SPEAKER 0

Mm. Tests Test, OK.

SPEAKER 1
Yes. OK I know. Yeah. I Yeah We Sorry. Yeah OK, OK, good morning everyone.

SPEAKER 0
It's 9 o'clock. So perhaps we should get started, right, so welcome to. Semester 2?
Uh, maybe this is your first class, you know, thank you for coming to a 9 o'clock
lecture on a cold and rainy day. Um, just a few administrative things. I think this
is what school admin needs me to put up, you know, if there's an emergency, you
know what to do, right? So, you know, I'm not gonna to belabour the point, but
maybe let me, before we start on the material proper, let me give you an
introduction of. About myself. My name is Li Chu. Um, I am currently doing my PhD
here at UWA, a PhD in finance. You might notice that I have a few more grey hairs
than the average PhD student, and that's because I'm not a career academic. So
prior to coming back to school a couple of years ago, um, I'd spent the last 20
years as a practitioner in finance. So, Um, after my undergrad, I had worked in
banking and finance across Hong Kong and Singapore. Um, I worked on trading floors,
uh, I traded bonds for a very long time, way too long. And then I've transitioned
to a role within private banking within wealth management, so I ran a team of 40
people in wealth management and we weren't relationship managers, so we didn't, we
weren't sales people, we, we didn't go out to get customers, but my team basically
helped wealthy people manage their portfolios. So when a customer came to the bank
and everybody opened the account and they had the salesperson and they were happy.
The customer would come to my team and we would help them make investments with
their money. Now, so this, so managing your personal finances is kinda, you know,
very, it's it's a passion of mine, right, it's sort of front and centre of what I
believe in. You're gonna be thinking about, you're gonna be looking at this and
you're gonna be thinking about what I've just said to you and be like, well, she
looked after rich people, and I'm not rich. How does this, you know, how does this
apply to me? I would argue that managing your personal finances is not just for
rich people. Right, it should be in your heads, front and centre of everything that
you do and you're gonna think, oh my god, like this is so exhausting, but. I would
love for all of you by the end of this course, for some of the principles that come
out of this course to be second nature. Right, you know, that, that would be music
to my ears too, for you to have em embodied some of the learning so that you don't
even think about it when you practise it in real life. You know, that would be sort
of KPI met for me, right? Um, you know, so that's just kind of giving you a
perspective, um, you know, on this course, right? Um, just a couple more things,
so, uh, this is a finance course for non-finance, uh, majors, right? This is not.
So I did notice that in the pre-co survey that a number of you um are majoring in
finance and there's nothing wrong with you if you major in finance to be doing this
course as well, but you might find that there's a significant amount of overlap,
and that also this course, because it's a finance course that is targeted at non-
finance individuals that, It's, it might be pitched at a lesser quantitative level
as your other courses, so you might find a significant amount of overlap, right,
uh, it probably means that you'll, you should do pretty well, but, The reason why
you do this course is not just to ace it. OK, let's put it this way, I'm gonna put
this out there. This is maybe. The most relevant course at university that you will
do for the rest, that will impact the rest of your lives if you pay attention. Why?
Because your life ahead of you, after you leave university, you're gonna be getting
jobs, you're gonna be earning money, you're gonna be starting families, buying
houses, etc. All of those things require financial decisions or require you to make
those financial decisions, right? And hopefully what you get out of this course
will guide or will help you make those decisions in a more informed manner, and
that's why I say, Maybe this course is away from your majors, away from if you're
an engineer, you know, studying engineering to become an engineer, away from that,
this course is possibly the most practical course, uh, and the most practically
relevant course that you will do that will impact you for the rest of your lives if
you pay attention. OK. With that, I will begin. Oh, the other thing I wanted to
mention is Because it is a course for it's it's a finance course targeted at non-
financed individuals, and if you are a non-finance individual, um, I apologise in
advance if some of the terms that we use, you're like, oh my God, I don't
understand that, right? There's, I apologise if we start going into um. Very
specific terms, please stop me, please feel free to ask questions. Sometimes
subject matter specialists assume or like we have these biases where we assume that
everybody knows what we do or we, we don't even realise we're going into that,
right? So if at any point you catch me going into terms or going into language that
you're like, I don't know what she's talking about, please tell me so that I can
take that back and I can. I can explain it or I can think about what I've just said
and explain it in a different manner. The chances are I've had this unconscious
bias and I've put that into, into, into the lecture and I haven't even realised
because it's unconscious, OK? With that, let's uh let's begin. I'll open it up to
questions, but if there are no questions, we can begin. Thanks. OK. All right. Um
Does anybody, has anyone ever seen this? I know most of you are so young. I mean,
do you even know what a a banknote today looks like cause it seems like these days,
all we do is take out our phones and tap. You know, I don't think my children even
know, you know, how to handle money, right? But anyway, these are old, you might
have seen these in vintage shops or collector shops. Um, they are old dollar bills,
old, uh, currency bills that Australia used to use. Probably not legal, I don't
think they're legal tender anymore, but, uh, uh, they are, you know, you can
probably find them on, you know, eBay or Etsy or something. And the reason I've
shown you that is. I wanted to ask you this, right? If your grandmother had 100 of
these bills and she'd shove them under her mattress in 1966. And you then today,
maybe taking that mattress and you wanted to throw it away and you realise there's
$100 sitting underneath that mattress, ignoring the fact that maybe these bills are
not legal tender anymore. I mean you can still take them to RBE to swap them for,
for actual money now. Do you think that the value of those $100 is the same in 1966
versus today? So, you know, you're right, I mean I see a see a few heads shaking,
yes, the value of that dollar or that $100 has certainly changed since 1966 and
changed in, changed in what way? What do you think? What do you guys think? What
was $100 in 1966? Let me show you that. It's in 1966, it was. A fortnight's wage
for the average worker. It's quite a lot of money. Right, in those days. Um, And so
maybe your grandmother worked for two weeks and she, uh, you know, gotten $100 in
dollar bills and then she saved that, right? Non has done that. $100 in 1966, in 19
so assume non has done that, and maybe in. Maybe instead of holding it for 40
years, she's. Actually held it for 10 years, right? In 1976, if you then went and
opened that envelope under your mattress and you went out to buy groceries. Do you
think you could have bought the same amount of groceries in 1976? With that same
$100 versus 1966, maybe that $100 bought you. I don't know, 20 stakes in 1966. I
have no idea, but maybe. 20 stakes in 1966. In 1976, how much do you think that
$100 would have bought you? Would it still be 20 stakes? Do you think? No. Do you
expect more steaks or less steaks? The stakes, why? Because generally prices go up
over time and it's something that we don't like and it's called inflation, right?
So, In 10 years, In 1976, if Norna had opened her envelope of $100 and she then
went out to Coles to buy steaks. She could only buy probably half the number of
steaks that she did 10 years ago, so she bought 20 steaks in 1966. Um, in 1976, she
could probably only buy. Um, 10 states, right, that's the power of inflation. Over
10 years, it halves. The buying power or it did back inflation in those days, it
halved the buying power uh of your money. Right. OK, what if you want it, so the
other way to look at it is what, If you wanted to buy those 20 stakes in 1976. What
is, how much would you need? Sorry? Hm? No, no, so if you wanted to buy 26, 26
costume in 1966 $100 right? OK, in 1976, those, uh, your $100 only bought you 10
stakes. If you wanted to go back to buy 20 steaks, actually you would need about
$200 close to $200 right? So on average, in 10 years. Prices went up by 96%.
Cumulatively, because remember, and some of you would have read the news and you
would see inflation numbers and it's always uh what 5%, 3%, 7%, etc. whatever, but
that's on those numbers that get reported in the press are annual numbers, right?
Over 10 years, cumulatively compounding that effect, and we'll talk about
compounding later in this lecture, prices went up by 96% between 1966 and 1976,
right? So just to take that concept a little bit further and you know, there was 10
years, right? So what if. Your $100 your $100 bills were stuffed under your
blanket, not just for 10 years for longer than that. Alright, $100.02 weeks' pay
for the average worker in 10 years buys only $51 worth of goods. If you opened your
envelope in 1986, that goes down further. That's only worth $21 worth of goods of
1966 goods. In 30 years, 13. And well, if you open it today. Your $100 is only
worth $6.16. 0 gosh. What does that, but conversely, what does that mean? If you
wanted to buy the $100 worth of food in 1966, right,
to buy that same amount of food today that the baby born at the beginning of 1960,
how much would you actually need in that envelope? So, your $100 being worth $6.16.
If you didn't do anything with it. OK, the If you wanted to buy that same $100
basket, that was 20 steaks or the half a cow or whatever it was that you could buy
with that $100 back in 1966 today. You would need a much bigger envelope. You would
need like that on that big in dollar bills. You will need about $1600 today, right?
How did I get that? Well, I'm gonna show you something. Uh, Let me I've got a
calculator here. I mean, there are these calculators online everywhere that you
can. You know, play around with, right? Um, so this is what, in $2013 or whatever
it is, lots of online calculators, um, I'm gonna put in $100 here and you can see
I'm going to recalculate this. There you go. $100 in 1966 is worth about $1600 in
2024. OK, so that's where I got that number, I didn't make it up. Well, it was
