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Building Wealth

Building Wealth . Over the Long Term. Insurance. Insurance- think of a safety net for the “what ifs” in life What are the types? home, life, auto,health, flood, renter, ect. Why insurance? Pay a little every month instead of a lot all at once. Insurance. How much do I pay?

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Building Wealth

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  1. Building Wealth Over the Long Term

  2. Insurance • Insurance- think of a safety net for the “what ifs” in life • What are the types? • home, life, auto,health, flood, renter, ect. • Why insurance? • Pay a little every month instead of a lot all at once

  3. Insurance • How much do I pay? • Premium (monthly payment) is determined by many contributing factors - age, liability, income, lifestyle, health, records, ect. • Am I fully covered? • Even if you have “full” coverage on an insurance policy, you may have a deductable

  4. Deductible • What is a deductible? • A deductable is the sum of $ that the policy holder owes out of pocket before the insurance company will pick up the tab after a claim - Ex. Hospital Bill = $5,000 Deductible = $500 You pay 1st $500, insurance pays $4,500

  5. Deductible • Can I avoid a deductible? • Yes, but the insurance company will charge you a higher premium each month to compensate • Translation- You are going to pay for coverage one way or the other. An insurance company is a business, not a charity!

  6. Three Rules For Building Wealth • Start early Give money time to grow. 2. Buy and hold. Keep your money invested. 3. Diversify “Don’t put all of your eggs in one basket”

  7. Income • Income- flow of payments to an owner in exchange for the use of a productive resource • Wealth- the collection of assets owned by an economic actor • Assets- things of value owned by an economic asctor Different types of income • For labor: WAGES • For loaned money: INTEREST • For use of land: RENT • For entrepreneurship: PROFIT

  8. Interest Rate • Interest rate is the financial return to lenders that they are paid for the benefit of using their money • When interest rates are high, investors are more willing to supply (loan) funds because of the promise of a high return

  9. Interest Rates • Simple Interest - rate that is applied only on the value of the principal - (each year the interest will only equal the rate of the original amount invested) • Compound Interest • rate that is applied to both the principal and accrued interest • (interest piles up on interest) • Ex. Credit Cards

  10. The Magic of Compounding • When you save, you earn interest. • When you take the interest out and spend it, it stops growing. • If you leave the interest in your account so it can grow, you start to earn interest on the interest you earned previously. • Interest on interest is money that you did not work for. It is money your money makes for you! • Over time, interest on interest can increase your total savings greatly.

  11. Buy and Hold • In order to leave money in savings or investments, you have to do these things: 1. Spend less than you receive. How? • Perhaps you could… • Earn more by improving your formal education or job skills. • Spend less by using a budget to keep track of where your money is going. 2. Become connected to financial institutions. How? • Open and maintain accounts at mainstream financial institutions-banks, credit unions, and brokerages. 3. Manage your credit responsibly. How? • Limit the number of credit cards you have. • Limit your purchases to what you can pay off each month. • Apply for loans when you are confident that your current income (in the case of college loans, future income) will allow you to repay the loan.

  12. Risk and Return (Reward) • The higher the amount of risk in an investment, the higher the amount of return • The lower the amount of risk in an investment, the lower the amount of return • High risk=High return • Low risk=Low return

  13. Forms of Saving and Investing: Low to High Risk in Order • Savings accounts: provide a small but steady return. • Certificates of deposit: very safe, but instant access carries a penalty. • Bonds: lending money to a corporation or government with a promise of higher returns than those offered by bank savings accounts and CDs. • Mutual Funds: see next slide • Stocks: part ownership in a company, offering higher risks and, potentially, higher returns than some other investments. • Real estate: the risks and benefits of being a landlord.

  14. Mutual Funds • A mutual fund pools investors’ money. • The fund puts its investors’ money into the markets on their behalf. • In effect, investors own small amounts of many different assets. • Mutual funds enable investors to avoid risk that comes from owning any one asset. In other words, mutual funds make it easy to diversify.

  15. Investment Situations • You have $5,000 to invest. No other information is available. • You have $4,000 that you’ll need six months from now. • You inherited $10,000 from your great-aunt: she has suggested that you save it for use in your old age. • You are just starting a career and can save $50 per month for retirement. • A new baby arrives and Mom and Dad plan to save $100 a month for the child’s college education.

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