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IDEAS. STRATEGY. TACTICS. INNOVATION. INSPIRATION.

A Primer To Building Personal Wealth



Many of us mean to get more financially savvy, but put it off for various reasons - the concept is overwhelming, someone else in the family has been handling ( eg a partner), or it just feels too late in the game to dive in. Lisa Erickson, SVP + Head, Traditional Investments Group at U.S. Bank Wealth Management wants to help. In this Masterclass Moment, she breaks down finance basics, such as why a financial plan takes priority over creating an investment strategy, the differences between Mutual Funds and ETFs and other important cornerstone ideas, so you can get comfortable with creating a stronger financial future. Plus, we've added some end of class Q & A questions you might find helpful.


Over 40% of women feel that they are in a better spot as far as how they manage their financial wealth than their parents did. That's a very positive thing. Additionally, compared to men, only 16% of women worry about making ends meet compared to a higher percentage for men. But what's interesting is when you juxtapose how women will talk about what we would call outcomes--how do they actually feel about where they're at, and then contrast that with actually going through the process, you hear a very different story. When we talk to women, what we actually hear is while women feel okay about where they're at, the process of getting there is not easy. Almost 50% of women associate very negative words with thinking about finances and investing, words like fear, inadequacy and stress.


There are two concepts to be aware of here: financial planning and investing. The first question that comes up is: what stock should I buy? That's a very natural question. And it's a good question. But before we even get to the hottest stock tip, step back and think about your plans and goals. It's all about that concept of financial planning.


Step 1--Make A Financial Plan: A financial plan is simply taking a look at the different elements of your budget and asking how those future goals relate back to your current income and assets. Then putting that all together to find the gaps.


Step 2--Consider Investing: Investing is being able to purchase into an asset with the hopes that it will grow into the future and is the step you take once you make a financial plan. The first step is always figuring out your goals. What am I aiming for? And what time frame am I hoping for to meet that goal? Those plans and goals can fold into a complete financial plan to determine your direction.


What are types of investments can you get involved in?

  • Real assets are more physical assets such as a house, a rental property, or gold or silver. The common characteristic of real assets is 1) You own something physical that you can touch. 2) Their return tends to be driven by supply and demand. Let's just take houses, for example. Housing prices depend a lot on how much people want to buy into a particular area versus the supply of homes. The supply and demand for any particular real asset is what's going to determine its return. But in addition to that, some real assets, but not all also have an income component. That's where rental property is a great example. You can also earn a steady stream of income from certain types of real assets. So it has both components of return.

  • Debt Securities or Bonds. To give an example of how debt versus equity (stocks, see below) works, lets use as an example, a potential new company owner. Let's say I've come up with a great new widget, and I'm just convinced this is the next thing that's going to storm the nation. Debt investing is a loan, where you as a potential investor are willing to loan some of your hard earned capital so that someone, say the widget maker, can go out and start their business. In exchange for that, I agree to pay you a monthly interest rate. Essentially, I give you a physical or electronic security called a bond, where I promise to pay you, say 6% interest for you loaning me $1,000. A primary characteristic of a bond investment is it tends to be more driven by the income component of return. While there is a risk that I could default and my company doesn't make it, most of the time, if you buy a higher quality bond, meaning one that's issued from a financially strong company, it will continue to pay his interest over time so you get that steady stream return.

  • Stocks. Let me explain the contrast between a bond or debt security and stocks, or equity. Let's say that instead of you giving me capital in the form of a bond, you actually are very convinced that I've just come up with the most amazing widget and you actually want to become a co-owner in my business; that's where an equity or a stock comes in. So stock owners essentially own all the residual value of the company once the company pays its other obligations. Equity owners have the opportunity for a lot of upside. If the company proves very successful there can be a lot of value after paying all those expenses, or there is risk because not every company makes it. Because of this, equity securities are best utilized in longer term horizon situations, where people want to go for a little bit more return, and can also handle potentially more risk because not every single equity security will work out.


When we talk about investing, there are other key terms that get thrown around like mutual funds and ETFs. Here's how these particular concepts relate to those three asset types we just talked about: real assets, bonds and stocks. Mutual Funds and ETFs don't overlap with real assets, bonds and stocks. Instead they are different kinds of pool vehicles, like mutual funds, that refer to a collection of individual different types of investments.


A pooled fund takes individual securities and bundles them into one vehicle that then multiple investors invest in, and those investors share proportionally in the fund. Let's say we each have $100. Rather than you buying stock A and me buying stock B, we want to get more diversification. So we both decide to invest in XYZ Mutual Fund, which is a stock investment fund. We will each own half of that mutual fund and have shares in the individual securities that are put into that mutual fund. There are several benefits to pool vehicles, one being that pool vehicles allow the opportunity for more diversification by investors pooling their money into a particular mutual fund, and, they can have access with that same amount of dollars to a more diversified range of investments.


They can also be a very affordable way to inv