Win With Money: Four Steps to Take Control of Your Finances | James Conole | Skillshare

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Win With Money: Four Steps to Take Control of Your Finances

teacher avatar James Conole, Certified Financial Planner™

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

11 Lessons (59m)
    • 1. Introduction

    • 2. Step 1 - Create a Budget

    • 3. Budget Project (Part 1)

    • 4. Budget Project (Part 2)

    • 5. Step 2 - Pay Off Debt

    • 6. Pay Off Debt Project

    • 7. Step 3 - Build an Emergency Fund

    • 8. Step 4 - Build Wealth (Why Invest)

    • 9. Step 4 - Build Wealth (How to Invest)

    • 10. Step 4 - Build Wealth (Where to Invest)

    • 11. Conclusion

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About This Class

Most people feel out of control with their money. They have the intelligence and the drive, but they just don't know where to start when it comes to making smart decisions with their money. 

This class provides a simple framework to help people get organized, create a plan, and take control over their financial future. Students can expect to learn:

1. How to create a budget and actually stick to it.

2. The best strategies for paying off debt and staying out of debt. 

3. How to create an emergency fund and why it's so important.

4. How to build wealth for retirement and more. 

Meet Your Teacher

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James Conole

Certified Financial Planner™


James Conole is a Certified Financial Planner(TM), holds an MBA in Finance, and is the Founder of Root Financial Partners, a San Diego-based financial planning firm. After providing financial advice to thousands of people from all different financial backgrounds, James discovered a similarity between those who succeed and those who don't. His mission is to help people approach money in a way that allows them to succeed and enjoy the freedom that comes with that success.