based on the compounding of this. Uh, in this, um. Website. Oops, OK. Alright. OK.
This gives you, so we, we talked a little bit about inflation, we talked a little
bit about, you know, how, The how the value of money changes over time, that's a
very key concept in managing your personal finances. It's something called the time
value of money. OK, time value of money, right, and we will go through some of
those calculations a little bit later in, The lecture, um, but that time value of
money is linked to inflation or inflation rates if you like, right? This gives you
a chart over a very long over since 1965 of how inflation has looked for Australia
in different Australian cities, um. You know, over the last what, 40, 50 years,
right? And you can see we went through some periods of really, really high
inflation. Um, and Inflation was quite high all the way until about mid 90s, and
then actually from the mid-nineties onwards, we went through a period of fairly,
Benign inflation if you like, right, for the 20 years to about 2021, actually
inflation was quite benign. Many of us got very used to that, and then after COVID,
what happened? We had an inflation spike, the first inflation spike in probably 20
years, that caught everybody by surprise, caught market by surprise, um, and, It
it's gotten a lot of press, right, you, I think all of you would have read things
about cost of living, prices keep going up, etc. etc. Because Most of us have
gotten very used to that, very low period of uh low inflation period of the last 20
years. Right, and then suddenly you had COVID, and then COVID caused or COVID was
the catalyst that caused inflation to spike for many of us. OK, so that's
inflation. And that's sort of, if you didn't do anything with your money except
stuff it under your mattress, inflation erodes the buying power of your money,
right, because that money is not doing anything. Now, what if? What if Nonna,
instead of. Putting that money under her blanket, she had been quite, you know,
risk taking and she said, OK, well, actually I'm just gonna put it in this, I'm
just gonna invest in some stocks. I'm gonna go buy some stocks. And what every time
I get a dividend, so what if nonna had. Invested $100 and kept reinvesting returns.
And when I say reinvesting returns, I mean every time she got a dividend, every
time those stocks paid her a dividend, um, income, she took that and she bought the
same basket of stocks again. That's called reinvesting your returns, right? And. It
also means she didn't cash in those stocks, she didn't, she bought it and she just
sat onto it. She didn't sell it, she didn't do anything with it, right? She
invested $100 in 1966 and she just kept buying the same basket of stocks, um, every
time she got a coupon or got a dividend. How much do you think your $100 would be
worth um in 10 years? What do you guys reckon? If you do nothing, $100 worth $50 or
$51. If you bought shares, how much was it worth in 1976? What do you guys think?
I'll show you. The investment would be worth $260. It's pretty good. Right? Now,
And I'll explain why there's a star there, but you know, we will get to that. What
if, Um, We held it for 20 years, the same basket, same reinvesting. That investment
would be worth $1500 in 20 years. And so on and so forth, right? So on and so
forth, you know. You know, your investment would be worth by 2023, about 256. Um,
$1000 if you had invested $100 back in 1966. OK. Now, Think about that, right?
Under the mattress. Value gets eroded, over time, your $100 becomes worth about $6
versus $56,000 if you had actually kept. That money in the stock market. Think
about that. Now I'm gonna explain the star in a second, right, so you'll notice
that all these returns have stars on them, um. See, here I made a very simple,
simplistic assumption, there were no taxes, no fees, no nothing, you know, it was
just, I just looked at the stock market return and just, Just compound it, just use
that ra raw return without taking out any sort of cost or fees, right? When you
invest or if you do any sort of investment, there's usually a fee, you know, so,
and that's usually in the fine print. So, you know, just as a precursor to some of
the lectures coming forward uh to come that, you know, if you start looking at
investments, if you start looking at any sort of personal financial decisions, so
please always read the fine print. There's always some sort of a fee involved, and
those fees when compounded over time can make quite a lot of difference. But
anyway, What if, instead of the stock market, she'd invested in gold? Now, In 1965.
$100 could have bought 3.2 ounces of gold, right, $35 an ounce, right. Um, at the
end of 2023, those 3.2 ounces was worth about $10,000 Aussie dollars. So if she
Bought gold instead of buying shares, it's worth 10,000, right? Um, That's still
better than putting it on a mattress, still a lot better than putting it under a
mattress, right? My point is. And my point is not here, my, the point here is not
that stocks are better than gold, um. My point is, where you store your wealth, or
whether you store your wealth at all, you know, whether it's, where you store your
wealth, whether it's under the mattress, in the stock market, in gold, in bonds,
etc. that's quite important because that determines where. You know, I guess your
future prosperity. And what do you think the hardest part is in all of this? Some
of you maybe in finance courses or with a little bit of life experience would be
like ah, you know, it's not, you know, it's not, not bad, but I would argue if
you're just starting out, maybe your first year at uni, you know, just come out of
high school, the hardest part of this, I tell you what. I think it's starting, it's
knowing what to do, right? Um, I can tell you this, that from personal experience,
even though I'm a 20 plus years finance professional, I can tell you that, I didn't
have a finance background when I went to uni. I Did liberal arts, and even coming
out of uni and starting in finance, I had, I didn't go through a course like that.
I had no idea how, how to invest my money. I, you know, it was trial and error. I
just, I didn't know what to do, you know, even though I had a job in finance, isn't
that, you know, so I would argue that hopefully this unit will. Give you those
skill sets to actually know what to do, right? And then if you when once you
actually know what to do. The, the intent to actually do it, the, the doing, you
know, you've actually got to, to apply it, right? You've got to form that
intention. You've got to act on it. Then you've got to stick with it, and what does
stick with it means, stick stick with it means once you've put in an investment.
Um, a part of the investment should be letting it grow, right? Letting it
accumulate or compound over time. And I keep using the word compound, we will come
to that concept later in this lecture, right? Um, the worst thing you could do is
to, I guess, sell, cash in at the wrong time. What do we mean by wrong? When
markets plummeted 40% or 50%, as they do sometimes, right? In 2008. Um, shares went
down 40, 50%. If you were sold at the bottom of the market, you probably lost
money. Um, At the start of COVID, I remember markets plummeted as well. If you had
panicked and sold, you might be out of the money as well. The, the, the point is,
part of your portfolio should be long-term and letting it grow, right? Now, Coming
to what this unit is about, right? It is about um developing those fundamental
financial concepts and skills. But it is not about becoming a financial expert. You
will not becoming, you will not become a uh financial advisor after this, after
this course, that's not the point, right? Um, What you will know is how to have
those discussions with financial advisors, should you choose to use one. Um, this
unit will hopefully allow you to consider the major decisions you make in your
life, right? So it's the knowing and the doing part, right? Um, for you to
articulate to yourself what your known objectives are, and then consider unknowns,
because nothing in life is, is assured. I know I showed you $100 grew to $56,000 in
40 years, but that's not a guaranteed return. Right, so we've got to con consider
unknown objectives and then what's the most probable outcome. Right And then
hopefully you'll reflect and plan for those financial consequences of your
decisions because you are responsible for each of those financial decisions, um,
and when you put together a plan, you need to also think about the contingencies,
right? What if my investments lose money, what if I lose my job, what if I get
sick, things like that, right? Um. And this is the start of putting together a
personal financial plan for yourself, right? It's, again, it's not, you're not
becoming a financial advisor, advising other people after this course. You are
putting together
a plan for yourself, right? And you start this process remembering that actually
at the end of the day, whatever plan you put for yourself, it is a plan. And plans
are worthless in because things happen in life. But then planning is everything,
right, having that plan is the point. Right, but because it's just a plan, life
doesn't always go according to plan and you've got to adapt, right? Now. Just
putting it out there, this unit doesn't provide financial advice. I don't know your
circumstances, um, I will need to know a lot more about you individually on a
confidential confidential basis in order to give you advice, and I don't plan to do
that, OK? Um, this unit also tries to. Like, not, tries to not tell you what to do,
you know, it's they're no shoots, it's not like, you should skip that cup of coffee
or you shouldn't take out the debt. Um, there is no, 8 to 5 point plan of financial
success, that there's none of that, you know, gimmicky stuff, right? There's no,
you should do this, you shouldn't do that. It's what it does try to do is to say
everything is a choice. Every single thing You do with your money is a choice. And
you are responsible for that choice, and the buck stops with you, right? So, you
can't, you shouldn't be turning around to your financial advisor saying you gave me
bad advice. I mean, it happens, but hopefully after this course, you know, you'll
listen to a financial advice, uh, you listen to that financial advice and then
you'll be able to make a decision for yourself, right? Because these are your
decisions for you. Yeah. Now, coming back to the course. Topics Topics on the
course, right? So these are some of the topics that we will cover, financial plans,
financial planning process, taxation, um, investments, loans, risk and insurance,
etc. Um, these are, you know, and that will be in the unit outline on LMS. Um, some
of the more Course related things for you to figure out how to pass this course,
but again, you know, as I say, Hopefully, when you take this course, it's not just
about passing, it's about, you know, taking away learnings to use for the rest of
