0:03 foreign good afternoon and welcome to the way to wow show I am your host Kevin bemel and we're here every Wednesday at 12 30 Pacific time uh 3 30 p.m eastern time and an hour in for Central and mountain and we talk about all of the various aspects of our professional and financial lives so last week my guest was Anna Rook of Akasha superfoods Anna had a wonderful
0:38 story about how she was not living a particularly healthy life as a as a young person and and learned more about it and eventually built her interest in eating and living well into a business with her partner and they have a number of products now that are in stores like Erawan and are also available online so I invite you to go to our YouTube channel and check out last week week's episode with Anna I think he will find
1:14 her story both inspiring and and Charming um and and something that you could replicate um you know for for the thing kinds of things that interest you and would give you the opportunity to have a a career or a business that you love which is in the end one of the Prime goals for this show so today I'm I'm going to talk about the the subject of financial literacy and I'll I'll tell you that what sparked my
1:49 interest is I'm involved in something called the understanding America study it's being uh it's sponsored by uh it doesn't say here on this little um magnetic uh business card they gave me it's sponsored by um I believe it's the school of education at USC my alma mater and basically what what I've been doing is um periodically answering surveys about different aspects of my day-to-day life and one of
2:25 the surveys asked a number of questions about finances and as I'm reading these questions I'm thinking to myself oh yeah see here's this is where they're not they're trying to trick people per se but they're building they built into the questions certain common misunderstandings about how investing in finances work and I thought it was quite fascinating really that part of this particular survey involved a number
3:00 of these questions and as I looked at the what what I thought were the right answers pretty sure where the right answers and the wrong answers they were offering and thinking myself yeah I see what they're trying to do there in terms of uncovering you know people's common misperceptions so digging into this topic a little bit more um and talking to some friends of mine who are in uh um the financial services business including my friend Norm who
3:35 was my guest two weeks ago and Norm Norm has a financial services business and the major focus of his business is helping people understand financial matters in particular investing better so the the level of financial literacy in the United States and and even more so worldwide is unfortunately not particularly high and so I um found a a survey or a not a survey a study I mean um published by
4:11 um the Milken Institute okay and and and just you know full disclosure here um I am involved in an organization called the military leadership Circle uh which is a group of current and former um uh um Military Officers um that are um sponsored by the Milken Institute to bring the military perspective to the work that they do we receive no pay it's
4:46 a competitive um a selection process um but we're not compensated um we we do get the opportunity to attend a couple of the Milken Institute Global conferences here in here in Beverly Hills um over over the time that we're a part of the group so so I do have a connection to the Milken Institute but um it's it's not a one through which I I you know gain any uh compensation um I I do however find their work to be pretty solid and in this this particular
5:22 study financial literacy in the United States was published a couple of years ago and it talks about this this issue so before we get into the learning and math portion of the of today's show I wanted to cover just a few of the uh graphs that are are in this study to so we can better understand what it is we might need to to learn to do remedial work on so let me uh quickly go to oops
5:57 okay here we go so first of all I I think in order to unders in order to gain better financial literacy we need to First understand what it what is that um I mean if we say you know ride a bike we I think we pretty much understand what it means to know how to ride a bike but I'm not sure that we really comprehend um the the components of financial literacy so the this study breaks it down into four categories the first is knowledge which is uh made up of key financial Concepts things like inflation
6:32 compound interest Etc awareness of financial products and services and uh that's that's something my my friend Norm could certainly help you to do and then practical know-how such as how to make payments how to open a bank account how to open up a mutual fund account Etc so that's the knowledge portion then there's the skills portion which is numeracy Skittles I love that word I had no idea what it was I had to look it up numerous accuracy means being able to deal with numbers I don't know we used to call that math so I guess it's called
7:07 numeracy and then literacy skills presumably that's understanding the language of financial matters okay and then attitudes reason for or or for not saving borrowing Etc attitudes toward the future confidence in our own retirement plans and and the proclivities we have toward things like budgeting savings investing Etc okay and then finally behaviors so money management which is managing day-to-day finances um just you know getting a coffee every