See full profile

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1. Introduction: hi, everyone, and welcome to my class called Win with money. Four steps to take control over your finances. I'm glad you're here in my hope is it will learn a lot from this course. So why does this course matter? Quite simply, it matters because you have goals and those goals matter. Financial planning isn't all about money. It's about pursuing what's important to you. Unfortunately, most people fail when it comes to accomplishing their goals simply because they don't have a clear path. They don't have well defined steps of what it takes to get where they want to go. So my goal in teaching this class is that you'll walk away feeling like you know exactly what it is that you need to dio to take control of your finances in accomplish what's important to you. To do that, we're gonna talk about four steps and we're gonna walk through them together. The, I believe, are crucial for you taking control of your money. These four steps are number one learning to take control of your monthly cash flow Number two, how to pay off debt number three, how to build an emergency fund. And then finally number four. How to build Wealth. A little bit of background about me, as I mentioned, my name is James Connell. I'm a certified financial planner and I'm the founder of the financial planning company called Route Financial Partners. And after working with thousands of people, I've seen that those that succeed are those that have a clearly defined path to get to where they want to go. That's my hope for you in this course is that by the end of it you will have that clear path to get where you're going. With that said, let's jump right in. 2. Step 1 - Create a Budget: now, this is probably the most important lesson of isn't higher course, because if you can't get control of your budget, the nothing else really matters. If you can't get control of your budget, you cannot pay off debt. You can't save up an emergency fund. You can't save for retirement. You can't save to send kids to college without your budget, everything else starts to fall apart. So that's why I want you to focus on making this part of the course matter and all starts learning on a budget. Now. Budget typically has a bad connotation. We hear budget and we think restriction, We think, being limited, we think, having to live on beans and rice. But that's not what a budget ISS. In fact, John Maxwell said it best when he said a budget is telling your money what to Dio. Instead of wondering where it went, I'll say that again. Ah, budget is simply telling your money. What to Dio Instead of wondering where it went, you see a budget doesn't limit you. You can budget for as much as you'd like in terms of spending, entertainment, eating out whatever it may be. A budget is simply giving every dollar a plan. Now, why does it matter so much that we give each dollar a plant or tell each dollar where to go ? Well, consider this. The median American household income is $60,000 per year. That may not sound like a lot of money in one year, but consider this. You work in that same job for 30 years, $1.8 million will have passed through your hands, and that's without even considering raises. The most powerful wealth building tool you have is your income. And if all this money is gonna pass through our hands over the course of our working lifetime, we better have a plan in place for what to do with it. Without a budget, you could make a $1,000,000 per year. You be like the Titanic was no rudder. Ah, Budget serves as your rudder to steer you in the right direction. It allows you to pursue and accomplish your goals. So if you want to have ultimate control of your finances, you must start by taking control of your budget. A budget again is you telling your money where to go. So here's the steps you can take to create a budget that works for you, and we're gonna go over and exercise together in the next module. But in general, budget improperly has four main steps. Number one. You start by writing out all of your monthly income. This may be your income. It could be your spouse's income. It could be freelance work. It could be a second job. It could be a pension. Social Security, anything. Any income you have start by. Totaling that up, that's step number one. Step number two is riding out your monthly expenses. Now. This includes things like fixed expenses such as your rent or your mortgage, your utilities, your bills, your your cell phone bill. But dont forget also include nonrecurring expenses, things that may not happen every month. Think Christmas gifts. Think a vacation fund. Think other things of that nature, so you need to write out your monthly expenses. Then step number three is to make sure that your income minus your expenses equals exactly zero. If you have more expenses than income, well, there's a shortfall. You're gonna need to find a way to make things work or either spend less or make more. If you get to the end of this exercise and you have access income above your expenses, that's not necessarily a good thing. I don't think of a surplus. Have one think that surpluses simply unbudgeted dollars. If you have extra money left over then of your budget, your budget is again your way of telling the extra money where to go could be savings. It could be spending. It could be anything, but you must tell it where to go. And then finally, number four. You need to track your expenses throughout the month. Too many budgets fail because people simply write down where they want their expenses to go , but they don't actually track what's happening throughout the month. So those are the four main steps that every successful budget is going toe have. Now, let's jump into an exercise together to see how this actually happens in practice. 3. Budget Project (Part 1): Okay, so we know that there's four steps to the budgeting process. Number one, write down your income number two right at your expenses. Number three. Ensure that income minus expenses equals zero or the number four. Track your progress. So now what we're gonna do is we're actually gonna dive into an example, and this is gonna be a first project to complete this on your own. But I'm gonna show you an example what it looks like to actually complete this process. So what we're gonna do is we're gonna take this spreadsheet right here. It's called your budget worksheet. And again, step number one is totaling up all of your cake. Home income in a month. I keep mine. This is income after taxes. So what you're actually receiving in your bank account. So if you are working in your spouses working and maybe there's a second job, your combined after tax income is 5000. I'm going to enter that in this box here. Step number one is done. Now. Step number two is to add up all expenses. And before doing that, I'm gonna point out three different columns we have here in this budget worksheets. The first column is a list of any possible expenses that you may have. Now they're being maybe expenses on here that are unaccounted for, and you can just ride over any of these, um, these expensive I have listed, but in general, this is going to cover all of your expenses. Column number two is the Budgeted Cola. I mean, if you have an expense that corresponds to something in one of this, the expense columns, you're gonna write the amount that you like the budget in this column for budgeted. And then finally, the amount remaining shows how much you have left to budget once you year mark a certain amount for each expense. So let's look at an example. Let's say maybe you're saving a few 100 bucks for retirement. Let's assume that on top about you've got rent and what you start to see is starting with this $5000 when you indicate how much you've budgeted. So 300 here. What that does is it drops the amount remaining by $300 so now we don't have 5000 left to work with. We have 4700 left to work with And when we look at rent of 1500 now, after spending that or