ProtectYourWealthASSETSLIABILITIESNET WORTH!"#iCredit ReportBuild CreditandControl DebtSaveandInvestLearntheLanguageBudgetto SaveA Beginner’s Guide to Securing Your Financial FutureWealthBuilding Introduction: Building Wealth 1Learn the Language 2Budget to Save 4Save and Invest 8Build Credit and Control Debt 16Protect Your Wealth 22Review 26Glossary 27Wealth-Building Resource Guide 30Tools for Building Wealth 33!"#$%Building Wealth: A Beginner’s Guide to Securing Your Financial Futureoffers introductory guidance to individuals and families seeking helpto develop a plan for building personal wealth. While a comprehensivediscussion of accounting, finance and investment options is beyondthe scope of this workbook, it presents an overview of personalwealth-building strategies. For more information and assistance,consult the resource guide at the back.All Building Wealth materials are available at buildingwealth.org,including an online guide, a tablet guide and classroom lesson plans.For additional copies of this workbook (also available in Spanish),order online at buildingwealth.org or call "##-$$$-%%&#.Building Wealth: A Beginner’s Guide to Securing Your Financial Futuremay be reproduced in whole or in part for training purposes, providedit is not distributed for the purpose of private gain and is appropriatelycredited to the Bank.A new look forBuilding Wealth!We’ve updated thecharacters and thecontent to be relevant tothe financial choices weface in today’s economy. 1Federal Reserve Bank of Dallas Building WealthYou can create personal wealth. It’s possible to meet your financialgoals. 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. Throughbudgeting, saving and investing, building credit and controlling debt,all these goals are within your reach.Defining WealthSome people consider themselves wealthy because they live in a veryexpensive house and travel around the world. Others believe they arewealthy simply because they’re able to pay their bills on time. What weare talking about here is financial wealth and what it means to you.Building wealth requires having the right information, planning andmaking good choices. This workbook provides basic information anda systematic approach to building wealth. It is based on time-honoredprinciples you probably have heard many times before—budget to save;save and invest; build credit and control debt; and protect the wealthyou accumulate.Some people might define wealth as:• being able to put my kids through college.• having enough money to buy a house.You have defined wealth.How do you acquire it?1.2.3.What is your definition of wealth?A Beginner’s Guide to Securing Your Financial FutureWealthBuilding Building Wealth Federal Reserve Bank of Dallas2 Building Wealth Federal Reserve Bank of Dallasi$!",###You want to create personal wealth, right? So does Anthony.Anthony is 35 and works for a manufacturing company. He looked athis finances and realized that at the rate he was going, there wouldn’tbe enough money to meet his family’s financial goals. So he chose toembark on a personal wealth-creation strategy. His first major stepwas to pick up a copy of this workbook for guidance. Anthony beganby learning the language of wealth creation. The first lesson was tounderstand the meaning of assets, liabilities and net worth. They makeup this very important formula:ASSETS ! LIABILITIES " NET WORTHA wealth-creating asset is a possession that generally increases invalue or provides a return, such as:• A savings account.• A retirement plan.• Stocks and bonds.• A house.Some possessions (like your car, household furnishings and clothes)are assets, but they aren’t wealth-creating assets because they don’tearn money or rise in value. A new car drops in value the second it’sdriven off the lot. Your car is a tool that takes you to work, but it’s not awealth-creating asset.A liability, also called debt, is money you owe, such as:• A home mortgage.• Credit card balances.• A car loan.• Hospital and other medical bills.• Student loans.If you make a good incomeeach year and spend it all,you are not getting wealthier.You are just living high.Thomas J. Stanley and William D. Danko,The Millionaire Next DoorLearn the LanguageHome EquityThe market value of a home is an asset; the mortgage is a liability. Let’s sayyour house is worth $120,000, but your mortgage is $80,000. That means yourequity in the home is $40,000. Equity contributes to your net worth.! 