7:42 day at Starbucks or whatever right and then long-term planning which is could include anything from having a rainy day fund planning for emergencies to retirement financial decision making I.E the ability to choose appropriate Financial products you know it it if you've ever heard of an annuity it's it's an investment that once it's what's called annuitized means meaning it's gone from the from the accumulation time period to the payout time period it payouts it pays out a certain amount of money depending on the type of annuity
8:17 is that and it sounds like a great thing because you can get an annuity that'll pay you out money for the rest of your life no matter how long you live sounds great right but is that the correct product to be putting your money into as opposed to other potential um Financial products and then finally seeking Financial advice I mean from whom do you get financial advice do you get it from you know your friends who um you know have done very well financially do you get it from professionals who are trained in it or
8:52 do you talk to people who are not in a very good uh financial position and and if so you know why are they in that position and do they then are they then a proper uh place to seek Financial advice so these are the four categories of uh the four components of financial literacy I'm not going to deal with them individually really um but I think it's good to know about these until look at them and say hey do I have the knowledge what are my attitudes so I will tell you as a young man my attitudes my attitude toward
9:27 wealth building and the wealthy was not at all conduced to gaining Financial Security at all and indeed I had a lot of remedial work to do with my attitude in order to gain financial literacy um so you know those are the kind of things I help you know if we know these things about ourselves then we can correct or or we can take steps to overcome whatever hurdles we've created for ourselves or have been created for us okay so now let's let's go on to the
10:05 next little thing here Okay so this is financial literacy among adults okay so the overall financial literacy rate among adults here in the United States is actually 57 that's that's not too bad okay and when it comes to Concepts like Risk diversification inflation over 60 in both of those so that's good numeracy meaning the ability to make calculations related to finances is only about half of us know how to do that that's based
10:41 on a cert on survey questions and we're going to look at a couple of them in a few minutes so you get so you get a sense of that and right about 60 percent um you know understand interest compounding you know having said that and and let's look at um let's look at this next slide here okay so um the reality is that there's a there's a fairly significant skew by sex and by income groups so whereas over 60 percent of men and high income people are
11:16 financially literate um just slightly above half of women are and less than half of low-income people are financially literate so that's a that's a you know 10 uh gender gap and uh what a 15 you know over 15 at a uh 17 Gap uh income gap in in literacy and you might say well that makes sense people who are low income they don't have money to invest etc etc and and and that's that may be the case but the but the
11:52 fact that they don't either don't have the knowledge or don't have um productive attitudes that could keep them in in in the low income category as opposed to being able to break out of it okay and okay so let's let's let's go on from there I want to so test results okay so there were a number of surveys that they used where they asked people to answer questions okay and you can see that um between 2017 and 2020 it looks really dramatic but it's only three percent you
12:29 know after the ques only three percent more people answered the questions correctly over that time period and in fact um in 2017 um roughly half of people a little over half of people answered 50 half or fewer questions correctly and by 2020 it was slightly less than half of people answered half or fewer questions correctly okay and and and those questions and and by the way the number of people answering 70 76
13:05 or more of questions has gone up from 16 to 20 so it's gone up by a quarter which which is good but still only one-fifth of people get um basically a c or above in financial literacy so even this group right here is only answering between half and three quarters of questions correctly now you think about you say well three quarters may not be so bad but if you're only answering half of your questions correctly exactly how well are you going
13:40 to be able to handle your finances okay so I I think that's an important thing to take a look important thing to keep in mind and then so and here's really I think one of the the the the key things so when it comes to the types of questions that were answered correctly so roughly two-thirds of people answered questions about borrowing correctly 64 okay and and just under 60 percent understood or answered questions about savings correctly and then it kind of goes down to earning and consuming 56 go
14:18 to information sources have okay but then when we get to investing and ensuring now we're under half a people and comprehending risk look we're only slightly above a third of people understanding what how risk impacts finances that is that is not good that means people are potentially either taking more risk than they understand they're taking or they're not taking risks because they don't understand the risk reward trade-offs and therefore are