allocating that towards rent, we have 3200 left to work with. We came. So what you're gonna dio is you're gonna use this and customize it to your unique situation . We're going here, and I'm just gonna add some expenses in these may or may not even be close to being accurate understandings for illustration purposes. And what you'll Bill is your Adam, all of your monthly expenses. And when you get to the bottom, the goal is going to be making total income minus total expenses equal zero. Now, this example, of course, I haven't no, all the way through this work shapes. There's still $2710 left over. What you would do is if there's an excess. That money is simply dollars aren't accounted for yet. So you need to go back in and tell your budget where you're gonna spend about money and it's completely up to you. But at the end, today, you need to ensure this last amount goes zero and you may get to a worksheet that looks like this. I mean, is This is an example. Here's that 5000 just looked at that. Say you've allocated that among your different expenses. Wonderful. You've you've gone through your bank statements, your credit card statements, whatever it is you're actually showing or your budgets actually reflecting how much you actually spend? Well, sometimes you may get to the bottom. Look, your income, your expenses and see that there's a shortfall. Now, this is not a good place to be. What this means is you're spending more than you're earning. Typically, how that happens is you put money on a credit card so you can spend it. You don't necessarily have the income to pay that off on time. So what you need to do in this situation is, if you have a shortfall here, you can do one of two things. You can work mawr to increase your income, or if you can't do that or prefer not to do that. What you do is you start going through your expenses to see where you can potentially start saving money. Maybe you don't need to spend $600 eating out each month. Let's maybe drop that to $300. Okay, maybe you don't need to spend as much as concluding until you get your budged in orders. Got back of 50 and what you'll see is at the bottom. Now you're coming a lot closer to getting this to zero out. So now, again, this is your project, and this is going to complete, or this is going to take you through steps one through three in step one is writing out your total take home income. Step number two is listing out your expenses. What you're doing here, Step number three is you are going to tweak and adjust and work on your budget until this remaining amount or your income minus your expenses equals zero. Now, with this project, I want you to again go through this on your own. If you want to submit your budget to me for feedback or have questions, please feel free to reach out. But steps one through 33 the budging process or taking care of here. The next module is going to deal a step for which is once you've done this. How do you effectively track this throughout the month 4. Budget Project (Part 2): all right, so we just look at steps one through three in the prior video, and September 1, as we mentioned, is at a pure income step. Number two is out of all of your expenses, and step number three is to ensure that income minus expenses equals zero. Now, here's why. I'm doing Step four of the budgeting process in a different module. Steps one through three are all about the math. Can you add up your expenses? Can you add up your income? Can you make sure that one minus other equals zero? And that's great. And if we could make it work on paper, then steps one through three are accomplished. Step number four, however, is different. Step number four isn't just about making this work on paper. It's about making it work for your specific situation, actually becoming a reality because here's our challenge and I'm gonna take you back to an example to illustrate this. Here's the take home income. Er, Here's the budget, I should say of someone who's gone to this process, and they've made. They're income months. Their expenses equal zero. So we go through here, we see they've itemized all their expenses. They're looking at everything as you get to the bottom. What you see is income minus expenses equals zero. Beautiful parts one through three of the budgeting process are done. Perfect. Now here's a challenge. Many people can get this to work on paper, but actually implementing it in their day to day lives is difficult. And this is why, if you look at an expense, let's taken easy one like rent, for example, that $1500 in this example isn't going to change month month, except for maybe annual increases every now and then $1500 this month. It's going to $1500 next month in the month after. That's very easy to budget for other expenses, however, eating out groceries, clothing. These are areas where it's very easy to overspend. So just because we were right $400 on our budget doesn't mean that's actually going to be what we spent. So Step number four is to track this effectively throughout the month. Now what many people do is they'll download an app. This may be mint dot com, and maybe you need a budget. It may be something else. No include some of these links in the, um, we'll include some of these links for you to click on just to test on your own. And what these absolutely to do is as you link up a credit card or link up a debit card, they'll actually track how much you've spent on groceries throughout the month. Or they'll track how much you've spent on restaurants throughout the month. That works great if you have the discipline to stop eating out or stop spending my neck money on clothing or stop going out once you've hit your max. For others, though, myself included, I have a difficult time tracking my spending when I can simply spend more by just swiping a credit card. That's why, for categories that I personally intend to overspend in, which again tends to be eating out tends to be entertainment tends to be doing things with friends. I will go to the bank and beginning of each month, and if I want to spend $200 on dining out, and I will physically withdraw $200 of cash and put it in an envelope, and if I want to spend $150 that month. Then I will physically withdraw $150 put it in a clothing on. Look, here is the magic of that as I'm getting through the month. If I'm 20 days into the month and I've already Spohn through my entire $200 restaurant budget, there's no more cash left to spend. I must either wait until the beginning of the next month to go out to eat again, or I have to take that money from somewhere else, maybe clothing, but what it doesn't allow me to do it doesn't allow me to simply swipe a credit card to spend more. So I encourage you to understand and really know yourself on what works best for you. If you're the type that can simply use an app or use a spreadsheet to track your expenses through the month, and once you've spent your limit, you stop Great. If you're anything like me, then what you need to dio is you need to understand what expenses you overspend on. Typically, it's dying out its shopping. It's going out with friends. These areas are where it's easy to overspend. Identify those areas for you and go to the bank each month and pull out just nothing cash to cover those expenses. Put cash in separate on looks for each expense. And that way you're preventing yourself from overspending, because when that cash is gone, it's gone. You can't simply swipe a card to go buy another piece of clothing or go by, go out again to eat, so use it works for you. What works for me is the cash envelope system. What works for others is tracking their expenses in, ah, budgeting app. But the end of the day step number four is very important because you can have the best looking budget on paper, but if you're not actually tracking it, it's not gonna do you any good. 5. Step 2 - Pay Off Debt: one of the keys to long term financial success is paying off debt. In fact, a survey of the Forbes 400 which is the 400 wealthiest