Building Wealth: A Beginner’s Guide to Securing Your Financial Future

Text-only Preview

Building Wealth
A BEGINNER’S GUIDE TO SECURING YOUR FINANCIAL FUTURE
Edition
Federal reserve Bank oF dallas
Expanded
and
Revised

TABlE oF coNTENTS
Introduction: Building Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Wealth Creation: Learn the Language . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Budget to Save . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Save and Invest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Take Control of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Protect Your Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Buying a home, saving for retirement or Resource Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
for children’s education, or even effectively
Building Wealth: A Beginner’s Guide to Securing Your Financial Future
managing the family budget now requires offers introductory guidance to individuals and families seeking help
more financial sophistication than ever to develop a plan for building personal wealth. While a comprehensive
before. Financially literate consumers discussion of accounting, finance and investment options is beyond
make the financial marketplace work the scope of this workbook, it presents an overview of personal wealth-
building strategies. For more information and assistance, consult the
better, and they are better-informed
resource guide at the back. For additional copies of this workbook (also
citizens as well. available in Spanish), call (800) 333-4460, ext. 5254, or order from the
Ben S. Bernanke, Chairman, Dallas Fed’s web site, www.dallasfed.org. An animated CD-ROM ver-
Federal Reserve System sion of this guide has been developed for individuals to use at their
home computer or for multiple users in classrooms and computer
labs. This interactive program is also available at www.dallasfed.org.
Building Wealth: A Beginner’s Guide to Securing Your Financial Future
may be reproduced in whole or in part for training purposes, provided it
includes credit to the publication and the Federal Reserve Bank of Dallas.

Building Wealth
You can create personal wealth. It’s possible to meet your financial
goals. By choosing to budget, save and invest, you can pay off debt,
send your child to college, buy a comfortable home, start a business,
save for retirement and put money away for a rainy day. Through
budgeting, saving and investing, and by limiting the amount of debt
you incur, all these goals are within your reach.
Some people consider themselves wealthy because they live in a very
DEFINING WEALTH expensive house and travel around the globe. Others believe they are
wealthy simply because they’re able to pay their bills on time. What
we are talking about here is financial wealth and what it means to you.
In the following space, write your definition.

Wealth is…
Examples: Wealth is…
1. being able to put my kids through college.
1.
2. having enough money to buy a house.
2.


3.
Now that you have defined what wealth means to you, how do you
acquire it?
Building wealth requires having the right information, planning
and making good choices. This workbook provides basic informa-
tion and a systematic approach to building wealth. It is based on
time-honored principles you probably have heard many times
before—budget to save; save and invest; control debt; and protect
the wealth you accumulate.
Federal Reserve Bank of Dallas 1

➀ Wealth Creation:
Learn the Language
You want to create personal wealth, right? So does Bob.
Bob is 35 and works for a manufacturing company. He looked
at his finances and realized that at the rate he was going, there
wouldn’t be enough money to meet his family’s financial goals.
So he chose to embark on a personal wealth-creation strategy.
His first major step was to pick up a copy of this workbook for guid-
ance. Bob began by learning the language of wealth creation. The
first lesson was to understand the meaning of assets, liabilities and
net worth. They make up this very important formula:
Bob
AssETs – LIABILITIEs = NET WorTH
Accumulating wealth—as distinct from A wealth-creating asset is a possession that generally increases in
value or provides a return, such as:
just making a big income—is the key to
your financial independence. It gives you • A savings account.
control over assets, power to help shape • A retirement plan.
the corporate and political landscape, • Stocks and bonds.
• A house.
and the ability to ensure a prosperous
future for your children and their heirs…. Some possessions (like your car, big-screen TV, boat and clothes)
Rev. Jesse L. Jackson, Sr. and Jesse L. Jackson, Jr., are assets, but they aren’t wealth-creating assets because they don’t
It’s About the Money!
earn money or rise in value. A new car drops in value the second it’s
driven off the lot. Your car is a tool that takes you to work, but it’s not
a wealth-creating asset.

A liability, also called debt, is money you owe, such as:
• A home mortgage.
The market value of a home is an asset; • Credit card balances.
the mortgage, a liability. Let’s say your house is • A car loan.
worth $120,000, but your mortgage is $80,000. • Hospital and other medical bills.
That means your equity in the home is $40,000. • Student loans.
Equity contributes to your net worth.