3Federal Reserve Bank of Dallas Building WealthFederal Reserve Bank of Dallas Building WealthASSETS#MINUS$LIABILITIES#EQUALS$NET WORTHAnthony’s Balance SheetWealth-building assets AmountCash $ 1,500Savings account 1,000Stocks, bonds and other investments 5,000401(k) retirement plan/IRA 25,000Market value of home 0Other assetsMarket value of car 14,000Total assets $ 46,500Liabilities AmountHome mortgage $ 0Home equity loan 0Car loan balance 13,000Credit card balances 3,000Student loan 5,000Miscellaneous liabilities 1,500Total liabilities $ 22,500Net worth $ 24,000Net worth is the difference between your assets (what you own) andyour liabilities (what you owe). Your net worth is your wealth.To calculate how much he is worth, Anthony used the followingformula: Assets – Liabilities = Net Worth. He made a balance sheetlisting all his assets and all his liabilities. He listed his wealth-buildingassets first.Anthony discovered his net worth is $24,000.Remember that net worth is your wealth.Are you where you want to be?Balance DueAccountStatementInvoice$!",###123 Figure Your Net WorthUsing Anthony’s balance sheet as an example, complete theblank balance sheet on page 33. Be sure to add any assets orliabilities you have that are not listed on Anthony’s sheet. Building Wealth Federal Reserve Bank of Dallas4 Building Wealth Federal Reserve Bank of Dallas$$$$$$$$$$$$You have set short- and long-term goals.How do you meet them?Set Financial GoalsMost people who have built wealth didn’t do so overnight. They gotwealthy by setting goals and pushing themselves to reach them.Anthony set two short-term goals: (1) to save $3,000 a year for threeyears to have $9,000 for a down payment on a house, and (2) to add$500 to his emergency fund in one year. Anthony also set two long-term goals: (1) to save and invest enough to have $25,000 in 15 yearsfor his children’s college education, and (2) to have $5,000 a month tolive on when he retires in 30 years.5 years from now? $10 years from now? $My short-term goals are:1.2.3.My long-term goals are:1.2.3.Budget to SaveIt takes as much energyto wish as it does to plan.Eleanor RooseveltWhat would you like your net worth to be?What are your short-term and long-term goals?Tip: Financial GoalsA 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." 5Federal Reserve Bank of Dallas Building WealthFederal Reserve Bank of Dallas Building WealthDevelop a Budget and Live by ItWhen it comes to reaching your financial goals, are youdoing or wishing? The difference is doers put action totheir goals. And doers are much more likely to reachtheir goals and achieve their dreams.If you are a doer, you are more likely to:• Track spending.• Live within your means.• Stick to a budget.• Pay off credit cards in a timely way.• Deposit money into savings each month.• Make regular contributions to retirement savings.To maximize your wealth-creating ability, you want tobe a doer, like Sonya.Sonya is a single parent with one child. She budgets inorder to live on her modest income and tracks whereevery dime goes. Saving is very important to her. Whenher son was born, she started investing every monthin a mutual fund for his college education. Sonya is ahomeowner, has good credit and never loses sleep overpaying her bills. Sonya controls her future.Gabby, by contrast, doesn’t put action to her dreams.Gabby has a good job, makes good money and lives apretty comfortable life, but her bank statement tellsa 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 paycheckto paycheck and doesn’t budget.You can choose to be like Gabby, or you can followSonya’s road to wealth creation by learning to budgetand save.A budget allows you to:• Understand where your money goes.• Avoid overspending.• Find money for saving and investing to build yourwealth.To develop a budget, you need to:• Calculate your monthly income.• Track your daily expenses.• Determine how much you spend on monthly bills. 6 Building Wealth Federal Reserve Bank of DallasGabby’s Day-to-Day SpendingDate Expense Cash/debit/check Charge1/2 Breakfast, Get-N-Go $ 5.501/2 Coffee 3.751/2 Lunch $ 6.751/2 Gas for car 46.001/2 Drinks with friends 10.001/2 Groceries 50.001/2 Dinner 15.001/2 Music 10.001/3 Breakfast, Moonlight Diner 8.501/3 Coffee 3.751/3 Dress 50.001/3 Movies 15.001/3 Dinner 18.001/4 Breakfast, Get-N-Go 5.501/4 Coffee 3.751/4 Birthday present 20.001/4 Lunch 15.001/4 Household supplies 30.001/4 Coffee 3.751/4 Pizza 15.00Track Day-to-Day SpendingOne day, Gabby realized that to create wealthshe had to become more of a doer, like Sonya,and plan her financial future. To start, Gabbylooked at her finances to see how much moneyshe made and how she was spending it. She seta goal to save $125 a month to put toward herwealth-creation goals. First, she calculated herincome. Then she added up her monthly bills.She also kept track of her daily spending,whether by cash or debit card, check or creditcard. Here is a page from her notebook.You know how to track where your money is going.Do you need to make a change?123 Track Your Daily SpendingUsing Gabby’s spending log as an example, record your dailyexpenses on the blank day-to-day spending form on page 34.Include everything you purchase—whether with cash, debit card,check or credit card. 7Federal Reserve Bank of Dallas Building WealthGabby’s Monthly BudgetCurrentincomeIncomechangesNewbudgetTake-home pay $ 2,600 $ 2,600Overtime pay $ 40 $ 40Pension, Social Security benefitsAlimony/child supportOther incomeTotal income $ 2,600 $ 40 $ 2,640CurrentexpensesSpendingchangesNewbudgetRent $ 750 $ 