ANNOUNCER: Paco De Leon is an author with expertise in banking, business consulting, financial planning, and wealth management, and she's the founder of a financial firm dedicated to inspiring people to engage with their personal finances.

PACO: We're all weird about money, no matter how much you have.

It's no surprise that so many of us struggle with our finances.

I'm going to give you money advice that you can actually understand, and practical tools so you can take action today.

This is the reset we all need.

This is Finance for the People.

(audience applauding) Howdy, hey, and hello there.

I'm Paco de Leon, and today we're going to do something that seems to be frowned upon, but should be normal.

We are going to talk about money.

I'm a personal finance expert and author.

I've had lots of different jobs in the world of financial services.

I got into finance because it seemed like magic.

Somehow people are making something from nothing.

They're using money to make money, and to me, it's like there's slight of hand inherent in how the financial world operates.

I chose to study finance because I wanted to know how it all worked behind the curtain.

What I learned is that in a lot of ways our feelings about money influence our financial behaviors.

Sometimes those feelings and behaviors can prevent you from stepping into your financial power.

So today, we're gonna learn the rules of an unfair game and better understand how to play it.

We're going to go on a journey of self-discovery that will help you find your agency and step into your own financial power.

Now, every journey has a map.

So here I give you your map.

This is the pyramid of financial awesomeness.

(audience chuckling) These are all the components you need to master in approachable, broad strokes.

We're gonna climb this pyramid level by level, understanding the financial concepts you need to know and learning the action steps you need to take.

So let's begin our journey of financial wellness, starting with our mindset and addressing a surprisingly important question.

Why are we all so weird about money?

Well, the recipe is perfect.

Take our fears about our survival, our confusion about how investing and taxes work.

Layer those feelings with your limiting beliefs.

And don't forget about the backdrop of classism and inequality.

And these are just a few examples of how we become weird about money.

While there isn't just one reason why we're weird about money, our external and internal environments and our past behaviors are all shaped by how we think about money, what we believe about money, and what we value.

♪ I'd love it if you'd share some of the kinds of sayings that you grew up with about money.

LATOYA: Well, I definitely grew up with the saying that money doesn't grow on trees.

MAURICE: With my family, it was don't talk about it.

PACO: Oh, (all laughing) the famous, don't talk about it.

MAURICE: Exactly.

DAVID: So my parents grew up during the Depression, and what I learned from it was, was the concept of value.

PACO: Hmm.

DAVID: You know, like something may cost a hundred bucks.

What is it- what- what is it really worth it to you?

PACO: I have to ask, does it feel weird talking about money in this public way?

ELIZABETH: I like talking about money.

PACO: Okay (laughs).

ELIZABETH: And I think any kind of taboo topic, as long as you're respectful of others, it really should be talked about.

MAURICE: I think as we talk more about it, we realize we're more alike than we are different.

Everybody wants the same things outta life.

Many of us fear the same things.

So when we talk through those things, we really have the opportunity to learn from one another.

PACO: It's beautiful.

So in a way, it's normal to feel weird about money and it's not your fault.

But if you don't take your worldview apart and see how the beliefs got programmed, you're letting a bunch of other people's rules subconsciously dictate how you deal with money and how you think it works in the world.

Fortunately, there are things you can do to make sure that these societal influences don't cause you to make bad financial decisions.

So what's the most fundamental decision you need to make about money?

How to spend it.

The way we spend our money can sometimes feel chaotic.

I've worked with all sorts of people from folks that barely make enough to get by and folks in the 1%, and no matter how much folks make, everyone I've worked with has always felt like they didn't have a way to manage their spending.

And at the end of every month they wondered, where had all their money gone?

(audience laughing) If you feel this way too, just know that you are not alone.

♪ Okay, I have a confession to make to you guys.

I've been terrible at budgeting for many, many years, so I'm gonna lead with that.

And I- I failed a whole bunch of times, and over time what I realized was I couldn't do this all or nothing budgeting.

Did you guys also struggle with budgeting too and having a spending plan?

Was I the only one?

ELIZABETH: No.

PACO: Okay.

(laughs) ELIZABETH: I was in law school and I didn't have any money to budget... PACO: Okay.

ELIZABETH: Period.

But once I started to get some, I was looking at it and I was like, well, what do I- what do with it?

Do I go buy the designer jeans now that I have some money, LATOYA: Get the jeans- ELIZABETH: Or do I- get the jeans, or do I behave responsibly?

And I actually had to look up some guidance on that because I didn't- I didn't know, I'd never really had money before.