14:55 selling themselves short in terms of how well they're doing financially all right so now let's let's look at a couple of other things Okay so here's some demographics so again we saw um these are these are percents of of people by demographics who answered questions correctly so 56 percent of men versus 49 of women notice that for people 45 and over they're 56 58 of the questions they're answering right fewer than 50 Cent fewer than 50 percent for
15:31 people under 45. but here's the real dramatic difference so for people who are earning over a hundred thousand dollars a year almost two-thirds of them are answering uh well so they're answering 62 of the questions correctly but for people earning less than 25 000 a year only they're only answering slightly more than a third of questions correctly right that's a huge gap there and again it points out that at for for
16:06 people at the lower and and by the way under 50 percent of people under for people earning 25 to 49 000 a year they're answering less than half of the questions correctly right so again we've got this big knowledge gap between low and high earners okay that we I mean we hear a lot about the um earning Gap and the wealth Gap here in the United States it it shows up here in terms of financial literacy right right and then let me just I want to
16:41 look at uh one other thing regarding to demographics we're going to come back to that okay now um the percent of questions answered correctly for people under 34 is 40 whereas above 55 it's 58 okay for people making less than 25 000 only 37 making more than seventy five thousand sixty percent now when it comes to to race and ethnicity so whites and Asians are answering over 50 of of of
17:18 um uh questions correctly whereas for blacks and Hispanics under 50 and in in the case of lacks under 40 there is a huge knowledge Gap well not a huge but there's a significant knowledge Gap 15 difference for blacks between blacks and whites and Asians okay and then for other groups it's at roughly 50 I'm not sure what's frankly uh included in other groups but we can also see and we can see a racial Gap there as well okay now I wanna uh let's Okay so lest we think this is a
17:54 problem just in the United States let's look at this okay this is financial a financial literally literacy survey done in 2014 so about eight uh nine years ago note that um the financial literacy rate blue and and dark blue mean 50 or more and you would think here in the United States we would be in the dark blue category but we are not okay this uh
18:30 Sweden and um and uh Norway and Denmark are it looks like the only countries in the over seven seventy percent or more okay we're not even in the 60s okay Canada is Finland is Germany is England Australia New Zealand okay and and and and that's that's basically it in this experience we're only in the 50 50 to 59 so that's you can see that's the United States that's France that's uh looks
19:06 like uh the Czech Republic um Switzerland I'm trying to see I think Hungary is in there Etc Thailand and I'm not I'm not sure what the country is just North of of uh South Africa um but but that's it when you now of course this doesn't necessarily speak to population density um but when you consider that the two most populous countries in the world China and India with a billion people each okay or over a quarter of the world
19:42 population okay they are in the only 20 to 29 percent of people in those countries are financially literate okay 22 29 and that's true by the way of a good swath of uh Central and South America it's true for a lot of South Asia as a matter of fact okay um now um sort of Central Asia um this looks like Mongolia here I think it is this this would be some of the
20:17 former Soviet republics um and and we've got some of the um East Southeastern African countries they're in the 40 to 49 but look Russia is only in the 30 to 39 percent um uh um literate category same is true of Brazil Mexico most of of northwest Africa Saudi Arabia right and then and then of course there's the countries where you know 10 to 19 financially literate
20:52 um this is uh um uh not Oman um Yemen um I I'm not sure if this is Somalia or Eritrea here but um I mean these are countries that are experiencing a great deal of civil Strife um if you've been reading about what happens what's happening in Yemen Etc Okay so so worldwide the the level of financial literacy overall is very low at least it was eight years ago and even the U.S is is you know we're not anywhere near the
21:27 top of of financial literacy okay now I want to look at one more thing before we go on just kind of clicking through real fast okay here we go now here's the United States and this is a state-by-state look as to how uh um the level of requirement of financial literacy for high school students okay and it's on an A through e scale a being they got an A that's the top level
22:03 okay where they require 60 credit hours of Financial Training to graduate high school now you know I think one of the prejudices I certainly hear it a lot here in California is you know quote unquote how illiterate people are in the South and and I I really take issue with that um one of my dearest friends uh lived and grew up in the South very wonderful woman the woman I I salute um at the end of each show but I think it's interesting to note that um the majority of countries in the
22:39 South either get an A or a B only Mississippi and Louisiana don't okay they get a they get a c and a d respect respectively but some of the so California gets an e okay California which you know considers itself so Progressive um in so many ways and yet when it comes to teaching financial literacy it's way down at the bottom by the way so is is South Dakota Alaska Hawaii Wisconsin Pennsylvania Massachusetts
