[MUSIC] Welcome, we have really been going over a lot of investment concepts pretty quickly in this module and it has been an overview of some of the basic investment terms to think about. Thinking about what our risks are. Looking at diversification, as a strategy to help us start to minimize risk in investing. And so then there's sort of, like, what else can we possibly talk about in this short amount of time that we have? And so, there's some things that I really want to make sure that we do cover in this module. And then I also wanted to encourage you, now that you have this basis to add to your knowledge as you go forward. Read things. Talk to people that have been investing and this is an opportunity for you to build upon the framework that we've provided in this module. So, what are things things that you need to start thinking about is how and when do you start investing? Because I really don't think you can be too young to start thinking about the future. And so, you have some huge advantages about taking advantage of it while you're young and starting that process. So, one of the things when you start thinking about this and I challenge you to think about it today is to think about the cost of investing. What we know from research is that how much people need to spend to invest has a big impact on their long-term wealth building. And so, we want to keep your costs down. There's different ways that cause can add in to investing. Sometimes there are fees to purchase investments, either through commission or through loads or service fees and then there are fees to manage things like mutual funds. There maybe also fees to sell investments. So you have to keep that in mind, as well. So when you are doing investment choices, you want to be aware of what these fees are and you want to compare them to other options that are similar to see that you get the most bunk for your buck, that you are getting back the most of your return that you can with less deducted for these different cost. One place to start looking if you are just starting out, thinking about these things is that we know again from research that no-load mutual funds with low maintenance fee are often a best buy, so that some place to think about again. The main thing is keep your cost down. The other thing which we hit on if you skip that piece this course goes back to at ease at diversification matters. It will really is one of those things that is just sort of a key concept of investing and I just wanted to reemphasize it even thought we're already talked about it. Be especially wary of putting all your investments into your company. So like buying a lot of shares in your employer, because, think about this. If that company does really badly and goes under, not only do you risk losing your investments, you've also lost your job. It's a double whammy. So that's kind of a red flag when somebody says to me, well, I have all my investment dollars in the company I'm working at. The government really likes to encourage people to save for the long-term and to save for retirement. And because of that, the government's created some tax advantage ways that you can do this long-term savings. You might have heard of things, such as 401(k) or 403(b) plans that are offered by employers. These come with tax advantages. And so even when you're working for a company that offers a retirement plan, you want to gather information about that. You want to find out what it is and whether it's something you want to take advantage of. One of the real things that works nicely with retirement plans to an employer is that it sort of automatic investing. Once you've make a decision that a certain amount will be deducted from your paycheck and put into investment, then it happens every time your paycheck whirls around and you don't have to keep the citing. Yes, I want to keep investing. I want to keep investing in my future and my future needs. So, we've talked about this before about savings where putting things on automatic can really make a difference and this is another example. The other things that you might want to think about is the match from the employer and we're going to come back to that in just a bit. But right now, let's touch a little bit more on the tax advantages and what is that really mean. You may have heard somebody say, saving in a retirement plan is a tax-deferred plan and let's look at what that exactly means. Essentially, what it is and this is a real simple example, but I think it helps illustrate it is let's say that you decided you wanted a hundred dollars from your salary each week to go into a retirement plan at work. If you did it in a tax-deferred plan, which most US employer-sponsored retirement plans are, then $100 of your salary goes straight to that retirement plan and that investment. You don't have to pay taxes on it at that time. Now, it's deferred. You will get to pay taxes on it, but it's deferred. But if you assume that you are at a 28% tax bracket, let's just say, a combination of federal and state tax. And you decide that, well, I don't want to do it through the retirement plan. I'm going to take it home and I'm going to buy my own stocks. That's fine, but be aware that then you're taking that $100 from your salary. You're going to pay your taxes first and now you have $72 to invest rather than the $100, if you had gone to the tax-deferred plan. So that's an example of a tax-deferred saving plan is like as I said before, the 401(k) or a 403(b) retirement plan. A regular IRA is another example, but not through your employer. Let's look at a little bigger example to see how this might add up over time. Let's say, again, we've got money from salary, $5,000. That's going to be invested yearly in a tax-differed plan, you don't have to pay taxes up front. So all of that money is going to be earning return and it's going to get reinvested into that account, and more return will add up onto that. Now at the end of 20 years, 28,000 would be have accumulated at a 9% return rate. Now at this point in time, if we went to withdraw that money, you would have to pay taxes on it. Remember, I said, it was tax-deferred not tax free. And if we assume that the tax rate stays the same at 28% from investment year to year 20, then after taxes from the tax-deferred savings, you'd have over 20,000. Now on the non-tax deferred, if you had started out with 5,000 and you would immediately pay taxes on that. So at 28%, you'd really be investing 3,600. Let that grow at 