people in America. A full 75% of these respondents said that one of the keys to building long term financial success is getting out and staying out of that. So either take it from me or take it from the wealthiest people in the world. But one of the most important things you can dio to set yourself up for success is pay off your debt. And that's why the second step in our course on how to win with money is to pay off all non mortgage debt. Now, why not your mortgage? Well, number one, your mortgages for your home. Your home is typically an appreciating asset, which means that it goes up in value and number two. It provides your utility and that it provides you a place to live and you're eventually gonna pay after home. But it's usually not a priority to pay it off before accomplishing some other goals. First, your credit card, however, your car loan, your personal loans. These are all the types of debts that should be paid off a soon as possible. And the reason for that is if you were to look at your monthly budget, my guess is a pretty significant amount of your take home pay. If you're like most Americans, goes to pay down debt. Now let's illustrate this. Let's assume that you have an unexpected medical expense, and let's also assume that extends cost $5000. So you got this $5000 medical expense, but you don't have an emergency fund, and we're gonna cover what this means. Next last. There's no emergency fund, which means you charge the entire expense on your credit card. You pay 18.9% interest on that debt, which is pretty normal for credit card interest rate in the minimum payment because you can't afford to make the full payment is $183 per month. Now look what happens when you do this. The total cost ends up being $6771 which is a combination of the $5000 you paid for the medical expense on top of $1771 an interest that you'll pay to the credit card company. On top of that, this is why getting out of debt is so important when you have debt, your pain interest to other people besides yourself. And if we can stop paying that interest to the credit card company or to the bank or to ever painted, too, that's money that we could save. Think of what you could do with that $1771. You could put that into your emergency fund. You could say for a car you could save for retirement. There's a lot of things you could dio other than paying that an interest. Now some people ask what's the best way to pay down debt? And they think that the best way is probably to start with your highest interest rate debt First. Mathematically, this makes sense. You want to pay down high interest rate debt first, so you start saving money. But I actually disagree with this. See, I believe that success in anything is 80% behavioral and only 20% head knowledge and success and finance is no different. And what's more rewarding then the feeling that comes with pain. Something off for accomplishing something. See, we want to reward good behavior. We want to reward the progress that you're gonna feel as you move forward. So, in my opinion, the best way to pay down debt is toe lime of your debts in order from smallest to largest start paint on the smallest debt first. And then when you pay that off, you're gonna feel a sense of progress and mo mt and you're gonna take up progress into the second debt. You're gonna pay a second debt off, and you're gonna take that progress into the third debt and so on and so forth. So that's why step number two and how to win with money is pay off all debt using the debt snowball. So the next step organ or the next module, I should say we can actually jump into an exercise together to illustrate how this is done . 6. Pay Off Debt Project: Okay, So this is the second project of this course, and what we're gonna do now is we're gonna walk through how to use the debt snowball together. So, as you can see on this worksheet is a very simple worksheet. And there's four columns and as simple is this. Maybe this could be very powerful when used effectively. So let me walk you through it real quick. The first column is where you list your debts. So this could be a credit card. It could be a student loan. It could be a personal loan. It could be anything that's not your mortgage. And that's what you list in this column. The total pay off balance is where you list the remaining amount left to be paid off on each debt. So that goes in this column that corresponds with each of your debts you've listed here. Minimum payment is the absolute minimum that you could pay on each debt while still remaining current and not falling behind or delinquent on your loan payments. We'll discuss new payment in just a second, but I want you to keep these 1st 3 columns in mind and remember, you start by listing your debts and order from smallest the largest. So a small step would go first. Second, small step to go second. So one and so forth, let's walk through an example. Let's say we have these debts listed out, so this individual has a visa credit card. They have an American Express credit card, a car loan in a student loan, and they've done this right. As you can see, they have less to these deaths in order from smallest the Visa credit card all the way down toe largest with a student loan again. No, we haven't necessarily looked at interest rate. We're not paying off the highest interest rate that first were simply starting with the smallest debt first. And here's the minimum payment on each of these debts, and so the total minimum payment is $695 per month. So that's what you have to pay it a minimum in order to remain current with these debts. But now let's assume that this individual goes through his or her budget, and let's say they have an extra $500. They found they could apply for pain up, that they know how important it is to be debt free. So they've really screwed, scrounge and scrapped together 500 x dollars per month. Here's what they're gonna dio. They're going to take this 500 and they're going to apply it on top of the minimum payment of $45. So the new payment for the Visa credit card is in the $545 per month. Well, what you see is that $545 it's only gonna take a couple three of those payments to really fully pay off the visa credit card. So that's great. What that means is, this individual is gonna have this court knocked out in a couple months and they're gonna take that moment, um, into the second debt. So this card, two months later, is done Beautiful. So now when that these has paid off The American Express, which has a minimum payment of $60 Well, it's not just $60 you pay now, but it's 60 plus the extra 500 plus the 45 that was going to pay down the visa. So now all the sudden the minimum payment is $605. Now that's gonna pay off for $4000. Balance a lot quicker than just a $60 payment would be or would pay it off in. So they're gonna pay that for a few months and as soon as that's paid off, now they have that $605 plus the $290 on the car loan, which means they can now pay $895 per month. We get in this car loan paid off. And as you can see, what this does is now you're applying a lot more dollars to each loan payment, and you're feeling a sense of progress. The visa card was paid off in two or three months, and that feels good box check. Now apply that moment into the American Express. Wonderful. Then applied to the car loan didn't apply to the student loan. And before you know it, your debts are going to be paid off. So now this is how you use the debt. Snowball worksheet. You each have one in your course you can complete for your own your own specific situation . If you have questions, feel free to contact me directly or post this and the project section of the course so we can go through it together. 