Definition of Wealth:
The abundance of material possessions (as desired by humans)
The state of being rich
Well I suppose wealth is different things to different people, what’s the old saying “Health, Wealth and Happiness”?
Whether you have $100 or $1,000,000 – you need to be able to manage and save money and by doing so you build wealth.
To create wealth you need to understand the language of wealth creation.
Lets look at the following meanings:
Assets - Need to be wealth creating:
Providing a return on the investment (ROI)
Ex. Stocks
Savings Accounts
House
Liabilities – assets that don’t earn ROI:
Car
Boat, Big-screen TV
House
Net Worth – the difference between your Assets and your Liabilities
NOTE: the market value of a house is an asset. The mortgage on the house is a liability. Any equity built up in the house contributes to your net worth.
Investment –
Is anything you acquire for future income benefit. Investments increase by generating income (interest/dividends) or by growing (appreciating) in value.
Compound Interest –
Interest accrued on top of previously earned interest as well as on the original deposit amount of the investment.
Savings Account –
Simple account that accrues compound interest
Living paycheck to paycheck is hard on all the family, frustrations build up and arguments become more frequent, blaming each other for the worsening problem, did you know one of the biggest causes for divorce is having money problems???
Every article you read encourages you to save at least 5 to 10% of your salary each time you get paid, great!! I hear you say, we can’t afford to do that!!!
So, if that’s the case at the moment, save as much as you possible can, $10 a week is better than nothing – that’s still $520 a year!!!!
Look for ways to reduce your spending. In last month’s (July) newsletter we looked at some “Money Saving Tips,” all these are proven ways to help you save.
Yes, I know, it’s like saying you can’t do certain things anymore, but when you start to seeing those $$$$ in that savings account building up and you begin to sleep a little easier at night because you are starting to get an “emergency cushion,” trust me it will be worth making those small sacrifices.
Ask yourself this?
Do I really need that “Coffee Shop” coffee and bagel every morning? Or could I make them at home for a fraction of the cost:
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The Donut and Coffee
1 cup of coffee and a donut = $1.90
1 cup of coffee and a donut per day x 5 days per week = $9.50
1 cup of coffee and a donut per day x 5 days per week x 50 workweeks = $475.00
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The Soda
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1 can of soda = $0.65
1 can of soda per day x 5 days per week = $3.25
1 can of soda per day x 5 days per week x 50 workweeks = $162.50
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The Video Rental
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1 video rental per week = $3.00
1 video rental per week x 4 weeks per month = $12.00
1 video rental per week x 4 weeks per month x 12 months = $72.00
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The Peak-Calling-Time
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1 ten minute phone call during peak time = $3.00
1 ten minute phone call during peak time x 2 times per month = $6.00
2 two week periods per month x 12 months = $72.00
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The Take-Out Dinner
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1 take-out dinner per month = $18.00
1 take-out dinner x 12 months = $216.00
What do you think? Can you give it a go?????
A very cheap, simple and effective way to start saving, and one that involves all the family.
Clean out a big clear glass jar, like a mayonnaise or pickle jar.
Cut a hole in the lid big enough for coins to go through.
At the end of the day put your loose change in the “savings jar”
At the end of the month, have a family meeting and count out the money from the “savings jar”.
If you have kids, let them count the money, it’s a great way to involve them the family finances.
Deposit the money into your SAVINGS bank account
Watch the savings grow.
Another twist to this is to give each family member their own jar and have a monthly competition to see who can save the most. You could even have a prize – maybe the winner can have a treat from some of the most money saved!! But don’t spend too much; we don’t want to defeat the purpose do we?
One reason we’ve already stated is having that Emergency Cushion.
Having an emergency cushion is essential in today’s society, whether it’s to replace that broken refrigerator, get your car repaired, or to see you through a period of unemployment, we need some savings.
A good rule of thumb is to have savings that are equal to approximately 3 to 6 months of normal living expenses:
My Emergency Cushion Savings Worksheet
To maintain a 3 month emergency cushion for financial emergencies, I need $_________ in savings.
To maintain a 6 month emergency cushion for financial emergencies, I need $_________ in savings.
I will need to pay myself first by saving a minimum of $______every month.
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How can we can save: |
$$$$$$$ |
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In addition to saving for an Emergency Cushion, what other reason could you have to save?
Take a look at those listed below and identify how many are relevant to your situation, add others that you need:
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Further education
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Children’s education |
First home |
Bigger home |
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Car/2nd car |
Retirement planning |
Medical needs |
Elderly care
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Dream Vacation
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Child care |
Having children |
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When saving and investing, the amount of expected return is based on the amount of risk you take with your money. The higher the risk, the better the return or the bigger the loss.
Example:
The savings account at a bank is insured by the FDIC up to $100,00. The returns on a savings account will be less than on other types of investments.
As compared to an investment in savings, stocks are not insured. A stock’s value is tied to the market and your entire investment may be lost if it does not perform well. As well as the returns can be far greater.
How much risk do you want to take?
Here are concerns that should be addressed when determining the amount of risk you wish to take on:
Financial Goals
How much do you want to invest?
How much do you want to accumulate over a certain period of time?
Your investment decisions should reflect your wealth-creation goals.
Time Horizon
How long can you leave your money invested?
If you will need your money in less than a year, you may want less risk than if you won’t need it for 20 years
Financial Risk Tolerance
Are you in a financial position to try riskier investments?