DAVID: Before I met my wife, I was in deep trouble with credit cards, you know, and she taught me not to, you know, pay for ordinary expenses on credit cards and- and carry a balance.

That was just a stupid idea, you know?

But it was using it to get around sort of those monthly shortages and getting things and- and caught up with me, you know?

But, so I had to learn how to budget, you know, within my means.

PACO: Maurice, do you have any thoughts on being in your 20s and how you were with money?

MAURICE: Yes, sometimes I shake my head at some of the decisions that I made.

For me personally, it was a lot of childhood trauma from financial insecurities.

PACO: Yeah.

MAURICE: So when I began to make money, it was just like, hey, just go do all the things that I couldn't do as a child.

But then eventually you have to wake up and realize that- that lifestyle creep is dangerous.

PACO: Almost everyone I've ever worked with has struggled with budgeting or having clarity on their spending.

If you're feeling this way, you are not alone.

Traditional budgeting is tedious and demands an all or nothing approach, leaving you always asking, can I afford this?

Fortunately, there's a better method.

You have to split the check.

♪ Splitting the check is a process to manage your spending in a simple way.

It begins with understanding that there are only three categories for your spending.

There's your bills and life for essentials, the fun and BS group for non-essentials and the future and goals group, which is all the money you save and invest for your future self.

Every time you get paid, you'll need to split the check.

Here's how it works.

Set up two separate checking accounts.

One for bills and life, one for all the fun and BS.

And for your future self, you'll start with an emergency fund, but it's also a category that encompasses retirement and any future financial goals you're saving and investing for.

Next, fund each account with how much you need.

This is how you are literally splitting your check, and in order for it to work, you must separate your spending.

This means you only pay for bills and life expenses out of that account, and only use the fun account for the non-essentials in your life.

In other words, don't bring your bills- and-life debit card to a fun-and-BS situation.

If you're going out for a night of fun, leave your responsible bills-and-life debit card at home.

So let's get into a little bit more detail.

How do you fund your accounts?

You have two options.

Option one, automate.

Set up your direct deposit to go to multiple accounts.

This is great for folks who earn a regular paycheck.

The other option is to do it yourself and manually transfer money after you get a check.

It's the most time intensive, but it does force you to look at your finances regularly.

It's also a good option for freelancers or retirees who don't have a set paycheck.

Splitting the check is a simple way to manage your spending.

It eliminates the all or nothing approach with budgeting, and it doesn't require you to keep track of every dollar spent, which means you can approach your spending from an entirely different perspective and mindset.

When you split the check, the question shifts from can I afford this to, how do I wanna spend this?

This system will help you protect yourself from yourself.

Even if you're pretty good with money like bumpers on a bowling lane, you need to protect yourself from your own irrational decisions and your particular weirdness around spending.

Splitting the check helps you boost your savings and refocus your spending in a way that's more aligned with your values.

When you split the check, you can focus on what's essential, but also what's life-giving.

You're giving yourself and your partner if you have one, permission to spend that money as you wish.

This reduces friction in your family and in your own brain, and it makes it easier to enjoy your money.

Another foundational aspect to having healthy finances that I wanna talk about is how to think about financial goals.

So it's important to learn how to set goals, but it's even more important to realize that sometimes what you get by achieving your goals is not as important as who you become in the process.

♪ So I love talking about financial goals.

I haven't always met the goals that I set out, and I've learned a lot from that.

So I wanna talk to you guys.

MAURICE: The personal goal that I have now is I have five children, nine and under.

And my goal is that should they go to college, that they don't have to borrow for it.

And that's important to me because I remember going to college and wondering how I was gonna pay for it, and the stress that comes from that.

So I think as we talk about setting goals, we have to understand ourselves and why things are important to us, not just that they are important.

PACO: What about your financial goals, LaToya?

LATOYA: One of my financial goals is preparing for retirement.

Create a side hustle (laughs) or you know, create a way for more income to come in.

PACO: Mm-hmm.

LATOYA: And so I'm going to use that to help me as I get ready to transition into my next career, my encore career and into retirement, so yeah.

PACO: That's so exciting.

Goals can be elusive and challenging for many reasons, but setting a goal is the starting point.

Once they're set, the best way to optimize for reaching them is to deconstruct the goal into a behavior that would precede reaching it.

For example, you might have a goal to save $3,000 to go on a trip.

The behaviors that would precede reaching your goal could be to generate extra income each month to put it towards the trip, or it could be to automatically save a portion of your regular income.

