(audience applauding) - First of all, thank you all for making it to this conference. We think it's the 20th conference. So it's very exciting that our conference currently is the largest conference, I think, by a good measure relative to conferences in the past. And we're just excited to see all of you and we're excited about all of the people who are volunteering and making other contributions.

We're especially excited about our speakers who are all donating their time to be here. So one thing we test ran last year that worked out really well was this idea of doing a university where we're doing a full day or a half day of educational sessions. And that went over really well.

Pretty much everyone who attended the conference made it to university. So we decided to do it again, but we decided to break it into two tracks. So in this room, we have kind of a somewhat more basic track and then in the next room, we have a more advanced track.

So this is 101, we have 501 going on next door. There's absolutely nothing wrong with mixing and matching. If you wanna be here for part of this one and move over to the other room for the next one, that's absolutely fine. But one thing to know is that the times don't line up perfectly.

So when we have our breaks for this session, it won't necessarily be a break for the other session. So you'll need to mind the schedule if you want to dip in and see sessions in the adjacent room. We have a very tight schedule for this session. If you attended last year, you remember we really kept things moving along very quickly.

We'll do the same for this event today. We'll be watching the clock very, very quickly. I wanted to make a note about questions. We're handling questions a little bit differently than we've done in the past. So some of you may have remembered we had kind of an open mic set up for questions.

This year we are doing written questions. So use a sheet of paper, whatever you've got handy to submit a question. We have Gauri here who is going to look through your questions and help us decide when we get to the question part of the discussion, will help us decide the most worthy questions.

And I'm sure that we'll have more than we need, but please go ahead and submit a question. Wanted to start with my portion of the presentation, which relates to kind of what I call primordial asset allocation, things to do before you actually get started investing. Because even though at Bogleheads we're all very passionate about the idea of getting started in investing, getting your money to work for you as soon as humanly possible, it's actually better to lay the groundwork.

So that's what I'm gonna be talking about today. So this is just a slide. We've all seen a million like this that illustrates the importance of getting an early start. And there are other versions of this that show that even if someone got started later and contributed a larger sum than that person who got started very early, it's very hard to make good strides on catch up if you haven't started early, which is one of the reasons why we all evangelize about the importance of first job, get started in investing.

So getting started is super important, but there are other things that you need to attend to before you start investing. So what are the things that you need to address before you begin investing? The first thing is identify your why. Why are you investing? What are your goals? Articulating, quantifying, probably prioritizing goals, that's top of the heap.

Then thinking about human capital. Especially for people who are young and just starting out in their lives, their human capital is their most valuable asset by far. We'll talk about how to burnish human capital. Creating a safety net should also precede investing for the long term, so you'd wanna be sure to have property and casualty insurance and so forth, as well as a basic emergency fund.

We'll talk about how debt fits into this. Many new graduates especially come out of school with significant loads of debt and have to figure out how to balance having debt and paying down that debt alongside longer term investing goals. And finally creating a budget and a savings target. So this is just a slide of what I think of as kind of a pyramid when you're thinking about your financial plan.

And you can see that at the tippy top is the thing that many of us obsess over, investment selection. But really when you think about the most important determinants of whether someone succeeds or fails, I would say that having a goal, having a well articulated goal, and also having a vision for what you're investing for is one of the key reasons why you would want to put that at the bottom of the pyramid.

Human capital, I discussed just in passing, but the human capital is the value of your earnings power over your lifetime. It's the economic value of your earnings power. It's, as I mentioned, young people's most powerful asset. So it's important to be really thoughtful about growing that human capital because there's a direct connection between your eventual investments.

The more you have to, the more income you have, the more you will have to save and invest. So thinking about human capital is super important. For younger people especially, thinking about making additional investments in education can be very, very valuable and pay for itself many times over. But even those of us who are older and further along in our careers, I would argue that there are still plenty of opportunities to continue to invest in your own human capital.

So how do we do that? Well, we would think about investing in our own health. We'd think about investing in additional training. We'd think about making sure that our connections within our employment circle are robust. And so really thinking about that whole range of activities that you can do to embellish your own human capital is really important.

But as I mentioned, higher earnings, there's a very tight connection with higher savings opportunities. So this is a slide that depicts income groupings and shows that folks with higher incomes quite logically have many more opportunities to put money to work. And many of us have likely found this in our own lives where as we earn more, we have more funds at our disposable for saving.

So kind of a logical, intuitive connection there. Creating a safety net is another thing that I would urge everyone to think about before beginning investing in long-term securities. So there are really two ways that I think about this. The first would be to make sure that you have purchased all the appropriate insurance products, probably don't wanna overdo insurance, but make sure that you are covered in terms of property and casualty, disability.

We've all heard statistics about how you're much more likely to be disabled than certainly to die. And so it makes sense to have disability insurance and then life insurance, obviously, if you have dependents, people who are depending on your economic wherewithal. So laying a safety net in terms of having those insurance products, and then the old sort of the self-funded insurance where you have your own emergency fund, where you have liquid reserves set aside.

When I think about young people who are just getting their lives started, I would say this is really job one, two, and three, is making sure that they have liquid reserves set aside to cover them for those outlays that are really difficult to predict. So the baseline in terms of emergency funding, the one I learned when I went through the CFP program was that you would wanna have three to six months' worth of living expenses at a minimum.