750Renter’s insurance 30 30Utilities 155 155Telephone 100 100Cable TV/Internet service 75 $ –20 55Insurance (life, disability) 0 0Charitable donations 0 0Credit card payment 200 200Groceries 200 200Clothing 130 –30 100Day care/tuition 0 0Car loan 300 300Car insurance 75 75Gas for car 145 –20 125Meals out & entertainment 425 –50 375Miscellaneous daily expenses 100 –50 50Total expenses $ 2,685 $ –170 $ 2,515Monthly net (income – expenses) $ –85 $ 125Available to save or invest $ 0 $ 125Get a Handle on Income and ExpensesGabby used the information from tracking herday-to-day expenses to develop a monthlybudget. When Gabby reviewed her budget,she realized she was spending more than sheearned. This means she was building debt, notwealth. Gabby knew if she were ever going tosave $125 a month, she had to cut her expenses,earn more money, or both. She worked overtimeat her company, which increased her take-homepay. She bought fewer clothes, discontinuedpremium cable TV channels, carpooled towork to cut gas consumption and reduced herspending on eating out and entertainment.Tracking her expenses paid off. Gabby success-fully developed a budget that enables her tosave $125 each month.Here is her budget. If Gabby sticks to it, she willhave $125 a month that she can:• Put in a savings account.• Invest in a 401(k) retirement plan at work.• Invest in an individual retirement account(IRA).• Invest in stocks, bonds or mutual funds.• Use to pay off debt.These are just some of the wealth-buildingchoices available when you budget to save.You know how to successfully budget to save.How will you invest your savings?Tip: SavingTo help you maintain the discipline to save:• Save every month.• Have savings automatically deducted from yourpaycheck or checking account.• Base your budget on what’s left.In other words, get on automatic pilot and stay there.123 Budget to SaveUsing Gabby’s budget as an example, track your income andexpenses on the blank monthly budget sheet on page 35. Identifychanges you can make to increase your income or decreaseyour expenses. Then develop a new budget that includes moresavings. Be sure to make changes that you can live with frommonth to month. Building Wealth Federal Reserve Bank of Dallas8 Building Wealth Federal Reserve Bank of DallasThe Compound Interest Advantage050,000100,000150,000200,000$250,000No interest8 percent6 percent3 percent302520151051YearsValue of savingsExamples assume $125 monthly deposits; the compoundinterest examples assume monthly compounding.You have budgeted and identified an amount to save monthly. Where areyou going to put your savings? By investing, you put the money you saveto work making more money and increasing your wealth. An investmentis anything you acquire for future income or benefit. Investmentsincrease by generating income (interest or dividends) or by growing(appreciating) in value. Income earned from your investments and anyappreciation in the value of your investments increase your wealth.Get GuidanceThere is an art to choosing ways to invest your savings. Good invest-ments will make money; bad investments will cost money. Do yourhomework. Gather as much information as you can. Seek advice fromlicensed or registered advisers. States require licensing or registration forbrokers, investment advisers and insurance salespeople, so check withyour state securities regulator before trusting any investment adviser.Also, check out the Wealth-Building Resource Guide on page 30 forhelpful sites.Take Advantage of Compound InterestCompound interest helps you build wealth faster. Interest ispaid on previously earned interest as well as on the originaldeposit or investment. For example, a $5,000 investmentearning 6 percent interest for a year earns $308 if the interestis compounded monthly. In just five years, the $5,000 willgrow to $6,744.Let’s see how interest compounds on Gabby’s savings.Assume that Gabby saves $125 a month for 30 years and theinterest on her savings is compounded monthly.The chart to the left shows how compound interest atvarious rates would increase Gabby’s savings compared withsimply putting the money in a shoebox. This is compoundinterest that you earn. And as you can see from Gabby’sinvestment, compounding has a greater effect after theinvestment and interest have increased over a longer period.There is a flip side to compound interest. That is compoundinterest you are charged. This compound interest is chargedfor purchases on your credit card. Chapter 4, “Build Creditand Control Debt,” discusses this type of interest.Take the power of compoundinterest seriously—and then save.Dwight R. Lee and Richard B. McKenzie,Getting Rich in America$$$$Save and Invest# 9Federal Reserve Bank of Dallas Building WealthFederal Reserve Bank of Dallas Building WealthSTOCK$$$$$$$$The Investment Pyramid: How Much Risk Do You Want to Take?