When you focus on the behaviors that precede the goal instead of the goal itself, you'll get more out of the process regardless of whether you achieve your goal.

I hope this reframing can help you see that when you focus on your behaviors instead of just the outcomes, there are fewer rules and with fewer rules come more ways to win.

Having goal-driven financial behaviors is a way to play offense in your financial life.

While it's important, not all financial behaviors fall into this category.

Nobody's goal has ever been to pay for a future divorce or medical problem, to lose your job or to stay afloat during a future pandemic.

But it's still important to consider this.

In these instances, we have to play defense.

♪ Think of your financial life as a sandcastle.

You spend time building it up and make decisions you hope keep it from crumbling, but there are always things outside of your control.

Financial shocks and emergencies are the waves threatening your sandcastle.

The tide will inevitably come in.

What you need is a moat, also known as an emergency fund.

The textbook definition of an emergency fund is a cash reserve of 3 to 6 months of your expenses.

Let's say for example, if your monthly expenses total $3,000, a fully funded emergency fund is between nine and $18,000.

Before you start to feel overwhelmed, remember to focus on the journey, not the destination.

Savings is a habit.

It doesn't matter how little you begin with, it's just important that you start the habit.

The best way to make savings a habit is to make it automatic.

Leverage the technology that's available by setting up automatic transfers or by directly depositing a portion of every dollar you earn.

Before you set up your automatic savings, you'll have to decide where to park your emergency fund because the type of account matters.

I recommend putting your money into a high yield money market savings account, which generally earns a higher interest rate than a regular savings account.

The bank also matters.

I recommend that you put your emergency fund at a bank that is different from the bank where your bills and fun accounts are located.

This makes it inconvenient to make transfers, and that's a good thing.

It's another way of protecting yourself from yourself.

So then, how do you know when it's okay to use your emergency fund?

Before the emergency hits, write down some of the things you define as being a true emergency.

If you have an unexpected expense that you absolutely have to pay for like a medical expense, this definitely constitutes use of your emergency fund.

You get laid off, you have to travel to see your very sick mother, your water heater breaks.

These are all valid emergencies.

Non-essentials, like a last minute vacation, are probably not the most prudent reason to tap into your emergency fund.

Now that we've tackled a handful of fundamental building blocks, it's time to shift our focus.

Coming up, we're gonna talk about debt.

How do you get out of credit card debt?

How do credit scores actually work?

And how do you play the credit score game to your advantage?

It's a deep dive into debt next on Finance for the People.

(audience applauding) (audience applauding) Welcome back to Finance for the People.

Now it's time to talk about a big topic that often comes along with big feelings.

Debt.

I'm very familiar with debt, not just because I've been in debt myself, but because my very first job in the financial services industry, while I was working towards getting my finance degree, was as a debt collector.

One of the biggest lessons I learned was that people feel all sorts of negative feelings about debt.

So it might surprise you to hear that debt can actually be positive if used correctly.

Debt is a tool that allows people to start businesses, they otherwise couldn't.

Debt can allow families to live in homes that they couldn't afford to purchase outright, but of course, unchecked, runaway debt, predatory lending practices and overspending can create an unnecessary burden of debt, turning a positive tool into something financially toxic.

I'm gonna give you ways to reframe debt so you can understand how to use it as a tool to your advantage.

I'll teach you how to play the game of credit scores and give you tips for dealing with credit card debt and loans so that you walk away with a greater understanding of this nuanced topic.

♪ Now it's time to talk about the prickly subject of debt.

How are people out there feeling about debt in your opinion?

ELIZABETH: They often feel ashamed, unfortunately, and they feel ashamed and like other people don't understand PACO: Hmm.

ELIZABETH: How they got there, even if they had a very good reason for going into debt, like going to school.

PACO: Mm-hmm.

ELIZABETH: Or having to take out a loan to pay for a medical issue, or even buying a house that's a long-term debt.

So the word debt shouldn't have this- this negative connotation, but it it often does.

PACO: Mm-hmm, right.

ELIZABETH: So that's one of the reasons people don't wanna talk about money.

LATOYA: I am hearing, as I listen to some younger people, I am hearing that they may be a little indifferent to debt.

PACO: Yeah.

LATOYA: Just because so many of their peers have incurred a lot of debt and they sort of feel like there's no way out.

PACO: Mm-hmm.

Yeah, one of the toughest things about debt is the systematic nature of it.

The systemic issue of first of all, inequality, racism, things like redlining, and the fact that people who need to use debt or credit get penalized for doing so.