9% at the end of year 20, you'd have $12,000 over $12,000. You've already paid taxes on this, so you don't have to pay taxes on it again. So now, you have that 12,000. You can see the difference. It's a piece of the information that you need to consider when you're deciding whether you want to invest your money through a tax-deferred retirement plan or not. The big assumption here, which probably a bunch of you are already thinking is I said that your tax rate would stay the same in year 1 to year 20. For many people, their tax rate may raise over 20 years. So 20 years further along into your career, you might be making more and be at a higher tax rate. So, that's one of those things that we have to consider when we're making these investment choices. But now you know what it means when somebody says, a tax-deferred savings plan. Another thing to keep in mind when you use a tax-deferred or any kind of a tax advantaged retirement plan through the US tax situation. Keep in mind that you're making a commitment to leave your money in that plan for a long time period. If you make early withdrawals, there's likely to be high penalties. And so you there's something you need to always understand the plan's rules, the retirement plan's rules before you make any kind of investment. I mentioned matching. This is something really that you have to ask your individual employer about, because it varies tremendously from company to company and business to business, but some employers will match or partially match an employee's contribution. So in the example shown on the chart, let's say that somebody said for every $1 you put into your retirement plan, we'll put $0.50. You can see how that can grow over time. Sometimes a company will put a one to one match for every dollar you put in, they'll match it with a dollar. That's 100% return, you won't do better anywhere else. You need to ask questions about, is this available and for how much money? Companies won't match your full salary, it's usually a certain percentage or up to a certain amount. So you need to know that, but you really want to keep this in mind, because you don't want to be giving up this money that you could be getting, essentially on top of your salary for free. I want to mention one other thing, which is these different things called Roth IRAs. Roth IRAs are especially appealing sometimes to young adults in the US, because they provide a tax advantage and they have a little bit more flexibility than some other retirement plans that have tax advantage. And again, it gets back to that thought that this is like a vehicle, like a basket that holds your investments. So you can still within a Roth choose your investments whether it's a mutual fund or mix of bonds or mix of stocks, but it will provide some different kinds of tax advantages. You do end up with a Roth compared to some of the other tax advantages paying taxes before you contribute to it. But again, that could work out sometimes better for some people than in other situations. Mostly, what I want you to take away from here is that there are different tax advantage plans that could be to your benefit for long-term retirement saving in the US and it's worthwhile thinking about them and deciding which ones make sense for you. And to understand that these tax advantaged plans have different kinds of investments within them and you still make choices about what you want to put in them, and those are the two important things to think about. Looking ahead, where are you in terms of saving for the long term and saving for retirement? And keep in mind, again, that compounding returns make a huge difference. If we look at this chart, let's take a look and pretend that somebody decides when they're at 22 years old that they’re going to save $2,000 of their income each year and they're going to do it for 9 years and they're going to invest it and they're going to get 9% return. Now they only put away $18,000 of their income, they essentially stop saving when they turn 31. I'm not advocating that, but for the example with chart, let's just look at that. Because they started so young, they have lots and lots of time for that money to compound and grow and they would have over 579,000 available to them at age 65. Now what about somebody who doesn't start saving until their 31, but they do put away $2,000 annually for over 35 years? That's $70,000 of their earned income compared to the 18,000 on the other side. They're still going to have a good sum of money available to them at age 65 over 470,000. But you can see, it's not as much even though more of their income when into it than the person who started earlier and had more time for returns to compound. Something to think about when you're starting to make decisions about what do I want to spend on today's needs versus investing for the future. We've really covered investing very quickly in this module, but it's a place for you to kind of get some basic information and terms and then start thinking about how it will fit into your life. One of the things to do is to keep adding to that knowledge through readings and listening to people, and talking to people, and don't hesitate to think about talking to a financial professional. There's lots of ins and outs on different ways to invest at different points in time. It doesn't have to be all that scary. It's something that we can all do, but it doesn't hurt also to talk to somebody else about it and sometimes having help from a professional can really make a difference. Sometimes you can talk to people through your employer, there may be other avenues available to you. But we can also suggest that if you're choosing a financial professional, that you want to think about who's a good match for you. Not everybody is the best match for everybody else. You want somebody that can think about your needs and is use to working with somebody in your life stage, and all those kinds of things, and somebody who communicates well with you. You also want to ask that person about how they're going to charge. What they're fee structure is and what that would look like? If you'd like more information about how to choose a financial professional, including a free downloadable interview guide, you can go to University of Illinois Extension's website, Choosing a Financial Professional and take a look at some of the types of questions you might want to ask when you're out there. Looking for professional help and that wraps up our investment logic. [MUSIC]
