1. Personal Finance - Framework for Thinking

all right ladies and gentlemen welcome to another lesson Dennis the professor

then it's the professor today we'll be

studying personal finance and hopefully

helping you get the tools you need to

repay your debt our wealth and achieve income

independence right that's our goal with this class okay so let's begin so the

idea here sorry I'd like need to get a new piece of chalk but the idea here insert is to introduce you to a

practical framework to a practical framework for thinking about personal finance and a lot of the ways you can add it and you

can work with it right so this class will be predominantly focused on application all right so we're going to

be light on theory there's not any extensive math so it's math free as a matter of fact everywhere where I can

tell you to use software I will tell you to use software right and finally we'll be focusing on having a broad application which means we won't just be

discussing some theoretical case if someone that has millions of dollars and you know a great job and all this stuff and they're able to pay back all your income instead we'll be focusing on your

case the students case in general and in particular and we'll be learning how you can leverage the tools that you learn about here in personal finance in order

to achieve whatever your goals are right and those goals can include things like paying off your debt like amassing wealth like having a great lifestyle that you desire

achieving income independence and never having to work again and of course mitigating a lot of the risks that come with personal finance right so you're going to make decisions in personal

finance your entire life this is simply a reality for every single person that exists in a capitalist environment right you will be making these decisions the

entire life your all of your life right I can't stress this enough no matter how much money you have no matter how good things seem no matter how bad things

seem no matter how old or young you are you will be making these decisions regularly and so it's important to understand what you can do

in order to make their decisions and buy better decisions I don't mean the decisions that I say are good right these aren't the decisions that I say are good the decisions that you'll be making are the decisions that further

your goals that further your ability to succeed and your ability to get what you want out of life right so sometimes your

decisions will be delivered right this won't always be the case right sometimes you'll be able to plan something out and it'll happen similar to how you expect

it to happen right and so you'll be able to follow through and see kind of the results of your decisions right but sometimes you'll be forced to make a

decision on the spot and believe it or not the decisions on the spot are going to be some of the most critical that you make right so you can plan to have a house and a mortgage and all those

things and save up money and borrow money from the bank and put all that together right but for an on-the-spot decision if your spouse suddenly gets pregnant you decide to have a child that

could be an on the spot decision right and so you need to understand your financial situation your financial position and how that effects everything that you've been planning up to now and

how you can now adjust in order to meet new needs right so at the bases personal financial planning is like planning anything else

right it's like planning the wedding it's like planning a birthday party it's like planning what you're going to do this afternoon right so you're going to

consider some factors and then you're going to consider some possible decisions that you can make right the more transparent and the more able

you're able to look at factors and say well these are the actual factors of my life I'm being honest with myself and this is where things are right the better inform your decisions will be in

the better you will make or the better you'll be able to make good decisions right so the thing not to expect is don't expect that you will take this

class and then all of a sudden you will attain mastery right that's simply not going to happen right you may take this class and you may learn some things you

may rewatch it or come back to it or experiment some more right but mastery will happen over time right and the reason mastery will happen over time is that you'll be doing this for a very

very long time you'll be iterating on your decisions you'll be exploring new options and understanding how different things come together so nothing's gonna

happen overnight right keep that in mind when you're doing your planning the most important factor of your planning won't be your goals or anything else it'll be

information and the majority of today's lesson will work around obtaining this information and leveraging it to help you make decisions

right but this information is extremely important right information about how you spend your money how you save your money how much money you make what the income potential is of what you're doing

right could you diversify that income could you invest in different assets right what are you doing with your excess money what are you doing with the debt that you should be repaying right

how are you planning for all of that right and that's extremely important but just having the information isn't enough right and this is where you come in so I can hand you the tools to obtain and

process the information what I can't give you is context right in a broad economic sense I can do this right so I

can tell you that the economy is heating up and the jobs are in short supply and that people are hiring and that wages are going up what I can't tell you is whether or not you have three kids five

kids or no kids whether or not your aging parents depend on your income and whether or not you're going to get a raise next week right that's up to you to judge and value it so you're going to

take this information and you're going to apply it to your specific context and we're going to go through all the tools and exercises necessary to find out this

context so first things first there are going to be some individual factors to your context and to your decisions right some

individual factors this is an important piece right because their circumstances in your life that are going to affect

they're going to affect your plan right regardless of whether or not do you think they will now we will find that they will in fact affect your plan over

time right so the first thing we want to look at that will affect your plan is

your family structure like I said before right you might be single right or you might be married if you're married you

may want to work with your spouse on a financial plan right or on some joint goals and on some separate goals but if you have dependents people that you're

careful right what are their children or aging parents or grandparents or nieces or uncles or nephews whatever it is

right you need to plan to be able to provide for these people right so this will require you if you do have dependents if you do have people

depending you will have need to have additional income right because they will raise your expenses right you need to plan around having additional disposable income and how you're going

to do that right you will find that if you're not currently in the stage of your life where you do have dependents that having dependents makes you more

risk-averse or it makes you more resistant to taking risks and the reason you don't want to take risk is because when you're younger and you're on your

own and you take a risk that risk only affects you who as you get older and as you have dependents and as you have us family and a spouse and so on and so

forth your risks affect everyone that depends on you and so your risk higher have a lot more gravity the one thing I will note and this is a

personal note right so one of the things that I try to do is my lectures and you know my explanations as I try to inject a little bit of a personal note here and there just on things that I think people

overlook and that aren't often written out in the text right so there's a misunderstanding of risk there's financial risk and then there's personal

risk right I guess there's also bodily risk now that I think about it right you should you should really unless it's necessary

try not to risk your ability to function in a body for most things right you're gonna want to pretty much keep that safe that's pretty pivotal to this whole

process but financial risk carries rewards right and you can do the math on what this is worth right you can do the math on risking your money and putting

it in a stock risking your money and lending it to a friend or anything else and you can come up with a very good quantitative solution but personal risks

wanted to change careers wanting to pursue a passion wanting to pursue a side project whatever it is are more

quality and what that means is that you will have a tougher time valuing these decisions on paper right but what's important is although I can't teach you

how to value this right if you decide that you wish to become an artist right after your career in engineering that's fantastic and I completely support your decision to go do that however I can't

help you value what that's worth to you what I can't help you do is I can help you plan for it personally right I can help you plan for it so that you do it

with the minimum amount of financial risk right and you don't put you know your family to live on the street if you decide to be an artist and it doesn't

take off for a little while right you're able to have a cushion and some opportunity to go do things so that's a little just a side note on risk and kind of separating the two

because it is important to separate the two a lot of people see their passions as only financial risk or as only to be evaluated in some way right so

throughout this kind of lesson we'll try to do some exercises some basic exercises that you can do on your own right so at this point you're gonna want

to identify if you have a co planner for your financial plan now that doesn't have to be a hundred percent of it right so for example if you know you and your wife for you and your husband decide or

you and your boyfriend or girlfriend or whatever it is do you decide that you're going to be making a financial plan together you don't have to decide on every single item together right you

might want to buy a brand-new BMW right your spouse or the person that you're planning with might want to buy a boat right so you don't have to agree on everything but you have to agree is the

process to getting there right and so this process is going to be important so identify if you have a col planner and identify what your family position is

now I want you to do this not only in the immediate term right so don't only look out okay well I don't have any kids right now and I'm not married okay that's great that's great that you've

identified that but think about your goals and think about where your life is headed think about whether or not you plan on getting married right whether or not you plan on having kids if so how many right start thinking about these things because they're going to make a

difference in how you look at your financial plan because our our personal finance plan is not going to be not going to be just an instantaneous how do I get enough money to get launched

tomorrow it's going to be an iterative process over time right and so you're going to need to know some of the factors that will be we'll be looking at in the future

excuse me the next thing you want to look at is your health right your health is important this goes back to kind of bodily risk right so if your health is

affecting your financial plan directly right now which means that some health condition doesn't allow you to earn more income right or work a certain number of

hours or whatever is you need to note that and you need to work with that reality right furthermore your personal

financial plan will also have some sort of insurance and this is insurance against bodily harm and insurance against injury and anything that can

stop your income from coming in right you're gonna want to start thinking about how you can do something like that and what you're going to be insured now insurance doesn't have to be something you go and buy from the store right so

you don't go you know you don't go to the insurance agent and say hey you know I think in a year or two my wife and I are planning to have kids can you sell me insurance because you're not gonna

sell you I mean there's no insurance for that right you just have to put it in a savings account or put it away in some way right but your health is going to be an important an important piece of that

so furthermore besides planning right and besides anything that's currently preventing you you're going to want to look to the future and that's why I said with kids right you're gonna want to

look to the future for your health and this often requires you to take a pretty good look at what conditions you may have that are hereditary right well you're predisposed to and things like

that and that's going to be very important right so take your current plan that we started working on and had any history of illnesses anything that you think you should be planning for

anything that could get in your way right so if you work a job where you're regularly exposed to large doses of radiation be realistic with yourself

right you might not have 50 years on the job in great health right that's just the reality if you work a job where you're physically required to lift extremely heavy things that might expire

someday right not be able to so take a look at your health and make sure that it aligns with your financial goals

the next personal thing we're going to look at is career choices now your career choice is pretty important right because it will affect your financial

plan because different careers make different amounts of money right so it'll affect your income directly right a dentist earns a different amount of income from a web developer and also

different amount of income from a doctor and so on is from a lawyer and from all the other professions out there right whether or not you're working as a clerk at a store or you're managing your own business whatever it is your income is

going to be decided by your choice and career largely it doesn't mean you're not limited to that income nobody's telling you that's all you're ever going to make but that's that's the limitation

we'll talk about a good idea called income diversification right we'll talk about how you make sure that you're not just relying on one source of income

right and you're reducing that risk but that's to come okay the second note is pretty important do not if you've not selected a career yet do not select your

career based on income okay so don't go about building a great financial plan how you're gonna or you know have twenty-five boats and you know seven cars and eleven houses and five wives

and whatever the hell you want to plan okay do not plan all those things and then say well the only way for me to do this is if I'm Bill Gates or the only

way for me to do this is if I become a doctor okay and then you go out and you become a doctor to achieve that now that may be it might be the right choice for some people right I'm not saying that

that's definitely not but for the majority of you try to choose a career that you're interested in and passionate about because the reality is you have to do it for most of the day for like the next 40 years alright so if you hate it

it's going to suck and if you're a doctor and you're constantly on call and you're putting in 80-hour weeks you're not even gonna have time to be in two houses forget about 11 houses right so

think about what you're planning but don't don't select your career based on just income right that should be a part of your consideration but not the only

thing all right so the most important part is that it reflects your reality it reflects your reality so this is very important right it's very easy to say

wow I'm taking these online courses to be a Java developer and so I plan on getting hotter having me making a totally different salary five years from now yeah that's great that's a great

goal keep working towards that but your financial plan doesn't care about your goal it doesn't care about whether or not you think it's going to happen your financial plan should reflect reality

that's the most important piece right the next thing you're gonna want to consider with your choice of career is

your income predictability so simply put what that means is if you work in a sales position where you're paid entirely on commission so for example

you're a real estate agent right your income is not predictable it doesn't come every two weeks directly deposited into your bank account for an exact amount right if you do work for a salary

that's income predictability and you're going to be able to look at that and say okay well I know how much I'm going to make every month so I can plan one way or I don't know how much I'm going to be

making from once a month so I need to plan around that right and so this is the important thing about your career

right it's most people most people sell their labor right and this is done on the collective labor market right so for

example if there were ten thousand jobs in only five thousand people those five thousand people would have great negotiating ability because the jobs need to be filled but there's not enough

people right if it's the other way around and there's 10,000 people in only 5,000 jobs wages will decline because