So I think it's really hard to give blanket solutions with how to attack debt because everybody's coming from a different place, and I think it's important to recognize that.

DAVID: Well, you know that's a good point because there are certain neighborhoods in this country where your only source of capital or credit are petty lenders who are charging 30, 40, 50% interest and more, which is crazy.

MAURICE: A lot of people don't realize that everybody at some point has either for the most part been in debt or they may have certain parts of their life where they have debt.

I think everybody thinks the situation that they're in, nobody has ever seen.

PACO: Mm-hmm.

MAURICE: And that's just not the case.

And because we have this condemning nature of our society around debt- PACO: Hmm.

MAURICE: People don't wanna talk about it, and if people aren't willing to talk about it, they won't get help and it just continues.

PACO: Yeah, that's a great point.

♪ Some forms of debt are considered better than others, but since the nature of debt is paying what is owed, deciding which category of debt is better than another is like having to choose between the following: being punched in the face in exchange for a cupcake you already bought an ate four weeks ago, being kicked in the shin in exchange for being able to drive a car to work, or being thrown down a flight of stairs each month.

But hey, you own the flight of stairs and the house attached to it.

These categories are secured or unsecured debt and revolving or installment debt.

Secured debt is any debt backed by an asset as collateral.

Since assets are valuable, collateral makes lending less risky for the lender and often results in a lower interest rate.

If the person who borrows money can't pay it back, the lender can seize the collateral, something like a car loan or mortgage.

Unsecured debt has no collateral such as student loans and medical debt, as there's nothing the lender can seize.

When you borrow money classified as revolving debt, you usually have a maximum amount that you're allowed to borrow, but you're not obligated to borrow it like a credit card.

Non-revolving loans are installment loans.

Installment loans allow you to borrow a fixed amount of money and pay it back in installments over time.

The types of debt ranked from the least to the worst, to the criminal are secured installment debt, unsecured installment debt, secured revolving debt, unsecured revolving debt.

Then you have the payday loans that are just a trashcan fire.

Looking at debt categorically, can help you understand the mechanics of how borrowing works.

This is especially important when you're considering the decision to borrow money.

The decision to borrow money considers the type of debt, whether the debt is something one can afford financially and emotionally, and the cost of debt compared to the potential wealth it can help you build.

We can't talk about debt without talking about credit scores.

Credit scores are odd.

I'm fascinated by these three-digit numbers.

They're used to help lenders judge the likelihood that they'll get paid back and to determine our credit worthiness.

Credit scoring is a system that we can't really opt out of if we ever wanna borrow money, rent an apartment, or in some instances get a job.

This is why it's important to learn how to play the credit score game.

While I understand the importance of credit scores from a lending perspective, it can be problematic for us consumers.

Credit scoring can create a system where people who need access to credit the most get penalized for having to rely on credit.

Understanding how our credit scores are calculated can arm us with the knowledge we need to bolster our scores.

♪ How is your credit score calculated?

We don't have the exact methodology because the actual calculation is not public information and can sometimes change.

What we do know is the calculation consists of five different elements.

Currently, the categories and their weighted impact are as follows, payment history, 35%.

Credit utilization, 30%.

Length of credit history, 15%.

New credit, 10% and type of credit used, 10%.

Your payment history is a record of how you've handled paying back money that you've borrowed.

For example, when you borrow money for a student loan or from a credit card company, each month the lender you borrowed from reports your payment history to the credit bureaus.

Since payment history accounts for 35% of your score, it's important to prioritize paying your payments on time.

Your credit utilization ratio is how much of your total available revolving credit you're using compared to how much revolving credit you have available.

Revolving credit are credit cards and lines of credit.

It's like the amount of gas in the tank relative to the tank's capacity.

If this tank can hold 20 gallons and it has 13 gallons in it, then the utilization ratio is 65%.

Since credit utilization accounts for 30% of your score, it's important to keep your credit utilization as low as possible.

A lower utilization translates to a higher score.

Your length of credit history simply means the amount of time you have a credit line open.

The longer the better.

Credit history accounts for 15% of your score.

One way to get good marks in this area is to avoid closing down cards too soon.

I know this might feel counterintuitive and it can present some risk, but that's why it's called playing the credit score game.

New credit accounts for how many new loans or credit cards you've opened recently.

When you apply for new credit, it does bring down your credit score temporarily.

I can understand this reasoning because lenders don't want people applying for new credit all the time because with access to too much credit, there's the risk of borrowing too much.

New credit accounts for 10% of your score.

And finally, 10% of your score is impacted by the type of credit used.