But I like the idea of really customizing that based on your own situation. So if you're a higher earner, if you're an older worker, if you're someone who has, if you're the sole earner in your household, so you have other people depending on your income, I would argue you would think about having an even larger emergency fund, more like a year's worth of living expenses.

And I think young people sometimes get daunted by that three to six months reserve. And the way I always think about it is it's not how much you're spending currently, it's how much you could get by on in a pinch, right? That you don't wanna think about this overwhelming sum of what your current spending is.

Think about the things that you might change if, for example, you experience job loss. But I like the idea of each of us stepping back and thinking about, well, how much do we wanna hold in terms of liquid reserves? Little bit more on emergency funds. I like the idea of keeping it super liquid.

I think it makes sense to keep it liquid. The idea is that it is there in a pinch. So you wouldn't want to invest in anything where there is a risk of you not being made whole if you, in fact, need those funds. So I would say bond funds, even very safe short-term bond funds, I would take off the table in terms of emergency funding.

Stocks, absolutely off the table in terms of emergency funding. And then if you're using CDs, and the good news is is that interest rates on all manner of savings instruments are looking better today. But if you are using CDs, you'd wanna make sure that you're not going to pay a penalty if you need to tap into those funds earlier than you expected to.

So just read the fine print if you're using CDs. Another key point here is that your emergency fund can be kind of scattered in a few places. So maybe it's whatever you keep in your checking account on an ongoing basis. Maybe it's some liquid reserves that you hold in your taxable investment account side by side with your investment, so it doesn't have to be all in one place.

In terms of the where, a key thing to note while we're talking about strictures, you just wanna be careful to hold those emergency reserves in something that you could easily tap without taxes or penalty. So retirement accounts would generally not be a first stop or would not be a stop at all.

In terms of emergency funding, you'd probably wanna use some sort of taxable non-retirement account for those assets. But I would say there are a couple of investment accounts that could be sort of standby liquid reserve accounts. So one I like to call out is Roth IRAs. Ideally, you would have the money invested for long-term and you would never touch it until you reached retirement.

But the Roth IRAs do offer a really nice escape hatch in terms of being able to withdraw those contributions without any penalty or taxes at any time. So especially for sometimes young savers, when I talk to young workers, I often say that the Roth IRA can be a really great sort of compliment to the emergency fund.

So if in a worst case scenario, you need to tap those funds, they are there for you. Another account that can fit in here would be a health savings account. It shouldn't be anyone's first stop emergency fund, but health savings accounts have a really nice feature in that if you're using the health savings account to save and to invest for long-term and you're using non-HSA assets to actually cover your health savings or your health expenses as you incur them, the good news is that you can tap the HSA at a later date as long as you have receipts available to substantiate those expenses that you paid with non-HSA assets.

So it's a super nice feature. I know Mike Piper is going to talk about all manner of tax-advantaged vehicles, but from a pure tax standpoint, HSAs are easy to love because they have a lot of nice features. So the debt versus invest question, that's a fork in the road that many people hit really at all life stages.

And a key point I would make there is that you want to use your return on investment, and I would put that in quotes, to light the way. So I'll just use a simple example from my own life. Probably seven years ago, my husband and I still had a little bit left on our 15-year mortgage.

And I remember my husband had shopped around and locked in a 2.875% mortgage rate, which at the time was really quite a low mortgage. And he loved having that very low, no one had a mortgage rate that low. But we looked at our savings and we looked at our liquid reserves and what we were earning on the money, and this is before yields went up as they have recently, and we said, well, this is kind of an easy decision to pay off this mortgage.

We weren't getting any mortgage interest deduction at that point either. It was an easy decision to pay off our mortgage rather than earning next to nothing in our savings, especially 'cause we really didn't need those savings imminently. So I like the idea of using that concept. Think about the expected return on your debt pay down, which is basically your interest rate plus any, or less any tax benefits that you're earning to hold that debt, alongside whatever you expect to earn on your funds, on your invested funds.

And I think that that can be a great sort of centering mechanism when figuring out how to address debt pay down. Right now, I would say that given how high interest rates are on very safe investments, and how low many mortgage holders rates are relative to those safe returns, it's probably much less attractive to consider mortgage pay down.

But it's a very personal decision. Use your expected return on each of those uses of funds to help illuminate. Finally, creating a budget and setting a savings target would be the next step before you actually determine whether you want to go ahead and invest. You'd wanna think about having that budget that you use on an ongoing basis.

And there are really two main ways to think about budgeting. There's certainly lots of software out there to assist people with budgeting. But two ways I think about it would be, think about using the old-fashioned expense tracking, or you can use some sort of digital expense tracking system to track your outlays on an ongoing basis, and periodically check up on your spending to make sure that it's in line with whatever you said you would spend within those categories.

The way that we do it in our household, and have done for many, many years, is that we let our savings target light the way. So we just automate those contributions to our retirement plans, to our IRAs, to our taxable brokerage account, and we have those funds coming out of our checking account on an ongoing basis.

And then the amount that's left over for us is an amount that we are free to spend, or we can certainly save more if we're able to do so. But that's been a really powerful tool for us, where we're not monkeying around with tracking spending in each category. So I would say it's very individual-specific for us, for my husband and me, that was kind of an intuitive way to approach it, it was something that worked for us.

But I would urge you each to experiment with different strategies. If you're working with young people, talking to young people in your life, I would counsel them to choose one of those two strategies. Thank you.