the job givers will have an opportunity to do it differently right and so you have to decide what happens right because you sell your

labor if you sell your labor right you may want to become self-employed right you may want to go out and just work for

yourself right you may also become unemployed right now many of you may have never been on employed right after you started working but the reality is

over the course of a 40-year career right the probability is at some point you will become unemployed right excuse me and you'll want to diversify your source of income so if you already saw

your labor you could choose to sell your labor to someone else right so you could choose to just have two jobs that's a way to diversify it's not a great way to diversify because of what we spoke about

the labor market still carries risk right and so it's not fantastic but if you could sell your work to multiple people if you could have income coming in from other sources then you have a

very different position in terms of your financial plan and your career choice so as part of as part of kind of the exercises that we're doing right you're

gonna want to list your current career position your dream choice of career and then any education that needs to be undertaken any steps needs to be undertaken to take to get there

right because although a financial plan doesn't enable you to go and change careers right you still need different skills and so on and so forth it can provide you with the financial resources

and the peace of mind to go out and pursue something like that right so what that means is you could buy yourself some time to get the education that you need and then you can get yourself an

opportunity to go out and look for work or sell your skills or however it is that you decide to pursue this okay the

next thing to think about is your age your financial plan is going to vary depending on how old you are right

because your needs your desires and of course your priorities are going to change with me right now I know many of

you may be watching this and thinking okay yeah but I love drinking and I'm just gonna keep drinking the rest of my life for I love partying and I'll keep partying or I love working so I'll keep I think the reality is that's going to

change right yeah if not because of your desires your physical body will force that to change eventually right nothing is sustainable forever right and this

will have a direct impact on your financial concerns hopefully by the time you're 75 you're not working anymore if you're not working anymore you still

need a way to pay the bills right you still need a way to live and so your financial concerns leading up to your retirement may be to put money away for retirement specifically to have enough

money to keep living so what we're doing analysis of different of different life stages right and what we'll do is I'll give you a

rough idea excuse me I'll give you a rough idea of what other people what

other people not necessarily you but what other people consider to be important at different stages and this

makes sense because you can listen to some of the wisdom of other people now remember we're taking their opinions in their situations out of context and leaving it only their age right so we don't know about their economic position

we don't know about anything else but we do know that priorities change over time and so we can have some broad strokes right because you're when you're planning 10 20 30 years in advance very

rarely are you going to stick to the plan for 30 years right your plan is going to adjust but by having an eye on the long-term right you're able to make decisions that help you in the future as

well in the near future as well as the distant future okay next so your risk tolerance as you age will

decline and the reason your risk tolerance will decline is because it becomes more difficult it becomes more difficult to take risks because you have

less time left in your life to recover from a bad risk right to recover from a bad result the second things you may depend on your investment income and on everything else that you have in your

wealth portfolio at that point to keep living and continue to support yourself without working right so this risk tolerance will start to go down and we'll evaluate how you start changing

your opinions and how you start changing the different things that you do based on your adjusting risk tolerance next

alright by the middle of your adulthood right you'll have more people to care for this isn't inevitable or by any means rule right some people have kids

very early on some people have don't have kids right some people have aging parents that can't care for themselves some people have the opposite right but

you'll also have more income and because of that your lifestyle will change so your expectations will also change right

expectations will also change now again many of you may be thinking as I once did when I was a little younger then I could just eat cup noodles forever right the reality is that much sodium forever

is not going to leave me in a very good shape to even survive past 30 right so your expectations for what you consume on a regular basis are going to change

right we'll talk about your consumption and how that affects your planning you'll also need more protection right you'll need more protection for certain

things so if you have kids right so let's imagine this scenario for protection let's say that you have two kids right let's drop two adorable

little kids here a boy and a girl right and then there's you and you take care of your kids right so your income is paying for their school and their

ability to live and so on and so forth right and you didn't consider protection you were just living your life as though you were living your life everything was going fine and then one day you wake up

and you cross the street without looking and a bus hits you okay the bus hits you and now you can no longer make an income

right we won't go as drastic as saying that you're dead maybe you survive you can no longer make an income in your current capacity what you need is insurance in a case in a situation like

that and so you'll start looking more and more on how to protect the things that you already enjoyed that you already have rather than how to make

or right and then finally in retirement you'll spend less money right and you'll spend less money because your needs are lower all right you're probably not going out partying every day if you are you're retired at a good age and good

for you that's very important as well right even when you're socializing you're not spending that much you're eating less you have less dependence to care for your kids are probably out of the house of doing their own life

right maybe something whatever helping you Wow right and so you want to be able to live in financial security right now some of that is done through Social

Security some of that is done through various government aid programs right but the reality is none of that is enough to sustain a lifestyle right all of that is enough only to kind of cover

the basic needs and keep you alive right it's not enough to pay for medical insurance it's not enough to pay for going out and doing things and activities and nursing homes and

whatever care that you need at that point in your life and so you're gonna want to plan for retirement now as the demographics of twitch and YouTube suggest most of you are not at this

point landing for retirement and that's fine that's fine but you need to know that one day you will be and so you need to be making decisions that can allow you to ease into that in the future

right so let's let's just review this section quickly just to make sure we all got the major points and we've covered basically everything right so your

personal circumstances are going to be influencing your financial plan right your personal circumstances this

includes family structure family health

career and H obviously it includes other factors right if you live in a place that's ample with opportunity and you can change jobs and do different things

that's fantastic right if you live in a place like that great but if you don't you need to consider that you need to think about it write these things in

turn will affect your income needs and your tolerance for risk right they will

in turn affect I now the stage of your life is also going to be very important because as we discuss you're going to be going through life and your priorities

and the things that you're thinking about in planning for are going to change and then finally right making

good financial decisions is the process of understanding understanding

your circumstances and goals and we'll talk about the different ways that you can set goals and a different way that

you can adjust to circumstances right how exactly you can do that okay now we'll move on to the next step so we

looked at personal factors right we looked at personal factors that are going to be important there are also

going to be systemic factors that influence your financial plans whether you like it or not right almost no one

is immune from systemic factors as a matter of fact usually the more wealth you have the more exposed you are to systemic factors right so it doesn't

exist in a bubble right it's not just you and your financial plan right as much as I'd like that to be the case but then everyone would just write a

financial plan that makes them trillions of dollars and so inflation would go up and we'd have a bunch of problems right so that's just not the case so economic

factors are going to influence your decisions and if you ignore them you ignore them at your own peril right because as usual with economic factors

the sooner you know about them and the sooner you take corrective action to adjust your plans and adjust your decisions the more effective you'll be at doing something like this right the

more effective you'll be at achieving your financial goals first things first you should be concerned with the current labor market

for the majority of us we sell our labor either to individuals through some massive form to businesses or to

companies right we sell our labor directly to those people right so we're going to be worried about that right so

if unemployment is growing in your country and it continues to grow there's

a good chance you may get laid off right if employment is growing in your country that may be a good opportunity to switch

careers or ask for a raise or do something else right so write down wherever you are on the planet what is currently happening around you and this

is not only on a macro level right so it's something to say that in America employment is growing okay great I'm very glad that in America employment is growing but what's going on in your town

what's going on in your city right when you're talking to people are they having trouble finding jobs are they finding them very easily what's going on in your profession right are all your software engineer friends finding jobs no problem

and you're also a software engineer right are all of your doctor friends having trouble finding jobs even though employment is growing right you're gonna want to look at the details of your

particular section within the labor market right so the broad strokes are important because that's important to watch and important to look for but just

as important is looking at the details of what's happening okay so you should also be looking at the capital market

right we'll talk about what capital markets are right we'll talk about it in more detail when we get to spending but

capital markets our composed of stock and bond markets okay so in general this will give you a

pretty good understanding of the health of the economy right it'll give you a great understanding of exactly what's going on so this gives you a chance to

go ahead and look at okay well you know stocks are rising which means people have more money to spend on investments and more excess income the economy is doing well right bonds are paid higher

interest the economy is growing right and that's a good opportunity and so you want to take advantage of this opportunity not only in your financial

plan but in your day to day life right and finally you should be concerned with

the store of value of your currency and your concern here is predominantly with inflation right so in the situation of

inflation you may have five dollars right and today you can go out and buy two loaves of bread with five dollars right if there's inflation in your

country next year you may need six dollars to buy two loaves of bread right and so your money is storing value over time but inefficiently right it's losing some value over time

and that's going to directly influence your buying power and so if your buying power is slowly deteriorating you need to find ways to combat this right you

can't always have income that goes in line with inflation right that often doesn't happen but your buying power needs to start increasing right and the way you increase your buying power is by

looking at investments and trying to move your money somewhere where it's hedged against the deflation now it's okay if you've never been you know if

you've never checked financial news or done anything like that that's totally understandable right but the reality is learn all these

things together and learn how to leverage these tools to get a better understanding let me just see if there are any questions on the chat okay well somebody somebody's upset okay

so um never mind business cycles business cycles business cycles happen all the time right so you're going to constantly see that the economy is getting better and getting worse and

getting better than getting worse right and this will keep happening now you may not have lived through a specific recession or anything like that right

but recessions will come and so will expansions and over the course of your 40-year career averages you'll probably experience about five recessions right so the way the economy's growth is

measured is through GDP which is gross domestic product right and gross

domestic product is just a value of everything produced in an economy right importantly this excludes things that

were produced in the past and then resold right so it's the value of everything new produced in an economy right so

if the GDP of a country is increasing right that is what is known as an

expansion if it's decreasing that is known as a contraction and if it's

decreasing for six months that is known as a recession right that is known a

recession and so you have the opportunity to take advantage of expansions and contractions and vary

your financial plan to adopt any to adapt to these things right so the economy is cyclical right you'll always find that that's not that's not news

right you'll always find that it's cyclical but how you adapt how you react and how you change your financial plan will decide how successful you are at

achieving your goals right the next thing we'll go back to the employment

rate we'll go back to the employment rate right so this is measured by the number of people actively looking for

work all right so someone is stopped looking they are no longer in this statistic so when you look at unemployment and it says 5 percent that means 5 percent of

people are actively looking for work right if another 10 percent have given up those 10 percent are not included in that statistic if so know that the

employment rate can be a little bit misleading right and so your employment will also change with business cycles right it will change throughout business

cycles so during expansions employees have an opportunity to renegotiate and get better terms during contractions employers will often fire you know or

layoff employees and then find new ones right and so therefore you want to be able to work these things into your financial

plan especially if you sell labor right if your primary source of income is the sale of your labor you're going to want to work within these cycles in order to

maximize how much you're making and get what you're worth right remember that you are selling your labor actively every single day and so if one day your

labor becomes more expensive and more valuable you should retain some of that if not all of that benefit right on the other hand if in fact it doesn't happen

right then you will be in a situation where your labor may be too expensive right and so you may be laid off or the company may be contracting right and so you need to have a contingent plan for

that as well right there are also other indicators of economic health that you can keep an eye on right now remember depending on where you're from is where you're watching from not all economic

factors are very transparent or well gathered or well organized right in general you're going to be able to rely on that right and you're going to develop over time and a kind of intuition for what's happening based on

what's going on around you right though if you don't live in a bubble then that's going to happen pretty pretty often right so some of the things that indicate economic health or houses being built

and this tends to be good if there's more and bad if there's less right so if more houses are being built and in general the economy is doing well and

people are buying new homes right also existing home sales right this is an interesting one because if people are

selling their homes and maths that may need that people are liquefying their assets they're making them more liquid and so if they're making them more liquid you may have an opportunity oh I

have a whole collection of chalk there you may be encountering a situation where actually work attracting right and people are selling their homes but those