Type of credit used refers to whether your debts are installment loans or revolving credit.

Loans that have fixed terms are considered better forms of debt than a credit card.

So now you know how your credit score is calculated, what is considered a good score and how is it helpful to you?

850 is the best score and when you get down to around 630, it starts to get classified as a poor score.

A good score is rewarded with lower interest rates and better credit and debt options.

Below average scores are punished with higher interest rates and crappy credit and debt options.

Don't be too alarmed if your score is bad.

Rebuilding your credit can take a while, but time heals all wounds and it can also do wonders for your credit score.

Focus on the most important aspects of your credit score to rebuild it.

There are a few simple steps you can take to do this.

First, make your monthly debt payments on time.

Set up automatic payments or put a reminder in your calendar to make sure you don't miss a payment.

Second, keep your utilization low.

This means that you don't carry balances on your credit cards.

Finally, be mindful about opening up new credit lines because some lenders might worry that lots of credit lines mean you're borrowing a lot of money and can't afford to pay it back.

In the US, having credit card debt is seen as pretty normal.

This is unfortunate for many reasons.

First, it's a financial stressor.

It's like what smoking does to your body.

Smoking alone can harm you, but it can also make other things worse because it's a stressor.

If you have credit card debt, even if you do your best to keep up with payments, when a financial or economic shock happens, and it will, the credit card debt is an added stress.

Second, credit card debt is risky.

High-interest rates and minimum payments mean that the debt can grow indefinitely.

This means you can literally be in credit card debt forever.

That said, dealing with debt requires us to make one big mindset shift.

We have to first take responsibility for the position we're in regardless of how we got into that position.

It's important to note, however, that taking responsibility doesn't mean that you're taking fault.

When you take responsibility, you have more power to exercise over your life.

Accepting responsibility for your problems will be the first step in solving them.

I don't want you to feel bad about being in debt.

What I want you to feel is a sense of urgency.

Treat credit card debt as swiftly and urgently as you deal with a small trashcan fire in your room.

It's not imminently life-threatening, but it's best not to ignore it because it can get outta control real fast.

There are five steps I want you to take to put out the fire.

The first step is to understand and connect with why it's important for you to eliminate the debt.

The next step is to take a break from using credit cards.

Step three is to know what you owe.

Make a list of everything so you understand what the heck you're dealing with.

Here's what should be on your list.

Name of the lender who you owe money to.

The total amount you owe or the principal.

The interest rate you're paying or APR, annual percentage rate.

The minimum monthly payment and the type of debt, credit card, student loan, personal loan, et cetera.

Then reference your credit report to double check your list.

Step four is to explore your payment plan options.

How much will you need to pay each month and for how many months?

In essence, you're creating a payment schedule.

To map this out, you can find free web-based tools to do the calculations for you.

Now, this is important.

If you wanna shorten the amount of time it takes to get out of credit card debt, you must pay more than the minimum monthly payment.

♪ No matter what strategy you choose to make credit card debt disappear, you absolutely must pay more than the minimum monthly payments.

The minimum monthly payment was supposedly created with good intentions.

It offers consumers flexibility when they need it by allowing them to pay only a minimum amount.

However, the minimum payment is a trick.

Only paying the minimum payment puts you at risk of falling down a trap door only to emerge owing more than you ever planned to borrow.

Let's look at this pitcher of water to illustrate this.

Let's say the water in the pitcher is your total credit card balance.

When you make a payment, you pour out some water, but when you don't pay the balance, you're charged interest, so that's more water added to the pitcher.

As you'll see, if you continue this pattern, the pitcher will never be emptied.

Only paying the minimum amount keeps you in debt longer and racks up interest.

If you're accruing double-digit interest on a four- or five- digit balance, paying the minimum only makes a small dent.

And if you're still using credit cards, paying only the minimum may not be making a dent at all.

Step five to getting outta debt is to make sure your payback plan is reasonable.

Is the timeframe longer than you're willing to accept?

Are the monthly payments unsustainable because they leave you with too little to spend, save or breathe?

If your plan is unreasonable, here are some other payback options.

You can cut back expenses and redirect that money to pay down your debt.

You can also increase your income and before you roll your eyes, it's important for you to realize that you do have some control here.

You can ask for a raise, look for a new job, start a side hustle or new business.

Finally, you can try to negotiate a lower interest rate on your existing credit card debt.

It is possible, and the only way to find out is by asking.

If you find yourself in credit card debt, don't beat yourself up.

Commit to the actions that will get you out of debt and reflect on the circumstances that got you there so you can avoid it in the future.