your life, but we know passing is important, so exams, 60%, you've got two, there's
a mid-E and then there's an end semester exam. There is also participation that's
worth 20%. Um, the waiting is here. Uh, please fill in, uh, if you haven't done the
survey, please, uh, do that survey. And then there's a reflective journal that will
go out every week, there's none for this week, but I think the first one goes out.
This Friday, that's due the following Friday. Um, and then there are lecture
quizzes. OK, so please do them, E 20%, um, reflective journals, we don't need
essays. OK, it's for you to reflect on your learning, but we don't need 3 page
essays. Write a couple of lines about what you took away, that's sufficient. We
don't use chat GPT for these things. If we find, if your tutors, your tutors will
be marking these, if they find you use chat GPT they'll give you a 0. So don't,
don't bother, right? Look, look at the question. I'd rather you write two lines
about what you took away than a 1 page essay from Chat GPT. OK, and it's only worth
whatever, 11 mark every week, so I don't know why you would use chat GPT just just
don't do it, right? Um, The assignment will be out sort of in a couple of weeks, so
please refer to LMS and then, you know, you've got the exams, right? Um, this
recording will be available, so if you can't, hopefully you'll come to the lecture,
but if you can't come to the lecture, the recording will be available. Your
attendance, OK, your attendance at Tuts is expected, um, your Uh, having listened
to the lecture before attending the tut is also expected. Please don't go to the
tutorial without having gone through the material or listening to the lecture
because the tutorial is not a replacement for the lecture. OK, and if you go to the
tutorial without having listened to the lecture, you won't have the background on
what's being discussed. Um, OK, so attendances expected, you can't attend, please
let your tutor know. Um, and then the tutorial is the source of all solutions. We
do not post, uh, solutions, we do not make them available outside of shoots. There
are no handouts for tutorials. Um, I get asked, not just for this course, but for
many other courses that I teach, why can't you give it? Well, the minute I, I'm
just gonna put it out there, the minute we give something out, it's gonna, it's
going to end up on the internet, unfortunately. So, we can't give anything up,
right, and that's an incentive for you to attend a tut, right? Your textbook. Um,
that's the textbook you'll use, um, the ebook versions, the hard copy versions, and
there's also one in the library if you don't want to spend the money, but it's
quite, it's actually quite a good book. Um, I've got it, I've read it, I've, I've
told my kids they need to read it. It's actually also quite readable, right? It's
written for, it's a finance book that's written for non-finance. Uh, a non-finance
audience, but it's not as gimmicky as Things like the barefoot investor or you
know, so, so it's, it's slightly more, It's slightly less gimmicky than some of
those sort of 5 steps to your financial freedom or whatever it is, yeah. Now, more
administrative things, who should you contact? um, I can't change your sorry, your
tutor can't change your tut either. If you need to change your tut, please go to
teaching Ops. Um, if you just, if it's just a one off, just ask your tutor. If you
don't know anything, ask Teaching ops. OK, so. With that, now I'm gonna, um, some
of you have already filled out the survey. How, show of hands please, who's filled,
who's done the survey? Oh, thank you. OK, so everyone who's not come to this
lecture hasn't done the survey. Thank you. Who are you? Right? OK, this is sort of,
um, you know, I just wanted to, I guess it's, it's quite fun, right, to figure out
who, who you are, right? So, uh, many of you have not done economics and business,
which is fine. There is no prerequisite for this course. There is no pre-required
knowledge and again, as I say, if I start going into language, you don't understand
what I'm saying, please stop me and please say, please explain that or please tell
us in another way, right? It's also certainly quite interesting to see what your,
who, I guess what your financial, personal financial circumstances and household
arrangements are. Um, a third of you, uh, don't work, you're full-time studying and
that's, that's great. Maybe you've got scholarships or, you know, you don't have a
financial requirement to work. It's great, you've got the rest of your life to do
that. Um, 2/3 of you take on some work. I know that's, and that's admirable, that's
also challenging, so um I guess think of your, Work study life balance if you like.
Um, 2/3 of you are working and studying at the same time, so there's that balance
to be struck, yeah, uh. I was quite surprised actually, given the housing crisis in
WA that most less of you today, compared to 2023 and 2024 stay at home, about 60%
of you stay at home. Um, that's actually less than in the last couple of years. Uh,
and many of you, but there's been a big increase in the number of you who are
sharing flats. Right, so that was slightly surprising for me, given what I keep
reading about, you know, cost of, Uh, cost of living, housing crisis, can't get
rental, etc. But you know, that was, you know, that's just a, but we, we, I don't
think the whole class has done the survey, so, you know, I think we're just drawing
from a very small sample at this point. So there might be biases. OK, more on who
are you, right? I think there was a question on ethnicity. Um, I looked at the
question, but I didn't say this, and I was like, I don't know if Australian is
necessarily an ethnicity, but OK, you know, because if you identify as Australian,
that's, that's fine. Um, but it's quite diverse. There's many of us from many
different ethnic ethnic groups and national groups, and then majors. So as I
alluded to at, um, the start, I, I did a word cloud on what your majors were. I
don't know why finance comes up as the biggest word cloud. I was hoping it
wouldn't, but it did, you know. Um, you know, those, those of you in finance, you
know, as I said, you might find some of this stuff quite repetitive, uh, but
hopefully you'll still take something out of it for your own personal. For your own
personal financial planning, right? The good thing is there's lots of you from non-
finance, non-economics courses, um, there's lots of you from psychology, computer
science, you engineers, biochem, so you're quite a diverse group, right? And I
think your understanding of. Things related to personal finance uh finances will,
will vary, right, so, Uh, some of you have rated yourselves quite poor on one on
ones and you know, and. It doesn't really matter where you are right now. The point
is this course should hopefully shift you from the red or the pink towards the
blue. That's the aim of this course. If there's nothing that you take out of it,
it's that. If there's something you take out of it, it's, you know, shifting your
knowledge of these items, um, towards the blue. Right now, Is putting it out there,
there is a little bit of maths in managing your personal finances, but. The math,
the calculation is not knowing the formula is not the focus of this unit. OK. It is
a finance course for non-finance people, we are more interested in principles, in
the concepts in the application of this to your personal finances, um. There will
be some opportunities to do calculations, but Ah, and in acute work, etc. um. But
that's not the most important part, and there's always online calculators, your
tutors can always help with some of the more mathematical concepts if you're
struggling, OK? Now, An overview of what
we will be going through, uh, between weeks 1 to 3, um. We're gonna be talking
about personal financial decision making, what, you know, what that means. We're
gonna be talking about fundamental ideas and then we're gonna be doing some
financial, initial financial checks, right, where you are at this point. Yeah. Now,
For the exam and also for your own personal um takeaways, after this lecture and
after the tutorial next week, these are some of the takeaways, right? You should be
able to do all of these. So if there's one slide, if you sort of thinking, oh my
God, there's so many slides, I don't know what I need to focus on. I guess for the
exam purpose, this slide sort of gives you an idea of all the things you need to
know after you've done week one lecture and week one tutorial. OK, and look, these
slides are available on LMS. You don't have to take pictures, you know, if you want
to take notes, go ahead. But this is sort of a summary of sort of the learning
objectives for week one if you like, yeah. Now, I'm gonna move on now to personal
financial. Planning Right, um, 3 key concepts to, to think about is, Well, we're
gonna approach The personal financial planning process in a, in a very structured
manner, right? Um, and the idea is to help you gain some practical strategies to
develop your own personal financial plan. That's what we want to get out of this,
right? So there is the planning process, well, there's the planning, right? Then
there is the process and then out of all of these, you should have a plan. Alright,
so 3 things. And we'll go through that step by step. So what is the planning
process? What is, what is personal financial planning? Right It's actually The
process of meeting your life goals through management of your finances. Right, not,
not. Your parents or your brother, your sisters or your friends, but your finances,
yeah. And it isn't, no, I would argue it is a deliberate process and at at many
stages of your life, it needs to be deliberate. But I would also like some of the
takeaways to be sort of, I guess, because deliberate is very tiring, deliberate
means you have to make a decision every day, every time I would like some of these
habits or some of these personal financial planning. Habits to also become second
nature to you when you consider, you know, you're always making my decisions every
day, right, so to become second nature, so that actually it, it, it just becomes
natural and you, you incorporate it in your everyday life, right? So, So what are
life goals? Things like getting a job, buying a home, um, saving for your master's
degree, you want to go overseas, um, you know, you want to retire early, uh, you
want to, I don't know. You know, travel around the world, etc. Or maybe you just
want to be frivolous. I mean that's fine too, it's your personal financial
planning, right? You want to spend a week with your friends on the Mediterranean
and you wanna take out the super yacht, um, you know, for a stupid amount of money
that's, you know. If you want to, you know, it's, it's a goal, and if you want to
do that, there is a plan for that. Right. So, personal uh personal financial
planning, again, it's, it's a process that, It's not a one-off task, you don't just
