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April 11, 2011Financial Insecurity in AmericaFinancial insecurity in the US does not exist because incomes are too low, but exists because consumption per person is growingMore consuming + less saving = more debtCredit card debt is rampantIs America in Trouble?Real income per person is rising, but:Savings rate is fallingDebt is increasingPlanning for Financial SuccessThe bad news: Failure to save regularly, conserve wisely, invest strategically, and use credit cards prudently is the major cause of financial insecurity in AmericaThe good news: Each one of these things is fixableThe Importance of Financial SecurityFinancial security leads to:Less conflict in marriageBetter healthRetirementA greater ability to achieve personal goalsThe 12 Key Elements of Personal FinanceThe following is a list of fundamental steps that are necessary for achieving wealth and financial security into the future#1 Discover Your Comparative AdvantageDiscover what you can produce at a lower opportunity cost than other people. Start now!Don’t just think about money, your opportunity cost includes your personal satisfaction as well#2 Be EntrepreneurialRemember, in market economy, people get rich by helping others and discovering better ways of doing thingsEntrepreneurial talent involves the ability to discover:A) New products that are highly valued relative to their costsEndless possibilities!B) Cost-reducing production methodsC) Profitable opportunities that others overlookIt is hard to know what will workRequires the tolerance for risk:Entrepreneurial activity and self-employment are riskier than being employed by someone elseThis greater risk can translate into higher income and wealthEntrepreneurs tend to:A) Have high savings rates: they are often reinvesting in their businessesB) Work long hours and work more strategicallyA free market economy tends to promote entrepreneurship#3 Spend Less Than What You EarnSavings and investment are the most likely ways you can become richStart saving now!A) If you don’t exert the willpower to save now, it is unlikely that you will start laterB) The longer you wait to start saving, the more potential wealth you give up!You only have to save a littleStart out saving small amounts and then build up to larger amounts“A journey of a thousand miles begins with a single step”— Lao TzuApril 13, 2011Save automatically: You can have the money automatically deducted from your paycheck or bank account for savingsSave strategically: Tax Deferred Savings (government cannot touch it)401 (k): retirement account, not taxed right now; matching program: employers will match it up to a certain level (like giving you free money)  to attract employeesWant to put the most you can into 401k so that you can get the most “matched”Don’t count on Social Security to exist when it’s time for us to retireTraditional IRA’s: reduces tax bill now; taxed laterRoth IRA’s: taxed now; not taxed later#4 Don’t Finance Anything Longer Than Its Usual LifeYou don’t want to be paying for things long after your done consuming themThree things worth financing: (taking out loans or putting on credit)HouseOnly buy a house with at least 20% down paymentBetter credit history  better interest rate on loansPay credit and bills on time!Buying a house is not risk freeOnly buy a house if you plan on living there for a long period  can ride out bad downturnsEducationAutomobiles (in some cases)Things you don’t want to finance:FoodClothingEntertainmentVacations(Enjoy it quickly and then end up paying off for a long time)#5 Get More Out of Your MoneyA) Avoid credit card debt1) Interest rates on credit cards are very high (usually higher than savings and investment return rates; average credit card interest rate is 15.39%)2) Always pay your credit card in full and on time!Important to establish good credit historyWise to use credit card like a debit card just to be safeB) Consider purchasing used items1) New cars lose substantial value as soon as they are driven off of the lot (good if you’re going to own it for a long time)2) Used cars have higher maintenance costs, but depreciation costs are much lower (good if going to own for a shorter period of time)April 18, 2011#6 Begin Paying Into A Real-World Savings Account Every MonthThings are going to go wrong, it’s just a matter of whenEstimated that every 10 years, a major and costly event will occur in your lifeMake contributions to an emergency savings account a regular part of your budget#7 Harness the Power of Compound Interest“Mr. Einstein, what is the most powerful force in the universe?” —“Compound Interest!” (saving early to become wealthy)The Rule of 70: Divide by 70 by the expected rate of return and you will see how long it takes for your investment to double (can also work with 72)All about saving early!70/rate of return (interest rate receiving from investment)#8 DiversifyDo not put all of your eggs in one basket!Investment involves risk, especially in the short run. Mitigate this risk by building a diversified portfolioHistorically, long term returns of stocks have been really good. Just make sure you:Hold a large number of unrelated stocksHold stocks for a lengthy period of time (about 10-15 years)The Law of Large Numbers: the tendency, over an increasing number of observations, for the sample average to approach the population average (the expected value)i.e. if you flip a coin enough times, you will see that the probability of flipping heads over tails and visa versus will be 50-50 (the expected value)If you hold a diversified set of stocks, some will do poorly while others will do well so that the rate of return will converge toward the historic average of the stock market (7%)Avoid Double Jeopardy:If your company offers you a stock-based retirement program then you may want to sell your company’s shares as soon as you are permittedCompanies do this to give you an incentive to work betterIf you don’t, and the company goes under, then you have lost your job and your investment!Types of investments (from less risky to more risky; from lower return to higher return): checking account, savings account, CD/CD ladder (pay attention to expiration dates), mutual funds, individual stocks#9 Indexed Equity Funds Can Help You Beat the Experts Without Taking Excessive RiskRandom Walk Theory: Current stock prices reflect all known information about the company, so unforeseeable events is what drives changes in stock


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