253
If you like doing dangerous things,

00:05:40.131 --> 00:05:41.940
if you have things that
increase your risk of death,

00:05:41.940 --> 00:05:42.990
well, they're gonna charge you more,

00:05:42.990 --> 00:05:46.230
and if you lead a very,
very risky lifestyle,

00:05:46.230 --> 00:05:47.880
then they might not insure you at all,

00:05:47.880 --> 00:05:49.260
so that's this notion of insurability.

00:05:49.260 --> 00:05:51.750
When I got my last health insurance,

00:05:51.750 --> 00:05:53.580
someone came and literally
took a blood test,

00:05:53.580 --> 00:05:55.020
they checked my blood pressure,

00:05:55.020 --> 00:05:58.680
they checked my BMI, my body mass index

00:05:58.680 --> 00:06:02.130
to just kind of figure
out what the risk was.

00:06:02.130 --> 00:06:03.990
And there's all this questionnaire

00:06:03.990 --> 00:06:06.360
about my lifestyle, et cetera, et cetera.

00:06:06.360 --> 00:06:08.250
Now, the last thing I'll talk about is,

00:06:08.250 --> 00:06:10.200
and this isn't just
applies to life insurance

00:06:10.200 --> 00:06:11.970
but it definitely does
apply to life insurance,

00:06:11.970 --> 00:06:14.400
which is the notion of an individual plan

00:06:14.400 --> 00:06:16.230
versus a group plan.

00:06:16.230 --> 00:06:18.930
A group plan usually comes
through, say your employer,

00:06:18.930 --> 00:06:19.763
where your employer says,

00:06:19.763 --> 00:06:22.177
"Hey, we're gonna give
every employee we have

00:06:22.177 --> 00:06:23.400
"a life insurance policy."

00:06:23.400 --> 00:06:25.380
They might do other types
of policies as well.

00:06:25.380 --> 00:06:26.700
And that's, they're just paying

00:06:26.700 --> 00:06:29.430
usually a fixed amount for every employee,

00:06:29.430 --> 00:06:33.240
and the insurance company
isn't trying to differentiate

00:06:33.240 --> 00:06:35.100
because they're just
averaging everyone out.

00:06:35.100 --> 00:06:37.470
Sometimes they might do
a little bit of that,

00:06:37.470 --> 00:06:39.330
and that's nice.

00:06:39.330 --> 00:06:41.430
It's a benefit you might
get from your employer,

00:06:41.430 --> 00:06:44.070
but if you leave your employer,

00:06:44.070 --> 00:06:46.050
that policy might not
be effective anymore.

00:06:46.050 --> 00:06:47.970
So if it was a life insurance policy,

00:06:47.970 --> 00:06:50.310
if you die after leaving your employer,

00:06:50.310 --> 00:06:52.290
well, then it's not
gonna be so beneficial.

00:06:52.290 --> 00:06:54.570
While on the other hand if
you have an individual plan,

00:06:54.570 --> 00:06:56.010
one that you pay directly,

00:06:56.010 --> 00:06:57.450
well, that's just going to be tied to you.

00:06:57.450 --> 00:07:00.240
It's not gonna be tied to
where you happen to work.

00:07:00.240 --> 00:07:02.940
So, if you're young, you're
probably not thinking a lot

00:07:02.940 --> 00:07:03.900
about life insurance.

00:07:03.900 --> 00:07:05.250
Maybe you wanna talk to your parents

00:07:05.250 --> 00:07:06.720
and make sure they have life insurance.

00:07:06.720 --> 00:07:09.960
They may or may not
appreciate the conversation,

00:07:09.960 --> 00:07:12.180
but it is an important
thing to think about

00:07:12.180 --> 00:07:15.060
if we wanna make sure
those that we care about

00:07:15.060 --> 00:07:19.113
are taken care of if
anything really bad happens.


How insurance works

WEBVTT
Kind: captions
Language: en

00:00:01.170 --> 00:00:02.730
- Let's say that you have a car

00:00:02.730 --> 00:00:05.160
that right now is worth about $10,000

00:00:05.160 --> 00:00:08.970
and you don't have $10,000 as a cushion.

