Lessons
Class Introduction
12:39 2Taking Control of Your Money
08:22 3Identifying Your Emotional Relationship With Money
21:37 4Finance Basics
09:15 5Creating Financial Goals
14:32 6What’s the Difference Between Your Credit Score and Report
09:43 7What is on Your Credit Report?
27:25 8Quick Ways to Improve Your Credit Score
11:52Lesson Info
Finance Basics
All right, we are leaving now, thinking about our past, and talking a little bit about things that we need to know. So these are benchmarks and formulas that are important for you to know. You do not have to be masters of these factors, but I just also wanna make sure that we have a common language that we're speaking throughout this. And also, these are things that you're going to just generally hear when you hear people talk about finance, especially things like debt-to-income ratio, or DTI. If you're ever applying for a loan, that's a term you're gonna hear very rarely spoken about. So I just wanna make sure that we all understand what that means. First, how much to have saved for retirement. I always get very hesitant putting these kind of things up on the board, 'cause it really freaks people out. If you Google this term, a couple of months ago an article just went bananas, got memed out of control, because it suggested that you should have one year's worth of salary saved by the ...
time you're 30. Millennials went berserk. This actually says something very similar, but the reason it's up here is because we love a good benchmark. Let's be honest with ourselves, we, as human, love to compare ourselves to other people. And this is a table that generally gets used by financial planners to kind of set benchmarks about different ages in your life. This is also assuming that you're gonna retire around 65. Whether or not millennials can do that is up for debate. But this is a table that does commonly get used to discuss how much you should strive to have saved at certain points in your life. This also really, kind of, assumes that you are traditionally employed, but I'm not letting you off the hook if you're a freelancer, 'cause you still can be saving for retirement. We will definitely be digging into that tomorrow. But how to read this, how to break it down, is this is your salary, so the one represents a year's annual salary, which, obviously, is going to change from 25 to 65, we hope. And what's happening over here, on this side of the ratio, is the percentage of your salary you should have saved. So, for instance, at 25, let's say, hypothetically, you're earning $40,000 a year, you should have 20%, or roughly $8,000, saved in retirement. I don't think I had that amount of money saved for retirement when I was 25, but it's a metric, it's a benchmark. That's all this is. I am by no means condemning anyone's personal progress toward saving for retirement. It is totally okay if you are not keeping up with this benchmark, but like I said, we like to compare ourselves to things. This is the comparison chart. And so if you look at here, by 45, they want you to have three to four times your annual salary saved. So if, at 45, you're earning six figures, you're earning $100,000, they want you to have three to four hundred thousand dollars saved for retirement. I'm also gonna address something very quickly, and we're gonna really get into it in the retirement section. We use the term save for retirement a lot. That's how we talk about it. You're not saving for retirement, you're investing for retirement. That money needs to be invested, not just stuffed away into a savings account. We will certainly be getting into more of what that means in the retirement section, but I do like to address that. I will continue to say save for retirement. I might flip in and out of the vernacular, because that's what we commonly say, but if you invest your money, it does some of the heavy lifting for you, so it's not just you trying to stuff all of this money away, it starts to compound and grow, which takes a little bit of the pressure off of getting to 16 to 20 times your annual salary by the time you're 65. Again, do not panic. If you are feeling not so great about how you stack up on this benchmark, that is not why it's up here. It's just something to refer to, 'cause some of us feel very motivated by having a benchmark, and if you don't, just skip this part, don't pay any more attention to it. We're moving on, right now. Emergency fund ratio. We've talked a little bit about this idea of saving for an emergency, saving for the unexpected. This is the rule of thumb. I will be talking more, in the savings section today, about how to maybe customize this and tweak this for your own financial situation, but the general rule of thumb, when we're talking about personal finance cliches, which is what this section is about, is that you should have three to six months worth of living expenses. And the formula that gets used is cash and cash equivalents, so if you have money saved in something like a certificate of deposit, a CD, that's generally what we mean when we say cash equivalents, divided by the amount that you need to cover your basic needs. That's something I want to address in this emergency fund part. It's not the amount of money that you need to live your most comfortable lifestyle, it's the amount of money that you need to, when everything goes sideways, make sure that the lights are staying on, food is on the