Lesson 2: Investing, Credit, and Debt Management

Summary

The video script by Theophilus Tago, a financial student ambassador, delves into personal money management, emphasizing investing, credit, and debt management. It explains the power of compound interest and the importance of choosing investments wisely based on risk tolerance and time horizon. The script also highlights the impact of credit management on financial health and the potential consequences of debt mismanagement, advocating for disciplined financial choices for long-term prosperity.

Takeaways

• 🎓 The speaker, Theophilus Tago, introduces himself as a financial student ambassador for the Society for Financial Education and Professional Development.
• 💼 The main focus of the lesson is on personal money management, specifically investing, credit, and debt management.
• 📈 The importance of investing is emphasized for wealth creation and future income generation through the potential growth of assets.
• 🔢 The concept of compound interest is introduced, highlighting its superiority over simple interest for growing wealth due to interest being earned on both the principal and accumulated interest.
• 🏦 The difference between simple and compound interest is illustrated with an example, showing how compound interest can significantly increase the value of an investment over time.
• 🤔 The Rule of 72 is presented as a tool to estimate the time it takes for an investment to double, based on the annual rate of return.
• 📊 The script compares different types of investments, such as stocks, bonds, and mutual funds, explaining their potential for wealth and income creation as well as the associated risks.
• 💡 The principle of risk and reward in investing is discussed, noting that higher risk investments offer greater potential returns but also carry the possibility of loss.
• 🕒 The concept of time horizon and risk tolerance is introduced, explaining how they should guide investment choices based on individual financial goals and the time until funds are needed.
• 💳 The power of credit as a tool for wealth building is recognized, but also cautions about the importance of credit management to avoid financial strain.
• 🚫 The '3 C's of credit' (Capacity, Character, Collateral) are identified as key factors lenders consider when granting credit.
• 📉 The script warns about the long-term impact of negative credit history on financial health and the potential for higher costs of credit due to poor credit management.

Q & A

Who is Theophilus Tago in the script?

Theophilus Tago is a financial student ambassador for the Society for Financial Education and Professional Development.

What is the main focus of Theophilus Tago's work with college students?

The main focus of Theophilus Tago's work is on building college students' personal money management skills, with an emphasis on budgeting, credit and debt management, and investment.

What is the title of the lesson presented by Theophilus Tago?

The title of the lesson is 'Fundamentals of Personal Money Management: Investing, Credit, and Debt Management'.

What is the significance of compound interest in personal investment?

Compound interest is significant in personal investment because it allows the money to grow more substantially over time, as interest is calculated and paid on both the principal and previously accumulated interest.

How does simple interest differ from compound interest?

Simple interest is calculated and paid only on the principal amount, whereas compound interest is calculated and paid on both the principal and all previously accumulated interest.

What is an example of the difference between simple and compound interest over 10 years with a 6% interest rate?

With $5,000 deposited for 10 years at a 6% interest rate, simple interest would result in a total of $8,000, while compound interest would result in $8,954, nearly a thousand dollars more.

What is the Rule of 72 and how is it used in investment?

The Rule of 72 is a method to estimate how long it will take an investment to double, given a fixed annual rate of interest. It is calculated by dividing 72 by the annual rate of return.

What are the three factors, known as the 3 C's, that lenders look at when granting credit?

The 3 C's are Capacity, Character, and Collateral. Capacity refers to the ability to pay the debt, Character to the creditworthiness and past payment history, and Collateral to an asset pledged to secure the loan.

How can mismanagement of credit and debt impact an individual's financial well-being?

Mismanagement of credit and debt can drain financial resources, limit the ability to make investments, and negatively affect credit scores, which in turn can increase the cost of credit and affect access to various services and opportunities.

What are some of the investment vehicles mentioned in the script that can increase in value and create wealth and income?

The investment vehicles mentioned in the script include stocks, bonds, and mutual funds.

What is the relationship between risk and return in investing?

In investing, there is a risk-reward relationship where generally lower risk investments offer lower returns, while higher risk investments offer the potential for greater returns.