do this once and forget about it, right? It's something that needs to be
deliberately reviewed. Um, I would argue once a year, deliberately review, but also
again. The takeaways that you take from this hopefully will give you the skills to
make these tiny tiny decisions every day that become second nature and they don't
even feel like decisions. So that when it comes to your once a year financial
planning, It doesn't feel like such a task. So that's sort of what I hope you'll
take out of it. OK. So we've gone through the planning. Now we're gonna do, we're
gonna look at the planning process, right? So there are many ways to do this,
right? You go on the internet and there'll be 10 ways, 5 ways, 10 steps, 7 steps,
whatever. We've gone with 5 steps here, a structure that Identifies 5 key steps in
the process, and we'll address each of these steps, right, and then we'll return
to, you know, um, each step and we'll link them all up as we progress, right? So 5
steps, right? You analyse the finances, step 2, you develop your goals, step 3. You
come up with a strategy to get to those goals. Um, step 4, implement the plan, and
then step 5, reevaluate every year, you need to go back to their plan to see what's
changed and whether you need to adapt your plan. Yeah. OK. Through the process of
financial planning, you identify 4 key components of a, uh, you can identify 4 key
components of a financial plan. So number 1, establishing that foundation, what you
need to know, what tools you need, what your objectives. Number 2, securing your
basic needs, right, so that you don't end up homeless, so that you've got emergency
funds, um, you've got cash flow in case you lose your job. Also you want to,
hopefully, you want to build wealth, you want to save, you want to invest, you want
to see that money compound over time. And, Also you want to protect yourself in
worst case scenarios, so we would be talking about state planning and insurance and
all those things. So these are 4 elements, 4 components that will emerge from your
process if you, if you go through that, you know, financial planning process. OK.
Financial planning involves making effective decisions. Arguing about now, but also
impacting your future, right? And You make these decisions because life is not a
given. You make these decisions because returns are not guaranteed usually, right?
And the principles behind making these decisions will be, number one, you use
reasonable assumptions. Right As an example, if historical stock market return over
the last 50 years is 6% per annum, in your forward projections, I don't think it's
reasonable to assume 15% per annum if you're investing in the same stock market.
Right, that's reasonable, right? Um, you apply marginal reasoning, and we'll talk
about what marginal reasoning means. You'll consider your opportunity cost. Uh, and
we'll, again we'll talk about that. And then also you use sensitivity analysis,
right? So these are the four, Key uh principles that will cornerstone your
financial decision making, yeah. Reasonable assumptions, what do I, so again, you
know, reasonable assumptions. So, again, life is not a given, um, you contemplate
your possibility. You need to be reasonable, but you also contemplate the outlier,
the extreme. So as a, as an example with the stock market again, historical stock
market returns, 6%, 7%, call it 7% per annum for the last 40 years. You go, OK, a
reasonable assumption might be if I then put my money in the stock market over the
long run, 7% per annum is a reasonable, Assumption of what I might return over the
next 20 years, but, Contemplate the outlier, right? What do I mean, right, um.
Service as expected, it's not guaranteed. It could be 20% 1 year and minus 30%
another year. Like, you know, things happen, right, the outliers, you can see. You
see a sort of a bell curve, but then actually the extreme good and extreme bad can
also happen. Think about COVID. That was an outlier. I was, you know, have you guys
heard of something called a black swan event? Do you guys know the the the term of
black swan event, basically. Except in WA around the world, black swans are quite
rare. Right, I think there are only two places in the world where you can find
black swans, WA and Bhutan. I believe. So black swans are quite rare and in markets
we've got this term called black swan event. It means a very unexpected, very bad
event, right, it's called black swan event. Um, but black swan events happen all
the time and COVID probably could be considered a black swan event where you had,
you know. A pandemic and the world basically shut down and borders shut for like 3
years. Um, Talk about marginal reasoning. Right. Um, Marginal reasoning applies to
a concept of what changes because of your decision, what's changing at the margin.
It also is related to the concept, don't cry over spilt milk, right, if you've,
Spent the money and it's in a bad outcome, a bad decision, that's what we call sunk
cost, right, that is no, That has, that should have no bearing over your next
decision. Which will change the trajectory of what goes forward. Right? Um, so,
Basically you, the concept of marginal reasoning. Refers to a decision that you
take and, The resultant change in outcome because of that decision, it doesn't take
to account everything that's happened in the past that's sunk cost. You look at
what changes, whether it's a marginal cost or marginal benefit that happens because
you took that decision and we'll go through some examples, um. You know, with that
Actually, a good example would be. A good example maybe that applies to you now is
um. Marginal reasoning, do you pack your lunch or do you buy lunch at the cafe
here? If you pack your lunch, that might cost you $3. Right, cost of ingredients,
etc. etc. If you buy your lunch from here, I think it's, well it depends on what
you buy $10.12 $10 OK. The marginal cost of that decision is $7. OK, so that's
what's changed. Do I pack my lunch or do I buy my lunch? But then at $7 you need to
maybe weigh that against the non-monetary cost to yourself, costs of your time. Me
your mentors, you, you're not a good cook or you hate cooking, or you hate prepping
meals, so that's mental stress to you. What is that? Is that $7 saving worth, What
is that $7 saving worth to you? Only you can answer that question, but then that is
the concept of marginal reasoning. You've made a decision, do I pack my lunch, or
do I buy my lunch, and that's got a cost, but is that cost worth, is that $7 worth,
you know, um. All the non-financial benefits that I get. Um, Yeah, so again, you
know, just reiterating,
if an income or expense doesn't change because of choice, then that income expense
isn't marginal, so, you know, don't cry over spilt milk with marginal reasoning.
Yeah. Opportunity cost, basically. Well, we don't have a multiverse and you can't
exist in two multiverses as far as I know, so an opportunity cost is basically
what, what have I given up doing, right? If You have $100 and you decide to, you've
got a decision, could I put that $100? In the bank and earn a guaranteed 5%
interest per annum, or could I take that $100 and gone out to the pub and had a
drink with my friends, and a good night out. The opportunity costs. Is the $5 that
you've forgone, oh sorry, it's the 5% interest that you've forgone at the bank,
right, so that's the opportunity you got if you've gone out and spent the $100
instead. Um Sensitivity analysis. Basically means, how robust are your plans, so
remember it's a plan, right, so you put together a plan, it's for yourself. And
these are all based on assumptions, reasonable assumptions, as we said. What if
your assumptions are wrong, right, again like. What if, you know, What if another
pandemic happens and the stock market falls 30% in one in one year? What if you
lose your job, you know. Uh, what if you get sick and you can't work, right? A lot
of our planning is based on. Assumptions, but you also need to consider how
sensitive the end result, um is, right? Uh, an immediate example that you might
have heard of is with, uh, purchasing houses and getting housing loans, um, that
you might have read about in the papers where, The interest rate today, if you take
out a loan today, you might pay 6% interest, right? And maybe that's today's
interest rate, uh, that the bank will charge you, but that rate, if it's not a
fixed rate, And you know, we don't offer long term fixed rates. That rate could
change, right? What if That rate went up 1%. What if that rate went up 2%? What if
it went up 3 or 4%? What is this, how would you run a sensitivity analysis on your
ability to pay that mortgage? It's as simple as that, right? So your decision
making in putting together a financial plan and in making any financial decisions,
needs to be based on some form of sensitivity analysis. Yes, I can do this now, but
what happens if the outliers, the outlying um situations happen, and if those
happen, how does that impact me and how does that impact my plan and how should I
change that plan to adapt to those outlying situations? Now So on the point of
housing loans, because I've actually got a chart here that shows you kind of home
loan interest rates and. You know, you can see for a very long time, we had quite
low interest rates and then around about the time of COVID, everything spiked and
lots of families and lots of uh mortgage, mortgagees got into. You know, some
housing distress, right? And on that topic, You know, people make bad forecasts all
the time. I mean, I remember the RBA saying, Back in 2021 or 2022, 0, we're not
gonna raise, or was it 2020, they, they made that they said it in 2020 or 2021,
we're not gonna raise rates in 2024, but then they ended up raising rates in two
years early, which caught a lot of people by surprise, um. But hey, you know, this
is like the RBA, even the RBA makes a bad forecast at times, even they get it
wrong, right? Um. At the end of the day, if you had taken out a loan based, well, I
think if someone had taken out a loan based on what the RBA had said and then
turned around and said, oh, but the RBA, you know, just completely misled me. Well,
yes, they did, right? Well, that's fair enough, they did, but at the end of the
day, coming back to the point, it's your personal financial plan, it's your
decision. It was your decision to take out that loan and, Arguably, you should have
done a sensitivity analysis before you took that loan out to figure out whether in
the extreme scenario, you could still afford it. OK. We are right at 9:55, um,
before I go to the next part, I will give you all a 5 minute break, get a coffee.
You know, Go to the bathroom, So let's be back here, it's 9:56, let's be back here
by 10:01. Happy to take any questions. Happy to take any questions as well if
you've got, uh, otherwise, you know, take a break, stretch your legs, do whatever,
10:01, I'll see you. a question That Yes.