table, you can pay rent, you can pay off your debts, so nothing goes to collections. So it's your real baseline number. So that's what you're dividing. So hypothetically, let's say that you need $2,000 to hit all of your base needs, and you have 4,300 saved, so you've got a little over two months saved in your emergency savings fund. You're still pushing to get that three to six months' worth. That is the goal, as the cliche. Again, we will talk about customizing this to your unique situation when we get into the savings segment today. None of these that I'm putting up here are meant to demoralize you about where you stand right now. We're just talking benchmarks, and just talking rules of thumb. Debt-to-income ratio. A lot of people may not have ever have heard this term before, but if you apply for a loan, that's usually when this is going to come into play, and it kind of gets described as a slightly more wholistic approach to looking at your unique financial situation, for a lender, as opposed to just looking at your credit history. They don't just care about your credit score. They also care about how much money you have, relative to the amount of debt that you have. That might sound like a terrifying sentence if you think, well, I have $60, of student loans, and make $30,000 a year. That's not actually how they're comparing it. It's your monthly debt payments divided by your gross monthly income, so your income before taxes. So don't panic if your debt is drastically out-seating your annual income. So let's say you maybe have $500 worth of monthly debt payments, and you divide that by your gross monthly income, let's say it's $2,500, so your DTI would come out as 0.2, when you do that math, times by a hundred to get the beautiful percent, you're at 20% debt-to-income ratio. The magic number is generally not exceeding 40%. If you exceed 40% in your DTI, that might be where it's hard to get access to a loan, especially something like a mortgage. Can't exactly tell you why they've decided that that is what it is, but at some point, that must've been the cutoff number, where they felt, if people tip above 40% of their debt to their income, then they're less likely to be paying their debts back. Which, the reason I wanna bring this up, and this is the only time we're actually gonna talk about DTI, but if you ever apply for a loan, particularly a mortgage, this comes into play. So if you hear it, I just wanted you to understand what it meant. And sometimes, it's also nice to run, just for you to have a personal sense, outside of just your credit score, 'cause you can have a stellar credit score, and a ton of debt, and feel in a very uncomfortable situation, but be like, why do I have a 780 credit score if I barely feel like I can get by. This, on the other hand, might indicate, like, whoa, my DTI is 60%, that's why it feels like I'm suffocating month to month, which is one reason it can be good to run this ratio. And your net worth calculation. This one can also be very demoralizing, depending on where you are in your financial situation, but I bring it up because, again, everybody is motivated differently. So you might have a negative number right now. It's total assets minus total liabilities. Pretty simple in calculation, assets being maybe a retirement savings, any investments you have, money you have in savings. If you're getting real fancy, it could be art, it could be jewelry. Some people go up to include that in their net worth calculation. Generally, we wouldn't include a car, because that tends to be a depreciating asset, which means it usually loses value over time. Some people put it in. You can kinda tailor it how you want. And then you subtract all of your debts, credit cards, student loans, auto loan, mortgage, everything else, the difference is your net worth. For a lot of us, that could be a negative number, and that's why I say sometimes this can actually be motivating, if you maybe run this number once a quarter, so about once every three months, and you see that you're getting closer to zero, that can actually be a motivating factor. But for other people, if you just keep seeing that angry red squiggly coming up in front of it, you might feel a little demoralized. So you don't have to run your net worth calculation with any sort of regularity. Generally, investing experts will usually say once a year is honestly a good time to check in. If you follow any personal finance vlogs, you might see people doing it monthly. You don't have to do that, especially if its something that just really stresses you out. But maybe you're really encouraged at the idea of just getting to zero, and then going positive, and so every couple of months, it might be great to check in and see if you're inching closer to your goal. But it is still a good calculation worth knowing, and when people talk about their net worth, that's the formula that they're using to get there.
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user-a8bbb8
Erin really helps breakdown how to create SMART realistic goals and provides some amazing handouts to help you know what you don’t know! I wasn’t even sure what financial health looked like beyond paying down debt or buying a house or car.
a Creativelive Student
Very good material, coverage and presenter. Too bad they are all planted "that is a very good" questions.
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