$$$$BONDSTOCKIncreasing Risk Decreasing RiskFinancial PlanGoalsBudgetFinancialRecordsNet WorthLifeDisabilityHealthProperty andLiabilityInsuranceMoney that might be needed within the next threeyears or that must be easily accessedMoney that won’t be neededfor three to five yearsFive years orlongerHighStakesLong-Term HoldMedium-Term HoldShort-Term HoldFinancial FoundationNOTE: Information not intended as specific individual investment advice.SOURCES: Adapted from National Institute for Consumer Education,Eastern Michigan University; AIG VALIC.Understand the Risk–Return RelationshipWhen you are saving and investing, the amount of expectedreturn is based on the amount of risk you take with your money.Generally, the higher the expected return, the higher the risk oflosing money. For less risk, an investor will expect a smaller return.For example, a savings account at a financial institution is fullyinsured by the Federal Deposit Insurance Corp. up to $250,000.The return—or interest paid on your savings—will generally beless than the expected return on other types of investments.On the other hand, an investment in a stock is not insured.The money you invest may be lost or the value reduced if theinvestment doesn’t perform as expected.After deciding how much risk you are able to take, you canuse the investment pyramid to help balance your savings andinvestments. You should move up the pyramid only after youhave built a strong foundation.Here are some things to think about when determining the amount ofrisk that best suits you.Financial goals. How much money do you want to accumulateover a certain period of time? Your investment decisionsshould reflect your wealth-creation goals.Time horizon. How long can you leave your moneyinvested? If you will need your money in one year,you may want to take less risk than you would if youwon’t need your money for 20 years.Financial risk tolerance. Are you in a financialposition to invest in riskier alternatives? Youshould take less risk if you cannot afford tolose your investment or have its value fall.Inflation risk. This reflects savings’ andinvestments’ sensitivity to the inflation rate.For example, while some investments suchas a savings account have no risk of default,there is the risk that inflation will rise abovethe interest rate on the account. If theaccount earns 5 percent interest, inflationmust remain lower than 5 percent a year foryou to realize a profit. 10 Building Wealth Federal Reserve Bank of DallasTools for SavingA good first step toward saving is to open a savingsaccount at a bank or credit union. With a savingsaccount, you can:• Take advantage of compound interest, with no risk.• Keep your money safer than in your pocket or athome.• Take advantage of direct deposit of your paycheck.• Monitor your balance online.Financial institutions offer a variety of insured savingsaccounts, each of which pays a different interest rate.Among them are:• General savings accounts, which earn interest andallow access to funds at any time and movement ofmoney from account to account.• Money market accounts, which earn interest, mayoffer check-writing services and impose no feeswith a minimum balance.• Certificates of deposit (CDs), which are purchasedfor a specified term and return principal andinterest at the end of the term (early withdrawalpenalties apply).Tools for InvestingOnce you have a good savings foundation, you maywant to diversify your assets among different typesof investments. Diversification can help smooth outpotential ups and downs of your investment returns.Investing is not a get-rich-quick scheme. Smartinvestors take a long-term view, putting money intoinvestments regularly and keeping it invested for five,10, 15, 20 or more years.Bonds—Lending Your MoneyWhen you buy bonds, you are lending money to afederal or state agency, municipality or other issuer,such as a corporation. A bond is like an IOU. Theissuer promises to pay a stated rate of interest duringthe life of the bond and repay the entire face valuewhen the bond comes due or reaches maturity. Theinterest a bond pays is based primarily on the creditquality of the issuer and current interest rates. Firmslike Moody’s Investor Service and Standard & Poor’srate bonds. With corporate bonds, the company’sbond rating is based on its financial picture. The ratingfor municipal bonds is based on the creditworthinessof the governmental or other public entity that issuesit. Issuers with the greatest likelihood of paying backthe money have the highest ratings, and their bondswill pay an investor a lower interest rate. Remember,the lower the risk, the lower the expected return.A bond may be sold at face value (called par) or at apremium or discount. For example, when prevailinginterest rates are lower than the bond’s stated rate,the selling price of the bond rises above its face value.It is sold at a premium. Conversely, when prevailinginterest rates are higher than the bond’s stated rate,the selling price of the bond is discounted below facevalue. When bonds are purchased, they may be held tomaturity or traded.Savings bonds. U.S. savings bonds are government-issued and