23:16 um this is Connecticut and Rhode Island here okay and excuse me States getting a d are um Montana Wyoming uh New Hampshire again Louisiana and States getting a c we see actually most the three of the four Western States get a c or lower right and then there's a number of Midwestern states uh this is Iowa here Nebraska Kansas Oklahoma uh this would be Colorado New Mexico and then uh Indiana and Kentucky Okay so
23:54 I think that we need to open our eyes a little bit to where we think um young people high school students are are getting trained well financially now this is as as of 2017 so it's possible things have changed a little bit but um I would frankly be you know skeptical um that that is the case so what I want to do next is look at some of the questions that were on these surveys they had people take here we go
24:29 um so you can get an idea of what it means literally to be you know to test one's financial literacy so this question here's a survey question and you note that the correct answer is in Red so in Risk diversification suppose you have some money is it safer to put your money into one business or investment or to put it into multiple businesses or Investments right now for any for most people who've been in business it's obvious if you you know the old saying that you don't want to put all your eggs in one basket so you don't want your choices are one business
25:04 or investment multiple businesses or Investments don't know or refuse to answer so the correct answer would be multiple businesses or Investments now notice you don't need any math to do this this is just common sense and so much of financial literacy is common sense so to give you an example last night I was working with my daughter who's taking personal finances in in high school this year or this semester I should say and um she's convinced that she's a math
25:39 phobic unfortunately she's very bright and she's doing really well in algebra now but she's got it in her head that she can't do math and so when it comes to doing the math the numerical side of personal finance she really struggles so what I had her do is just set the numbers aside and just look at the question and what is the question asking logically speaking what is the question answering all right I mean sorry what is the question asking and therefore what might
26:14 the answer be just using logic and Common Sense okay all right so let's look at this next one on inflation suppose over the next 10 years the prices of the things you buy double Okay so essentially a hundred percent inflation if your income also doubles will you be able to buy less than you can buy today the same as you can buy today or more than you can buy today right now the Temptation I think is to say wait my income doubled so
26:50 um you know gosh I I you know I'm making much more money than I did before but of course everything else that you buy has also doubled in price so the so the the the reality is you haven't gained any ground you haven't lost any ground you're it's the same so if you if if 10 years ago you could buy a loaf of bread for uh whatever it was two ten years ago I don't know two dollars something like that and today a loaf of bread costs four dollars and you made forty thousand dollars a year 10 years
27:27 ago and now you make eighty thousand dollars a year well to buy that loaf of bread for four dollars your situation hasn't changed if you were to work out the numbers you would see that as a percentage of your income the loaf of bread is the same now as it was ten years ago okay now you don't need to work the numbers though hopefully it's as we talk about these you'll kind of intuitively see well yeah okay I'm making twice as much money but everything everything is doubled in cost so I haven't gained any ground okay now let's do a numeracy
28:02 question I just I love that word numeracy it's like wow okay let's do it let's do a a kind of a a question where we are going to have to do a little bit of math to figure it out now before I do this question whenever you are doing math related to your finances I I encourage you don't think of it as math think of it as money when we I know you're going like the kind of cliched the Jewish guy talking about money I know I know okay but the
28:39 reality is most of us can intuitively understand money better than we can intuitively understand abstract math okay that's I think it's just the way the brain works because you know human beings for Millennia have been trading and exchanging and buying and selling and all that kind of stuff we know how to do that people without even a high school education have become very successful in business it can't be that you've got to be able to do math really well to understand finances not
29:16 at all not at all okay whether it's you know Harlan Sanders who started Kentucky Fried Chicken whether it's um uh I think it's Ray Crocker Roy crock who started McDonald's these these men did not have uh College educations Walt Disney by the way and Roy neither Walton or Roy Disney who who you know started what what is now known as the Walt Disney Company these they were actually I don't I think Walt Disney was a high school graduate because he he joined the ambulance Corps in