homes aren't closing right so that's an important one to watch also orders of durable goods right now just call that durable goods and these are things like washing machines and cars right things

people tend to buy with the long term in mind and they tend to be pretty expensive right you tend to need to finance them if you do buy them but if people are buying durable goods that means in general the economy is doing

well and people are securing themselves for the future right and then finally you want to look at consumer confidence right which is a general indicator of

how confident people are that they're going to be able to sour sell their labor in the future and be able to keep making income due to their spending right and in particular one of the

things that we tend to look at very closely is holiday spending because holiday spending tends to be at an all-time high and it's nice to compare overtime right now if that doesn't mean

that you need to take each one of these into consideration every time you do your financial plan right but all of these things are worked into employment

of GDP right so you can imagine if more houses are being built more people are employed and GDP is rising right if consumers are confident more people are

needed to staff stores and ship products and move them around and GDP keeps growing right so this is an important piece to consider when you're thinking about

your financial plans the next factor we're going to go over is your currency

right or the value of currency the value of currency and so the value and

usefulness of your currency is based on one thing and one thing only trait if you can trade your currency for a house

it's worth that much if you can trade your currency for a loaf of bread it's worth it's that much whatever you are able to trade your currency for is its current value and so if there's

inflation in your purchasing power decreases you are able to trade the same amount of currency for less things right and that's something that you need to be

concerned about especially if your tendency is to earn money have excess wealth right have excess income and then put it all in a mattress right because

it's deteriorating over time although it physically stays very good great now in general you can expect consistent

inflation right you can expect consistent inflation in the economy so there will be more and more money in your currency will deteriorate over time at some specific rate right you don't

want it to be too high or too low right and the reason is because there needs to be more money to accommodate all the new people and to accommodate all the new ideas

right so if we had a set fixed amount of money and somebody had a new idea we'd necessarily need to destroy some old idea first before we could implement

right and new people would be dividing up less and less wealth amongst themselves and so inflation is going to be a constant that you're going to run

into looks like part of my eraser got wet okay try to work around that just a little bit

and we'll try to put my eraser somewhere where it can stay dry okay so give me just one second just to make sure the board is usable and we'll move on to our

next factor so the reason the reason that you consider all of these externalities is because they're going to affect your financial planning they're going to affect the performance

of your plans right so if you had plans to you know buy a brand new yacht because you expected things to keep going as well as they did and then we hit an economic downturn your plans are going to have to change because if you

do buy that brand new yacht even though there's been a change you're going to see some trouble right so that's your currency value most

commonly the way you'll see currency valued is to a CPI at least in the United States right which is called the consumer

Price Index and what that is is it's a basket of goods right I'm terrible at drawing baskets but so you can imagine

that that's a basket okay and in that basket or all the goods that the average family buys food and the car and the house and all these things throughout a year right a washing

machine right and so this basket costs a hundred dollars right and every year it's reset back to a hundred dollars okay reset back to that set amount but if we look at the basket from the

previous year and in order to buy it in year two you need a hundred and four dollars that means we've experienced four percent inflation right your

hundred dollars now needs an additional four dollars just to buy the same thing right and so that's going to be the way

you often look at it now you may be thinking that okay well you know I mean Dennis you're in you're in the United States aren't just talking about the

dollar right well first of all your investments are going to become global right there's simply no reason for you to keep all your money tied to one

currency right the second thing is that even if you tie all of your money to a single currency even if you invest only in American companies buy only American

products and are totally isolated from the rest of the world the companies themselves are global and so those companies will transact in foreign

currency very often and that will affect how you're doing now think about it right if there's rapid inflation abroad let's say China and they ship goods to

the United States right we may be able to buy more goods for less money and so the goods will cost you less in dollars right and that the opposite is true the

goods will cost you more there's inflation in the United States and we import wine from France and wine has excuse me wine and France has lower

inflation than we do then we will end up paying more money for the same goods

right now so final though it's completely normal completely normal to

expect things not to change there are a huge amount of people that are paid exorbitant amounts of money to

manage finances and manage personal wealth that expect things not to change ok so it's normal if you expect things

not to change however nothing could be further from the truth right change is going to be the only constant throughout this process right so throughout this

process you're going to be changing your financial plan the external circumstances around you will keep on changing they'll keep on evolving right you'll start to notice some patterns

about what happens before something what happens after something how you can do it right and so you will need the tools

to plan to take advantage of this change right if change is a constant that there's nothing we can do about it right so we have no control over the change

what we can control is how we respond to the change our response to the change will result either in us achieving our financial goals or not achieving

okay so as a review of systemic factors let's see what we've covered so business

cycles will keep happening and they include expansions and contractions

so an economy is unsustainable if it's growing too fast or too slow needs to be

somewhere in the middle and so we'll always tend to somewhere in the middle if it speeds up too fast it'll slow down drastically if it slows down too much

it'll speed up drastically right GDP and GDP is going to be your measure of

wealth and economic health for the country in which you operate on a

regular basis right this combined with CPI which will measure the stability of

your currency will decide how the economic factors look in the near present right so GDP is growing drastically but so is the CPI and so is

your inflation and amount of currency there's actually nothing here happening right so GDP is growing at 10 percent but the money supply is also growing at ten percent that's a net growth of zero

right we expect as we expect GDP to outpace CPI by some degree right but you'll find that that's not always the case and when

it's not the case it's important that you adjust what you're doing so we'll be looking at economic factors and all of these things as we conduct

our financial plan right next we move on

excuse me next we move on to the

planning process right so now you know all of your external and your internal factors but and you know where you're

headed so we have a financial process right or the process for actually planning for your financial goals and how you're going to do all right so the first thing you're going to do is you're

going to define your goals right we'll talk about a little bit how to define your goals and we'll talk about the different tools but you need to know they need to define your goals right you

then need to assess your situation you need to assess your situation once you've assessed your current situation you'll be able to identify

your choices right you'll be able to identify your choices your choices right well then each need

to be evaluated and we'll talk about how to evaluate them in this section right but they'll need to be evaluated and once they're evaluated you're going to make a choice

now you're periodically going to adjust your goals right and then you're going to continue to reiterate this process over and over again reflecting on your past choices

reflecting on the impact that they've had towards your goals how their goals have changed and how that's changed the overall situation but the important thing to remember is that this is a

continuous process you're going to be doing this over the course of a lifetime and so it's important for you to understand that you're not going to get good at it right away it's not going to be perfect and the process is all about

the learning right the learning and how to make better choices and how to evaluate better choices right and how to make decisions faster how to define your goals more effectively and we'll cover

some of the basics to give you kind of a running and start so that you're not reinventing the wheel on these steps

right so what you're going to do is you're going to define goals you're going to define goals and you're going

to do this regularly right so you're going to have short term goals and these will look up is somewhere between one to two years but you're going to have

intermediate goals anything from two to ten years and then you're going to have long-term goals and

these are going to be anything over ten years to plan right now your short-term goals are going to change because they expire quickly but once you've set them

they're not going to change very often moving nouns intermediate because they take longer to achieve and to see into fruition you're going to have to adjust them more often even if you're not

making progress towards them because your lifestyle and your thinking and your priorities are going to change and then your long-term goals will change often right you'll actually find that you can set some pretty basic ones like

having the money to retire and so on and so forth but that you'll need to keep adjusting for things like cost of living and so on and so forth and so although your long-term goals may be constant right in terms of their actual objective

what you'll find is that the thing that you're doing if you're adjusting the details of those goals over time right

so in the process of defining your goals in the process of defining your goals you're going to use the smart method now you can use any other method that you believe is good but I found this one to

work and a lot of people have have recommended it as very good and so when you set your goals you're going to want them to be specific

right not I want to buy a car which car how much does it cost what model right tap you know how much how will you buy it will you finance it

how will you do it in so on and so forth they want to be measurable again if I want to buy a car right I can buy a car for a hundred bucks that doesn't run I

could buy a car for two and a half million dollars if there's only like three up on the planet I can buy an antique car right but if I want to buy for example a Toyota Camry I can look up at any price a brand new Toyota Camry

what the price is and so that goal is measurable right you also want it to be

attainable if I'm currently buried in debt and don't have enough income to even cover what I'm doing having a goal

to buy us a jet is going to be an unattainable goal right unless there's some windfall of lottery or something else and so if you believe that to be attainable then your financial plan

should include regularly going to Vegas and gambling away all your income for the chance to buy a jet right they also have to be realistic this doesn't mean sell yourself short

right a lot of people think okay well my goal has to be realistic so I'll buy a cheap car No yeah you don't decide yourself short you can be ambitious right but be realistic

buying five Jets probably isn't very realistic right and then you want them to be timely right you want them to be timely in the sense that you want to be able to say that I want to buy this in

five years right I want to achieve this in 10 years and your plan has to support the time that you've chosen right so if your plan is to save up all your excess income right let's say that's ten

dollars a year right to buy a car in five years you're gonna buy 100 car right if your plan is to save your in excess income of 10,000 a year and

buy a car in five years old cash your going to buy a car for 50,000 if you plan on using leverage this will be even higher right so that's how you're going

to want to set your goals you're going to be smart now your goals will change so if you're just graduating for example

you may want to reduce your debt right so you may want to pay off all your college debt you want to kind of make sure that that's there and that you have that taken care of

right assuming that you are in debt for college you might not be in debt for college right the next step usually after doing that is to accumulate some

assets accumulate some things that make your life easier and make earning more money an easier thing to do right so you

accumulate assets right and then finally you'll want to create retirement income right now these are extremely broad strokes right there's that mean there's basically only three steps right that's

your entire life right so maybe this is your 20s this is like thirty to sixty right and then this is sixty plus right so you might want to think about all these things but you might want to start

planning for retirement income very early because we're gonna see if you start saving earlier you're able to put away more money right and you're able to earn more interest on your earnings and

to talk about the different ways to diversify and make positive positive impacts on your life right so the next thing we're going to do is we're going

to look at assessing your situation but we're going to be assessing your situation so in order to assess your situation

right you're going to have to be honest with yourself right that's gonna be the first step just be honest with yourself you're not presenting this in front of a class nobody's judging you right be honest with yourself because you've

already taken a positive step in the right direction right if you start with honesty you already know you've taken a positive step towards the future and so you've actually done something very good right everything you've done in the past will

discuss but everything you've done in the past as well in the past right so you'll need to clearly organize different aspects of your financial life

right he used to organize things like your assets so if you have a car right or if you have a house or anything that can be traded for liquidity or for cash

out of pretty quick basis those are your assets right you're gonna want to think about your debts anything you owe things

like student loans car loans mortgages credit cards right you're also gonna want to think about your income if you just started a job and you're making 30k

a year then you're gonna have to put that down right and they didn't talk about your expenses Ryan your expenses are directly related to supporting your income right so in order to go and make

an income you have to put on clothes right and you have to go and take a shower and you probably have to live in a house of some sort right so you have expenses related to getting your income

and so you're gonna want to rip that down right we're gonna learn how to then take all this and organize it it's a three financial statements right the

first financial statement will be excuse me an income statement the second financial statement will be a

balance sheet right so balance sheet will contain your assets and your debts your income scene will contain your

income and expenses and then finally you'll have a cash flow statement and now although that may include your income and expenses it will also include

any other windfalls of cash that you have for example from selling an asset or from borrowing money right so the way

this looks is the following the way this looks is the following right so you

might have after-tax income and I'll keep the numbers extremely simple right but you might have after-tax income of