government-backed. Unlike other invest-ments, you can’t get back less than you put in. Savingsbonds can be purchased in denominations rangingfrom $50 to $10,000. There are different types ofsavings bonds, each with slightly different features andadvantages. Series I bonds are indexed for inflation.The earnings rate on this type of bond combines afixed rate of return with the annualized rate of inflation.If you have paper U.S. savings bonds, you can registerthem online at TreasuryDirect, www.treasurydirect.gov.Then, you won’t have to worry about losing the paper copy.Treasury bills, bonds, notes and TIPS. The bonds theU.S. Treasury issues are sold to pay for an array of gov-ernment activities and are backed by the full faith andcredit of the federal government. Treasury bills areshort-term securities with maturities of three months,six months or one year. They are sold at a discountfrom their face value, and the difference between thecost and what you are paid at maturity is the interestyou earn. Treasury bonds are securities with termsof more than 10 years. Interest is paid semiannually. 11Federal Reserve Bank of Dallas Building WealthiTreasury notes are interest-bearing securities with ma-turities ranging from two to 10 years. Interest paymentsare made every six months. Treasury Inflation-Pro-tected Securities (TIPS) offer investors a chance tobuy a security that keeps pace with inflation. Interest ispaid on the inflation-adjusted principal.Bills, bonds and notes are sold in increments of $1,000.These securities, along with U.S. savings bonds, can bepurchased directly from the Treasury through Treasury-Direct at www.treasurydirect.gov.Some government-issued bonds offer special tax advan-tages. There is no state or local income tax on the interestearned from Treasury and savings bonds. And in mostcases, interest earned from municipal bonds is exemptfrom federal and state income tax. Typically, higher-income investors buy these bonds for their tax benefits.Stocks—Owning Part of a CompanyWhen you buy common stock, you become a partowner of the company and are known as a stockholder,or shareholder. Stockholders can make money in twoways—receiving dividend payments and selling stock thathas appreciated. A dividend is an income distribution bya corporation to its shareholders, usually made quarterly.Stock appreciation is an increase in the value of stock inthe company, generally based on its ability to make mon-ey and pay a dividend. However, if the company doesn’tperform as expected, the stock’s value may go down.There is no guarantee you will make money as a stock-holder. In purchasing shares of stock, you take a risk onthe company making a profit and paying a dividend orseeing the value of its stock go up. Before investing ina company, learn about its past financial performance,management, products and how the stock has beenvalued in the past. Learn what the experts say about thecompany and the relationship of its financial performanceand stock price. Successful investors are well informed.Mutual Funds—Investing in Many CompaniesMutual funds are established to invest many people’smoney in many firms. When you buy mutual fundshares, you become a shareholder of a fund that hasinvested in many other companies. By diversifying, amutual fund spreads risk across numerous companiesrather than relying on just one to perform well. Mutualfunds have varying degrees of risk. They also have costsassociated with owning them, such as managementfees, that will vary depending on the type of investmentsthe fund makes.Before investing in a mutual fund, learn about its pastperformance, the companies it invests in, how it ismanaged and the fees investors are charged. Learn whatthe experts say about the fund and its competitors.Stocks, bonds and mutual funds can be purchasedthrough a full-service broker if you need investmentadvice, from a discount broker or even directly fromsome companies and mutual funds.Invest for RetirementHave you ever thought about how much money you willneed when you retire? Will you save enough today to meetyour future needs at prices higher than today’s due toinflation? Many people don’t save enough for retirement.Rule of 72The Rule of 72 can help you estimate how your investmentwill grow over time. Simply divide the number 72 byyour investment’s expected rate of return to find outapproximately how many years it will take for yourinvestment to double in value.Example: Invest $5,000 today at 8 percent interest. Divide72 by 8 and you get 9. Your investment will double everynine years. In nine years, your $5,000 investment will beworth about $10,000, in 18 years about $20,000 and in 27years, $40,000.The Rule of 72 also works if you want to find out the rate ofreturn you need to make your money double. For example,if you have some money to invest and you want it to doublein 10 years, what rate of return would you need? Divide 72by 10 and you get 7.2. Your money will double in 10 years ifyour average rate of return is 7.2 percent.