00:00:08.970 --> 00:00:11.820
If by chance your car were to get totaled

00:00:11.820 --> 00:00:13.380
or if it were to get stolen

00:00:13.380 --> 00:00:14.670
or something were to happen to it,

00:00:14.670 --> 00:00:16.380
you don't have an extra $10,000

00:00:16.380 --> 00:00:19.470
to then buy another car just like it.

00:00:19.470 --> 00:00:24.000
So one option you have to try to transfer

00:00:24.000 --> 00:00:27.570
some of that risk is to buy car insurance.

00:00:27.570 --> 00:00:29.730
And this video is about
all forms of insurance,

00:00:29.730 --> 00:00:30.563
but I'll just use that

00:00:30.563 --> 00:00:31.980
as an example to just help think

00:00:31.980 --> 00:00:33.960
about how insurance works.

00:00:33.960 --> 00:00:35.841
So what's going to happen

00:00:35.841 --> 00:00:36.900
in that situation is
that you would likely go

00:00:36.900 --> 00:00:38.040
to an insurance agent

00:00:38.040 --> 00:00:38.873
and you're just, like,

00:00:38.873 --> 00:00:41.190
"I would like to insure my car

00:00:41.190 --> 00:00:42.330
in case it gets stolen,

00:00:42.330 --> 00:00:43.593
in case it gets totaled,

00:00:44.460 --> 00:00:46.140
in case something bad happens to it

00:00:46.140 --> 00:00:48.390
and I have to pay a
lot of money for that."

00:00:48.390 --> 00:00:50.310
And so then the agent,

00:00:50.310 --> 00:00:53.130
they might work for an insurance company

00:00:53.130 --> 00:00:55.500
or they might be able to get you quotes

00:00:55.500 --> 00:00:56.940
from many different insurance companies,

00:00:56.940 --> 00:00:59.225
but they'll come back to you and say,

00:00:59.225 --> 00:01:02.310
"Okay, if you pay $200 a year,"

00:01:02.310 --> 00:01:03.510
and I'm making up these numbers,

00:01:03.510 --> 00:01:04.710
these aren't necessarily the types

00:01:04.710 --> 00:01:06.030
of numbers that you will see when you

00:01:06.030 --> 00:01:07.507
when you go to an insurance agent.

00:01:07.507 --> 00:01:09.783
"But if you pay $200 a year,

00:01:09.783 --> 00:01:11.461
we got you covered.

00:01:11.461 --> 00:01:13.380
If anything were to happen

00:01:13.380 --> 00:01:16.440
we will cover the cost of the car."

00:01:16.440 --> 00:01:17.970
You're like, "Okay, I do.

00:01:17.970 --> 00:01:19.590
I can pay $200 a year,"

00:01:19.590 --> 00:01:21.240
and I'm willing to pay $200 a year

00:01:21.240 --> 00:01:23.160
because I don't have $10,000

00:01:23.160 --> 00:01:24.420
if something bad were to happen,

00:01:24.420 --> 00:01:26.190
so I agree to do that.

00:01:26.190 --> 00:01:27.337
Now the question you might have is,

00:01:27.337 --> 00:01:30.000
"Well, how does the insurance
company make money here?"

00:01:30.000 --> 00:01:31.560
Well, they have a whole bunch

00:01:31.560 --> 00:01:33.240
of people looking at the statistics

00:01:33.240 --> 00:01:34.470
of it all, statisticians,

00:01:34.470 --> 00:01:36.060
they're usually called actuaries

00:01:36.060 --> 00:01:37.350
when they're at an insurance company,

00:01:37.350 --> 00:01:39.060
and they look at the probability

00:01:39.060 --> 00:01:40.920
of something like that happening.

00:01:40.920 --> 00:01:42.060
So let's say they decide

00:01:42.060 --> 00:01:44.850
that there's a 1% chance in a given year

00:01:44.850 --> 00:01:48.630
that they are going to
have to pay out $10,000.

00:01:48.630 --> 00:01:50.250
Now, if it was just one person,

00:01:50.250 --> 00:01:52.530
and in that if you're the
only person they insured,

00:01:52.530 --> 00:01:54.051
and in that year you paid $200,

00:01:54.051 --> 00:01:56.460
but they had to pay out 10,000,

00:01:56.460 --> 00:01:58.320
that's not that good of
a business, (chuckles)

00:01:58.320 --> 00:01:59.790
or at least for that year

00:01:59.790 --> 00:02:02.250
they would've obviously
lost a lot of money.