10,000 okay your rent is 2,000 your living expenses right this is a positive this is a

negative the living expenses are another two thousand okay then you're also paying off your debt you happen to be various dads in this situation right so let's say you're paying five thousand

towards your dad right you're get trying to get out of debt quickly that's your goal right and so you have a remaining one thousand right and this one thousand is available for savings it's available

for you to be able to do something with it now when you look at something like this and you're able to expose your financial position right you'll begin to

understand not only where your money goes and how much of it is left but the best way for you to attain your goals right so if your current living expenses are two thousand but one thousand of

that is actually caramel lattes right you may cut out caramel lattes and reduce your debt at six thousand a month instead of five thousand rather than saving and earning less money than you're paying an interest you might want

to put this 1,000 back into here right or on the contrary your goal may be to have a rainy day fund because you're worried about your job prospects because the economy is not that great and in

that situation you take the debt you reduce the amount that you're paying and you start saving a little more and each of these things are choices that you can make based on the information that you

see and everything else that you've put in front of yourself the next thing you'll do is evaluating

and making choices now this is perhaps the most important thing anybody any person your family member your friends

your cousin I don't know whoever your cat whoever you ask for financial advice myself right your professor or your loan officer anybody that tells you what you

should do with your finances without finding out your goals doesn't have your best interests in mind they don't because what you do with your finances just sure serve your goals right it

should cover your goals because that's what's important what's important is that you are serving and getting to your goals and using your finances as a way to get there as a way to enable you to

live the life that you want to own the things that you want to have the freedom that you desire to mitigate the risks that you desire to care for the people that you love right and so the decisions that you make the way you're going to

evaluate them is you're going to evaluate them individually based on how they serve your particular goals not someone else's yours

and that's very very very important right so you're going to want to kind of figure out short-term choices short-term

choices and on the other side you're going to want to figure out a long-term strategy long-term strategy now over time right as many of you will know that your

long-term strategy is actually composed of a series of short-term choices right but by knowing your direction where you're headed in what you want to attain right so let's say you want to attain Income Security right let's say you want

to make sure that no matter which of your income sources falls through tomorrow you have enough income to survive on a regular basis without picking up more work right that's your long term strategy long term strategies

to get there your short term choices will serve your long term strategy alright so like I wrote down in my notes this seems like a good time to mention

that the plan is meant to support everything else you're doing right and I'm glad I actually had the same thought when I was going through it you should

understand that money and financial planning are your service right they are your servants and you should treat them as such they're tools

for you to get to where you want to go you do not serve your money in your financial planning they serve you so

once you understand your current situation you'll sort of valuating choices right so here's a framework that you can consider right you can think

about costs and benefits now Benjamin Franklin had kind of the best way of thinking about this and this is perhaps the simplest way right so you take a t-chart you want one side you write down

the costs right the cost of doing something or not doing it and the benefits all right and then you see how many things are here and how many things

are here and you start to think okay well I think these two things are pretty much equivalent these two are pretty much equivalent this one is really big so maybe it equals two of these right this one equals two of these and so I'm

left with overall more costs than benefits right and you start working through that process than understanding and this will be based largely on your values right if you value spending time with your family and your goal is to

have a very high income perhaps adding a second job is not the way to go perhaps you need continuing education or something like that okay now you'll also want to consider besides

costs and benefits you want to consider risk right and risk is pretty important basically the way you're going to think about risks is if you take a risk right

and the risk doesn't work if the risk doesn't work or if it doesn't work right so there's kind of a positive aspect and the negative aspect to the risk right where does it leave you

I don't even know how to represent that visually you are here right so if you

take the risk and you succeed you're better off great and if you fail you're worse off right what you want to try to maximize you want to try to maximize your future decisions right so some time

ago I remember reading an article right we're talking about strategy here so this is I guess kind of relevant but you want to maximize your future decisions your ability to make different future decisions because the more decisions you

could make the more choices that you have in the future the more likely you are to have good choices right and the more likely you are to be able to make them right and so I read an article not

too long ago about how artificial intelligence in one of its simplest forms wins a chess and the way it wins a chess isn't by having a bunch of memorized moves or making a bunch of

director or you know pre-programmed decisions instead it maximizes choices right it simply looks to make the move that leaves it in the best position to make the most possible choices next time

right because it's able to evaluate those choices so quickly it has an advantage and so as your financial planning skills get better think of it as training your artificial intelligence your ability to make choices on the spot

based on what you're observing in your finances and the more you think through this process the more times you do it to further ahead you'll be able to think

right the further ahead you'll be able to decide that I can do so-and-so and that's an appropriate risk or I can't do so-and-so because it's not an appropriate risk but it doesn't actually

have the payoff that I want all right so one of the kind of good illustrations of risk is the following right so let's say you need additional income to pay down your debt all right so let's say you

have some debt right and you're currently here now you have two choices you can either get a second job

and put away money to pay down your debt or you can take all of your savings and go to Vegas right and if you wait you get to pay off your debt great right I

mean Vegas seems like a much better alternative because I mean if you lose you can just go back to square one and get a second job this of course is why

Vegas is appealing right but you have to weigh the risks right the probability of you actually being able to pay off your debt on one trip to Vegas with all your

savings is something like 1% right and it's probably actually lower than that but the odds that you'll be able to pay

it off with your second job or 100% okay so now when you look at these risks and you understand that you'll end up at that second job anyway except you'll be something like one or two years behind

on income right suddenly Vegas doesn't seem like such a good idea for paying off debt still might be a good idea if you want to go catch a good show or something like that right so it's

important to consider when you're considering risks that not all risk is equal right not all risk is the same and not all payoffs or equal and not all probabilities are equal right so risk

should be factored in as a cost right that's what's important here so let's do a quick review here of what we just covered just to make

sure that everybody is up to dates so financial plan planning is a recursive

process a recursive process okay so you'll be defining goals

assessing your situation coming up with choices evaluating them and then making

them and then you'll be circling right back to setting your goals again right your goals are going to be shaped by your current expected circumstances your

current and expected circumstances and expected circumstances we're going to shape your goals right and that's very

important because as your car didn't expected circumstances change your goals will as well right this will affect those that are short turn calls that are meteor turn

and of course goals that are long-term

right and then finally your choices will allow for faster or slower

progress towards your goals and this is what I goal-setting is so important it's because we did start with goal-setting and you just chose to be faster ready to chose your goal later going faster in

the wrong direction is much more detrimental than going slowly in the wrong direction because at least you have time to turn back right going faster in the wrong direction means you have to turn back and cover all that ground again and so knowing which

direction you're headed towards is going to greatly inform your decisions I feel like my paper towel is working better than

oh one more item for review that I

missed is you should evaluate choices

and think about benefits explicit costs implicit costs and finally your strategic costs so we

actually missed one of these so I'm glad I went over this right but the benefits are what you get right that's what you get this what you're actually trading right so you give money you get something you give something you get money right that's your benefit that's

pretty straightforward your explicit costs are just how much things cost right the risk and everything else is that's baked in there your strategic costs are going to be where you end up at the end of the situation right if you

had to make a choice between for example buying shoes and buying a jacket your strategic cost is that you end up with a jacket in those shoes or a shoes in their jacket right but what's important

here is that we discover actually or that we look into implicit costs right and so I'm glad that we did the review because I missed that earlier so your

implicit costs are going to consist of the following right your implicit costs are going to consist of one sunk costs

and sub costs are going to be anything you've already done okay so if you chose the shoes over the jacket you've already done it there's no going back right so

even if it rained terribly tomorrow or it's very cold and dry you have the shoes you don't have the jacket right those are your sunk costs and those are going to be the things you went through learn from them right learn from them if

you have some cost that's probably because you have regrets and if you have regrets learn from them and don't make those mistakes again right or make choices differently try to inform your choices differently right so maybe

before deciding whether or not you buy shoes or a jacket check the weather for the next to be right see what it's gonna be like the second thing is opportunity

cost and this is important right because let's say the shoes are $100 and the jacket is also $100 now when you

go into the store and you have $100 and you make a decision right so let's say we chose the shoes you're giving up the

$100 right but you're also giving up the opportunity to have a jacket so how do you held onto the hundred dollars and waited a day until to see if it's raining or cold you could have decided

which one you want right but today you're giving up the opportunity to have the jacket and so opportunity costs are very important they're much more important not only when it comes to just your money but

also when it comes to your time all right if you commit 80 hours a week to your employer you're not gonna have much opportunity to do anything else and if you don't have much opportunity to do

anything else you're going to be in the situation where you need to change this right you need to change something so all right the next thing

is financial advice if financial advice is pretty short but it's important to cover so financial advice all right so no doubt not to compete in completing

the course you'll feel empowered to go do something about your finances and you'll be planning them and improving them and making decisions right however along the way the complexity will

increase there will be more and more complexity as you do this right assuming you're doing it correctly and you are achieving your goals your new goals are going to be more complex more

interesting more difficult to achieve right and so you may need to seek help you may need help and so when you seek help there's going

to be a litany of professionals that can tell you how to spend your money right everyone from your cousin and your uncle suddenly becomes a financial adviser right your dad and your grandpa also

great financial advisors all of a sudden right and the guy that works at your local branch and the person you meet in the grocery store basically anyone that you tell that you have this complex situation will give you some sort of

advice on what you should do okay and so it's important to understand how you can work with that advice right so some of them are going to be accountants right and they're probably good to consult for

tax purposes and so on and so forth some of them are going to be investment advisors right other people are going to be

estate planners state planners and insurance agents and there's going to be a litany of people there's going to be a huge group of people that all have these

different certifications and different backgrounds and different experiences and so on and so forth that are going to be available to help you right so there's a couple of things that you need to understand before you take financial

advice from anyone right and the following things are extremely important right first of all you won't understand their training right you won't

understand what their training so if you go to your insurance person and they're trained in providing insurance and you ask them about whether or not you should buy Tesla stock and they tell you yeah sure that's not a great person to be

taking that advice from right they're trained in insurance you can listen to them on insurance but make sure that they have your business just mine right

also know how they're compensated if your insurance agent gets paid on the amount of money that you pay the company a month and the size of your insurance

policy you could damn well bet they're gonna try to get you a very expensive insurance policy right here you're going to want to for the most part should find people that are going to charge you

money per hour right they're going to charge you per hour and you're going to pay them the 300 or 350 or whatever it is that they decide their hourly rate is and you're going to want to find people compensated like that people compensated

on selling you products do not have your best interests at heart they have their own best interests at heart which is perfectly natural and they're not to be blamed for that that's just how the system works right so be

wary of how they're compensated right and then finally diversify your sources of information so go ahead ask your grandpa about whether or not Tesla stock

is good right ask your uncle about whether or not putting money in the hi array is a good idea ask your neighbor ask your financial planner ask your accountant right ask different people but always consider how they're

compensated and how they're trained and where expertise live before you rely on them okay

so now we're gonna move on to some basic ideas of Finance and these are once again these are going to be critical absolutely critical to your success

basic ideas of finance this is going to be critical to your success because it's important to understand them if you're going to be doing financial planning right if we were doing party planning

we'd have to know the basic ideas of parties right so Adam Smith in the wealth of nations says money says the proverb makes money when you have got a

little it's often easy to get more the great difficulty is in getting that little right and so we're going to

beginning that little and it is true that once you have a little money it's often easier to keep making money right but how do you get to having that little

right so personal finance addresses the great difficulty of getting that little bit of money that you need in order to

grow right will learn things like how to manage income and well managed income Wow right

in order to hopefully satisfy your desires satisfy your desires right and increase your income and increase your

wealth and increase both right that's kind of the gold standard so if you're able to have your income in your wealth work for you not only to satisfy your desires but also to increase your future

income in your future well you've found a very good situation and we're going to talk about how to get into that situation and how to keep it there by sending your financial goals by planning

correctly right so the idea of creating more wealth rests with having productive

assets right these productive assets are going to be generating income right so they're going to be generating income of

