Building
Wealth
Wealth is
not easily defined. Take a moment and think about what wealth
means to you. Everyone will have come up with a slightly different
answer. Some may feel that living in a big house is wealthy,
while others may feel that having no debt and paying bills on
time defines wealthy. There are many ways to achieve wealth
regardless of ones definition.
Achieving
your goal does not happen quickly. Building wealth must be taken
step by step. First, you must decide what a realistic goal is.
Just brainstorm for a few moments and decide where you would
like to be 5 years from now or even 10 years from now. Next,
decide how you plan to get there. You must allow yourself enough
time to accomplish your goals. Then, you must have a plan that
you feel is going to work for you. Most importantly, you have
to be open-minded. What was important yesterday may not be tomorrow.
Your goals may change as time goes on.
Budgeting
is most likely going to be a key step in achieving your goals.
When it comes to finances, generally speaking, people usually
fall into a certain group. You may be a planner who budgets
to save. Then there is the struggler who finds it difficult
to budget and often is just making it financially. Deniers often
say that they do not need to budget and they will be just fine.
Finally, you have your impulse spenders who do not care about
their financial situation. They just assume everything will
work out. Do you fall into one of these categories? Do you know
which one you want to fall in to? You probably guessed right.
It is the planner.
You want
to be in control of your financial situation. In our August
newsletter we focused on budgeting. In case you missed that
issue we will cover it briefly again. A budget allows you to
track your spending to the penny. A budget will let you know
if you are living beyond your means. There is a budget worksheet
on page 4 that will help you figure out your own budget. To
budget you must track your spending for at least a week and
review it. Find out where you can make changes and cut back.
To ensure
that budgeting works in your favor follow these steps. First,
calculate your monthly take home income and then put that number
to the side. Next, track your daily spending. Now that means
track everything. Figure out every penny and dime that you spend
daily. Then figure out how much money you spend on bills. Finally,
you want to add together how much money you put out each month
between your daily spending and your bills. You may be surprised
to see how much you are spending versus how much you are bringing
in. Hopefully you have a lot left over to save after doing your
budget. Most Americans though, live paycheck to paycheck, and
if that is the case then budgeting is exactly what you need.
Budgeting
and debt work hand in hand. It is very difficult to budget while
trying to pay off debt. America has the most debt in the world!
1.4 million people filed for bankruptcy in 2001. It is important
to pay off your debts and budget at the same time. Credit is
one of the most important things in today’s world to enable
one to acquire things. Paying off your debt is a top priority,
since primarily, that will raise your credit scores. Assuming
that you are taking steps in that direction you are on your
way to a secure financial future. Obviously, money that is going
to debt can’t be used to invest or save. However, the
good news is that once your debts are resolved, that is when
you will have extra money to go toward investments. See, you
may not realize that you are already budgeting. All that money
that you pay every month to creditors is not in your budget.
So, once you no longer have debt, that money can go into your
investment future.
Once you
have resolved your debt and budgeted, what do you do with that
money? You need to invest the money. There are many different
ways to invest money. You should seek guidance on your specific
situation from a professional. There are good investments that
will make you money and on the flip side, there are bad investments
that will lose your money. Any investment that you decide to
go into should be well planned and thought out. Talk to people
in that industry and find out the risks, if any.
Generally
speaking the higher the risk the greater the return. If you
choose to go with a saving account or mutual fund that is fully
insured by the bank, then usually the return is less than a
stock. The reason is with a stock you are taking a chance of
losing all your money, whereas with an account or fund you are
playing it safe.
There are
many things to think about before picking which investment path
to go with. For instance, think about how long you can have
your money invested. Do you need the money in a year for a down
payment on a house, or do you plan to leave it invested for
many years? There are many options and all investments have
different requirements and penalties. Some have penalties if
you take your money out before the specified time.
Examples
of Investment Options
Chart
One: No Risk to Low Risk
Savings
Account |
Money
market Account |
Certificate
of Deposit (CD) |
| Interest
Bearing |
Interest
Bearing |
Interest
Bearing |
| Access
your money at any time |
No
fees if you maintain minimum balance |
Must
leave money in account for term to avoid penalties |
Money
Insured
(Up to 100,000) |
Money
Insured
(Up to 100,000) |
Money
Insured
(Up to 100,000) |
Chart
Two: Moderate Risk to High Risk
Stocks:
Part owner of company |
Bonds:
lending your money |
Mutual
Funds: Investing in many companies |
| High
Risk |
Money
is held for a certain amount of time |
High
Risk |
| Part
owner of company, therefore as company does well you will
receive money |
Interest
Bearing |
Could
have a cost in obtaining and managing a mutual fund. |
Sample
Budget Worksheet
| Monthly
Expenses-Housing |
|
| 1st
Mortgage or Rent |
$ |
| 2nd
Mortgage or Equity Loan |
$ |
| Property
Taxes (monthly) |
$ |
| Heat/Electricity/Water |
$ |
| Telephone
(home and cell)/Internet/TV-Direct TV or cable |
$ |
|
|
$ |
|
|
$ |
Total |
$ |
Monthly
Expenses-Insurance and Food |
|
| Auto
Insurance |
$ |
| Home
Insurance |
$ |
| Life
Insurance |
$ |
| Health
Insurance |
$ |
| Medical/Dental/Prescriptions |
$ |
|
|
$ |
|
|
$ |
Total |
$ |
Monthly
Expenses-Other |
|
| Savings |
$ |
| Education |
$ |
| Children’s
Expenses (Child Support/Child Care) |
$ |
| Recreation/Vacations/Health
Club/Sports |
$ |
| Books/Magazines |
$ |
| Cigarettes/Alcohol |
$ |
| Beauty
(hair, nails, dry cleaning) |
$ |
| Car
repairs and maintenance |
$ |
| Charity
contributions |
$ |
| Gas |
$ |
|
|
$ |
|
|
$ |
Total |
$ |
Monthly
Expenses-Debts |
|
| Credit
Cards |
$ |
| Student
Loans |
$ |
| Car
Loans |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
Grand
Total |
$ |
Questions
What
is a wealth asset?
It is something that you have that will increase in time. Some
examples of a wealth asset are real estate, savings accounts
and stocks or bonds.
Is
a car a wealth asset?
No, a car is an asset but not a wealth asset. Cars do not appreciate
with time. They will actually decrease in value the majority
of the time.
What
is a liability?
Money that you owe is considered a liability. A mortgage, car
loan and credit card debt are all examples of liabilities.
What
is net worth?
Net worth is your wealth. It is the difference between your
assets and liabilities.
How
do I calculate my wealth?
Take your assets and subtract them from your liabilities. For
example if you have assets of $100,000 and liabilities of $40,000
your net worth is $60,000.
What
does a budget do for me?
It shows you exactly where your money is going. It lets you
know if you are spending too much money. It also helps you figure
out how to build your wealth.
What
is an investment?
An investment is something you have for future income.
What
is a stockholder?
When you buy stock in a company you become part owner.
What
is a dividend?
When you buy stock it is the income that you earn that is distributed
to you by the corporation.
What
is the difference between a treasury bond and a treasury bill?
A bond has a term of no less than 10 years whereas a bill has
terms of 3, 6 or 12 months.
|
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