SPEAKER 1
Oh. Yeah. Yes, and I mean. That's You. Um, but it's huge. I'm not sure I. Are you
a?

SPEAKER 0
This causes possibly to face.

SPEAKER 1
But look, I mean, I think the first step of any sort of bias is to be. And then
through Then when you try to make a decision, then put on the lens of you are aware
of this bias, put this bias. that the lens of of this if that possible.

SPEAKER 0
The fact that you're aware of that probably means hopefully you won't have that.

SPEAKER 1
Yeah, I think a reasonable assumption as well, overconfidence but

SPEAKER 0
if you said historical return is 7% around, then reasonable

SPEAKER 1
you could expect 7% around for the long term. that's probably not over, but if you
then see it's guaranteed some like then that's that, yeah, yeah, that's right, you
know, you put 70% on average over 40 years. Some years could be higher than this,
right, if you put the 4, you know, particularly the sensitivity analysis, right,
like if you put the guide up with. So Yeah. I just like. Like the video camera. Oh,
it will be. I don't think it's, it's broadcasted, but if they are recording the
whole. And that is Yeah So. Uh, you don't have to attend in person. You can But the
expectation is you either attended or you the recording before the tutor's not a
it's not a. just doesn't have long, like a long travelling time to get here for
just these, it's fine to watch that at home and then read it there. Right, thank
you very much. Yes. I. Uh, Yeah Yeah that OK. I think there is a new Um, I think.
There there there's only at least one week. Uh, I think. I Yeah. I can just pick
No, you Because the rule We turn up and then really. Very Yeah Have you? We don't
because it's. Good And because my The next one It will We need to Sort it out
before the first to start. OK. Yeah. the Yes. So so Um I Yeah, yeah.