some sort more than likely they'll be generating either dividends interest right so you'd receive dividends from

stocks you receive interest by lending money right and then you would receive to be rent by owning property and

renting that out right and so all of your wealth is going to hopefully produce some form of income because the way the economy works is if you own

something you're able to borrow money or borrow liquidity and sell away pieces of future income ok so what's important

here is that right finance subjects can be not even on the dry side they can be difficult to grasp immediately right they can be quite challenging to grasp and quite challenging to understand but

the goal isn't to learn it right away the goal is to learn it over time first of all and second of all and perhaps most importantly the better you understand how the economy works

the better you understand the more likely you are to achieve to meet your

goals more likely you are to meet poles and this is an important piece this is extremely important because understanding how the economy works will

enable you to create things that generate wealth for you they give you better opportunities right so having

said that the best plans fail and it's fine right we don't expect all of our plans to succeed what we expect is to

know what to do know what's due when it happens right we can actually expect with reasonable certainty that this will

happen and what it does happen we want to know what we should be doing so let's begin with a simple question or a seemingly simple question of the source

of income or perhaps the question would be where does income come from and this is an important thing to

consider right because we're always really concerned about our income right but we don't often stop to think about where it's actually coming for right so income is is just money received in a

given period right that's that's pretty straightforward right so if you're an employee or a self-employed and you're still an employee you're going to be

receiving a salary that's going to be a source of income right if you have a savings account of all kinds of

different varieties you're going to be receiving interest right if you have

stock you'll be receiving dividends and if you own property you'll be receiving rent now this is pretty straightforward and

understandably here a Oh in addition if you're part of a partnership right so if you run a company with a few other people and you're all part of a partnership you're

also entitled to draw so you're entitled to take your piece and you're a part of the earnings out of that company whether your investment into that company out of that company at any point depending on

your contract and stuff but in general you'll be able to do that right so there's two fundamental ways to earn

income right the two fundamental ways to earn income excuse me the two fundamental ways

you're an income our selling labor and selling capital right selling capital is

the reason that we call it capital markets right and so when you sell labor you're either working for yourself or for someone else right and you're eight them isn't just your salary get your

total compensation so this includes stuff like retirement contributions health care and a litany of other benefits sick days all of that is

included as part of selling your labor and part of your salary furthermore your labor is sold in the labor market and so the condition of the labor market are

going to matter quite a bit right so if nobody's hiring and it's difficult to find a job and everybody is offering load below average pay you might have to take it because the way you earn income

is you Sawyer excuse me you saw your labor right the other way is by selling capital and

when you sow capital right you take your excess cash take your excess cash and

you quite literally sell or rent it right you sell or rent it to someone else who needs it right and the way this works right if you could be a private

arrangement so you could just you know rent your capital to a friend that's a lending is right you're taking your cash and you're renting it to a friend right and then your friends giving it back to you with a little bit of interest on right that's the rent you collect right

or you could sell it you could buy a piece of a company like a stock or a share right and sell your cash in exchange for some future income or piece

of what they're earning right so buying the stock buys future value and so it's important to start thinking about cash

in this transactional way right the cash isn't just there to go back and forth and trade for goods right you can also

trade cash and sell it and rent it right and that's very important right you can also rent it yourself if you wish the bar so there's many assets that you can

invest in obviously right these include like antiques some people choose to invest in art or coins land right you

can invest in things like commodities like orange juice right and these are all going to be different investments with different characteristics so we'll talk about the bedless pros and cons of kind of each one you know they're going

to defend I mean and commodities include things like soybeans and cattle and stuff like that but we'll talk about all the different characteristics of these investments and what exactly you're

buying for your money but what's important whatever you choose to do what's important is that it can be sold

later right and then it has some sort of appreciation right that you're able to sell it later but presumably more money

or at least receive income in the process in the form of dividends and get your money back right so that's not

always the case right it should create future income and future wealth but the photo is the case that's part of the risk that you evaluate you see looks like there might be a question here how

about a financial advisor that takes a portion of an investment revenue you know what let me jump to that I'm sorry to see that question earlier okay so a

financial advisor takes a portion of your revenue okay so let's say you are a

55 year old man you've got your old man you've got let's say two kids your wife

recently got laid off okay and you have some excess cash raised your wife is not working and you have some excess cash and you bring it to your investment advisor okay

so you bring it to your investment advisor and you say well I have this excess cash can you invest it right and your investment advisor says okay yeah but I'll charge you a percentage of what I make okay I'll charge you a percentage of what I

make okay and now your investment visor takes your money and he's got a decision to make okay he's not a decision to me he can put his money in since it's a

very safe debt that will produce $50.00 per month guaranteed right or he can put

it into a risky stock in a developing nation of a company that is unproven right but that could in one month make

$5,000 where do you think he's going to put it if his compensation is a percentage so here he would be making let's assume he gets 2% he would be

making $1 right $1 here he would be making 100 and the important thing is if this doesn't pan out and it fails he doesn't lose anything you're the one

that ends up with loss if this pans out he just gets his guaranteed dollars and so the incentive is for him to take more risk than you might bear right so that's an important thing that you're gonna

have to line up on then you're gonna have to be able to control right now he could mistake the register he could miss advise you on the risk or make mistakes himself so in general unless you plan on

taking very large amounts of risk and you want to compensate somebody to make as much money as possible with taking as much risk as possible this is going to be an OK outcome but if your plans are

different and if your plans are safer compensating them as a percentage of what you're making if you're not planning to make very much but you want to do it safely it's not going to be

good well you can however do is you can arrange for what they do to be risk adjusted risk-adjusted right so for example this

had a risk-adjusted return of $50 right which means that no matter what went wrong or right this would still pay $50 right at very very low risk let's say

these are government bonds okay but this had an adjusted value of $50 as well because although it could have made you 5000 it could have lost you 4950 right

and so the remaining that's not a chair you do risk-adjusted but let's just say for the sake of this example the risk adjusted value we'll discuss what that is is $50 right and so the compensation

then would be the same for these two things and he'd prefer to take the less risky option right but again that might create a conflict of interest if you want him to take on more risk so it's

difficult line to walk across the difficult thing to do so I hope I answered your question sorry I got too late I just was it wasn't

paying as much attention to the chat as it should be okay so in your labor market right the price of labor is the wage that the employer is willing to pay

willing to pay for your work right this is gonna depend on a lot of things like we discussed like your education and the labor supply and the labor demand right so if labor supply is high and demand is

low wages are gonna go down the other way it might work the opposite right so if the labor supply is very very low but the demand is extremely high wages will

rise as employers compete for employees right now this isn't the only thing that you determine what you're doing right and the reason is people also gain and when your wage jobs people also gain

intellectual they gain social and personal gratification and personal gratification by working right and so

you should start weighing these things for yourself as well right so perhaps the job that you have is personally satisfying you fly a plane

perhaps the job that you have a socially satisfying you're helping the world do something or achieve something right and maybe you don't make as much money but the social satisfaction makes up for

them or the intellectual satisfaction perhaps it allows you to learn and grow as a person and you take put a great

deal of value on that excuse me okay so your position in that flavor market is going to be very important it's going to change over time right but for the most

part it'll be more or less predictable right so in the future you'll be able to sell your labor for more assuming you haven't completely changed what you're doing right and if you have you'll have

to bear the consequences of doing that right so maybe before you sell your labor right it's for a different job you might accumulate some assets and decide okay well I have the side stream of

income that's making up the difference between a pay cut that I'm going to take to do something that I love or something that I'm more interested in right and so in this situation you can sell your

labor for more overtime right because you gain experience and you're better at what you're doing assuming that you're continuing to keep up with the skills right now in today's in current market that might not be the case right it

might not be the case for long that you're able to keep doing this without continuously refreshing your skills and getting better at what you do right and

so that's that's your position in the labor market in the capital markets in the capital markets right the reason

that they exist is so that buyers can buy capital it's that simple now you as

a person with savings are a source of capital and as a source of capital you get to choose how you sell your capital and you have a lot of choices whereas

the buyers of capital basically can go to you or to a bank right they're limited under choices in how they buy their capital and so that gives you

leverage and the ability to charge interest right this is actually pretty important right that's how you take your

excess cash and you buy things like stocks bonds right mortgage securities

and you're able to increase both your income and your wealth by doing so now for any particular investment where's ah

for any particular investment there's going to be a market right there's going to be a market there's going to be the general demanded supply right and so what you're going going to

want to look at right typically where the demand is highest and the supply is

Lois is also going to be where the risk is the greatest right now if you find a situation where the supply is low the

demand is high but the risk isn't being compensated for as in there's less risk than the compensation allows that is an absolute situation where you should buy

right now if you find that the risk is not being compensated as in the demand is extremely high the supply of capital is extremely low but the difference

between them doesn't come close to compensating that is a situation too short or not to buy right we'll talk about shorting stocks and some different financial options that you have but then in the situation where you should not

get involved because it's not a good place to sell your capital okay so another important thing to know

is that the more capital you have the more places you can sell so if you have a thousand dollars you can buy like one

share about it right if you have a hundred thousand dollars you might be able to buy some shares you might be able to buy some bonds you might be able to put some money in a savings account you might be able to lend some money to a major corporation lend some money to a

friend and so diversify your holdings and protect yourself right you may also get investment opportunities that require that someone invest a large amount of money upfront and so having a large

amount of money may allow you to open up new investment sources and new opportunities that are more lucrative right but remember everything that's more lucrative carries more risk that's

always the case right at the end of the day with financial instruments the pricing should reflect the risk sometimes gets out of whack and you should pay attention for when that happens but most of the time you're

going to directly reflect risk okay so we now we don't read an income comes from right so then is equally important

to understand where does income come what happens to income right so income will represent all your sources for money right all your sources that come

in and at least a semi-regular basis right and then all of your expenses now you need to make that money right that's

what your income is comprised of right so if you make $3,000 and it costs you

$2,500 to maintain that right your total income is about 500 right if you're making $3,000 and it costs to 3500 your income is negative 500 and that's an

unsustainable situation and not a situation that you could be in for very long without going into bankruptcy so

what is that called so when your income is less than your expenses right you're in a budget deficit you can get out of

this situation by financing it with debt right the only problem is debt will subtract through income because you have to pay interest right and so debt will make your income even lower right and so

you're you're kind of in this endless cycle of downward spirals so financing budget deficits or death is not recommended right that's the reason a

lot of people end up in bankruptcy now if you have more income what you have is a budget surplus and on your budget

surplus you're able to have some money to put away to invest into wealth generating assets or basically you have money left over that you can now sell right you can now sell that capital to

someone else and hopefully supplement your income and change how you do things okay so once let's assume you have a bunch because there's not much to explore really in a budget deficit

you're just out of deficit well let's assume you have a surplus now if you have a surplus you have some choices for what you do with that money right you

can put it in a piggy bank which overall it's not a great idea due to inflation right or as a lot of people like to call it under your mattress you might just

enjoy sleeping on cold hard cash and if that's your thing to do that because that'll bring you some pleasure at least but if you're not that type of person then don't put it in a piggy bank right you can put it in an account that bears

interest account with interest right so this is a savings account or something like that and you can earn interest on what you're

doing right you can also put it in a CD or a certificate of deposit so a certificate of deposit will require some

minimal amount of cash usually about $5,000 right you'll put in the $5,000 and what you'll agree with the bank is that you're not going to touch that money for five years

right and that in exchange they're going to pay you interest on that money so that when you take it out in five years you've taken out the principal plus the interest so effectively what you're doing is you're lending the bank money

right you can also buy government savings bonds which just like it sounds is another way to lend the government money right or