Net worth is the difference between your assets (what you own) and
your liabilities (what you owe). Your net worth is your wealth.
2 Federal Reserve Bank of Dallas

To calculate how much he is worth, Bob used the following formula:
Assets – Liabilities = Net Worth. He made a balance sheet listing all his
assets and all his liabilities. He listed his wealth-building assets first.
Bob discovered his net worth is $21,600. Using Bob’s balance sheet
as an example, figure your own net worth. Be sure to add any assets
and liabilities you have that are not listed here. Remember that net
worth is your wealth. Are you worth as much as you want to be?
Bob’s Balance Sheet
My Balance Sheet

Wealth-building assets
Amount

Wealth-building assets

Amount
Cash
$ 1,500
Cash
Savings account
1,000
Savings account
Stocks, bonds and other investments
5,000
Stocks, bonds and other investments
401 (k) retirement plan /IRA
25,000
401 (k) retirement plan /IRA
Market value of home

0
Market value of home

Other assets

Other assets
Market value of car
14,000
Market value of car

Total assets
$ 46,500

Total assets

Liabilities

Amount

Liabilities

Amount
Home mortgage
$
0
Home mortgage
Home equity loan

0
Home equity loan

Car loan balance
13,000
Car loan balance
Credit card balances
3,000
Credit card balances
Student loan
5,000
Student loan
Child support*
2,400
Child support*
Miscellaneous liabilities
1,500
Miscellaneous liabilities

Total liabilities

Total liabilities
$ 24,900
Net worth
Net worth
$ 21,600
*Represents one year of payments.
Federal Reserve Bank of Dallas 3

➁ Budget to Save
What would you like your net worth to be
5 years from now?
$
10 years from now? $
Most people who have built wealth didn’t do so overnight. They
sET FINANCIAL GoALs got wealthy by setting goals and striving to reach them. Bob set two
If you make a good income each year and short-term goals: (1) to save $3,000 a year for three years to have
$9,000 for a down payment on a house, and (2) to pay off his $3,000
spend it all, you are not getting wealthier. credit card debt within two years. Bob also set two long-term goals:
You are just living high. (1) to save and invest enough to have $25,000 in 15 years for his
Thomas J. Stanley and William D. Danko, children’s college education, and (2) to have $5,000 a month to live
The Millionaire Next Door on when he retires in 30 years.
A personal wealth-creation strategy is based on specific goals. In
preparing your goals:
• Be realistic.
• Establish time frames.
• Devise a plan.
• Be flexible; goals can change.

In the space provided, list your top goals.
Example: Short-term
My short-term goals are:
1. In one year, save $500 for my
1.
emergency fund.
2.
2. In three years, save $5,000 for a
3.
down payment on a house.
My long-term goals are:

1.
Example: Long-term
2.
1. In eight years, save $15,000 to help
3.
my child with college.
Now you, like Bob, can choose how to meet those goals. This is

where budgeting to save comes into play.
4 Federal Reserve Bank of Dallas

When it comes to finances, people generally fall into the following
DEVELoP A BUDGET AND LIVE BY IT groups. Where do you fit in?
Planners control their financial affairs. They budget to save.
Strugglers have trouble keeping their heads above rough financial
waters. They find it difficult to budget to save.
Deniers refuse to see that they’re in financial trouble. So they don’t
see a need to budget to save.
Impulsives seek immediate gratification. They spend today and let
tomorrow take care of itself. They couldn’t care less about budget-
ing to save.
Knowing what kind of financial manager you are will help deter-
mine what changes to make. To maximize your wealth-creating
ability, you want to be a planner, like Betty.
Betty is a single parent with one child. “I have to budget in order
to live on my modest income. I have a little notebook I use to track
where every dime goes. Saving is very important to me. When my
son was born, I started investing every month in a mutual fund for
his college education. I am proud to say that I control my future.
I have bought my own home and provided for my son, and I’ve
never bounced a check. You must have common sense regarding
Betty
money!”
Lynne, by contrast, is an impulsive. Lynne has a good job, makes
good money and lives a pretty comfortable life, but her bank state-
ment tells a different story. She has no savings or investments, owns
no property and has no plans for retirement. Plus, she’s got a lot
of credit card debt, lives from paycheck to paycheck and doesn’t
budget.
You can choose to be like Lynne, or you can follow Betty’s road to
Lynne
wealth creation by learning to budget and save.
A budget allows you to:
• Understand where your money goes.
• Ensure you don’t spend more than you make.
• Find uses for your money that will increase your wealth.
To develop a budget, you need to:
• Calculate your monthly income.
• Track your daily expenses.
• Determine how much you spend on monthly bills.
Federal Reserve Bank of Dallas 5

