Definition of Wealth and Wealth Building Strategies

2. Federal Reserve Bank of Dallas El Paso Branch

3. Disclaimer: The views expressed are those of the presenter and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

5. Defining Wealth What is your definition of wealth?

6. Defining Wealth • Being able to put my kids through college • Having enough money to buy a house • Travel around the world

7. Wealth Defined ASSETS–LIABILITES =NET WORTH

8. A wealth-creating assetis a possession that generally increases in value and provides a return, such as : • A savings account • Retirement plan • Stocks and bonds • A house Some possessions (car, big screen TV, boat and clothes) are assets but they aren’t wealth-creating assets because they don’t earn money or rise in value. (What you own)

9. Aliability,also called debt, is money you owe, your “bills,” such as: • A home mortgage • Credit card balances • A car loan • Hospital or other medical bills • Student loans (What you owe)

10. NET WORTH: is the difference between your assets (what you own) and your liabilities(what you owe). Your net worth is your wealth.

14. Most people who have built wealth didn’t do so overnight. They got wealthy by setting goals and pushing themselves to reach them.

18. Develop a Budget and live by it A budget allows you to: • Understand where your money goes. • Avoid overspending. • Find money for saving and investing to build your wealth. To develop a budget, you need to: • Calculate your monthly income. • Track your daily expenses. • Determine how much you spend on a monthly bills.

21. One day, Gabby realized that to create wealth she had to become more of a doer, and plan her financial future. To start, Gabby looked at her finances to see how much she made and how she was spending it. She set a goal to save $125 a month to put toward her wealth-creation goals. First, she calculated her income. Then she added her monthly bills. She also kept track of her daily spending, whether by cash or debit card, check or credit card.

23. Disclaimer: The views expressed are those of the presenter and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

24. You have budgeted and identified an amount to save monthly. Where are you going to put your savings?

25. Investments Aninvestmentis anything you acquire for future income or benefit, which increases your wealth Good investments will make money; bad investments will cost money. Important: Always do your homework. Gather as much information as you can.

27. Types of Savings Accounts Savings Account • Easy access to money • Earn interest • Move money easily from one account to another • Insured by FDIC/NCUA up to $250,000 Money Market Account • Earn interest • No fee if minimum balance is maintained • May offer check writing services • Insured by FDIC/NCUA up to $250,000

28. Types of Savings Accounts Certificate of Deposit (CD) • Earn interest during term (3 mo, 6 mo, etc.) • Must leave deposit in account the entire term to avoid penalty fees • Receive principal & interest at the end of term • Insured by FDIC/NCUA up to $250,000

29. Investments • An investment is anything you acquire for future income or benefit. • Investments increase by generating income (interest) or by growing (appreciating) in value.

30. Types of Investments • Bonds – Lending money to a federal or state agency, municipality or other issuer. It is an IOU and issuer promises to pay a stated rate of interest and face value • Stocks – Becoming part owner of the company • Mutual Fund – Investing in many companies (diversify risk)

31. Retirement Investments Individual Retirement Account (IRA) • Build wealth and retirement security • Money grows tax-free • Penalty fees if money is withdrawn before the age of 59 ½ 401K Plans • Certain percentage of before-tax salary is put into plan for retirement • Employer matching • Professionally managed • Investment choices vary in risk

32. Retirement Investments A 20-year-old who begins investing $3,000 each year toward retirement will have a nest egg over $1.2 million at age 65 if that investment earns an average annual rate of return of 8 percent. If you wait until you are 40 to start investing, the results are much lower (about $275,000).

33. Other InvestmentsBuilding Equity Quicker: Investing in your House Investing in a house • Want to build equity (difference between market value of the house and the balance on mortgage)

34. How much risk should you take? • Financial Goals – How much money do you want to accumulate over time? • Time Horizon – How long can you leave your money invested? • Financial Risk Tolerance – Are you in a financial position to be riskier? • Inflation Risk – Investment sensitivity to inflation rate.

35. Start Your Own Business Entrepreneur(äntrəprənər׳) n. An innovator and risk taker who tries a new way of doing things; one who develops products and processes and organizes economic resources to please customers.

36. QUESTIONS?

37. Disclaimer: The views expressed are those of the presenter and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

38. Why people get in trouble with Debt • Unemployment, medical bills, or divorce • Could not control spending, did not plan for the future and did not save money • Lacked knowledge of financial and credit matters

40. Speaking of Interest When you take out a loan, you repay the principal, which is the amount borrowed, plus interest, the amount charged for lending you money. BOTTOM LINE:Those who know about interest, earn it; those who don’t, pay it

42. Analyze debt and develop a strategy • Shop and negotiate for the lowest rate on loans • Save interest expense by paying off loans earlier or choosing shorter terms

43. Limit the number of cards you have Pay cash Don’t apply in order to get a free gift Choose cards with lowest rates and no annual fee Avoid Credit Card Debt Steer clear of blank checks companies send you Set a monthly limit on charging Pay bills on time

44. Credit Report

45. Components of Your Credit Score

46. Credit Scores

48. Too deep in debt… • Discuss options with creditors before missing a payment • Seek expert help such as local Consumer Credit Counseling Services • Avoid “credit repair” companies that charge a fee

50. QUESTIONS?