you can put it in a money market account now money markets account will usually have a higher threshold for what they require and they'll easily reward you for reaching that threshold so whether

it's ten thousand 50,000 or 100,000 dollars a money market account will allow you to make withdrawals from time to time right they'll make sure that you don't fall below a certain amount and in

exchange they'll give you an interest rate right so this is these are some of the things that you have access to right and this is just the baseline you can also obviously get stocks and bonds and

we'll talk about that but your immediate surplus can be divided up in the following ways okay so let's review

let's review so it's important it's important to understand your sources of income excuse me I just got lost on the page your sources of income

and expenses and whether or not you're in a budget surplus or deficit because that's going to inform a lot of your shorts or bulbs rate if you're in a

bunch of deficit then you need to get out of a bunch of deficit if you're in a budget surplus that you need to figure out what to do with that extra money

right your wages or salary wages or come from employment right I won't write it

out but interest comes from lending right rent comes from property dividends come from ownership in a stock or a bond regular she'd be just in a stock

oh and draw comes from partnerships I always forget enjoy life and draw cups refurbish it I've actually never been part of a partnership so I don't have it

in my in the back of my head is experience furthermore you need to

address deficits and surpluses right so if you have a surplus and you're not doing something with it you need to address it and rather quickly right you don't want it to just sit around as a

surplus and definitely and just accumulate somewhere in your house right where you just have stacks of hundred dollar bills that's not a great idea right you have a massive surplus so figure out what you could do with your

surplus and figure out what you can do with it rather quickly because it needs to be earning you more money or becoming more productive right so some of the ways to deal with the deficit is you're

going to be increasing income increasing income right that might be hard to do unless you find a second job immediately right you can reduce expenses again not an

option for everybody but something that if you look at it closely you might be able to do with the right things or you can borrow right and and borrowing should be kind of a last resort because

that mean this just leads to a downward situation right and then finally if you have a surplus you could spend more you

can save more right or you can invest right and so you know you may choose to do those things in some proportion over time right so you may choose to save

more when you're younger and have less things to spend on right you may choose to spend more and invest more for your middle age because you're worrying about retirement and stuff like that then you

may choose to just be spending and leaving all your money and investment and not saving as much in your retirement because time is running out

if you've got it you might as well use it okay so that's where you're at and that's your income and expenses

the next thing we're going to talk about is assets and when we talk about assets right an asset is anything of economic value that you can convert into cash

all right so if you can't convert it into cash it's a possession right it's just a possession I mean if you have a lamp and you get run a garage sale and sell it for a dollar that has that's an

asset that has an economic value if no one would buy it for a dollar or you'd have to pay somebody to take it away from you that's just a possession it's not an asset right so things like your

car your savings account any stocks that you own any land or a house that you want right these are all going to be

assets these are all gonna be assets right so when you sell your excess capital you're hopefully in the capital

markets right you're hopefully going to exchange it from some asset right not asset is going to store your wealth right or your goal is for it to store

your wealth and for it to generate income we're not depending on the asset you're going to take more or less of one of these right so some things are going

to store your wealth extremely well and generate very little income some things are going to generate a lot of income but not store your wealth right some things are going to do both haphazardly some things are going to do both extremely well but an extremely high

failure rate right so they might do it when it when it works it works great when it doesn't work it doesn't work and so we'll learn about how to evaluate those different decisions right so essentially where you're trading what's

important to understand is you're trading and you're giving up liquidity and liquidity has a value right when you give up liquidity when you give up your cash and you sell it into capital markets for some investment asset right

you're giving up liquidity to someone else that needs it and the reason that they're paying you and what they're offering you is hopefully something that stores wealth and generates

so if you buy an asset right so let's say you buy a stock and you buy it for $100 a share right you buy one share $1

and you take that asset and you invest it right so you invest your asset you have your stock your kind of holding on to it right nothing is really happening maybe you get a dividend or two for a

dollar or two right nothing serious but then when you go to sell it it's worth $80 right so what's happening is you have a capital loss and there's some cool things you can do with your taxes

to defer capital losses and capital gains so capital gains happen when the opposite happens right so if you bought your stock for a hundred and then we're

able sell it for 120 then your capital gains will have changed right so those are your capital losses in capital gains exactly exactly that right so those are

your capital losses in New Castle games right some things create doing an income right so some stocks will pay consistent dividend so they'll pay you just for owning the stock basically and they'll

pay you a part of their earnings for owning the stock right things like saving accounts also create interest right and that's another way that you can maximize and then diversify diversify your income right so what

you're doing is you're basically looking at your income and you're saying okay well my income comes from one place right and we'll talk about how you do this but let's say your income comes in one place just your job right what if

you lose your job that sounds like a terrible proposition right this was like a turnover position so what you need to do is you need to try to diversify where your money's coming from so that you can take advantage of what's going on right

so that you could have more opportunities if something goes wrong now the third thing that assets can do besides earning you income is story Wow

is that they can reduce expenses they can reduce expenses and what that means is that a NASA can reduce expenses if we you're spending right now is more

expensive so let's say that you wake up every morning and you go to work right this is your house you got a nice little chimney right and this is your job it's like one of those bland corporate offices with all the all the windows

okay kind of looks like jail but it's a job okay so you go over there and every day you take an uber right for $50 stores right now it's not eat it's not

difficult to think about how buying a car at this cost even an exam really you know expensive car how buying a car is going to reduce your overall expenses right and increase the

actual income that you're able to take home so that's one of the things you need to consider when looking at different assets excuse me my nose is itchy I think I'm sniffing a

lot of dust all right so those assets reduce your living expenses right and it's not always immediate right so at first it might actually cost you more to

have the car because you're making large payments and so on and so forth but once you've paid it off you might be a lot more successful so do a quick review of

this section and move on to our next piece so assets are items with economic

value with economic values that can be converted into cash right that's a necessity if you can't convert an asset

into cash once again that's a possession right what do assets do they create income these store wealth

and they reduce expenses it's not even difficult to imagine a scenario where you do all three of these right so let's say you buy a house that has two separate it's a two family house

right so you're able to buy a house right which stores your wealth because assets sent to appreciated price such as houses right and reduces your expenses

because you're no longer paying rent and then you can rent out the extra room or the extra apartment to create income right so you can hit all three at the

same time now whatever asset you choose to invest in right selling the capital

together can be more lucrative than selling labor right and it won't be in the beginning necessarily but over time

it most definitely will be and the reason it most definitely will be over time is because you only have 24 potential hours of labor per day right

so you're only able to sell 24 hours of labor every single day on the other hand your capital is unlimited and how much you can sell in a day and how much you

can move around right and that's just a simple map that makes it so that selling capital over time is going to give you better results so the next thing we want to talk about

is a concept is the concept of debt and equity and so buying capital right so if you go out and you buy capital which is

commonly known as just borrowing right enables you to invest without first owning the capital right so you're able to buy a home without first owning the

money needing to do it right this means you're using someone else's money to buy this asset or this investment right and what you're assuming is that you'll be

able to repay it with your future earnings with your future earnings and this is pretty important right you're

assuming that you'll be able to repay it with your future earnings right so with borrowing capital to be able to do something like that to be able to

finance a house with a mortgage right house costs this is going to have costs

right so the asset will have to either increase your wealth right or your earnings will have to rise right or the income that you receive will have to increase rates let's talk about that to

family house situation if you buy a two family house two family house will appreciate in value so you'll be able to pay off your debt at the end by selling your house right if you have to make

interest payments regularly and what you do is you take the second apartment and you rent it out you'll be able to make interest payments out of that rent right so in that way you can borrow money from

someone else that has it buy the house and then pay back over time by doing an investment and that's an important thing to understand right so most commonly

right of course people borrow money for houses and cars and all kinds of things but one of the most common ways and one of the largest amounts that we

do is for companies right and companies call this an initial public offering right or a further a secondary public offering when they come back to the

markets and they offer something but in 2004 Google bought capital on the market

right and what they gave in return is they gave a piece of their future success right so they share their future

success and their future failure if it was to happen with investors right so any money they made any value that they

accumulated would belong to the people that they sold the stocks to they also split up the risk right so rather than taking on all the risk by themselves

they shared the risk with the investors right and the gains right so and that's what ends up happening when companies borrow money the reason companies borrow one is that opportunities happen pretty

quickly right although you may be generating enough cash to take advantage of an opportunity in ten years it might be more important to take advantage of the opportunity unless okay

so when you borrow you rent someone's money right that's kind of the the easiest and most direct way to understand this so you're renting

someone's cash and when you're renting someone's cash the result is debt lets you create that and so when you're borrowing you want to

make sure that you can service both the interest and the principal at the end right because no matter how much you borrow even if you owe interest over

time you will then have to pay back the original amount as well as any interest that it's accumulated right so debt for

you is a liability right so if you borrow money that is a liability which simply means that you are liable to pay it back right you are responsible for

paying it back and that will be your your obligation under this contract or under this agreement

furthermore in contrast the cost of equity the cost of equity needs to be

paid only due to an increase in income in income so if a company's health equity and their income isn't increasing they won't owe any additional money to their investors right they will just oh

whatever they vote overtime right excuse me so the important thing here is that if you are in a debt contract right equity is is much cheaper because of

that right equity is much cheaper than debt in that sense so it's much better for companies to issue stock share than issue bonds and this changes from time to time and there's a capital mix but that's not really what we're talking

about in this class right but overall you should know that the cost of equity right or the cost of owning a piece of something is going to be lower than the cost of just borrowing the cash upfront

right and so an important thing to remember because this is a personal finance class is that your charge interest if you have credit cards right and those interest rates are negotiable from time to time

so what you can do is every few months you can contact your credit card company and you can say the following well I would like to reduce my interest payments for my car and the reason is I

believe I have a strong credit history I regularly been paying on time and I'm able to reduce my interest rate that's something that you should be doing because they're never going to reduce

the interest for you right you're only going to have to ask for it but if things go wrong they will increase your interest in return

the next thing to consider is the value of debt and the value of debt includes the benefit of having an asset sooner rather

than later so let's say you're buying a house right let's say you have kids you just had kids and you're buying a house now your kids are going to be able to go out and play in the yard and have a

great time and have fun and relax right outside and enjoy it now you could borrow the money now and have the house while they're young while you're young enough to enjoy it or you could save up

money for the next 20 years and then when your kids are 20 years old buy a house right and the problem with the latter scenario is that if you buy a house in that situation there's no one

to get joy from it anymore right and so the reality is that some of the value of dad isn't having the asset sooner rather than later right another perhaps

terrible example is financing education right so a lot of the times to think the thing that's espoused or said is that well education costs a lot of money in the United States because you have a

higher income with that education right besides that being not necessarily a baseless claim but one that is yet to be proven in the long run right what we also know is that other countries are

able to do it for free right and so there's a societal benefit to having an educated population and that education is an opportunity for people to succeed and for people to do well right and so putting a lot of

people in debt doesn't make sense but it's important that I explain kind of the rationale on the rationale is well if I borrow money to get my education

now instead of later then I can do a job and that job will baby more money right and so you know as ridiculous as that is that is the current situation

by the way if you guys have any questions feel free to ask me questions let me check out there any questions I'm not sure if there are any question there's a lot of stuff happening in the chat don't see any questions so if there

are any questions please let me know and you know just put him in the chat and I'll address the questions as we go along so the next thing okay I got to make sure I got to make sure I'm in the right

place all right oh this is important right so I think the pain for education is totally ridiculous absolutely ridiculous so my goal with these streams

and with what I do is to make education free for anyone with an internet connection right and I'm gonna work tirelessly to make that goal a reality so that about you have to pay for an education because you'll earn

more money later it's total nonsense and my work is trying to prove that it's total nonsense all right so let's review