Track Day-to-Day spending
Lynne’s Day-to-Day Spending
One day, Lynne, the impulsive, realized that to
Date Expense
Cash/debit/check
Charge
create wealth she had to become more like Betty
1/2 Breakfast, Get-N-Go

$ 3.56
and plan her financial future. To start, Lynne
analyzed her finances to see how much money
1/2 Coffee

.90
she made and how she was spending it. She set
1/2 Lunch
$ 6.75
a goal to save $125 a month to put toward her
1/2 Soft drink

1.25
wealth-creation goals. First, she calculated her
1/2 Gas for car
46.00
income. Then she added up her monthly bills.
1/2 Drinks with friends

10.00
She also carried a little notebook in her purse for
1/2 Groceries
50.00
jotting down her daily spending, whether by cash
1/2 Dinner

10.00
or debit card, check or credit card. Here is a page
1/2 Newspaper

.50
from her notebook.
1/3 Bacon and eggs, Moonlight Diner
4.95
1/3 Newspaper

.50
1/3 Coffee

.90
1/3 Lunch with coworkers

5.72
1/3 Dinner
15.00
1/3 Dress
45.00
1/3 Soft drink

1.25
1/3 Trip to the movies

15.00
1/4 Breakfast

3.50
1/4 Coffee

.90
1/4 Lunch

5.75
1/4 Cookies

1.25
1/4 Newspaper

.50
1/4 Birthday present

15.00
1/4 Dinner

6.77
1/5 Breakfast

3.25
1/5 Coffee

.90
1/5 Soft drink

1.25
1/5 Newspaper

.90
1/5 Magazine

3.95
1/6 Breakfast

3.25
1/6 Coffee

.90
1/6 Newspaper

.50
1/6 Lunch

4.50
1/6 Cookies

1.25
1/6 Jacket
50.00
1/6 Video rental

3.95
6 Federal Reserve Bank of Dallas

You can study your own spending habits by
My Day-to-Day Spending
using this sheet to track daily expenses. Be sure
Date Expense
Cash/debit/check
Charge
to includ e items purchased with credit cards, as
well as those purchased with cash, debit card or
check.
Federal Reserve Bank of Dallas 7

Get a Handle on Income and Expenses
Lynne’s Monthly Budget
Lynne used the information from tracking her
Current
Income
New
day-to-day expenses to develop a monthly bud-
income
changes
budget
get. When Lynne reviewed her budget, she real-
Take-home pay
$ 2,235
$ 2,235
ized she was spending more than she earned.
Lynne knew if she were ever going to save $125
Overtime pay
$
40 $
40
a month, she had to cut her expenses, earn
Pension, Social Security benefits
more money, or both. She worked overtime at
Investment earnings not reinvested
her company, which increased her take-home
Interest on savings accounts
pay. She bought fewer clothes, discontinued pre-
Alimony/child support
mium cable TV channels, carpooled to work to
cut gas consumption and reduced her spending
Other income
on eating out and entertainment. Tracking her
Total income
$ 2,235 $
40 $ 2,275
expenses paid off. Lynne successfully developed
a budget that enables her to save $125 each
month.
Current
Spending
New
expenses
changes
budget
Here is her budget. If Lynne sticks to it, she will
Rent
$
680
$
680
have $125 a month that she can:
• Put in a savings account.
Renter’s insurance
20
20
• Invest in a 401(k) retirement plan at work.
Electricity
60
60
• Invest in an individual retirement account
Gas
30
30
(IRA).
Water
25
25
• Invest in stocks, bonds or mutual funds.
Telephone
50
50
• Use to pay off debt.
Cable TV/Internet service
55
–20
35
These are just some of the wealth-building
Insurance (life, disability)
0
0
choices available when you budget to save.
Charitable donations
0
0
Credit card interest payment
25
25
Groceries
200
200
Clothing
130
–30
100
Day care/tuition
0
0
Car loan
300
300
Car insurance
75
75
Gas for car
145
–20
125
Meals out & entertainment
425
–50
375
Miscellaneous daily expenses
100
–50
50
Total expenses
$ 2,320 $ –170 $ 2,150
Monthly net (income – expenses)
$ –85
$
125
Available to save or invest
$
0
$
125
8 Federal Reserve Bank of Dallas