00:02:02.250 --> 00:02:03.750
But the way the insurance companies work

00:02:03.750 --> 00:02:04.583
through it is that

00:02:04.583 --> 00:02:06.330
they're actually insuring
millions of people

00:02:06.330 --> 00:02:08.070
and they're working on percentages.

00:02:08.070 --> 00:02:12.000
So for example, if across
millions of people,

00:02:12.000 --> 00:02:14.040
all of them are paying $200

00:02:14.040 --> 00:02:15.660
and there's a 1% chance

00:02:15.660 --> 00:02:18.600
of having to pay out $10,000,

00:02:18.600 --> 00:02:20.514
well that means on average 1%

00:02:20.514 --> 00:02:23.340
of $10,000 is $100,

00:02:23.340 --> 00:02:25.080
on average, they're gonna be paying

00:02:25.080 --> 00:02:26.746
out about $100 per insured person

00:02:26.746 --> 00:02:28.770
who's just like that,

00:02:28.770 --> 00:02:30.510
and if they're getting $200,

00:02:30.510 --> 00:02:31.650
well then they're going to be

00:02:31.650 --> 00:02:35.520
on average making about a $100 profit.

00:02:35.520 --> 00:02:37.170
People are paying $200,

00:02:37.170 --> 00:02:38.190
that's called the premium,

00:02:38.190 --> 00:02:40.290
what you pay the insurance company,

00:02:40.290 --> 00:02:44.250
and then their actual
statistical cost is $100.

00:02:44.250 --> 00:02:46.020
So that's how they would
actually make money.

00:02:46.020 --> 00:02:48.870
Now, let's say one of these
bad scenarios happens to you,

00:02:48.870 --> 00:02:49.950
your car gets stolen,

00:02:49.950 --> 00:02:51.840
it gets totaled in some way,

00:02:51.840 --> 00:02:53.790
well, then you would make a claim

00:02:53.790 --> 00:02:55.560
to your insurance company,

00:02:55.560 --> 00:02:57.300
usually, someone there would

00:02:57.300 --> 00:02:58.964
then investigate the claim

00:02:58.964 --> 00:03:00.630
if you made a police report

00:03:00.630 --> 00:03:01.740
they would take a look at that,

00:03:01.740 --> 00:03:02.573
they would interview you,

00:03:02.573 --> 00:03:05.310
make sure that you're not
committing insurance fraud,

00:03:05.310 --> 00:03:06.480
which is like, you know,

00:03:06.480 --> 00:03:07.860
you made the car disappear

00:03:07.860 --> 00:03:09.390
but it really didn't disappear.

00:03:09.390 --> 00:03:12.060
Don't do that, highly, highly illegal,

00:03:12.060 --> 00:03:13.830
you will get into trouble for that.

00:03:13.830 --> 00:03:15.630
But then if it's a legitimate claim

00:03:15.630 --> 00:03:18.870
then they will then
make the payout to you.

00:03:18.870 --> 00:03:20.190
So think about insurance,

00:03:20.190 --> 00:03:21.630
but also think about, you know,

00:03:21.630 --> 00:03:24.450
how they're benefiting
and how you can benefit.

00:03:24.450 --> 00:03:25.680
And also try to shop

00:03:25.680 --> 00:03:28.020
around for different types
of insurance policies.

00:03:28.020 --> 00:03:30.600
You'll often see some
pretty dramatic differences

00:03:30.600 --> 00:03:32.280
in the price of the premium,

00:03:32.280 --> 00:03:34.320
that's that $200 a year

00:03:34.320 --> 00:03:35.583
that I just talked about.


Ways to manage financial risk

WEBVTT
Kind: captions
Language: en

00:00:00.870 --> 00:00:02.970
- So let's talk a little
bit about the different ways

00:00:02.970 --> 00:00:04.410
that you can manage risk.

00:00:04.410 --> 00:00:06.630
And it's generally gonna
fall into a few categories.