this section what we know is that financing assets through equity means

sharing ownership means sharing ownership which means that you owe both you own both the downside and the upside

of that business right financing assets through borrowing means the following right now you take

on the financial obligation to repay financial obligation to pay and so your financial plan will have to contain some contingency plans in order for you to be

able to pay for what you're borrowing right equity and debt both have costs and value and they're important to do to evaluate when you're making a decision

right and know that both are almost always available to you right and they both allow you to buy an asset sooner and so there's an additional value to you and being able to buy it sooner

because you're able to enjoy it for longer right you know as is kind of the the fundamental case we're all here for a limited time and because we're all here for a look at a time the ability to

enjoy an asset for two-thirds of my life instead of one-third of my life is going to make a difference I need to take it

straight ah okay delicious iced coffee all right okay now on to income

and risks so the cumin seed cumin risk right personal finance isn't about getting what you want right most of the

time it's actually about protecting what you have this will often change right

but the majority of the time a lot of your priority is going to be on protecting what you already own protecting the lifestyle that you already have the things are you already used to and in addition getting some

more things right but the majority of your time is going to be concerned with that so since we're assuming that you have some surplus of income right you

have some surplus coming in you need a way to protect that surplus right now if you have a job and you work for someone and they're able to fire you in any

minute that's a massive risk right that's a huge risk if you have to then go ahead and find a different job and not have income for some time you'll be a difficult trouble so you want to try

to diversify your income sources right and the way you diversify your income sources is by investing your surplus income into something that generates income for you over time right this is

also commonly known this whole thing as not putting all your eggs in one basket right which I'm sure you've heard in the

past okay next so diversification has always brought up with investments right so you need to diversify your investments you know don't invest all your money into Apple

right although there probably wasn't a good I you know wasn't a bad idea 15 20 years ago right but overall it's not a good idea to have your investments all in one basket it's also not a good idea

and probably a worse idea to have all your income in one basket right so if you're selling it to one person like I said before you're going to run into some trouble right so let's imagine our fictional friend mark right in our

fictional friend market stuff figured out right mark is a school counselor so he has income coming in right his income is made up of things like health insurance and retirement benefits all

that stuff but he also gets a biweekly or a monthly paycheck or a weekly paycheck whatever it is but a regular paycheck he also tutors on the side right so he gets some other income

coming in right in the summers he paints houses so that's another source of income coming in right and then finally

he buys themselves sports memorabilia rents sports stuff in his free time online right and so what happens in this

situation if marks school lays him off marks fun right he might not have as much income as he had before but he still has sources of income now imagine for example if we were instead looking

at a person that was just a school counselor and had no other source of income right if that person was to get laid off they would have no source of income whatsoever they didn't ever really have to go into debt they didn't

ever they have to quickly find a job settle for whatever they have right lose their leverage in the labor market whereas when Mark goes back to negotiate if he doesn't like something about the job he's going to get his way because he

has other things that he can do in the meantime okay so make sure that you try to diversify your income you should also then try to diversify your investments right just like your sources of capital

you want to make sure that the things that you're investing in are different enough that you're able to make money in different ways right so excuse me

whether it's in capital markets or in labor markets diversification is absolutely critical right absolutely critical because you don't want to be exposed to just one

random shock right and so as a review right this is a rather short section she just has a review for every try to diversify your income and trying to figure out how you can diversify your

income in the best way getting a second job and not always be the best thing but you might have some hobby that can make you a little money on the side and try to figure out if you can do that in order to diversify your income and make

yourself more secure all right so that's one of the things to consider for your future financial play okay

so we move on to the next section the next section is the section called financial statements and so basically the idea is right we've looked at all these things and we understand the

basics of Finance right but we need a set of tools to be able to look at these things without every single time thinking well what's my income how much am I making let me take out the

calculator we need a way to be able to have a snapshot look at it for a day look at it for a week look at it for a month look at it for a year and make some decisions and that's going to

inform our goals and show us our weaknesses right now the tool that we're going to use our financial statements right so since the very first person can

count sheep I had a sudden need to draw a beautiful sheep so that's a sheep oh wait I she needs more likes our sheep

has four legs and a little tail a very hip human looking head right accounting was born okay so accounting is extremely important extremely important as a

matter of fact Warren Buffett the famous investor who was enormously rich and probably the most successful investor of our time if not in history basically

said the following when asked what he learned at his MBA right at his Masters in Business Administration the most important thing you learned without blinking he said accounting right that was the

most important thing that he picked up in that time so with this going to give you it's going to give you the tools for understanding your financial position for understanding your spending in your

income and how your money is moving around right so clay tablets were first used by Sumerian traders to keep records right and that was thousands and thousands of years ago right and so

today's accounting is called accrual accounting right and this is what most businesses use an accrual accounting accounts for things that have been treated with cash necessarily so it

accounts for cash but it also accounts for trading of goods it accounts for the future it it accounts for the recent past over long distances and in different amounts there's no physical

exchange of cash right instead you and I will be focusing on cash accounting and cash accounting is specifically specifically targeted so anytime cash is

exchanged every time you pay something every time you receive cash by borrowing something you're going to be following cash accounting so the most very modern cash accounting

was developed some time in the fifteen hundreds right but excuse me modern cash accounting is much older modern accrual accounting was developed some times in the 1500s due to a need

for exploding and basically expanding trade right so this trade got farther and farther away from the source it became more and more important to keep track of all the different risks and all different amount of money moving around

and everything else right and so we developed accrual accounting right well we focusing on the cash accounting which is a lot simpler right makes a lot more sense and is a lot more immediate right you pay for something you receive something right it's pretty

straightforward there's not really a lot of you know changes going on there right so financial decisions result in

transactions right which are actual trades that buy sell borrow and invest

all right so in that process right you're going to be tracking for buying and selling the flows in and out right so this thing spot as you buy you the cash flow goes out and as you sell the

kind of slow goes it range we're also talking about selling labor and capital here and as you borrow and invest you're also going to be tracking your current position right so we've already talked

about some of these excuse me some of these income statements right but they're going to be important in understanding what you do right so all of this is recorded in in a few places

right it's recorded in your income statement and we'll go over on each of these in detail income statement your

cash flow statement and your balance sheet and you're going to need each of these not only individually and not only interconnected but you're going to need

them over time as well in order to make good financial decisions right so the income statement will track the relative

size of your income and expenses right so if your income is $2,000 and your expenses amount to about eighteen hundred you'll be able to see how much of that is rent how much of that is your car how much of that is a latte right

for your cash flow statement you're going to be thinking about more about your liquidity situations how much cash is moving in and out right so if you buy a computer right that might affect your

cash flow statement because you pay cash for it right if you're later able to sell the computer because you let's say you bought it broke in and you invested a little bit you were able to sell it for a little more your cash flow comes

back in and so that nets out how much cash you have going in and out of the system at all time right and then your balance sheet isn't going to be overtime like all of these right so the first two

exist over a period of time right your balance sheet however only exists in a

snapshot in a specific moment okay so let's go into more specifics excuse me on the income statement

and before I do anything else I'm going to take a five-minute break I think we've been streaming for yeah I've been lecturing for a little over two hours so I'm gonna take a five-minute

break just to refresh and then I will come back in to awesome things with financial statements learn how to use them in order to take advantage of our financial situation if in the meantime

you guys have had any questions along the way feel free to ask them and I will be right back you huh I'm not sure about that you tell me

where my status is showing is away is it on uh on discord then it's showing us away because they'll have to change that I'm not sure if I haven't linked the

accounts or I might just have it as a way from before so I'll make sure I'll make sure to definitely look into that

oh I like that a-plus that's cool I like that eight plus a lot all right um excuse me okay now back to income states

so your income statement summarizes your expenses and your income right so in general it's basically how much money

are you taking in and how much money are you spending to get there right that's all of your income including wages and interests and everything else go through

the fellowship announcements okay cool well thank you for dropping by it's also that that's coming up there now I will make sure to change the away status to something else I will do that as soon as we're done here so thank you for that I

really appreciate it so your expenses are the cost of things in your daily living and your income is of course what you make in money right now as you accumulate more and more income as you

have excess income what you'll accumulate as well right so you'll have more and more wealth coming in and as your wealth is coming in you'll be able

to build new sources of income right this is a pretty pretty direct way so what

sometimes just glasses the names okay well thank you so much I'll definitely I'll definitely make sure that I uh that I have it on there that I have my account connected yeah that's a good idea right so the other thing that

income statements are very useful besides being able to see your expenses in your income right and how quickly or how slowly you're accumulating well it's for their level of detail right so

you'll be able to see how much money you make from your job how much money you spend on clothing how much money you spend on food or on rent right and the relative impact of those investments

right and how to make the greatest impact towards your goal so let's say your goal is to save more money or to pay more debt maybe you could cut out one of your expenses or limit them or

maybe it's time to increase your income in some other way right and so it's this allows you to identify the least expensive least expensive and least

expensive in terms of effort right way to get closer to your goals right that's going to be very important the next statement that we're going to look at

after the income statement is the cash flow statement cash flow right and so the cash flow statement will show you how much cash is

coming in and going out over the course of some period of time whether that be a week or a month or a year right and so this may not appear in your income and

expenses and the reason it may not appear is that your expenses on a regular basis don't involve probably buying computers right and so buying a computer would be a cash outlay right

let's say you decide to borrow money to buy a house you would have cash coming in and then immediately going out to create a new asset right to pay for the

house and so what this will show you is how good you are at creating liquidity and creating liquidity which means how

good you are at making sure that you have enough cash on hand to cover all of your expenses and how well the value of

your cash is stored right excuse me so your cash flow statement will actually be segmented into some

subtotals I need a new piece of chalk and luckily I have a whole pile of broken chalk down here right so your

cash flow statement will be all part of subtotals right so you'll have a bunch of different subtotals that you can look at in order to gain a little more a

little more insight right so for example you have operating operating expenses right and operating income that's how

much you get for just your regular day-to-day activities of working and eating and all of that stuff right you don't stop for financing right which will allow you to see how much money

you're paying towards service in your debt right or how much money you're receiving from debt that you have allowed someone else to take on right

and finally you have investing right so let's say you buy some rare coin right for two dollars and let's say in five years on your cash flow statement you're able to

sell it for five thousand right so your investing activity if you take a five-year span on your cash flow will reflect a $2,000 cash increase due to that investment and that'll appear in

that section and then finally you have something called free cash flows right and free cash flows are what's left over after you've taken your operating

expenses and your income subtracted or added any financing subtracted that at any investing and this is the cash that's left over for you to invest for you and you know take on more wealth or

spend or do whatever it is that you need to do with it that's your cash flow statement right the next thing is the

balance sheet so before I move on let me cover something very important right I'm not I I'm not going to give you a demonstration of how to create a balance sheet or how to create a cash flow statement because the majority of the

software that you use will do that for you right and just like long division or spelling creating these things manually

is no longer as valuable yeah absolutely I know I'll definitely be uploading this to YouTube once I'm done thank you for tuning in and yeah I'll segment it later

