Federal Reserve Bank of Dallas El Paso Branch Building Wealth: Developed by the Community Affairs Dept. Impetus for the publication was research showing that poor credit and lack of financial wealth were major barriers preventing individuals from purchasing homes or starting small businesses Offers basic guidance on wealth-creating strategies for individuals and families Contains information for budgeting, saving and investing, controlling debt and protecting wealth with insurance Reached a diverse audience of more than one million people Used in a wide variety of settings, ranging from credit counseling to home buyer education classes to high school classrooms. In 2005, Texas Legislature passed two bills mandating personal financial literacy training in Texas high schools One of those bills requires that all economics classes contain instruction in personal financial literacy In the Spring of 2006, Building Wealth was approved by the Texas State Board of Education for use for the personal finance training in economics classes Newly revised and expanded, new terms and concepts and it also has a new interactive CD-ROM that animates features from the book. Lesson plans Federal Reserve Bank of Dallas El Paso Branch

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.

What is your definition of wealth? Defining Wealth What is your definition of wealth? Some people consider themselves wealthy because they live in an expensive house, drive a nice car and are able to go on nice vacations. Others believe they are wealthy because they can make all their payments on time. What does Wealth mean to you? Please raise your hands?

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

ASSETS – LIABILITES = NET WORTH Wealth Defined ASSETS – LIABILITES = NET WORTH A wealth creating asset is a possession that increases in value or provides a return. For example: Savings account, etc. Some possessions like your car, big-screen TV and clothes are considered assets but they aren’t wealth creating assets. For example, the minute you drive out of the parking lot with a brand new car you know it has depreciated. A liability, which is also called a debt, is money you owe. Therefore, your Net Worth is the difference between your assets (what you own) and your liabilities (what you owe). For example, if your home is worth $120,000 and the mortgage is $80,000 the net worth on the home is $40,000 which is the equity on the home.

A wealth-creating asset is 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)

A liability, 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)

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

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

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.

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.

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.

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

Investments An investment is 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.

Types of Savings Accounts 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 Savings Account Easy access to money Earn interest Move money easily from one account to another Insured by FDIC/NCUA up to $250,000

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

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

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)

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

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).

Other Investments Building 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) Mortgage Term 30 years 15 years Loan amount $118,000 Months to pay 360 180 Annual percentage rate 4.0% 3.0% Monthly payment $563 $815 Total interest $84,806 $28,680 Interest savings   $56,126

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.

Start Your Own Business Entrepreneur (än trə prə nər ׳) 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.

QUESTIONS?

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.

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

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

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

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

Credit Report

Components of Your Credit Score

Credit Scores

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

QUESTIONS?