Even though sometimes things are outside of our control, in every moment we can find our agency.

Coming up, we'll be talking about treating your future self.

Whether you're just starting out, nearing retirement, or already retired, you need to think about investing.

Your net worth, the importance of building wealth, and how to protect what you've built.

We'll reach for financial awesomeness next on Finance for the People.

(audience applauding) (audience applauding) PACO: Welcome back.

Now we get to take a journey into our imagined futures and explore the magical world of multiplying our money.

We're talking investing and retirement.

In so many ways, the way investing works is truly magical.

Using money to create more money is the bedrock of the finance industry.

The concept of retirement rests upon the assumption that you can amass wealth through the wizardry of compounding.

Saving money isn't enough.

You have to invest it.

Why?

Because of inflation, an invisible force that has a real impact on how far your money goes.

♪ Inflation is when the price of things go up, which in turn makes the value of money go down over time.

I'm sure all of you understand this concept of rising prices over time.

It's like when an ice cube slowly melts and adds water to a glass of whiskey.

You might not notice the difference at first, but the more the ice cube melts, the weaker the whiskey becomes because it gets diluted.

In this analogy, the whiskey is your money's purchasing power or what your money can buy, and the ice cube melting into it is inflation.

But many of us don't need an analogy like this to understand inflation, just look to your own experience.

Think about how much the cost of gas was when you first started driving.

How much was it when your kids started driving and how much is it now?

What about a loaf of bread when you were a kid versus today?

So how can you fight inflation?

The most common way is by investing.

Let's say you save $10,000 in cash today, and you keep it in a high yield money market savings for 30 years.

You'll probably get a few hundred bucks every year, and after 30 years, you'll have about $18,144.

Awesome.

Now, say you invest $10,000 today and you get a 5% return each year.

Well, in 30 years you'll have about $43,219.

Amazing.

Of course, if you stuck your 10K under a mattress, you'd still have it, but after 30 years of inflation, it would buy you a lot less.

So invest because if you don't, you'll guarantee your money will lose value over time.

If you feel like the world of investing is not for you, because it seems complicated or not for people like you, I completely understand because I've felt that way before and sometimes I still do.

I'm here to tell you that investing is for everyone, especially now.

Today, you don't need to go to the bank and look a certain way or know the right guy, or be a guy to invest.

♪ I'd love to talk about why you think people are afraid of investing or if you've ever been in that position yourself, what was that like and how did you work through that?

LATOYA: Well, I have definitely been in that position where I have been afraid to invest.

I did not get into the stock market because frankly I didn't know enough about it, and the things that I did know about it was that it was just too risky.

PACO: Mm-hmm.

LATOYA: And that it was basically a way to just throw away your money.

You're gonna lose it.

Oh, it's just like gambling.

And honestly, I had no idea that 20 years would go by so fast.

So (laughs) you know, even if I would've invested a small amount back then, I would've been in a really good position now.

PACO: Yeah, I think it's important to reframe this idea of risk, right?

People think cash is like a sure thing, but especially in recent years, it's really not hard to find examples where you see your cash isn't going as far, and it really emphasizes the need to invest.

ELIZABETH: I was one of them.

PACO: Okay.

ELIZABETH: I was in college during 2008, 2009, the Great Recession, and I heard everyone talking about how they had all this money in their investments, and then it just tanked.

And I thought, my gosh, why would I ever (laughs) put any money in that?

I don't feel I can trust it, but I didn't understand, and it took me a number of years to learn about it.

And I started out really small, I started out like 25, 50 bucks every other week, and as my income increased, I put more in.

PACO: It's okay, if you don't know enough about investing to feel comfortable investing at this very moment.

The thing is, knowing you aren't comfortable and choosing to remain unknowledgeable is not okay.

Investing now is a chance to prevent financial insecurity for your future self.

It's the opposite of debt.

Your current self is putting money into the pocket of your future self.

♪ How exactly does your money grow by investing?

It grows in two ways.

First, the assets you buy can appreciate and become more valuable over time.

For example, the underlying stocks in funds might cost $1 a share when you first buy them, and in 40 years, those shares might be worth $10 a share.

The other way your money grows is through the magic of compounding.

When your money compounds, its growth is exponential instead of one plus one equaling two, when your money compounds one plus one equals three.

An example to help you understand is the concept of the snowball effect.

A growing balance due to compounding interest is like a cartoon snowball rolling down a mountain.

The original amount of money you invest is represented by the snowball.