I probably won't segment it I'll upload it as one block so you'll have to jump to like two hours or whatever it is but hey you have a great evening or a great day or whatever time it is where you are

and yeah just watch it on YouTube thank you so much for being here catch you later alright so I'm not gonna teach you how to make these statements because the reason is if you input your

expenses into accounting software and we'll go through accounting software towards the end of the lecture you'll be able to pull up a balance sheet what you need to understand is the insight that it gives you and that's what I'm trying

to teach you here right so the balance sheet is sometimes called a statement of financial condition right and the reason it's called that is because it's only going to show you a specific point in

time right so if your other statements can show you a three-month span right your balance sheet will only appear and a specific point in time and showing

you exactly what's going on right so it's not on a continue of like all your other things so your balance sheet is going to be made up of assets which are

things that can be traded for liquidity like we said before for cash it's going to mean up of liabilities which are debts that you owe or you know other

other things that you owe money on right and the difference between these two assets minus liabilities is going to be equal to your net worth right and your

net worth is composed of the following right so you can imagine networks as the following if you were to take everything you own right now and sell it pay back all the debt that you owe the remainder

is our net worth right if your net worth is negative you should be working very hard to get it out of the negative right if your net worth is negative for too long you'll be forced to declare bankruptcy because you won't be able to

address your liabilities right but this is exactly the kind of insight that the

balance sheet will give you so let's do a quick review this section and move on to comparing and analyzing financial statements

so here's the review there's three commonly used financial statements the

income statement the cash flow statement

and the balance sheet the results for a period of time on the income statement and the cash flow statement so these are

going to be a period of time right some continuum and a balance sheet is going to be in a moment right your income statement lists your income and your expenses your cash flow statement

is your operating expenses and so on and so forth so things that are coming in and out in terms of cash right and your balance sheet lists assets liabilities and importantly the difference which is

your net worth and in the event that your net worth is negative for too long which means that your assets are not large enough to service your liabilities you'll end up in bankers businesses literally end up in bankruptcy as always

immediately if this happens right but you will have some time to kind of recoup and figure out your way perhaps by borrowing more by having the opportunity to take another job um the

reason I do a little review sections here is because I miss stuff right so it's not always the case that I you know I think people need a review and I think

it's nice to have a review just to see what we covered in what was important but sometimes I miss stuff in my own notes and when I missed up in my own notes something I'm able to go back and catch up on it if I catch it in the

review okay so comparing and analyzing financial statements so comparing and analyzing so a tool is only as good that's how you use it right if you use a hammer to go

fishing you're probably not going to be very successful if you use a screwdriver well screwdrivers are pretty useful in general it's hard to think of something that you could use a screwdriver that's

not that useful but you get the point a tool is important right the tool is important but how you use it is going to be even more important so one of the things that you're going to do when you organize all this information right so

these three statements allow you to organize your entire financial position into an easy-to-understand way right you organize it into something that's easy to understand it's easy to interpret

that's easy to see right easy to see on the surface and so what you need to do now is you need to take those statements you need to make them even more useful for yourself right so one of the ways you're going to start making it more

useful for yourself is by making them common size and what that means is the following right so if you have an income statement that for example says like we

said before right you earn a thousand dollars you earn a thousand dollars right you spend five hundred on rent you spent three hundred

on lattes and you pay a hundred dollars towards your debt right so this is rent these are lattes and you pay a hundred dollars so you debt and then you save

$100 obviously this is not a realistic example because you don't eat anything but lattes right but what you do with a common size statement is you express it in percentages so fifty percent of your

income goes to red thirty percent of your income goes to lattes ten percent of your income goes to service in your debt and ten percent goes to savings right now if you were to glance up this

in a moment right if you were to glance at it without this piece right here if you were to just to say okay well five hundred three hundred you know I don't know 500 is a big number right but if you look at it this way right these

numbers are simplified and there's not that many of them but percentages become useful because when you're spending thirty percent of the money that you're earning on lattes you might have an addiction right this one actually this

might actually be a problem not not you know not just that it from time to time but you might need to go seek therapy or speak to somebody about this issue right so you're going

to be able to identify problems much easier when things are common sighs right so on a cash flow statement right

you're going to look at your different subtotals and so you're going to have inflows and outflows as a percentage of their own subtotals right so for example

if 10% of your inflows come from investing right if 30% of your inflows

come from finding cash on the floor right either you're making a very small amount of cash and you happen to find three dollars that year right or you seem to have some kind of supernatural

talent for finding cash but once again it's going to allow you to identify where most of your money is coming from and allow you to diversify more

effectively and more quickly in order to make sure that your income is secure and then finally your balance sheet can also

be made common size and how you're going to do that is you're going to make everything a percentage of the assets right so for example if you're owning at if you only ask that is a house and it's worth a thousand dollars right and you

owe nine hundred dollars for a mortgage and then you owe three hundred dollars for a credit card right excuse me a hundred dollars for a credit card let's make it simpler I don't really think I can do complex maths

right now but let's just say this is going to be 90 percent of your assets are locked up in a mortgage and ten percent of your assets are locked up in

credit cards and so you have a net worth of zero in this situation but you're able to see how much of your net worth corresponds to your assets and how much

you owe compared to how much you actually own right the next thing you're gonna want to look at is relating the financial statement so you've already made them common size

right so they're easy to interpret right so if your income is a million dollars if things are common size things are still going to be from 1 percent to 100 percent right if your income is ten dollars they're still going to be from 1

percent to 100 percent right and so it's easy to scale up the numbers in percentages and see the relative impact of everything that's going on and as your financial statements increase in complexity this will provide you with

more and more insights right the next thing you'll be able to do is relate them right and the way you relate them is the following right so you take a certain point in time times zero right

and you look at the balance sheet you look at your balance sheet so you look at your current situation which is what we started out with doing and just in

this lesson right then let's say three months passes right three months passes and so over here you look at your income

statement and your cash flow statement right and you see what's happened over those three months and then three months from now right you look at your balance

sheet again and you start to see the impact that this has had on your balance sheet the impact of the decisions for your income and your cash flow have had on your new balance sheet and then you start the process again right the reason

I do three months is that's a quarterly iteration right sometimes it's okay to do it every year if your income situation and everything isn't changing too much but as long as there's some change in you're working on this process

getting more practice that's better right so when I started out I was actually doing this monthly now I'm doing this quarterly right I'll talk a little bit more about how I do this

personally in the at the end of the lecture okay so when you start to see as you start to see these relationships and you start to see the consequences of

your actions right so if you took some actions to create more income by investing in assets right you went ahead and you ended up in the situation where now on your balance sheet you have more

assets right but perhaps you might even have a lower net worth and the reason you might have a lower net worth is maybe to acquire those assets you've borrowed money right so the next thing that happens or

the next thing you can look at is called ratio analysis now I'm gonna be honest with you I don't remember these ratios by heart so I'll be looking a lot off of

my paper but what I'm trying to give you isn't what you should write down or remember a hundred percent and say well these are the ratios of music what I'm trying to give you is I'm trying to show

you how we can take these three relatively simple statements and leverage them in order to answer very very complex questions so for example how much income is used out by my

expenses right and what you would do there is you would take net income right will abbreviate it as net I and divide it by totally and all of a sudden you know exactly how much of your income is

consumed by your expenses right how big is the income supporting the assets which is just net income / total assets right what is my return on net worth how

much asset value is financed by debt another question would be how large is debt relative to net worth right so if your debt is larger than your net worth you've got a problem

another question you can ask is how well does income cover interest expense so if you owe debt because you've borrowed to invest in an asset that's making you some income how well does your income

cover that debt right if you've just borrowed to buy a house and it's not making you any income and you're relying on making money every single week in order to pay it off how well does it

cover it right does it cover it well enough or are you in a situation where you're very close to the edge right and maybe you need to start rethinking what

you do see if my cat just laid down on the pile of papers and then finally you could look at your cash flows right so how much do payments for investments in

financing take from my income right so let's say I borrowed some money and I want to know how much of my income goes into just servicing that debt just paying it off on a regular basis right

so you'll be able to find all of these things within your software you'll be able to use it on a regular basis right and what you're going to end up with is you're going to end up with the freedom to go ahead and say okay well

I've got these three simple financial statements right this is the value that I kind of want to communicate with this piece of the lesson is that we've started with three financial statements

right and we've ended up with one a way to see the impact of decisions through

time impact of decisions right we can see the relative impact of every

component right and we can find out and stress test our own income situation in

order to understand what goals may be important to set in the short term and in the long term right and this is just by using these three based financial

statements right and so we're going to look at how to do that right but rather than kind of show you and demonstrate how the financial statements work like I said before right long division and

spelling are not that important to learn you need to learn the basics of how things work but after that right there's software that can do it for you and so you should be relying on accounting

software right and your accounting software is going to do the following right you're going to be able to collect data now if you do most of your spending

electronically you're going to be able to download this from your bank statements and so on and so forth and import it directly right if you don't do it mostly electronically or if you don't want to bother with that you can just

simply input it once a month or once every three months step-by-step right at the other day even if you import the data you'll often have to categorize it right so when you go to a local store

you might be buying food you might be buying computer parts you might be buying different things and so your bank might not know exactly what you're spending your money on and so you're going to have to integrate that in some

way you're going to have to answer those questions right now once you've gone ahead and collected that data and put it in you're going to be able to generate your reports and the reports that you're going to

generating are these three financial statements your income statement your cash flow statement and your balance sheet right generating these statements will allow you to then have the insights

that you need to understand where you are what progress you've made evaluate your past decisions and so on and so forth right so there's really one major thing to consider when you're

looking at the software right a very important thing is for have security right so if you're not comfortable with someone selling your data probably don't use something that's web-connected right

I tried you need a budget right I you know I like that software a lot it's pretty interesting it's easy to use and it's it's available on Steam right which I think a lot of people who already have

installed and it's not a good price point which is about thirty dollars right so that might be a little bit expensive if you're thinking about budgeting your $100 that you have to spend every month right but it's not

that expensive when you think about the long term impact of being able to do this on a regular basis track your expenses and obviously save money and do better right so there's others there's quick in that money dance and you can

just look around for what you're doing and you'll be able to do things like make make projections and make budgets and so on and so forth and try to control your spending and predict your

spending in different ways but the most important thing you'll be able to do is you'll be able to do what if scenarios right and your what-if scenarios are going to be critical to your goal playing so what happens if I take out

five thousand dollars worth of debt at six percent right what happens if I lend my friend five thousand dollars and don't charge him any interest right what happens to my statements what happens to

my cash flow what happens to my income statement over time if I do the following and these what-if scenarios are going to be great to experiment and understand how realistic and how timely

your goals are right and how good your decisions or bad your decisions might be right so look through the personal finance software there's going to be a lot of it there's going to be quicken I

can list off a few more there's money dance ace money YNAB banked repro rich or poor budget Express

account Express and I cash there's home bookkeeping three click budget and then you can use Microsoft Excel right you can just use Excel you can figure this

out yourself there's plenty of templates that you can download and as a final note I'll mention the following so I

personally tried Wyatt a/b but I no longer use software for my account and I don't use software for my accounting because I found that I would rush

through this process and rushing through this process isn't good so I found that I needed time to reflect and because I needed time to reflect what I actually

did was I did this with pen and paper and so there's something valuable about sitting down and writing that okay while I've made fifty dollars an income off of

my savings this one right or I spent $100 on clothing this month right and physically writing that out because it takes time does it take time you're able to digest and process everything that's

happening and you're able to think about well how would I do things differently what I really be able to do this a different way right you're able to think of anecdotes and scenarios in your life well okay maybe I bought extra clothing

because my son was born and he needed clothes and so on and so forth when I use pen and paper right but for starters and for understanding of these statements work I really do recommend

using accounting software all right that concludes our lecture for today once again I am Dennis the professor this is

personal finance and we're looking at the tools to help manage debt create wealth and get to income independence

let's see if there are any questions what's the name of the steam software again yeah sure the steam software is Y

and a B which stands for you need of budgets and if someone from you need a

budget sees this video and you'd like to support my cause and my teaching do reach out to me I'm not sponsored by you guys I actually don't take sponsorships or advertisement because I think that

doesn't belong in education but if you want to donate and support I'd appreciate it so if anybody know somebody from Y a B let me know I actually like this software