SPEAKER 0
OK, oops. Hello. Welcome back. Hope you. Got a coffee, got a drink, stretch your
legs, OK, um, we, I will have to end this by 10:45, um, I should be able to get
through it, ah. You know, but, you know, we will figure it out if I don't. OK, so,
We will focus on stage one, for the remaining bits of your personal financial
planning process, right, and it involves assessment of your finances. So what does
this mean? Right? How do you conduct an assessment of your finances, not your
mum's, not your dad's, not your brother's, but your finances, yeah. So, two types
of information you can assess your finances with, which is, Your net worth, um, how
much money, how much, how many assets you have, not just money, how many assets you
have, your personal balance sheet, right? And then your financial performance, your
cash flow statements, right? Um, I guess what money is coming in and what expenses
are going out. Yeah. So take one minute to. Take one minute, OK, to write down,
have a, have a think, write down about what your personal balance sheet looks like,
what assets you have and what liabilities you owe. Have a think about it, right?
Take one minute. I, um, assets could be. You know, clearly cash in the bank, any
investments you have, your car that's an asset as well, um, basically anything you
could sell for money, that's an asset. Basketball cards, collector's items, you
know, if you've got any of those. This is what you owe, um, credit card debt,
mortgage, car loan, whatever, um, if you've taken a loan from your mum and dad, and
your mum and dad expect to be paid back, I'd say that's liability as well, um, buy
now, pay later, that's a liability. OK, even though it's not coming up as
traditional debt, that's a that's a liability, yeah, so have a think, yeah. OK.
Take a quick list, assets, liabilities. And I'm curious Who's come up with? Just,
you know, quick and dirty, who's come up with a positive net worth? It's great.
What's come up with negative? Oh, OK, don't worry. You're early in your. Career
working life, you'll make it back, OK? Yes. Now, No matter what your net worth. OK,
whether positive or negative, um, I think there's a very strong chance you've
missed your most valuable asset. I'm gonna say it for most of you. What do you
think is your most valuable asset? Did you include yourself? I think particularly
the ones with that negative um. Net worth, I'm pretty sure you didn't include
yourself, right? There's a concept called human capital, right, so I know you just
listed your car and your house and your whatever your painting, your whatever your
your physical belongings, right, your physical things that you have, right? Um, I
would argue that whatever things you have outside of that, you are your most
valuable asset, right? Um, you've got your career in front of you, you've got
earning potential in front of you, you're at university doing a course, meaning you
are enhancing your own human capital. Um, after university, you will go out to get,
hopefully high paying jobs. Um, you've got all of that ahead of you. Um, that's an
asset. That's called human capital, right? So, those of you with negative net
worth, don't be. Um, don't be, um, disheartened. I'm sure with your human capital,
you're positive. Those of you who've got positive numbers but very small, you're
like, oh God, where's this? Well, I'm telling you, you have probably haven't
included human capital, right? And that's gonna be your biggest asset. Yeah. OK,
we're not gonna get into philosophy here, yeah? So, Human capital. Um, It's kind of
what you are worth over time. And you've got to There's a concept, well, well, the
whole point is converting that human capital to financial capital. So what does
that mean, right? The human capital enables you to earn money. Whether through
salary, through investments, because you've got better knowledge, you've set up a
business, etc. your ability to earn and save translates into later financial
capital, so when you're very young. Your human capital is very high, but possibly
your financial capital is very low. Over time, as you work and you save and you,
you make returns, your human capital goes down because arguably you're getting
closer to the end of your life, but then your financial capital goes up because
you've monetized that human capital. So that sort of makes sense, right? So as a
student here, investing in your own human capital, right? Um, so, and then as you
work and as you get older and towards the latter part of your life, human capital
becomes financial capital. Now. There's a model then of income and wealth over the
life cycle, right, and this is. Um, This is not human capital, so this is showing
you, right? Where you are in your life, in your life cycle will influence your
financial net worth, right? Um, as you start work, the green line shows you your
income. Brown line shows you your expenditure, right, and of course the difference
is your savings, right? Over time, as you accumulate savings, that's how your,
Human capital becomes financial capital, your wealth goes up. And As you Uh,
retire. Um, and you start digging into, I know it's die, but. As you retire and
stop earning. Uh, an income and start using your wealth to fund your lifestyle, at
some point you get into this saving, right? There'll be a point at which you are at
peak. Um, financial capital, and that's probably very at or very close to the point
where you retire. Yeah. Um, And that this saving is sort of when you spend when you
stop working. So this is sort of a an idealised model if you like, and you notice
that we've drawn um. Straight lines here, it's very neat, it's very nice, we love
models as economists and financial people, but, right? Um When you start work, do
you think you can estimate your income and your peak wealth? Yeah, you could
probably make some sort of financial. Projection if you like, use some reasonable
assumptions going back to reasonable assumptions to project what your human capital
might be worth, what your salary might be, what expenditure might be, what your
savings would be and how that compounds over time, you could probably make some
sort of, Reasonable assumption, but what I will say is, Life doesn't produce
straight lines, right? We can. We can always project. And assume, but it's unlikely
that you have a straight line income like this, uh, it's probably squiggly, you
know, up and down, back and forth. Cos life's uncertain and life happens, right?
Um, And you might get sick or you know things happen, right? The point is. Your
circumstances will change and you can use those reasonable assumptions to make
projections, but then that's just a projection that's just a plan, right, so what
you are gonna have to do is, as your circumstances change, you need to plan or you
need to review your plans over time, um, and build towards your objectives with
these changing plans, and you sort of just have to adapt, right? OK, so. This is an
example, um, you know, from a, an academic, like you know it was a World Bank
publication here, right? You had a pre-pandemic path and then so what did the
pandemic do to people's Human capital trajectory. Right, if they had done nothing,
or if there was no, I guess if there was no um. Uh, there was no COVID, no
pandemic, it would just sort of keep going up in a squiggly line fashion on some
sort of predetermined path, right? Uh, lockdowns probably caused human capital to
drop. Um, However, we do see some recovery of that, right, so I guess that's sort
of your. Um, sort of outlier, uh, situation, but over time we expect there to be
some sort of recovery. Now, Your human capital. For many of you, for most of you,
uh, salary will probably be your primary income, will probably be your primary way
to accumulate. Um, financial capital, right. If you wanted to estimate your human
capital, you probably need to do some of these things. You probably need to figure
out what your probability of getting a job at graduation. When you, when you get
that job, what your expected salary is, what the, you probably need to think about
how long you stay in that job, whether there is a possibility of layoff, and what
rate your income would grow at. So put reasonable assumptions to these, right, if
you're gonna estimate your human capital. It won't be perfect, but it'll be a
model, and it'll be a start. OK. So just going through step by step, you know, kind
of what it looks like. Um, likelihood of getting, uh, a job, you know, it depends
on your education level, you, you guys are in pretty good shape, um, the pink lines
the bachelor's degree, um, you know, most of you will be employed. Um, then don't
worry, you don't have to take any notes on these numbers, you're not gonna be asked
what is the employment rate in, you know, whatever year, right? Uh, this is just
for your reference, OK? And then you wanna think about, are you male or are you
female, are there differences in kind of your expected wage? Uh, I think, uh,
academic studies have shown that the gender inequality is higher for lower
education levels. Um, So on average, graduates of higher earnings, on average,
gender gaps still persists, but those gender gaps are higher with lower education.
Um, earnings will vary, as you know, right? By gender, by location, by job, uh,
there's some numbers here. Again, these are just reference numbers, they change.
Just give, to give you an idea of what it looks like over time, it's not important
for the exam, the exact numbers are not important, um. You expect your salary to
grow over time, but how much, right? um. Your human capital's worth whatever you
start and then you've got to think about how that growth compounds, yeah. So you
can see there's some averages over time, you know, it was anything from close to 0
to, like, close to 5% on average. Right. Annual change in wages. The one takeaway
from this
is that I just wanted to point out certain industries are more, Volatile than
others, there'll be some jobs that will be more stable than others, right? Um,
stereotypically teaching jobs very stable, right? Stereotypically mining jobs a bit
more volatile because why, when there's a mining downturn, you know, jobs get cut,
you might lose your job, right? I worked for very many years in finance, finance
jobs also very volatile, uh, uh, you know, getting laid off was sort of part and
parcel of, you know, the experience apparently. OK, so just a, just a kind of a big
picture overview of what annual change of wages looks like, some are gonna be more
volatile than others. Sorry? Yeah, actually it's interesting, right? So there you
go, that's the, that's the bright side of that. Yeah. I mean, it get, it gets close
to 0 in some years, but you know, never a negative. Um, so, least variable
healthcare, education, public admin, you know, if you work for the civil service,
manufacturing, that's sort of expected and most variable mining, professional
includes finance, construction, admin support. Ain support's quite interesting, I'm
not entirely sure why. But anyway, AI and CAT GPT, is that an existential threat to
your human capital? Have you, and it's, it's quite a good question because it's
only really come into force in the last two years, right smack in the middle of
your, your education, right? Um, do you expect, AI to have an impact on your, on
the profession you think you were going to go into. Right, for example, as an
example, if you are a coder, and this was, this is always an example that that
computer scientists give me, right, if you're a coder, if you're a computer science
major, um, it used to be, you know, it is still a very popular, Major, but then
arguably, GPT can now do a lot of the job of a level 0 level 1 coder. I mean, I
don't code and even I can code, OK? So it's, you know, so what does that mean if
you're a bad coder? That means you probably won't have a job or it's gonna be
harder to find a job, so you, you know. Canchat GPT replace some jobs? Probably,
right, it's been, I mean, AI has been said, you know, to threaten things like
counting, legal, we'll see, I think we'll see, um. I think we'll see this trend
play out over the next 5 to 10 years. What sort of jobs are impacted, but also
conversely, what sort of jobs become more desired because of AI, you know, because
they're able to maybe harness AI, right? OK, so anyway, back to human capital, um,
you. So you wanna figure out what job it is, you wanna figure out what your
starting pay is, and then you wanna figure out um what your growth, What that
growth is gonna look like. And then you're like, oh gosh, OK, I've got all these
numbers now. How do I make sense of all these numbers? I, I, I know what my
starting sal I I know what my likely starting salary is, I know what my likely
growth rate is, I know likely how many years I'm gonna work for, how do I, Figure
out what my human capital's worth, how do I figure out what it's worth in today's
dollars, cause that's what you're trying to figure out, right? Not what your human
capital is worth in 30 years, but what it is worth today. What do you put on your
asset side of your balance sheet? Right, how would you calculate that? We are going
to need to know what. Are we going to need to come to the concept which I spoke
about at the start of the lecture, which is the time value of money, OK? With that,
I'm going to get you to watch. Mhm.

SPEAKER 1
OK, sit in that chair.

SPEAKER 2
All right, here's the deal. Marshmallow for you. You can either wait and I'll give
you another one if you wait or you can eat it now. When I come back, I'll give you
another one, so then you'll have to, but stay in here and stay in the chair till I
come back, OK? All right.
SPEAKER 0
Everybody wants to eat it now, but if you wait, you could get through. You know
children are really bad at like.

SPEAKER 2
I'm gonna go do something and I'll come back. Oh smells really good.