You can take on more risk if you can afford to lose your investment or have its full value depreciate
Inflation Risk
This reflects saving’s and investment’s sensitivity to the inflation rate.
Example:
If an account sees the inflation rate rise above the interest rate bearing paid, then there will be no increase. For an investment to remain profitable, inflation needs to remain below the interest being applied to the account.
We are not financial advisors, so we strongly recommend that you speak to your financial institution and/or a qualified financial advisor, who can advise you in your individual situation.
There are lots of “vehicles” for saving money, let’s take a very brief look at some of them:
General Savings Accounts
A simple practical way to save money.
Access your money at any time.
Earn interest
FDIC insured up to $100,000
Money market savings account
Earn interest
Pay no fees if you maintain a minimum balance
FDIC insured up to $100,000
Certificate of Deposit (CD)
Earn interest during the term (3 months, 6 months etc)
Must leave deposit in the account for the entire term to avoid early-withdrawal penalty
Receive the principal and the interest at the end of the term
FDIC insured up to $100,000
Bonds
Lending money to a federal or state agency or other issuer such as a corporation
This is like an “I.O.U” – the issuer promises to pay a stated rate on interest during the life of the bond and repay the entire face value when the bond matures
The interest on a Bond is based primarily on the credit quality of the issue and current interest rates
Bonds are rated by firms like Moody’s Investor Service and Standard and Poors (S&P)
The Bonds of corporations depend on their financial standing
The highest ratings go to those issuers with the greatest likelihood of repaying the money. Hence, their bonds are issued with lower interest rates
Treasury Bonds, Bills and Notes
Issued by the US Treasury in increments of $1000 to pay for an array of government activities and are backed by the full faith and credit of the federal government.
Bonds – securities issued with terms of more than 10 years. Interest is paid semi annually.
Bills – short-term securities with maturities of 3 months, 6 months or one year. They are sold at a discount from their face value, and the difference between the cost and what you are paid at the maturity is the interest you earn.
Notes – interest bearing securities with maturities ranging from 2 to 10 years. Interest payments are made every 6 months.
Savings Bonds
US Savings Bonds – non-transferable, registered, government issued and backed bond in denominations $50 to $10,000
The earnings rate on this type of bond combines a fixed rate of return with the annualized rate of inflations (rate at which prices change)
Some bonds offer tax advantages such as no state or local taxes on the interest earned from Treasury or Savings.
Typically higher income investors buy these bonds for their tax benefits.
Stocks
Traded on an organized exchanged – NASDAQ, NYSE
Acquiring stocks makes you part owner of the company
No guarantee of making money as a stockholder
Make money in 2 ways:
Dividends – income distribution by a corporation to the stockholders
Sale of Stocks that have appreciated
Stock Options
Given by an employer as reward for employees contributing to the profitability of the company
Allow you to purchase your company’s stock at a fixed price
A profit is made if the value of the stock rises above the stated option price and is sold at that point.
Individual Retirement Accounts – IRA’s
There are difference types of IRA’s available to suit your needs:
Traditional & Spousal
Money grows tax free until withdrawal
You can’t put in more than you earn
Can contribute $4,000 per year (beginning 2005) in a traditional IRA
Married with only 1 working spouse can contribute a combined $6,000
Seniors can make an additional $500 payment
Tax deductible from current year taxes if your are not covered by a retirement plan at work and your income is below a certain limit
You can open one at any bank, brokerage firm, mutual fund or insurance company
You can make certain withdrawals without penalty for:
Tertiary education
Purchase your first home
To cover certain medical expenses that are not reimbursed
To pay medical insurance premiums if out of work
Roth
In general, Roth contributions are similar to Traditional IRA’s:
Contributions can be made up to a specified limit on a non-deductible basis
Do not allow you to make contributions if your income is above $95,000 (single filer), or $150,000 (joint filer).
You can withdraw the funds after age 591/2 tax-free within certain limitations
Less stringent rules for withdrawal than traditional
Contributions can be made after age 70 1/2
Education
It is an educational savings account
Parent or grandparent can contribute up to $2,000 annually on behalf of a child under 18
Withdrawals are tax free if used for qualified post secondary educational expenses (room, board and tuition)
Contribution is not tax-deductible
401 (K) Plans
Pre-tax deductions are the main contributions to the plan
Leads to a reduction in the pay subjected to Federal and State Tax
Employer matching of contributions up to a limit
Professionally managed
Choice of Investments that vary in risk
Investments grow tax-deferred until withdrawal
KEOGH Plans
Self-employed equivalent of corporation retirement programs that allows earnings to grow tax deferred until the capital is withdrawn.
Annual contributions based on % of self-employed income up to $41,000
Permits much bigger contributions than any other type of program plan involves all the costs and complexities associated with qualified plans
The same early withdrawal penalties of other qualified plans applies
If the participant is more than a 5% owner, payments must begin by April 1 of the year after reaching 70-1/2 whether or not the participant has retired
Mutual Funds
These were established to invest many people’s money in many firms. This makes the holder of a mutual fund a shareholder of a fund that has invested in many other companies.
Mutual Funds diversify their investments spread the risk across many companies rather than relying on just one to perform well.
These have varying degrees of risk
Costs associated with owning them, such as management fees that vary depending on the type of investments the fund makes
Before investing in a Mutual Fund, learn as much as possible about the fund such as past performance, how it is managed, fees charged and the companies it invests in.
Beware of investments that seem too good to be true.