7. Step 3 - Build an Emergency Fund: OK, now it's time to start Step three. So just a quick summary of where we've been so far Step number one was. Take control of your monthly cash flow or take control of your budget again. This is crucial because if you can't get control over your budget, then steps 23 and four are going to be much more difficult to accomplish. So Step one was take control of your monthly cash flow. Step two was pay off all non mortgage debt. Now, once you're debt free, apart from the mortgage, you're gonna feel like you got a very big race instead of paying money to the bank or paying money to the credit card companies and interest. Now that's money that you actually get to save for yourself. And that's what brings us to step number three, which is build up on emergency fund. So let's first talk about why we need an emergency fund quite honestly. And quite obviously, because emergencies happen, your car is going to go out. The hot water heater is going to burst. At some point, the kids are going to need braces. Whatever it may be, there are unexpected events that happen and you need an emergency fund to pay for them. Because if you don't have an emergency fund, you need to go into credit card debt or if you need to pay an unexpected expense. What we typically dio is swipe it on the credit card, and then we pay credit card interest. So an emergency fund prevents us from going into credit card debt, because instead of swiping our card to pay for an emergency, you have cash set aside to do so. It also prevents us from liquidating our retirement accounts. So when you liquidate a retirement account to pay for an unexpected expense, you're gonna pay taxes and you're typically going to pay penalties. So we want to avoid going into credit card debt. We also want to avoid liquidating retirement accounts to pay for an emergency. So that's why we wanted an emergency fund. And now we want talk about What is it? Well, it's a cash savings account and think of it as a barrier between you and your monthly expenses and credit cards or liquidating a retirement accounts like we just talked about. And when I'm when I say that, what I'm saying is it's insurance. It's not an investment. People say I don't want to have cash sitting around, not growing for me And I tell them, Think of this cash as an insurance policy that's going to prevent you from going into debt . It's going to prevent you from liquidating retirement accounts of the wrong kind. So, no, it's not gonna grow for you. But it's serving of even more important purpose. It's protecting everything else that you're doing from an investment standpoint and what it is is. It's 3 to 6 months of survival living expenses. So I want you to put 3 to 6 months of living expenses set aside into a cash savings account that you are not to touch unless there's an emergency. Typically, if you have a stable job or you know that if you were to lose your job, you could get another one Before too long. I would recommend you have three months of living expenses set aside. But if you have a more volatile job or you're not positive, you could get another one. If you lose your job today, then I would recommend somewhere closer to six months of living expenses for your emergency fund and notice that I say survival living expenses. If you were to look your monthly budget, chances are good that you maybe saving some for retirement. You might be saving some for a vacation or entertainment or dining out. I want you to look at your budget, though, and say, If you were to lose your job, what's the bare minimum that you could live on? It probably not saving for retirement. At that point, you're probably not saving and eating out as much or going out as much. So what's the bare minimum needed just to get by? That is a survival living expense month. So use 3 to 6 months of that number to determine how much you should have in your emergency fund now lasting. There's a difference between an emergency fund and a sinking fund, and this is important. What's an emergency for, well, emergencies? Again, it's very obvious. What's not an emergency, though, is you build up your emergency fund and also you need a new car. While there's cash in the emergency fund, Why don't we access that? That's not the way to think about this. The emergency fund should Onley be for emergencies. A sinking fund is where you might save for things like a car purchase or a vacation or gift fund is maybe for birthday gifts or Christmas gifts. So, in other words, these air those non recurring expenses. I mean, they don't happen every month, but when they do come around, you need to have money saved up for them. So rather than building up your emergency fund and then seeing there's cash there and using it for a vacation or car purchase, I want you to actually open up separate accounts at your bank for a car purchase fund, vacation funder, gift fund and what you can do for examples. If you want to go on a $6000 vacation in one year, what you can do is open up a vacation sinking fund. Put $500 per month into it so that by the time the vacation comes around, you have that 6000 saved up over the course of the next 12 months. That's the difference between a sinking fund, an emergency fund. But the emergency fund is not to be used except for emergency. Once you have the emergency fund built up. You're gonna be in a great position toward your debt free. You have fully funded emergency fund, and next it's time to move on to step four. 8. Step 4 - Build Wealth (Why Invest): all right, well, let's quickly review where we've been so far. Step number one and winning with money is creating a budget so that you can take control of your monthly cash plant again. You want every dollar to have a name or every dollar to have a plan in your monthly budget . Doing so is foundational for steps two through four to come to reality. So Step one is create a budget. Step two is pay off all non mortgage debt. What this does is this frees up money in your budget. So instead of painted credit card company or the banks, that money can be used for your own purposes. To save and invest. Step Number three is to create an emergency fund of 3 to 6 months of emergency living expenses. The reason we do this is to prevent ourselves from going back into debt or to prevent ourselves from having to pull money from retirement accounts. When there's an emergency that happens so steps one through three are kind of foundational . They build the platform from which we can move forward. And now that those air don't we get to talk about the fun part which is how do we build wealth and invest to create the lifestyle that we really want for ourselves So I could tell you why it's important to invest, but I think it be more powerful. Toe actually illustrate this through a story. So let's take a look at the story of two friends we have Tom and John and both of them begin working at the age of 20. Now Tom's ambitious and he decides to start investing $5000 per year at age 20. He invests for 10 years, and then he doesn't invest another dime after age 30. So he's put in a total of $50,000 to his investment accounts, and that's it. John, on the other hand, weights until age 30 to start investing, and at that point, he then begins investing $5000 per year. He does this, though, for 30 years, so he puts in a total of $150,000 to his investment accounts. Now both of their investments grow by 10% per year. So who's going toe have more money by age 60? Well, obviously it's going to be John right? John's been in three times as much to his investments as Tom has. Of course, he's gonna come out on talk wrong. Tom actually has more money at this point. You see, if John was to invest $150,000 combined. So 5000 per year for 30 years you would have $822,000 by age 60 if he grew at 10% per year . That's not a bad return of that 8 22 Only 150,000 is what he invested personally. The rest is growth. But look at Tom Tom, who Onley invested for 10 years and Onley invested a combined $50,000 would have just under $1.4 million by age 60. Wow, Now, the reason for that is Tom has something on a side that John didn't. And that was kind Tom started much earlier, which gave time for his investments to compound. Now, just because you're not 20 doesn't mean this doesn't pertain to