00:00:06.630 --> 00:00:09.060
You can obviously try to
avoid the risk altogether

00:00:09.060 --> 00:00:10.560
or reduce it.

00:00:10.560 --> 00:00:12.750
You could say, "All
right, that risk is there

00:00:12.750 --> 00:00:14.250
and I'm gonna retain the risk.

00:00:14.250 --> 00:00:15.360
And then how can I manage that?"

00:00:15.360 --> 00:00:18.330
Or you can actually transfer
that risk to someone else.

00:00:18.330 --> 00:00:19.560
And we're gonna talk about all of those.

00:00:19.560 --> 00:00:21.810
So let's just pick a
particular type of risk.

00:00:21.810 --> 00:00:23.790
Let's just say, one risk,

00:00:23.790 --> 00:00:26.010
one financial risk is your loss of income.

00:00:26.010 --> 00:00:27.660
What happens if you lose your job?

00:00:27.660 --> 00:00:28.830
Or if you run a business,

00:00:28.830 --> 00:00:30.420
what happens if the business goes under

00:00:30.420 --> 00:00:33.450
or it has lower income
for some period of time?

00:00:33.450 --> 00:00:35.010
Well, the first strategy is obviously

00:00:35.010 --> 00:00:36.570
to avoid that as much as possible

00:00:36.570 --> 00:00:39.180
or to reduce the probability
of that as much as possible.

00:00:39.180 --> 00:00:42.870
So if you're at a job, try
to perform well at your job

00:00:42.870 --> 00:00:46.650
so if they're firing folks
or if they're doing layoffs,

00:00:46.650 --> 00:00:49.590
you are a crucial employee
that they can't let go.

00:00:49.590 --> 00:00:51.480
That is a good way of avoiding

00:00:51.480 --> 00:00:53.010
or at least reducing your risk.

00:00:53.010 --> 00:00:54.630
You can't completely avoid your risk.

00:00:54.630 --> 00:00:56.280
Things happen in the economy.

00:00:56.280 --> 00:00:57.750
No matter how good you are at work,

00:00:57.750 --> 00:01:01.110
sometimes you can get
fired, you can get laid off.

00:01:01.110 --> 00:01:02.640
So always keep that in mind.

00:01:02.640 --> 00:01:05.970
But obviously, we all wanna
reduce that as much as possible.

00:01:05.970 --> 00:01:07.530
Now that risk is there.

00:01:07.530 --> 00:01:09.030
You're not gonna be able
to completely get it.

00:01:09.030 --> 00:01:10.860
So to some degree, you are going to retain

00:01:10.860 --> 00:01:13.020
some of that financial risk.

00:01:13.020 --> 00:01:15.570
And if you're taking
that financial risk on,

00:01:15.570 --> 00:01:16.860
as we've talked about in the other videos,

00:01:16.860 --> 00:01:21.150
one of the best ways to protect
yourself is by saving money.

00:01:21.150 --> 00:01:22.290
And I would say a combination:

00:01:22.290 --> 00:01:24.570
saving money and living below your means

00:01:24.570 --> 00:01:26.190
or having a very quick way

00:01:26.190 --> 00:01:28.110
of being able to live below your means

00:01:28.110 --> 00:01:31.320
if by chance you were to lose your income.

00:01:31.320 --> 00:01:33.240
Because if you do that,
you have more time.

00:01:33.240 --> 00:01:34.680
You could live off of your savings,

00:01:34.680 --> 00:01:36.450
especially if you don't
spend a lot to live,

00:01:36.450 --> 00:01:39.900
and you have time to
transition to something else.

00:01:39.900 --> 00:01:41.760
Now you can also transfer
the risk to others

00:01:41.760 --> 00:01:45.210
and that's usually through
some form of insurance.

00:01:45.210 --> 00:01:48.240
There is government unemployment benefits,

00:01:48.240 --> 00:01:50.610
but oftentimes that's
not going to be enough

00:01:50.610 --> 00:01:52.560
to cover your expenses.

00:01:52.560 --> 00:01:56.010
And there are other types
of unemployment insurance

00:01:56.010 --> 00:01:57.570
that you might be able to get

00:01:57.570 --> 00:01:59.640
that's a little bit less common

00:01:59.640 --> 00:02:01.740
for people to get unemployment insurance

00:02:01.740 --> 00:02:02.610
above and beyond that.