How can an individual's time horizon and risk tolerance affect their investment choices?

An individual's time horizon, which relates to when they will need the money, and their risk tolerance, which relates to their ability to withstand changes in investment value, will guide their investment choices towards more or less risk.

What is the importance of managing credit effectively?

Effective credit management is crucial for financial health as negative information on a credit report can follow an individual for years, affecting their ability to obtain credit and the cost of credit through higher interest rates.

Outlines

00:00

📚 Personal Money Management: Investing Basics

Theophilus Tago, a financial student ambassador, introduces the 'Fundamentals of Personal Money Management' course, focusing on investing, credit, and debt management. The lesson aims to educate on the principles of investing, the power of compound interest, and various personal investment tools. It emphasizes the importance of effective money management for achieving financial goals, the concept of investing as a means to create wealth and income, and the distinction between simple and compound interest. The script includes an example illustrating the growth of a $5,000 investment over 10 years with different interest types, highlighting the superior growth potential of compound interest. It also introduces the Rule of 72 as a tool for estimating investment doubling time.

05:00

🏦 The Power of Compounding and Diversified Investments

This section delves deeper into the power of compound interest, using an example to show how the frequency of compounding can significantly impact investment growth. It contrasts the outcomes of simple and compound interest over time and highlights the importance of starting to invest early to take advantage of compound growth. The script discusses various investment types, including stocks, bonds, and mutual funds, explaining their nature and potential returns. It also touches on the risks associated with investments and the importance of choosing investments based on one's time horizon and risk tolerance. The summary underscores the historical performance of investment assets and the necessity of smart investing for long-term financial success.

10:01

💳 Credit and Debt Management for Financial Health

The final paragraph discusses the critical role of credit and debt management in building wealth. It explains how credit can be a powerful tool for wealth building, allowing for the acquisition of goods and services with future repayment. The script outlines the three C's that lenders consider when granting credit: Capacity, Character, and Collateral. It warns about the long-term impact of negative credit information and how it can affect various aspects of life, including employment and housing. The importance of prioritizing debt reduction and making disciplined financial choices is emphasized, as these decisions can influence future financial well-being. The summary concludes by encouraging viewers to visit the course's website for more information and resources on managing investments, credit, and debt for long-term success.

Keywords

💡Investing

Investing is the act of committing money into assets with the expectation that they will increase in value over time, thereby creating wealth and income for the future. In the video, investing is a key theme, illustrating the importance of putting money into financial vehicles to seek potential growth. The script mentions the power of compounding interest as a way to grow investments over time, emphasizing the benefits of starting to invest early.

💡Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. It is a fundamental concept in the video, demonstrating how money can grow more substantially over time as new interest is added to the principal. The script provides an example comparing simple and compound interest, showing the greater growth potential of the latter.

💡Personal Money Management

Personal money management refers to the process of effectively handling one's financial resources to meet current and future needs, as well as obligations. The video's lesson is titled 'Fundamentals of Personal Money Management,' highlighting the importance of this skill in reaching financial goals. It involves budgeting, credit and debt management, and investment strategies.

💡Credit

Credit is a financial tool that allows individuals to acquire goods and services now and pay for them later, often with interest. The video discusses credit as a powerful instrument for wealth building, but also warns of the potential pitfalls of mismanagement, such as high interest rates and negative impacts on financial health.

💡Debt Management

Debt management involves the strategies and practices used to efficiently handle and repay debt. The script emphasizes the importance of managing credit and debt to prevent financial strain and to ensure the availability of resources for investments. It advises prioritizing debt reduction as part of sound money management practices.

💡Stocks

Stocks are securities that represent ownership in a company. When the value of a company's shares increases, so does the value of an individual's ownership. The video mentions stocks as one of the investment types that can increase in value and create wealth, subject to market fluctuations and the associated risks.

💡Bonds

Bonds are debt securities, essentially loans where an entity (like a company or government) borrows money and issues an IOU, promising to pay interest and return the principal at a future date. In the video, bonds are presented as an investment option that offers a fixed rate of return but also carries certain risks.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. The video describes mutual funds as a way to combine the features of stocks and bonds, managed by an investment company, offering a potential for higher returns but also higher risks.

