You can create personal wealth. It is 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, building credit, and controlling debt, all these goals are within your reach.
ASSETS – LIABILITIES = NET WORTH
A wealth-creating asset is a possession that generally increases in value or provides a return, such as: A savings account. A retirement plan. Stocks and bonds. A house.
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.
Net worth is the difference between your assets (what you own) and your liabilities (what you owe). Your net worth is your wealth.
Budget to Save – When it comes to reaching your financial goals, are you doing or wishing? The difference is that doers put action to their 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 a savings account each month. Make regular contributions to retirement savings.
To develop a budget, you need to: Calculate your monthly income. Track your daily expenses. Determine how much you spend on monthly bills.
To help you maintain the discipline to save: Save every month. Have savings automatically deducted from your paycheck or checking account. Base your budget on what is left. In other words, get on automatic pilot and stay there.
Save and Invest – You have budgeted and identified an amount to save monthly. Where are you going to put your savings? By investing, you put the money you save to work, making more money and increasing your wealth. An investment is anything you acquire for future income (interest or dividends) or by growing in value.
Get Guidance – There is an art to choosing ways to invest your savings. Good investments will make money; bad investments will cost you money. Do your homework.
Take Advantage of Compound Interest – Compound interest helps you build wealth faster. Interest is paid on previously earned interest as well as on the original deposit or investment.
Understand the Risk-Return Relationship – When you are saving and investing, the amount of expected return is based on the amount of risk you take with your money. Here are some things to think about when determining the amount of risk that best suits you.
Financial goals. How much money 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 need your money in one year, you may want to take less risk than you would if you will not need your money for 20 years.
Financial risk tolerance. Are you in a financial position to invest in riskier alternatives? You should take less risk if you cannot afford to lose your investment or have its value fall.
Inflation risk. This reflects savings’ and investments’ sensitivity to the inflation rate. While some investments such as a savings account have no risk of default, there is the risk that inflation will rise above the interest rate on the account. The inflation rate must stay below the investment rate for you to realize a profit.
Tools for Saving – A good first step toward saving is to open a savings account at a credit union. With a savings account, you can:
Take advantage of compound interest, with no risk.
Keep your money safer than in your pocket or at home.
Take advantage of direct deposit of your paycheck.
Monitor your balance online.
Other insured accounts offered at a credit union are Money Market Accounts and Savings Certificates.
Tools for Investing – Once you have a good savings foundation, you may want to diversify your assets among different types of investments. Diversification can help smooth out potential ups and downs of your investment returns.
Bonds – when you buy bonds, you are lending money to a federal or state agency, municipality or other issuer, such as a corporation. A bond is like an IOU.
Savings bonds. U.S. savings bonds are government-issued and government-backed.
Treasury bills, bonds, notes, and TIPS. Treasury bills are short-term securities with maturities of 3, 6 of 12 months. Treasury bonds are securities with terms of more than 10 years. Treasury notes are securities with maturities ranging from 2 to 10 years. Treasury Inflation-Protected Securities (TIPS) offer investors a chance to buy a security that keeps pace with inflation.
Stocks – Owning Part of a Company – When you buy common stock, you become a part owner of the company and are known as a stockholder or shareholder.
Mutual Funds – Investing in Many Companies. Mutual funds are established to invest many people’s money in many firms. By diversifying, a mutual fund spreads risk across numerous companies rather than relying on just one to perform well.
Invest for Retirement – Have you thought about how much money you will need when you retire? Many people do not save enough for retirement.
Individual Retirement Accounts – let you build wealth and retirement security. A traditional IRA is tax-deferred, meaning you do not pay taxes on the money until it is withdrawn. A Roth IRA is funded by after -tax earnings. After age 59 ½, you can withdraw the principal and interest tax-free.
401(k) Plans – Many companies offer a 401(k) plan for employees’ retirement. Participants authorize a certain percentage of their salary to be deducted from their paycheck and put into a 401(k).
Qualified Plans – A qualified plan is a plan designed to help self-employed workers save for retirement.
Rule of 72 – The Rule of 72 can help you estimate how your investment will grow over time. Simply divide the number 72 by your investment’s expected rate of return to find out approximately how many years it will take for your investment to double in value. The Rule of 72 also works if you want to find out the rate of return you need to make your money double. Divide 72 by the number of years you want to double your money; this will show you the rate of return required to reach your goal.
Other Investments – Investing in your house. Equity, in this case, is the difference between the market value of the house and balance on the mortgage. The more equity you have in your house, the wealthier you will be.
Start Your Own Business – You can also start and invest in your own business as part of a wealth-creation plan. Starting a small business can be risky, but it is one of the most significant ways individuals have to create personal wealth.
Consult a tax adviser regarding deductibility and tax deferment.