SPEAKER 0
Anyway, you get, you get the idea. You get the idea. OK. Um, yeah, the marshmallow
test, right? Consider. OK, so, Time value of money, right? um. Consider, well, it's
$100 today the same as $100 what is that $100 worth or if you have $100 today, what
is it worth in a year's time, or, If you have $100 today, and you are given this
opportunity, someone says, I've got a fantastic opportunity where, you know, I put
it into this investment, investment X, and I'll return you $105 in a year's time.
Is that a good investment? Are you better off? We don't know actually, not
necessarily. I mean you've got more, but 105 is better than 100, but is 105 great?
We don't know. I think we need to answer a few um other questions and we need to
figure out what the time value of money is. Right. So why does money have a time
value? Why does the value of money, if you don't do anything to it, seem to
decrease over time, why does the buying power decrease over time? Yeah, I think
it's, it's a fundamental question, right? Um, The thing with money is you need to.
Consider what else you can do with that money. If you had $100 today, what could
you, I mean, you know, you could invest or you could go and have a beer with your,
have a night out with your friends and have a good time, right? There's opportunity
costs. Opportunity costs of a great time with your friends. There's the risk of
course that it's, I mean, if I said, invest in, invest with me and you get $105
back. Is there a risk that I'm gonna default on $105? Maybe I won't give you back
the money. Right? Um, and, you know, $105 is, um, in a year it's not the same as
$105 a day, and we're, we're patient, right, and you saw those kids, they really
wanted to eat that marshmallow. So I So there are two ways to think about it. The
first way is what minimum amount does $100 have to grow by for this to be a good
investment? Like, what is the reward you need? Or How much do we take out of the
100 $105 that's it's worth in a year's, what is the discount you need to put on the
$105 to figure out what it's worth today? OK. So that's time value money now. And
putting it back to our marshmallow concept, because again this is a finance course
for non-finance professionals, um, it's the exchange rate of money across time and
basically, You know, if I'm going to, you told the kids that if they weigh it, they
could get two marshmallows. It's a it's basically a 100% return. If you don't eat
this marshmallow now and you wait, you get two marshmallows. That's 100% return.
How do you quantify that in money terms, right? You know, how would you break that
down into mathematical terms? OK, so, We're gonna go into a little bit of math now,
hopefully the last part of the lecture, um, and you know, I don't want you guys to
freak out. There'll be no. The formula are not important. OK, sorry. The, the
memorization of the formula are not important. You will not be expected to memorise
the formula for this course. In other finance courses, yes, you will need to know
them, but for this course, you will not be expected to memorise the formula. What
you will be expected to know is to understand the concept. How is this counting
related to compounding? And I can tell you that the basically. One and the same,
right, the, the, the, the, the two sides of a mirror, the mirror images of each
other, OK. Um, And so we're gonna go through this step by step, OK? And you're
gonna try to figure out, let's say you've got $100. And you want to figure out what
compounding rate to use, like, what is, what return would I need um. What return
would I need um to be equivalent, what would I need so that the money I have in 4
years is equivalent to my $100 now. OK, what return would I need so that the money
I have in 4 years is equivalent to $100 now, right? So what rate, so first of all,
in order to do that, we need to figure out what discounting or compounding rate to
use. And it's. There are a few ways, there are few rates you can use, you could use
the inflation rates. And that's published every year. You could use the government
bond rate and in finance, we call that the risk-free rate. Uh, that's not published
by the RBA or you could be just simple and just go to Westpac or CBA and find out
what their fixed deposit rate is and use that. Whatever, 4.5, 5% per annum at the
moment, maybe, right? Assume, OK? Assume a bank deposit then earns you 5% per
annum, assume you could take $100 and you could put it in the bank and the bank
would give you 5. percent Of $100 every year for every year that it's in the bank,
right? If you didn't do that, that's your opportunity cost. Yeah. So this implies a
compounding rate of 5%. So if I have $100. After one year, my $100 becomes $105.
It's very simple. Calculation there, right? After 2 years, OK, and then after 1
year, I have the option again. I can take my $105 out and I can have a good time,
or I can just leave it in the bank. And maybe I'm a, I'm a, you know, um, I've gone
to managing your personal finances, I've decided to delay my consumption. I will
continue to put this in the bank. My $105 continues to earn 5% per annum. And What
I then have is after year 2. My money has become $110.25. Why? Because 105 times
1.05 again, right? And let's assume that I can continue. To not touch this money.
In year 3 and in year 4. Again, I've just basically taken every single outcome and
multiplied it by the compounding. Right, or one plus the compounding rate. Yeah,
and I end up after year 4. With $121.55 now. This is, don't freak out, but this is
equivalent to. If I were to write that as a mathematical formula. $121.55 actually
equivalent to $100 times 1.05 to the power of 4. Just mathematical notation, if
this freaks you out, just take a deep breath and we'll continue in a second. But
you can see, without looking at this mathematical notation, you can see how that's
happened, right? You've basically taken $100 and multiplied it by 1 plus your
compounding rate of 5% because that money grows at 5% per annum. And you've ended
up with $121.55. Now, The point I want to make here is You started with $100. And
you ended up with $121.55. So you earned $21.55. Right? Now, I told you at the
start that your bank deposit was earning you 5% per annum and simple math in your
head says 5% of 5% of $100 is $5. So actually every year I earn $5. But hang on, I
put it for 4 years. I should have earned $20. Why have I earned $21.55? Why do you
think? It's also That's right. And that's the beauty of compounding. So, so the
gentleman just said the money that you've earned, the $5 every year that you've
earned, because you've left it in the bank. Has is also earning interest, it's and
this is the concept of compounding, it's compounding interest. Therefore, you've
actually ended up with more money, $21.55 instead of just the $20. Now the example
I give, you know, and I try to explain this to my kids, I say, well, you know, I
tell my son, son, you could. The alternative to this is you could withdraw your $5
every year. And just spend it, take that $5 and go to Macca's and buy a Big Mac
and, you know, whatever, right, you could take that $5 and spend it every year, and
yes, if you did that, because that $5 doesn't then earn interest. At the end of 4
years, when you total your total earnings without any sort of present valuing, it
is $20 because you know, it's 5% a year times and you've all you've done is you've
kept the $100 in the bank, you haven't touched it, but you've withdrawn that
interest, but if you don't withdraw that $5 it keeps earning interest, and that's
the beauty of it and the more you, the longer the more you do this, the longer you.
You do this for, you'll find that the more you earn and. For those of you math
geeks out there. This power of 4. Number, right, if you plotted that in the chart,
you powered of 30 of 100, you can imagine that goes on forever, it's actually what
we call an up, it's not a linear line, it's not a straight line, it's actual upward
sloping, right? It's exponential, that's right. What's the word I was looking
about, it's exponential, but you know, that's beyond this course, you know, it's
just for you math geeks out there if you are uh interested. So that's compounding,
OK. We're gonna now discuss the flip side, the mirror image which is discounting.
Now I'm gonna pause here first. Any questions? This is clear enough, it's, you
know, OK. OK, we're gonna now talk about discounting, right? Which is the same
assumption, you can deposit your money in the bank to earn 5% interest. And then if
you do that and it implies a compounding rate of 5%, then the question becomes, OK,
well, let's flip that around, right? If you knew you had $100 coming out of that
bank account in 4 years' time, how much is that worth today? So this was back here,
this was $121.55. In 4 years is worth $100 today, right? I'm not gonna ask you, if
I, if I know I end with $100 how much is that worth in 4 years today? Uh, so how
much, if I know I end with $100 in 4 years, how much is that worth today? Yeah? So,
I'm going to do the backwards calculation of what I did before, OK, I'm gonna go in
the reverse. I'm gonna discount. So remember, between year 3 and year 4 to
compound, I took. The principal, multiply it by 1.05. Here I'm gonna take The
forward principle divide by 1.05. You see how that's just, you know. The mirror
Yeah, so I'm gonna do that for between year 4 to year 3. I discount I get $95.24.
So my $100 at the end of year 4. Discounted to end of year 3 is only worth $95.24.
Oops, I'm gonna keep doing that, right, year 3 to year 2, keep dividing that by
1.05. $90.70 you know. Do the same $86.38 I keep doing that. Um, I get two at times
0, the start line, um $82.27 so $100 in 4 years is worth $82.27 today. If I think
my discounting rate or my compounding rate is 5%. OK, in mathematical terms? OK.
I'm just gonna
show you in mathematical terms, sit. Same as the previous slide. You see how,
well, The first line gives you what I've done mathematically, OK, but then the
second line reduces or or transforms into something which looks very similar to my
previous slide, I'll show you. So note that, right? That's 8227 times 1.05 to the
power of 4 gives you 100, oops. It's, it looks exactly the same as the previous
slide. Look at that. Just different numbers, that's all. Yeah. So my point is.
discounting and compounding are mirror images of each other. OK. And if you can
discount, you can compound. And if you are ever stuck or you have no idea what's
going on, the first thing you do. Is to draw a timeline. Time 0123, whatever, and
then you figure out, you put at every step of the timeline. Where the cash flows
go, and this I tell you, like doing this matters for this, it applies for this
course, it also applies for other finance courses if you're taking, you know, if
you're a finance major, you have no idea where these cash flows are going, just
plot your cash flows on a timeline. That's step number one. In any finance process,
if you're confused, put it on a timeline, and then you can figure out, What you're
doing in the middle, discounting, compounding, adding, subtracting, whatever, but,
you know, you can then figure it out. If you don't know where you are on the
timeline, you don't know what you're doing, OK? So that's tip number one, confused,
draw a timeline. Now, What will I like, what would I like to say here, right? um.
The most powerful force in the universe, I would argue, compounding, or the most
powerful force for your. own portfolio for your own personal finance uh decisions,
compounding. Why? Because if you compound returns, they go up exponentially. What
does that mean? They don't go up in a straight line, they, the more it goes up,
well, as it goes up, it goes up more. OK, that's the beauty of it. Now, Time value
of money, compounding discounting, we're always talking about present values or
future values. Any present value today, anything that's worth something today can
be compounded to a future value. And any future value can be discounted to a
present value, which is kind of why I say, if you're faced with some cash flows and
you have no idea what you're doing, draw a timeline. Where are you? Where does the
cash flow come in in the timeline? Is it current or is it future? If it's future,
where is it? If it's current, uh put it in the current, right? And then you can
figure out whether you're discounting or compounding. Yeah. Now, For the
mathematically inclined. This is the formula, this is what I just applied earlier
in my timelines. You do not need this formula for. Passing this course. I'm more
interested in your. Conceptual understanding of how to apply this discounting and
compounding then your memorization of this formula, OK, but this is just there
because it under it's. It underpins what I've just gone through. OK, but don't be
scared, you will not be expected to memorise this. If you ever need to make any
calculation, there are lots of online calculators, lots of them. Money smart, being
one of them, you know, that's, that's heaps, so, so don't, don't worry, OK? Um,
Compounding and discounting, it's a really important relationship in managing your
finances, OK? Um, And another example, I know I use $100 and 5%, which are very
easy numbers to, but other numbers, right? What is $200 today worth if I can earn
12%? OK. And all you do is, you know, if you wanted to do that calculation is you
calculate the future value. The future value in one year is to. You know, Future
value in one year is 224, future value in two years is 250, right? And again, to
the point about, the more it goes, the more a value goes up, well, as the value
goes up, it goes up more. In the second year it grows by, More than $24 right,
because as it goes up, it goes up more, OK? Now, In working out present values and
future values, um. You just need to bear in mind, how big is the amount of money,
what's the amount you're talking about? Um, Actually arguing how big and when are
you receiving that money, right? Uh, how, oh yes, how big, how big is the amount of
money, how long before you receive it, when are you receiving, where on the
timeline you're receiving that, and then how much you're discounting it? What is
your, what is the discount, the discount rate or the compound rate you're using? So
3 things, size, timing, and risk. Yeah. With the calculation, I know I showed you a
formula, but I said you don't need to, um, I I said you don't need to. Know that
there are lots of formulas, that's, there are lots of uh online calculators, um
just use them online, you know, um, not all calculators are created equal though
sometimes they're gonna be set up differently, ah. If you were truly interested,
look at the fine print, but otherwise, using an online calculator is probably
sufficient, right? And MoneySmart, we'll come back to MoneySmart a lot in this
course because well it's a government kind of run website, it's quite easy to use,
it's very intuitive, and there's lots of calculators on there for when, you know,
different things, right, you know, compound interest, mortgage payments, etc. etc.
So I encourage you to go and play around with MoneySmart, OK? Now, I'm not gonna
like this, a lot of this is what we've gone through, OK? So calculators will get
you most of the way to. Answers that you need, right? The biggest idea, your
biggest takeaway from all of this is that. You know, looking at example again, $100
5% uh discounting rate, 55% compounding rate, the present value of $100 if received
in 4 years' time, is $82.27. Right, you know, so that's the concept that you've got
to bear in mind or the discounted value of $100 we received in 4 years' time is,
$82.27. $82.27 is a future value of $100 today. Uh, no, $100 is, yeah, sorry, you,
you get what I'm saying. Yeah. Um, yeah. Going back to our timelines. Forget the
formulas. When in doubt, draw your timelines. Where are you on? The time scale,
when are you getting that money, how much money are you getting, and then what is
that compounding rate? Worth OK. You don't need a formula. You can always fall back
on this method of doing it on the timeline. You so you don't need a formula. OK.
Now, hang on. OK, um, Let's recap, shall we? We're coming to the end. We've got 3
minutes left, perfect timing. So today we considered factors likely to impact your
financial decision making. Um, we discussed the three. Key concepts of a personal
financial plan, you identified some key indicators to help you assess your own
financial plan. We talked about human capital. And then we also talked about
arguably I like to think the most important thing, the time value of money, right?
So, before. Next week Complete your first survey, please. It is worth, I can't
remember what it was worth 4% or something like that. It's been sent to your UWA
email address if you don't have it, please come and chat to us. Um, and also look
at Moneysmart.gov.au or play around with some of the things there. Um, the quest
your first ches will be next week. I will be posting up the chee questions, uh,
shortly in the next couple of days, so look out for them. And if you haven't
already signed up for a tut, uh, please sign up for one. I know it's very full. I
know there's some scheduling issues. Please email teaching Ops if you've got a
scheduling issue. I think they're trying to add more tuts. There will be more
coming up, um, but please email them and try to get that sorted before next week,
OK? With that, I will let you guys go.