💡Risk Tolerance

Risk tolerance refers to an individual's ability and willingness to take risks with investments, understanding the potential for both gains and losses. The script discusses how one's time horizon and risk tolerance should guide investment choices, with higher risk investments offering greater potential returns but also the possibility of loss.

💡Time Horizon

Time horizon is the length of time an investor expects to hold an investment before needing the money for other purposes. The video explains that the time horizon is a crucial factor in investment decisions, with longer horizons allowing for more risk-taking and shorter horizons necessitating more conservative investment strategies.

💡Financial Goals

Financial goals are the specific, measurable objectives an individual sets to achieve in their financial life, such as saving for retirement, buying a home, or funding education. The video emphasizes that effective money management is essential for reaching these goals, by focusing financial resources to meet both current and future needs.

Highlights

The introduction of Theophilus Tago as a financial student ambassador for the Society For Financial Education and Professional Development.

The focus on building personal money management skills with an emphasis on budgeting, credit and debt management, and investment.

The importance of effective money management for reaching financial goals and meeting current and future financial needs.

The concept of investing as a key to wealth creation and the potential growth of investments.

The power of compounding interest and its impact on the growth of investments over time.

The difference between simple interest and compound interest, and their effects on money growth.

The illustration of compound interest with the example of a savings account and its potential growth.

The Rule of 72 as a tool for estimating the time it takes for an investment to double.

The significance of starting investments early and the impact of time on accumulated earnings.

The types of investments such as stocks, bonds, and mutual funds, and their potential for wealth creation.

The risk-reward relationship in investing and the trade-off between risk and potential return.

The importance of choosing investments based on time horizon and risk tolerance.

The role of credit in wealth building and its potential impact on financial health.

The 3 C's (Capacity, Character, Collateral) that lenders consider when granting credit.

The long-term effects of credit mismanagement on financial resources and investment capabilities.

The importance of prioritizing debt reduction and its role in building a foundation for future financial well-being.

The final message on the significance of disciplined financial choices for long-term success.

The call to action to visit the website for more information on the course and related resources.

Transcripts

(gentle music)

[TEXT: DEMOCRACY, PROSPERITY, HUMAN RIGHTS, EDUCATION, SECURITY A PRODUCTION OF U.S. DEPARTMENT OF STATE]

Hello, my name is Theophilus Tago.

[TEXT: Theophilus Tago, Student Ambassador] I am a financial student ambassador

[TEXT: Society for Financial Education & Professional Development] for the Society For Financial Education

And Professional Development.

Through the society,

I work with college students

on building their personal money management skills

with an emphasis on budgeting,

credit and debt management, and investment.

[TEXT: Fundamentals of Personal Money Management: Investing, Credit, and Debt Management] Welcome to Fundamentals of Personal Money Management.

This lesson is Investing, Credit, and Debt Management.

In this lesson,

[TEXT: Learning Objectives: Investing, Credit, and Debt Management] we'll examine the principles of investing,

[TEXT: Principles of investing, What is compound interest?] the concept of compound interest,

[TEXT: Different types of investment tools] and the different types of personal investment tools

that can help grow your income.

[TEXT: Managing credit and debt] Finally, we look at best practices

for managing credit and debt.

I am presenting these concepts to you in general terms.

For information on specific, personal money management,

you should consult a qualified financial professional.

Effective money management is an important skill

because it helps you reach your financial goals.

It involves focusing financial resources

to meet your current and future financial needs,

as well as your financial obligations.

One aspect of money management that will play a key role

in meeting your needs at each stage

of your life is investing.

Investing involves committing some of your money

into assets with the hope that it increases in value.

As a result, you create wealth and income for your future.

When you are putting money into a financial vehicle,

you are seeking the benefit

of the potential growth of your investments.

Consider ways to start investing

a small amount of money early,

so that through the power of compounding interest,

the value of your investments increase over time.