you. It just shows why we invest. And it shows the power of starting as early as possible. So if you're 30 or 40 or 50 or 60 don't take this as saying You can't invest. This is just showing why you need to start as soon as you possibly can. Assuming, of course, steps one through three and this lesson have already been taken care of. Now, where do we get 10% per year? Of course, this looks great on paper, but just because I assume that Tom goes at 10% in the jungles of 10% doesn't mean that's actually gonna happen. So where do these returns come from? Well, the S and P 500 index, which is simply an index or a way of measuring the performance of the 500 biggest companies in America, has averaged a return of about 10% per year over the past 90 years. Now, that doesn't mean you get 10% every single year. You, Some years you're gonna be up 20 or 30% and some years you're going to be down 20 or 30%. But on average, this index has returned about 10% per year. Now let's see what would happen if you grew up just half of that. So if instead growing at 10% you only group 5% does that just mean your Indian balance would be cut in half. Let's look an example. If you started 35 say 5000 per year until age 65 you saved a total of 150,000 and that grows toe $1.35 million with a 10% annual growth rate. If he only grew by 5% per year, it doesn't just cut your Indian balance in half. It cuts it down much more than that. Now your balance only grows to $451,000 meaning you put the same amount in 150,000 total. In both cases and both cases, your money grew for you, which is very good. But I want this to illustrate the importance of two things. Number one. I want you to see why we invest. We invest because when we do so smartly, imprudently our money grows for us. So when it comes time to retire, time to purchase that home or time to do whatever you want to dio, your money has grown for you, so that's the importance of investing. But number two I want you to see the difference the different growth rates make. Now, I can't guarantee anyone will get 10% or you in 5%. I'm simple using numbers that unmanaged index will talk about that. And second, unmanaged index has achieved historically. And I want you to see the difference that it makes when you grow it. One rate of return over another. So this is great. This shows you why we need to invest. But now let's talk about the practical side of this. How do we actually start investing? And that's what we're gonna talk about in the next lesson. 9. Step 4 - Build Wealth (How to Invest): We just looked at why we invest. And the reason we invest, of course, is because if invested correctly, improperly over time, the money that we put in will grow for us. So our money is working for us while it's invested. Now what we need to talk about is how do we actually go about doing that? We see that investing is important. We know that the rate of return that we get on our investments matters. So now let's talk about the practical steps that we can take to begin investing before doing that, though I think would be helpful to define a few key terms you like. We hear a lot when talking about investment. You may hear stocks, bonds, mutual funds, and we want to start by defining what does that actually mean? So that you know how you can use it in your own investment portfolio. So it's buying to start by defining what is a stock. Quite simply, a stock is when you own a publicly traded company. So if you own stock in Apple or you hear about people only in stock in Nike or Starbucks or McDonald's, they're literally an owner of that company. Now it's them and millions of other people who own that company with them. But what that means is that the company doesn't necessarily owe you anything. Nike doesn't owe you anything. McDonalds doesn't owe you anything. But if the value of those companies goes up, then the value of your stock goes up in your investment goes up so it offers higher growth potential because as these companies do well, you're going to participate. Now when the flip side, if these companies go out of business or simply don't do as well as they were expected to dio, the value of your stock could stay flat or even go down in value. So a stocks you have higher return potential because you're owning companies that conduce as well as they could possibly dio. But you also have higher risk because those companies could potentially go to business or just not do well. So just think of owning stock is the same as owning a company, and you participate in the performance of that company. Now a bond is a little bit different. It's actually very different when you have a bond. Instead of owning a company, you are lending your money to a company or to a government. Now what you're doing is you lend your money to that company or government in exchange for a promise on their end that they will repay you your money at the end of some term, maybe five years, 10 years, 20 years. So you'll you will get your money returned to you, and they also pay you and interest rate along the way. So, for example, you may lend $1000 to Coca Cola, and they're gonna pay you a 5% interest rate for 10 years. That would mean you own a bond with Coca Cola. Now, at the end of those 10 years, they're gonna pay you your $1000 back, and along the way, each year they're gonna pay you $50 in interest. So with that, there's lower return potential because even if Coca Cola stock price goes through the roof or does very very well, you don't participate in that. You're just getting the interest that they were promised to you and then repayment of your principal so you can't quite do as well as you could potentially do it. Stocks. But there's generally lower risk and bonds as well. This is true because even though the stock price of Coca Cola tanks, even if Coca Cola doesn't do as well as people thought it would, as long as you're a bondholder they still are obligated to pay you an interest rate each and every year or every six months, or how it's structured until your bond is dio. So lower. Return lower risk and, in general, think stocks of higher return potential. Higher risk bonds. Lower return potential, but lower risk. Now That brings us to the third term of what is a mutual fund. Now let's is let's go back a couple sides and let's assume you want to invest in stocks. You're young and you're comfortable with the risk of you. You want to maximize your return potential to be truly diversified or to spread out your risk, you might need to own hundreds or even thousands of different stocks. Now you likely don't have the time. The energy or the resource is to go research the hundreds of thousands of different stocks you should own. So what you may do instead is you might purchase what's called a mutual fund. And with a mutual fund, you may put some money into this mutual fund. Uh, people around the world may put money in this mutual fund. You are essentially mutually funding an account or a pooled investment, and that investment has a portfolio manager that then goes out and decides to buy whatever stocks or bonds here she made by. So instead of you making the decision to purchase Apple verse, Microsoft First, Nike burst, Facebook, first Samsung or anything else, you have a professional mutual fund manager, along with a team of analysts who are making those decisions for you. So when you own one mutual fund, you're getting diversification to hundreds of thousands of different stocks or bonds. If you own just one stalker, one bond and that company goes out of business, you're out of luck. You just lost your money. But if you own just one mutual fund assuming it's a good mutual fund with good management, you may have exposure to 1000 different companies within just one fund. So it's a way to diversify or spread out your risk by owning a whole bunch of different companies without having to go purchase them individually by yourself. On top of that, it provides professional management. So again, instead of you trying to research what stocks