29:52 1917 when he was 16 years old and when he got back I don't think he went back to high school I think he went into the workforce after that right and yet he built an enormously successful company so how could it be that you have to have you know a college or even a high school level understanding of math to be successful and the answer is you don't most of finances is really just common sense okay so let's look at this numeracy question suppose you need to borrow a hundred dollars okay which is
30:28 the lower amount to pay back a hundred and five dollars or a hundred dollars plus three percent meaning three percent interest okay so there's two ways we can approach this we can say well what portion is five dollars of a hundred dollars okay and we can get into fractions five one hundredths which is one twentieth okay or 120th is five percent or we can say well okay three percent is three percent of a
31:05 hundred dollars is how much okay now this can be a little bit difficult I'm gonna work a problem like this in a few minutes and show you how to work it out but but for now just know that three percent is the same thing as point zero three okay so 100 times .03 is three dollars okay so a hundred dollars plus three percent is less than a hundred and five dollars because it's a hundred and three dollars okay so so that's where when you're
31:42 actually having to calculate interest you will need to know a little bit of money I'm not going to call it math anymore I'm going to call it money okay and and I'm going to work a couple of problems like that later okay this is uh uh uh here compound interest okay suppose you put money in the bank for two years and the bank agrees to add fifteen percent per year to your account will the bank add more money to your account the second year did than it did in the first year or will it add the same amount of money both years
32:17 okay so let's just let's just take a real simple example let's say that you put a hundred dollars into the bank after the first year it's going to add 15 percent to your account which means you're going to have no matter how much the 15 is starting at the beginning of the second year you're going to have more money in that bank than you did at beginning of the first year do you all see that because you the bank is going to pay you some money at the end of the first year okay so if you're
32:53 starting out the second year with more money than you started out the first year do you see that in the second year you have to get more money than you did the first year just common sense logic says you're going to get more money the second year that's what compound interest is that's how it works because each each period whether it's a year or a month or a day whatever it is that the interest is being compounded that money is being added to your account and now you're earning interest on the larger amount
33:30 the amount that includes the interest you've been paid up to that point okay and that's what's so great about compound interest is it it compounds which means it builds on itself and that's that's why um now that interest rates have gone up right we're I I'm not sure what passbook account uh rates are but treasuries are around like 10-year treasury I think is around the mid to high threes maybe up into the four percent whereas for years and years before it was at almost zero right so now banks are starting to pay
34:09 um good interest rates on things like CDs that they didn't pay before and and so you you have an ability to earn more money through compound interest that will really compound now I'm going to talk about I'm going to show an example of this again in in a few minutes but there's something called the rule of 72 okay the rule of 72 says your money will double in value in the number of years 72 divided by the interest rate so in
34:45 this case we've got a 15 interest rate according to the rule of 72 your money will double in less than five years so if you have a hundred dollar if you put a hundred dollars in an investment today that gets 15 per year because of compound interest or compounding uh return in five years you're going to have more than two hundred dollars okay because 72 divided by 15 is a little bit less than five
35:21 okay that's what that's why compound interest is so good all right then let's just see are there any other questions here we want to okay all right so I'm not gonna I'm gonna look at all these questions so I want to go back now to page 16 of this study oops I went too far why is it not moving Okay so here are by Concepts the where people in
35:57 general have the highest levels of literacy okay one is overall it's 40 across all people in the United States 40 under 50 okay so there's a lot of people in the in the older wealthier category that are way that are above 60 percent but the levels of financial literacy for younger less less affluent people is so low that it pulls the overall average down to 40 percent in terms of Concepts okay now um in general our financial literacy
36:35 when it comes to mortgages meaning loans to buy a house or a property and interest rates are are pretty good over 70 so approximately three quarters of Americans uh have financial literacy in those Concepts but then it drops off oops it drops off pretty dramatically so when it comes to inflation only slightly more than half of people have a strong under have a good understanding of how inflation works and it gets worse from there risk
37:11 only 43 compound interest less than a third Bond pricing only about a quarter of people understand how Bond pricing works so for for for the rest of today's show we have about another 20 or so minutes I'm gonna focus on these four Concepts to help you improve your understanding of them right so I'm gonna I'm gonna stop sharing this for now let's talk about inflation a little bit