00:02:02.610 --> 00:02:06.180
So most folks are usually, when
it comes to loss of income,

00:02:06.180 --> 00:02:09.510
let's avoid it or minimize
the chances of that happening,

00:02:09.510 --> 00:02:11.760
but then also create a nest egg.

00:02:11.760 --> 00:02:12.780
There's other forms of risk

00:02:12.780 --> 00:02:15.090
that we've talked about like liability.

00:02:15.090 --> 00:02:16.966
What happens if someone sues you

00:02:16.966 --> 00:02:20.670
because you know there's a car
accident and you're at fault,

00:02:20.670 --> 00:02:23.460
or at least the judge
decides that you're at fault

00:02:23.460 --> 00:02:26.550
and then you owe them a
lot of money in a lawsuit?

00:02:26.550 --> 00:02:28.770
Well, once again, the best thing to do

00:02:28.770 --> 00:02:30.150
is to avoid or reduce.

00:02:30.150 --> 00:02:31.920
Now you can't avoid that risk completely

00:02:31.920 --> 00:02:33.780
unless you're willing to just not travel

00:02:33.780 --> 00:02:35.520
or not drive or anything like that.

00:02:35.520 --> 00:02:39.450
But you can reduce it by
driving safely, conscientiously,

00:02:39.450 --> 00:02:41.760
not texting while you're in the car

00:02:41.760 --> 00:02:44.340
so that you're very
unlikely to be at fault

00:02:44.340 --> 00:02:45.690
if there's any type of accident.

00:02:45.690 --> 00:02:46.920
You are a defensive driver.

00:02:46.920 --> 00:02:49.773
That's always should be
the first line of attack.

00:02:50.640 --> 00:02:51.990
But then on top of that,

00:02:51.990 --> 00:02:55.380
if you could retain some
of that risk, obviously,

00:02:55.380 --> 00:02:59.160
and the best way to manage
that is save money, et cetera,

00:02:59.160 --> 00:03:00.720
so that if something were happen,

00:03:00.720 --> 00:03:03.780
it's not gonna be the end of
the world for you financially.

00:03:03.780 --> 00:03:06.600
And what many folks do
for that type of risk,

00:03:06.600 --> 00:03:07.530
and sometimes by law,

00:03:07.530 --> 00:03:08.730
in fact, in many states you have

00:03:08.730 --> 00:03:10.950
to have liability insurance.

00:03:10.950 --> 00:03:13.770
And so then you are paying
an insurance company

00:03:13.770 --> 00:03:17.490
to transfer some or a lot
of that risk of liability,

00:03:17.490 --> 00:03:21.930
it's usually capped to some
amount, to an insurance company.

00:03:21.930 --> 00:03:23.430
And I recommend that as well,

00:03:23.430 --> 00:03:26.460
especially for things like liability.

00:03:26.460 --> 00:03:28.710
So once again, just
always have that in front.

00:03:28.710 --> 00:03:30.660
Okay, what are my risks?

00:03:30.660 --> 00:03:32.820
Where can I completely avoid them?

00:03:32.820 --> 00:03:34.440
Usually you can't completely avoid them,

00:03:34.440 --> 00:03:36.690
but you can at least
minimize them a little bit

00:03:36.690 --> 00:03:37.620
or reduce them.

00:03:37.620 --> 00:03:40.110
And then above and beyond that,

00:03:40.110 --> 00:03:42.330
since those risks are hopefully
just going to be reduced,

00:03:42.330 --> 00:03:43.350
but they're still there,

00:03:43.350 --> 00:03:44.880
how much do you take it on yourself?

00:03:44.880 --> 00:03:47.580
And to manage that, you probably
need to have some savings

00:03:47.580 --> 00:03:49.080
or how much do you transfer to others?

00:03:49.080 --> 00:03:51.637
And that's probably paying
someone to ensure that,

00:03:51.637 --> 00:03:52.950
"Hey, if that thing happened

00:03:52.950 --> 00:03:55.947
that insurance company's got
my back to a certain degree."