Two of the most important concepts about investing

[TEXT: Simple vs Compound Interest] are simple interest versus compound interest

and how each factors into how your money grows.

Simple interest is calculated and paid

on just the principal or the money you deposited

into the account.

In contrast, compound interest is calculated

and paid on both the principal amount plus all

the previously accumulated interest earned.

Think of it as building blocks.

Simple interest is like adding

onto the first brick laid every time.

Compound interest is more like adding a new brick

to the last one you placed at the very top.

The wall gets taller,

your money grows more substantially with compound interest.

Money that is compounding is money at work.

When you open a savings account at a financial institution,

ask your representative if simple interest

or compound interest will be paid on your account.

Often money put away for savings at home loses

the benefit of compounding.

But money put aside into a savings account earning interest

that compounds frequently can make a huge difference

as it increases its value over time.

Let's look at an example.

If $5,000 were deposited for 10 years,

[TEXT: $5,000, 10 years, 6% Simple = $8,000] earning 6% simple interest annually,

the account value in 10 years would total $8,000.

But if the same amount of money

were to earn compound interest,

[TEXT: $5,000, 10 years, 6% Compound = $8,954] at the end of 10 years the value would be $8,954,

almost a thousand dollars more.

In fact, the account would reach $9,070

[TEXT: $5,000, 10 years, 6% Compound quarterly = $9,070] if instead of annual compounding,

the interest crediting method allowed for quarterly compounding.

What does this mean?

It means that instead of interest being credited

once a year,

interest would be credited

on the accumulated balance every quarter,

making the amount earned every three months slightly higher.

The frequency of compounding daily, monthly,

quarterly, or annually can make a big difference.

In this example,

[TEXT: $5,000, 12 years, 6% Compound quarterly = $10,000] the accumulated value in two more years would reach $10,000.

This is more than double the original amount.

Any subsequent growth continues to benefit from earnings

on top of the old earnings so that as the account gets larger,

it grows exponentially.

When it comes to compounding,

[TEXT: Rule of 72] the Rule of 72 is a simple way to estimate

how long it will take an investment to double

given the fixed annual rates of interest.

By dividing 72 by the annual rate of return,

you can get a rough estimate of how many years

[TEXT: 72 / Rate of return = Time for Investment to Double] it will take for a one-time initial investment to double.

In this case, we would divide 72 by 6, our interest rate,

to find that it would take

the original $5,000 investment 12 years to double.

This example assumes that not only

the initial amount deposited but the amount accumulated

will grow much larger if you continue

to add more into the account.

Depending on the length of time someone invests

and the rate of return earned on the money,

it becomes apparent that the accumulated earnings

can exceed the principal.

By taking advantage of the power of compounding,

you can put in much smaller amounts in the early years

and let the work of compounding do the work

of increasing the value of your account.

Delaying or starting later in life simply

may not give you enough time

to take advantage of accumulated growth over time.

Even doubling or tripling the amount contributed

on a monthly basis may not allow enough time

to catch up to the account value of someone

who started earlier with much less

and allowed the earnings to keep growing.

Now let's look at other types of investments

which can also increase in value

and create wealth and income for you.

These are stocks, bonds, and mutual funds.

[TEXT: STOCKS] Stocks are securities that represent ownership in a company.

If the share of stock increases,

the value of your ownership in the company increases.

[TEXT: BONDS] Bonds represent loans in which a company

or government entity is essentially borrowing money

and issuing you an IOU,

promising to pay interest and to return the amount

that was borrowed at a future date.

[TEXT: MUTUAL FUNDS] Mutual funds represent a combination of the two

by purchasing shares in a grouping of stocks

or bonds managed by an investment company.

Despite the volatility, historically,

the average return over a given period of time

on investment assets outperform

what can be earned in safer interest-bearing accounts.

Unlike a savings account that offers savers

a set interest rate,

money invested in stocks, bonds,

and mutual funds does not have a defined interest rate

when you invest.

Instead, these seek a rate of return on the investment.

There is no guarantee of what

you will earn on your investment.