Father Time is represented by the mountain and the money your investments make through dividends and interest is represented by the snow accumulating on the snowball as it rolls down the mountain.

If you accumulate more interest without touching either the amount you invested or the amount you earn, what you earn ends up growing the balance.

A bigger snowball has a larger surface area, which means it can grow bigger, faster.

Ultimately, investing illustrates trade-off between risk and reward.

Once you understand this, you grasp the basics of how investing works.

Since investing is really all about risk, there are three main concepts to grasp that all center around managing the risk of losing your shirt.

(audience chuckles) Concept one is to evaluate your risk in terms of time or when will you need the money you're investing.

If you're 24 and you're investing in a retirement account that you don't need access to for at least 40 years, you can take on a lot of risk and then slowly take on less as you get older.

If you're planning to retire in five years, you won't wanna take on as much risk because you don't have 40 years to ride out the ups and downs.

And if you're already retired, you're likely taking the least amount of risk compared to everyone else.

The second concept is asset allocation, which is how investments are put together based on the inherent risk of each asset class.

It's basically another way to manage risk based on when you'll need the money you're investing.

Stocks, bonds, and cash are three of many types of asset classes.

In general, stocks are riskier than bonds, and bonds are riskier than cash.

So if you're young and don't need the money, you're investing for a long time, having more exposure to stocks is the way to go.

If you're nearing retirement or already retired, you're likely to favor a portfolio that is bond dominant.

Finally, there's the concept of diversification, which means that you want to invest in a variety across asset classes.

This is yet another way to help reduce risk.

For example, owning foreign stocks can help hedge against risks that only impact your home country.

All of this might all seem like a lot, but don't worry, you don't need to be handpicking foreign stocks.

Most investing is done through a retirement account and within that account, you'll buy shares of funds.

Think of funds as a pre-made, done-for-you mix of a bundle of investments that already take into account asset allocation and diversification.

The most common type of fund that most people invest in is the target date fund or index fund.

Now you have the basics of using money to create wealth.

Creating wealth is a financial goal that's often assumed, but not often talked about.

♪ I would like to talk about wealth.

And I think a lot of people have an idea about what wealth is.

It's caviar and first class.

ELIZABETH: Mm-hmm.

(audience chuckling) PACO: But that's not necessarily the truth, right?

That's the media depicting what wealth is.

So I just wanna ask you folks, what does wealth mean to you?

MAURICE: For me, wealth is really about the freedom to choose what to do with my time and the freedom to choose what to do with my resources, and I think it's important that everybody has their definition, their own definition of what that looks like.

DAVID: It can be a- a- a different amount.

It depends on what you- what- what you want in your life, but it doesn't mean anything without, you know, the people in your life who make up, you know, the quality of your life.

PACO: Sure.

DAVID: You know, and how you are participating in the community I think is also important.

So all those things I think are part of being wealthy.

LATOYA: Wealth to me is transgenerational, and it is the ability to- for finances- finances to be sustainable, PACO: Mm-hmm.

LATOYA: You know, across generations.

Something that I will be able to pass on to my legacies so that they don't have to be financially fragile.

ELIZABETH: I felt wealthy as soon as I felt independent.

PACO: Mmm.

ELIZABETH: That I could take care of myself.

Now, I feel wealthy when I can use my money to help take care of other people.

PACO: I love that.

ELIZABETH: So if I make more money, it's more that I can give away, and that's following your bliss, following joy and I- I guess there's no dollar amount on that.

PACO: I like that everyone's definition of wealth isn't just how they can enjoy their money, but it's the legacy they can leave behind and really taking care of each other and your family.

So thank you guys for being this example to everyone and to me, appreciate it.

The whole point of being truly wealthy is so your financial security doesn't depend solely on the income you get from your paycheck.

This is what "independent" means in the term, "financially independent."

The goal of saving and investing is the idea that at some tipping point, your income will actually come from your wealth instead of your wealth being built by your income.

So how do you go about building wealth?

You build wealth by creating and owning valuable things.

Owning assets, which are things that put money in your pocket, is the key to building wealth.

This has been true throughout all of history.

Whoever came up with the scheme of owning land had the power and the means to accumulate wealth.

These days, for better or for worse, the financialization of everything means that there are many ways to buy assets.

Assets can be intellectual property, ideas that get monetized.

Art.

Some examples of other assets include things like your retirement account or index funds in a brokerage account.

Another common and traditional way people invest is in real estate, like a house that generates rental income.

Businesses can also create an income stream or you can sell them for a lump sum.

Wealth is achievable.