SPEAKER 1
Yeah. Sorry?

SPEAKER 0
No, I've got 3 kids.

SPEAKER 1
I'm sorry. office. Skin I I should know, but I don't.

SPEAKER 0
It's my first time lecturing this unit, thanks. I think for the first one, we, I
think we release it on this Friday, and you've got until next Friday to do that.
I'm pretty sure this first reflective journal and the first. But I'll, I'll, I'll
check the dates and I'll send out, um, I'll send out a reminder. Yeah, I know,
sorry, I. Yeah, but it will be, it will be a set schedule. Yeah. No, you're not,
you're not.

SPEAKER 1
I want I think I've got a. Yeah. good. I. And we we'll talk about that, that will
be part of the. Very Oh, very good, it's, it's the sort of cool. Sure Oh Yeah Uh,
Liu.

SPEAKER 0
I don't have a liu.

SPEAKER 1
I'll just, you just tell me Actually it's on the slice It's just a risk free ride
and then you see the risk free right you use. How long, so it's it's a bit like
which weight do you use, you know, there's a whole curve, there's. a 3 month I
argue with Evalu projects Making projects But Could The personal. So I I tend to do
that because.

SPEAKER 0
You know, typically, if I think about.

SPEAKER 1
If I typically if I think about. Not If I go to the bank and I'd put my money in
the bank, usually they offer. We offer short term Um, and also. Typically with cash
and it's typically with cash, but you, you wanna be able to. probably wouldn't it.

SPEAKER 0
So I would use it for personal finance service.

SPEAKER 1
Oh I don't know, um, I think it's just. Yeah, Thank you.

SPEAKER 0
Yeah, I, if you want, you can send me an

SPEAKER 1
email and I can ask whether. Yeah just just just just send me an email to

SPEAKER 0
say can I confirm my name's I don't have access to that system, so the previous UC
is running it, so you know I.

SPEAKER 1
Yes. Oh you.

SPEAKER 0
I I Yes Previous class haven't finished.