There is both the potential for gain or loss,

and there is no guarantee that the money will grow.

This is what we refer to as risk

when discussing investments.

Investing involves a risk reward relationship.

Generally, the lower your risk,

which is found in savings accounts

and certificates of deposits, the lower the return.

Conversely, high risk investment like stocks,

bonds, and mutual funds offer

a greater potential return on your investment.

Investment vehicles, such as stocks, bonds,

and mutual funds, tend to fluctuate in value based

on various market related and economic factors.

While in most cases,

historical return in this type

of investment represents high overall gains,

it should be expected that market or economic conditions

may also result in negative rates of return

or a lesser return than expected.

Smart investing requires that

you choose investments according

[TEXT: Time horizon, Risk tolerance] to your time horizon and risk tolerance.

Your time horizon relates to your life stage

or the time you think you will need the money.

Risk tolerance relates to your ability

to withstand changes in the value of your investment

that may occur from time to time.

For example, if you're investing for retirement

that will not come until 25 or more years in the future,

you can afford to invest in a more risk tolerant way,

taking a chance on a high risk,

potentially high return financial vehicle or tool.

Even in years of negative return,

the account has time to recover

and make up losses before funds are ever needed.

If, on the other hand,

you know you will need the money being invested

in 3-5 years,

it makes sense to limit your risk exposure

by making low risk, low volatility investments.

While smart investment is but one aspect of your focus

on the road to creating wealth,

the issue of credit and debt management

are vitally important to your financial well-being

and economic stability.

The mismanagement of credit and debt

can drain your financial resources

and limit your ability to make investments.

Credit and debt management are those areas in which

"what you don't know can hurt you" really applies.

Credit is a powerful tool for wealth building.

It gives you the ability

to acquire goods and services today, but pay later.

Credit can be used to pay for your education,

purchase a vehicle, help fund the startup of a business,

or buy a home.

When you are granted credit or use a credit card,

you are essentially borrowing money

and making a promise to repay it back,

usually with interest.

When you use credit to pay for expenses,

you are committing or giving up

the future use of your money.

When applying for credit,

potential lenders will look for these top three factors.

They are called the 3 C's:

[TEXT: Lenders look at: Capacity, Character, Collateral] Capacity, Character, and Collateral.

Capacity looks at your ability to pay the debt

that you are seeking.

That is, do you have the income and resources sufficient

to pay back the loan and maintain the payments?

Character is a consideration of your creditworthiness.

This refers to your reputation for paying bills

when due by considering your past payment history,

with other lenders,

as an indication of your willingness

and ability to honor agreements.

Collateral is an asset pledged to the creditor

until the debt obligation is paid.

Example, if you own your home,

it may be used as collateral to secure a loan.

Management of credit is extremely important

when it comes to your financial health

because negative information

on your credit report follows you for years,

well after an incident or late payment has occurred.

Even if you are able to obtain credit,

the cost of credit is increased

in the form of higher interest rates.

Another issue most people may not be aware of

until it's too late is how credit is used by others

in making decisions unrelated to borrowing.

Employers, landlords, banks, service providers,

and insurance companies use your credit history

as an objective assessment in determining

whether to accept or deny applicants,

deny services, or to charge higher fees.

This can make a difference in what job you get,

where you're able to live,

or your access to choices in obtaining basic services.

Prioritizing debt reduction now by adjusting your budget

to pay more than your minimum payment

can help get you on a better path

to have more money to invest later.

Money management is not simply about how you spend money.

It is about considering and making disciplined choices.

Despite having limited current resources,

carefully considered financial choices that you make now

have an influence on how you're able to build

a foundation for your future financial well-being.

Thank you for the opportunity to share

how investing, credit, and debt management

are tools for long-term financial success.

[TEXT: For more on this course and to access related resources, visit our website.] For more on this course and to access related resources,

visit our website.

[TEXT: DEMOCRACY, PROSPERITY, HUMAN RIGHTS, EDUCATION, SECURITY A PRODUCTION OF U.S. DEPARTMENT OF STATE]