It can represent freedom and financial security, but it also allows you to be financially resilient as opposed to financially fragile.

When you're financially fragile, you'll feel all the little economic shocks and bumps in the road.

Remember, these bumps are routine and we should expect them like we expect the tides to come in.

Wealth can leave you feeling like you're able to deal with that uncertainty.

♪ When we think about being wealthy, we often think about those famous billionaires who are discussed by the media in terms of their net worth.

Well, you don't need to be a billionaire to build wealth, but you should know your own net worth, which is how you can measure your own wealth.

Calculating your net worth is really easy.

You just add up all your cash and the value of your assets and then subtract all of your debts and voila, you'll have your net worth.

In general, assets put money in your pocket.

Here's what's generally included in your personal asset category.

Real estate, all cash in various checking and savings accounts.

Investments, including 401k plans and other retirement plan balances, furniture, jewelry, art, your stake in a business and other stuff that's valuable like a guitar or a violin, or that bit of Bitcoin you bought to see what all the fuss was about.

In general, debt takes money out of your pocket.

Your debt is money you owe because you borrowed it like the amount left on your mortgage or a home equity line of credit, your student loan balance, medical debt, your credit card balance, your car loan, personal loans, or anything you may have financed that you're making monthly payments on.

Your net worth number can help you gauge where you are relative to your financial and life goals.

It's a data point that guides what actions you take.

So what should your net worth be?

There's a simple, quick, and dirty method for coming up with your target net worth.

Let me preface this by saying that a lot of people might be freaked out if they're very far away from where they should be.

On one hand, being freaked out and stressed about being behind is not a good state to be in, and it's hard to think clearly.

On the other hand, if you're interested in the kind of financial wellbeing that allows you to afford a retired life without having to work, this is a great tool for understanding what that will take.

Step one, find the age closest to yours.

Step two, multiply your annual take-home pay by each number in every category.

Step three, compare your net worth with your target net worth numbers.

For example, let's say Jan is 50 and has an annual take-home pay of 54,000.

These would be her net worth targets.

If her actual net worth or her assets minus her debts is 486,000, that would land her in the good category.

Another example, Jess is 30 and has an annual take-home pay of $45,000.

She has the following target net worth.

If her actual net worth or her assets minus her debts is $38,950, that lands her somewhere between better and good.

The chart has a range because you might wanna know how much you should be saving to live a traditional, normal retired life, or you might be curious about building a large pile of wealth that will free you from relying on a paycheck much sooner than retirement age.

The idea of wealth might seem flashy, but the act of building wealth is boring.

(audience laughing) It requires consistently saving and investing in valuable things, but by the time you're at the level where you're building wealth, you've seen how powerful you are.

You spent time setting up systems for spending and saving.

You funded your emergency fund.

Maybe you've gone through years of paying off credit card debt or slowly building a business.

I hope you'll appreciate the feeling of accomplishment.

I also hope you'll recognize that in a lot of ways your journey has just begun.

Building wealth is half the battle.

The other half is keeping what you've got.

And if there's one thing that really scares retirees, it's losing everything they've built in some kind of swift disaster.

This doesn't have to be you.

We'll talk about how to protect what you've got so you can relish in your own financial success without the stress.

That's next on Finance for the People.

(audience applauding) you progress in your financial life, building and working your way up, you might start feeling a sense of worry that you didn't have before.

Being at the top makes you acutely aware that from higher up there's a bigger tumble down.

Fortunately, you can use insurance as a tool to protect you from losing everything you've worked so hard to build.

♪ Insurance is a way to prepay now for something you really hope will never happen, so that if it does happen, you won't lose as much.

It's a way to pay now to potentially limit your misery later.

Here are the types of insurances to seek.

One, health insurance.

Two, long-term disability insurance.

Three, homeowners or rental insurance.

Four, automobile insurance.

Five, life insurance.

To take insurance seriously, we're forced to confront the realities of life.

I can't say I blame anyone for wanting to avoid insurance.

It requires us to confront the reality of a catastrophe, and that's hard, but the peace of mind you'll have knowing you're protecting what you've built is so worth the effort.

Whether you've reached the pinnacle of financial awesomeness or are just beginning with your journey, congratulations on the steps you've taken so far.

I'm excited for you to take these tools and concepts from today and begin applying them to your life.

Remember, your approach doesn't have to be all or nothing, no matter where you are or what obstacles present themselves in your path.

In every moment, you can find your agency.

In every moment, you can choose to begin again.

Take care.

(audience applauding) ♪ ♪ ♪