37:46 this is obviously an important subject right now inflation is still running at about six percent um across the board according to the CPI now the CPI basically is composed of what they call a basket of goods meaning it's a collection of things that people buy and the government surveys it periodically once a month the labor department does to see what how has the prices of these things changed so it includes things like the prices of housing the prices of gasoline of
38:23 electricity of water of food of clothing of entertainment of travel of durable goods which are things like cars Furnitures Etc now there are different versions of the the Consumer Price Index the CPI okay now here's the thing about the CPI there's probably not a single American whoever actually buys the the you know in one month all the things that go into making the CPI
38:58 it's an average essentially okay so just because the CPI went up by six percent that doesn't mean that my or your individual cost of living went up by six percent it could have gone up by more or it could have gone up by less and in fact depending on what it is you're buying in any particular month it's possible that even though the CPI went up your Cost of Living went down okay and and the reason I bring this up
39:33 is there's there's a um the impact of knowing what happened with the Consumer Price Index and it and it affects how we feel about our own financial situation even if our own financial situation is different okay so there it creates kind of a bias so when when when you know you hear that inflation went up like last year I think it peaked at around what eight nine percent something like that that's that's huge inflation uh unless you were
40:10 around in the 70s like me where we had inflation higher than that 10 12 um but but historically it's the highest inflation we've had in 40 years so hearing about that it can make us feel like we're poorer even if we're not as poor as it seems to indicate or even if we're not poorer at all okay the thing about inflation is there's at least two factors we need to consider one is what are we buying specifically that has
40:48 either gone up or down in price okay so for example if if we do a lot of driving so the price of gasoline unless we drive an electric car the price of gasoline has a much bigger impact on our finances so if gasoline goes up in a month that is going to make us it's going to literally cost us more so it's going to make us poorer I'm putting that in in quotes even even though
41:23 um we may even though for example maybe the price of um a car went down if we didn't buy a car that month so it doesn't matter to us that the price of a car went down gas went up we drive a lot so that's having a bigger impact on us okay same with food okay we all eat so if the price of food went up that's going to have a bigger big impact on us and the fact of the matter is the lower your income the bigger the impact things like the price of food and
41:58 transportation will have okay because they make up a larger part of your expenditures so these are that's important to know when you look at the CPI data it's one thing to look at the raw data or I mean the not the raw data it's one thing to look at you know the CPI went up six percent okay fine but what does that mean individually for my finances we need to dig into that and and just as an aside it's one of the big gripes I have about financial reporting is
42:34 we rarely get any kind of depth in financial reporting maybe on CNBC I I don't watch television news so I can't tell you but I I read the Wall Street Journal and and I'm I never fail to be surprised by the lack of depth in so much of financial reporting they'll oftentimes give examples of how it affects an individual person but my attitude is I mean that's that that's good or bad for that person but I'm not that person so I don't know how to how this affects me I would
43:09 rather they go into depth about um the the concepts and how and and break them down into more pieces so we could better understand logically and Co in a common sense way how we individually might be impacted okay so here's the other issue with inflation let's say we got a salary increase okay and let's say that our salary increase was eight percent last year okay overall inflation was six percent so that would seem to indicate that we
43:46 actually did better because what we buy is costing us six percent more but we're making eight percent more so we should be gaining ground okay having said that again it's gonna depend on what you buy so just because the CPI went up by six percent and you got an eight percent salary increase that doesn't mean that you're ahead of the game it's going to depend on what you specifically buy that's why sometimes you can get a very nice what seems like a very nice salary increase and still feel like gosh I'm
44:21 having a lot of trouble making ends meet what's going on here okay so that that's the issue there there's a mismatch always in how this what's happening with the CPI versus what's happening with us okay so when we hear things about wage increases like the national increase in wages was let's say four percent and and the CPI went up six percent so that sounds like everybody in the country is poorer as a result but but that's not
44:56 the case that's not the case at all some people are going to be better off some people are going to be worse off some people are going to be really worse off some people are going to be really better off it all depends on their specific situation okay so we need to look Beyond just the very sort of basic things that are reported in the news whether it's TV news newspapers whatever Source you know the internet you're getting you know you're getting your news from okay we need to dig more and and hopefully if we start asking well wait a minute I