to buy our bonds to buy, you have a manager who is doing that for you and the U oftentimes here index fund Roast Mutual fund. An index fund is just a type of mutual fund, but in general, mutual fund has a manager that's trying to outperform the market by picking better stocks or bonds or by picking them at the right time. Whereas an index fund says we're not trying to outperform the market, we're just trying to capture whatever returns the markets will generate on their own. So an index fund has lower fees than a mutual fund does. And often times I recommend that people use index funds with their investment because statistics show that index funds tend to be mutual funds over time. So if you hear index fund a mutual fund, just know that index fund is a type of mutual fund typically lower and cost and typically, at least historically, when the stats show tend to outperform the mutual funds just because they're less expensive . So this gives us a breakdown. We just defined a few key terms. And now what I want to dio is I wanna walk through. How do we apply this knowledge so that we can achieve strong long term investment results? So what you see in front of you is a lot of colors. And don't be overwhelmed. I'm gonna explain exactly what this is right now, But what this is showing you is from 1999 2 2013 This shows the performance of some of the major asset classes that you could invest in. So an asset class, like I said, is just something that you can invest in. So if you own emerging markets, asset class investments, you're owning stocks and companies that are located, and in countries like Brazil or Russia or India or China, if you own large growth company or an asset class with the owns large growth companies, then you're only the large growth companies in America. So think Facebook or think Amazon or apple. Some of those companies that we all know and love those air considered large growth companies. E V stands for Europe, Australasia and the Far East. So this is owning companies that are located internationally. So not in the US Yeah, he s and P 500 large value cos I want to get down to five year government bonds. So we just talked about the difference between stocks and bonds. This asset class is represented by owning hundreds of different bonds of government bonds and then finally reads stands for real estate investment Trust. So owning companies, the own real estate now a couple things to point out. These, with the exception of bonds, the five year government bonds from the orange. These are all asset classes, the own stocks. They just have different types of stocks. Each asset class owns, and I want to illustrate something for you. As you can see from this chart, there's no there's no pattern. There's no trends. There's no way to predict what any asset class is going to do in any given your based on the performance of the prior year. But what we do know is long term in this far right hand column here, this shows the average return of each of these asset classes. Over time, we see that some of them tend to outperform others over time, and now this is just 14 years of history. This would look a little bit different if we expanded this to 40 50 60 plus years. But I want to take on emerging markets real quick. Emerging markets again is owning. Stocks are only in an asset class to own stocks and companies like Brazil, Russia, India or China. It had a 10.9% rate of return during this time period. That's a very strong growth rate, and so a lot of people say That's great. I want to put all my money in emerging markets. But take a look at the experience that you had to go through in order to achieve that you got 10.9% on average of these 14 years, but it started by returning 66 a half percent in your first year of owning it. So you love the emerging markets in 1999 but the very next year you lose money, you're down 31% then a second year in a row, you're down over 2.5% then you're down over 6% anything Ingush. This investment, those great in 1999 now kind of stakes. I've lost money three years in a row on a lot of people tend to sell their investments right here. Well, the next year, emerging markets are up over 55% up 25% up. 34 up. 32 up. 39 They go on an incredible five year run. People warm up to them again and buy them at the top. And then 2008 happens, and they get absolutely hammered, losing over 53% of their value. Once again, people are scared. People sell here, and then they miss out on the recovery where they're up 78% up, 19 down, 18 up. 18 down 2.5%. And if you could simply hang on and tune out the noise of the media in the news telling you to sell this investment, you had an average return of 10.9% for 14 years. Now, if you get that rate of return for 14 years, you quadruple your money without adding another dollar to it. So what? You started with $100,000 in 1999 it crude over $400,000. 14 years later, But it wasn't a fun experience, meaning there. What did it didn't feel good along the way. So this is the point. I want to illustrate that you can get strong long term returns, but only the right types of growth investments. But understand that there's going to be years where it's very difficult to stomach some of the ups and downs in the market. So when you're building a portfolio, what you want to dio is you want to give yourself exposure or you want to own all these different types of asset classes, depending on what your goals are. So I would never say own just emerging markets our own just small value companies. You want to spread your money out these different types of asset classes with the understanding that risk and return are related. So the more growth that you want to get, the more ups and downs of more uncertainty you're gonna have to go through in the short run . Now, where mutual funds and index funds comes into play is in your portfolio. You can use a mutual fund, the owns emerging markets, or you can own an index fund that owns emerging markets you can get an index fund that owns the companies in the S and P 500 you can get an index fund that owns small value companies . So your job as an investor is to understand how much risk or how much uncertainty you're willing to accept. And then once you know that on the types of investments that are going to give you strong long term returns, but do so in a way that you're comfortable with on a point out, one more thing we talked about bonds and the difference between stocks and bonds. Well, in this chart, I want to take you to the year 2008. Look at the types of returns that many of these asset classes went through. In that crazy year. The S and P 500 index was down 37%. The thesis International investments as a whole were down over 43%. Small companies were down 43%. Emerging markets were down 53%. There's really nowhere to hide in a year like that. One of the places that people go for safety or preservation of what they have is they own bonds, bonds in that year, five year government bonds were up 13%. Look at 4000 to the U. S. Markets at least were down 9% down 12% down 22%. While bonds were up, up and up. So back to our point earlier bonds tend to be a safer, more conservative investment. But the downside. The bonds is historically three out of four years. Stock markets go up and look at what investment is typically at the bottom. So as an investor you need to understand yourself and understand how much risk you're comfortable taking. And then, based on that information, you need to diversify your portfolio between stocks and bonds so that you can grow your money over time. But do so in a way that you're comfortable with. Now there's different ways to do this. You know, you as an investor may love doing this, and you can research the mutual funds and stocks the bonds. You want tone, and that's great. If you want to put that kind of effort into it. If you're saying, gosh, this is just overwhelming, I'd rather have someone do this for me. I'd rather use a tool or service that can do this. I'm gonna put a couple links in the notes to a company called Betterment or company called Wealthfront. These types of companies, you essentially tell them how much risk you're comfortable taking, and they'll help to design a portfolio for you based on your feedback. That will be a well diversified portfolio to maximize growth potential based on your level of risk. Other people want to work with an advisor, and that's of course, very good thing to do as well. Just make sure that if you're working with an advisor, your advisor is a fiduciary, which means they put in your best interests ahead of their own. And by law, they're required to do that so many different ways to construct a portfolio. But I want this lesson to give you the foundations to know what goes in to proper portfolio construction and investing 10. Step 4 - Build Wealth (Where to Invest): Surely by now we've covered everything there is to know about investing, right? Well, not quite. We've covered why we invest. We've covered why your rate of return matters. We've talked about the different asset classes or how to diversify your portfolio. And the last step to this is now talking about where you actually put your money for it to grow for you. So there's different types of accounts you may have heard off. There's 401 K There's IR razors, raw fire raisers, brokerage accounts. So the last step is I want to explain what each of these accounts means and where is best to invest your money. So let's start with an individual account with an individual account. It is exactly what it sounds like. You can open up an account in your name, and you can invest as much as you like it. Now let's go back to our example and see how this applies from a tax perspective. So let's now assume you invest 50,000 or $5000 per year for 30 years, and you just do this in an individual account. Let's assume now you grow 8% per year. What that means is that your own contributions to this account would be 150,000 and the Indian account value would be $566,000 mean you're contributions grew from 150 that you put in to over $566,000. Pretty good. Here's the catch, though. Of that amount, $416,000 is growth. And if you know anything about the I. R. S, they want to ensure that any time you're earning money, they're getting a piece of it. So the cha are the challenged or the problem. It may be a good problem to have, but if you're growing like this, this entire amount is typically subject to federal and state taxes. Me, You don't necessarily get to keep that full 416,000 if you're investing in an individual account. Part of that gets paid to the ire s. Now the benefit is with an individual account. You can invest as much as you want, and you can access this money whenever you want. So there's total flexibility, but you pay taxes on any of the growth. Let's compare that to an IRA with an IRA. Any money that you put into that account is deductible on your taxes. So, for example, if your income is $50,000 did you make a $5000 IRA contribution? Then you only owe federal state taxes on 45,000 which is 50,000 minus five. So it saves you taxes on the front end and that money grows tax deferred. So if we go back to the prior example every years that money is growing. It's doing so in a tax free manner. At least won't stays in the higher a. Now the catch is when you take this money out in retirement, that's when it's fully taxable. So you put the money and they actually get a tax benefit for doing so. The money grows tax deferred. Walt stays inside of your IRA, but once you take the money out, that's when you do pay taxes. One thing to note those IRAs can provide a tremendous tax benefit by saving your taxes up front and allowing to grow tax free while the money is in the IRA. That's a wonderful tax benefit, but the IRS doesn't allow you to access that money without penalty in age 59 a half. Remember, this is designed to be a retirement account. It's not designed to be something that you save for your new car in or that you're saving for a Holman. This is money that should be set aside for long term purposes when there's a Roth IRA and Roth IRAs kind of the opposite, the exact opposite. In many ways of a traditional IRA, you don't get a tax deduction for any contributions made. So if you earn 50,000 to go back to our prior example and you put 5000 into a Roth IRA, you still get tax on. The full $50,000 of income doesn't help you from a tax perspective upfront. But then you get tax free growth in your Roth IRA, and the best part about it is all that money is completely tax free when with grown and retirement. So if we go to our example a few slides ago, where you say $5000 per year for 30 years and you have over $400,000 in growth ordinarily outside of an IRA or Roth IRA, that 400,000 is fully subject to taxes. But all that was in a Roth IRA, and you could take that full amount out without penalty without taxes in retirement. That's a very, very strong benefit again. You can't access without penalty until age 59 a half. But keep in mind as long as this is earmarked for retirement is provides tremendous tax benefits for you. The last Let's talk about a 401 K In many ways, a 41 K has similar tax treatment to an IRA, but it's done through your employer, meaning any money you put into a 41 K reduces the amount of taxes that you owe in the current year. A 41 K though, isn't something you can set up on your own on IRA stands for Individual Retirement account , and you can open one up on your own. But a 401 K can only be offered through your employer. Some of the benefits are there's higher contribution limits. As of the shooting of this this video, you can contribute up to $5500 per year to an IRA or a Roth IRA and If you're contribute to a 401 K you can save $18,500 per year and is actually a catch up contribution of another 6000. You can contribute if you're 50 years old. Her over. So 18,500 if you're under 50 and that increases the 24,500 if you're 50 years old or older now another benefit is. Many employers will offer a match on the 41 K an example of how that might work cause they may say, If you put in 3% here for a one K, they'll match 3% of your salary. So it's free money, so a great place to get free money and also invest in attacks. Preferred investment account. So the end of the day, We now know that if you going to invest, you want to do it in tax favored accounts. Commute for a one K commune IRA Roth IRAs, etcetera. But now you have the framework that you can use to pursue your own investment objectives. Use the tax deferred retirement accounts as much as possible. Try to invest in a diversified, global diversified, low cost portfolio of index funds and again be sure that as the market goes up and down, you're controlling your emotions. And if you do that and don't sell or panic when it's down, you're gonna be well on your way to accomplish in Step four, which is building wealth. 11. Conclusion: So there you have it. We were viewed what it takes to get control of your finances and one with money. There's four simple steps, and those steps are number one. Create a budget and take control of your monthly cash flow number to pay off all non mortgage debt. Number three. Build up an emergency fund of 3 to 6 months of living expenses and number four invest and build wealth. Now, why does it matter again? This matters because you have goals and you have dreams for your life. And those dreams in those goals matter and money can be used as a wonderful tool to help you accomplish what you want to do in life, but only when you have control over it when it's managed properly. So in closing, I would like to leave you with this quote from Sir Francis Bacon. He said money is a great servant, but a bad master. Money is a great servant, but a bad master. My challenge to you is to decide which is going to be Thanks so much guys, for taking my course. I hope you found it helpful. I hope you found it valuable. If you have any questions, please feel free to reach out to me. And thanks again So much for taking this course.