45:32 need more information than this maybe you know reporters will start reporting it okay so that's what I wanted to talk about inflation I don't want to get into the numbers of inflation because I think it's better to understand it on a common sense logical way and and and forget about them you can understand inflation even if even if you're a math phobic you can understand inflation because inflation is not math inflation is money okay and and the key thing is to be common sensical about it not get blinded by the simplified information that's out there and and the sort of stuff that people
46:08 talk about um because it's not necessarily applicable to our individual circumstances okay now let's let's talk about risk okay the reality is there's no such thing as a risk-free investment or for that matter a risk-free life okay living entails risk we just have to live with that okay two weeks ago it was a perfect perfect example for me I'm out exercising bang
46:45 got hit by a car not a pleasant experience right I mean I wasn't trying to get hit by a car the fellow driving the car I don't think was trying to hit me but it happens right this is why I have medical insurance so you know and and uh the paramedics you know sent me a bill because that's what they do today um that service isn't for free especially since they brought me home which was very nice of them okay um but I have medical insurance so the reality is you know when accidents happen
47:21 um you know I have I have the medical insurance okay and I think it's going to pay for most probably not all of the expense but for most of the expense okay now this when we talk about investing okay the higher the return on the investment the higher the risk okay so generally speaking we can break down risk or we can break down the return of an investment into uh four pieces I'm
47:58 going to bring up a white board here okay all right so let's let's I'm going to open up a text box here first okay so first of all we just have the basic level of interest rates oops and I can't spell okay so let's say right now you can get on a 10-year treasury let's
48:33 just use a round number a four percent return now A treasury is a very safe investment because it's backed by the full faith and credit of the United States government so you have what's called a treasury bill okay that's a that's a mid-length uh loan to the government basically okay so it's about four percent so anything that takes longer to pay off or is riskier than a 10-year what's called a t-bill
49:08 treasury bill okay or depreciate meaning it it loses value because there's it's some sort of physical asset like like uh like real estate like a car okay you need a higher return to compensate for those okay then let me give you those three things again you have risk you have what's called liquidity I'm going to explain that term in a minute and then you have depreciation okay so those are the four components of a
49:44 return on investment okay now if if you're investing in something and it's not guaranteed by the government then you have a higher risk of losing your investment okay so let's say it's a bond issued by I mentioned the Walt Disney Company a little while ago it's a big huge company pretty financially stable but is it as stable as the U.S government and the
50:19 answer is no because the the because in the end the Walt Disney Company cannot force us to pay money okay but the federal government can so if you were to buy a 10-year bond issued by the Walt Disney Company today it would have to have a return higher than the four-year t-bill return of about four percent so maybe it's only needs to be a percent higher one percent okay and maybe that's it now if it's a
50:54 10-year bond from the Walt Disney Company versus a 10-year t-bill so they have What's called the same liquidity liquidity means the length of time you have to wait for an investment to be paid back okay so you have very liquid Investments when you put your money in a savings account in a bank you can get your money out almost immediately okay these days you can go online probably if and or go on an app on your phone and you can transfer money out of your savings account into your checking
51:30 account essentially instantaneously it's very liquid okay now let's look at bonds okay some bonds are very liquid okay now let's look at government bonds there's three types of government bonds there's notes bills and bonds so notes basically have a term of less than a year bonds have a term of over 10 years I believe it is 10 or 12 years and T bills are are have a return in the middle so
52:07 you can see that treasury notes are are pretty liquid most you have to wait for about a year to get your money out now why is that important it's important because of how bonds work which I'm going to talk about in a minute but the the thing about liquidity is if your money is in an investment and it takes you time to get it out what's happening in the world economically or in the marketplace economically and change over the term of that investment and those changes can reduce the value of your
52:45 investment if you have to CH if you have to sell it before the term is up okay now that may sound weird but that is the case I'm going to give you a mathematical example of that actually you know I'll go ahead and do a mathematical example now Okay so let's say you've got a bond that's worth a hundred dollars all right you you bought a bond for a hundred dollars okay and let's say you bought it um five years ago when the interest rate was maybe you know point one
53:23 percent okay and and let's I I know this is these numbers aren't necessarily historically accurate and let's say it has a term of 10 years okay ten years all right so here it is five years later and interest rates are let's just say four percent and the fact of the matter is you've got
53:58 five more years before the bond does what's called matures which means gets paid back in full okay now if you want to wait all 10 years you're going to get 100 back okay that means your money is tied up for the 10 years let's say you need the money now okay the fact of the matter is would an investor today pay you a hundred dollars for something earning a
54:34 tenth of a percent interest in a climate where Investments similar Investments are now getting four percent the answer is no not a chance okay I mean unless it's a friend of yours and they're doing it as a favor but but those friends are hard to find okay so the reality is if you have to sell that team that that uh I think we said it was a t-bill today okay you would maybe be able to sell it for let's see let me do see if I can do a rough calculation
55:15 you might be able to sell it for let's say about 85 dollars okay and the reason is in order to get this four percent return the investor is going to wait five years and they're going to get a hundred dollars for that Bond plus a minimal amount of Interest and that hundred dollars is going to include the 85 dollars they paid for it plus a fifteen dollar profit that fifteen dollar profit is the return
55:52 on their investment which spread out over five years is going to be roughly a four percent four percent return per year okay so as interest rates go up the the value of a bond goes down they're what are called inversely proportional interest rates go up Bond values down interest rates go down Bond values go up okay now that's that doesn't mean that the face amount of the bond go changes
56:29 it does not it always stays at a hundred dollars but if you have to sell it before it becomes due then you'll be subjected to this inverse relation forget about the numbers that's why I didn't do a whole lot of math I my My Hope Is that you'll get a sense logically that has to be the case okay because if this Bond when it was initially sold is paying such a low return and you're selling it before the 10
57:06 years is up you have to sell it for Less in order for the person who's buying it to get a return that's roughly commensurate with what the returns are today okay that is the liquidity risk or what's sometimes called interest rate risk and by the way that's one of the issues for the failure of SBB um Silicon Valley Bank is is that they had an interest rate risk there that they took um and and it's not it's not uncommon but it just didn't get identified properly
57:41 um The Regulators didn't I well they're saying they did identify it but then they didn't do anything about it really and so that that's part of that's part of why uh Silicon Valley Bank um have had problems okay so let's let's take um a let's say a four-year treasury today okay if it's a corporate bond we're going to add risk because a company is riskier than the US government now if it's a longer term than 10 years maybe it's a 20-year corporate bond so now we're going to
58:17 have to add more of a return because it's illiquid meaning or it's less liquid let's say less liquid it's not as it has a longer term so we're going to be subjected to this risk for a longer period of time so that means the return is going to have to be even higher okay I'm not going to get into depreciation right now that's a pretty uh Advanced concept and um and and as such um it would take some time and and and and we would have to get into real
58:52 estate in that and we're also almost out of time here for for today's show but hopefully this was useful for you in starting to understand some of these basic concepts we talked about inflation we talked about risk we talked about compound interest in the questions in the survey and we talked about Bond pricing okay and again for just this is just money it's just money engage your common sense get your logic going look at these as as as you know as as often as you can
59:28 and that will help you become more financially literate so from time to time we'll deal with some more of these Concepts and if you have any questions my contact information is in the show notes drop me an email or make a comment on any of the social media Outlets where the show hosts if you're watching live streaming now that's terrific let me know tell me what what else you'd like to know about when it comes to finances investing or uh career and business matters happy to do a show based on what you want to learn about
60:04 so thanks very much for watching today I appreciate you tuning in tell your friends about it and join me next Tuesday for my show uh business lessons from the military where we take military Doctrine history leadership Concepts from from outstanding military figures and we use them to understand how to better run our businesses and our professional lives and and then of course every Wednesday work that's a half an hour 10 30 a.m Pacific time uh 1 30 p.m eastern time
60:40 and then we'll be back here again on Wednesday of next week talking more about people making money so thanks again for joining me and Marie darling as I was mentioning at the beginning of the show you are and ever will be my Bell have a great rest of the day