Overview

This page is an overview of the workbook "Building Wealth: A Beginner's Guide to Securing Your Financial Future"  which is a publication of the "Federal Reserve Bank of Dallas".

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The workbook offers introductory guidance to individuals and families seeking help to develop a plan for building personal wealth. While a comprehensive discussion of accounting, finance and investment options is beyond the scope of this workbook, it presents an overview of personal wealth- building strategies.

Learn the Language of Wealth Creation

You want to create personal wealth, right? So does Bob.

Bob is 35 and works for a manufacturing company. He looked at his finances and realized that at the rate he was going, there wouldn't be enough money to meet his family's financial goals. So he chose to embark on a personal wealth-creation strategy.

His first major step was to pick up a copy of this workbook for guidance. Bob began by learning the language of wealth creation. The first lesson was to understand the meaning of assets, liabilities and net worth. They make up this very important formula.

ASSETS - LIABILITIES = NET WORTH

A wealth-creating asset is a possession that generally increases in value or provides a return, such as:

1.) A savings account

2.) A retirement plan

3.) Stocks and bonds

4.) A house

Some possessions (like your car, big screen TV, boat and cloths) are assets, but they aren't wealth-creating assets because they don't earn money or rise in value. A new car drops in value the second it's driven off the lot. Your car is a tool that takes you to work, but it's not a wealth-creating asset.

A liability, also called debt, is money you owe, such as:

1.) A home mortgage

2.) Credit card balances

3.) A car loan

4.) Hospital and other medical bills

5.) 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.

To calculate how much he is worth, Bob used the following formula:

Assets - Liabilities = Net Worth

He made a balance sheet listing all his assets and all his liabilities. He listed his wealth-building assets first.

Bob discovered his net worth is $21,600. Using Bob's balance sheet as an example, figure your own net worth. Be sure to add any assets and liabilities you have that are not listed here. Remember that net worth is your worth. Are you worth as much as you want to be?

 Equity Contributes to your Net Worth

The market value of your home is an asset; the mortgage, a liability. Let's say your house is worth $120,000, but your mortgage is $80,000. That means your equity in the home is $40,000. This equity contributes to your net worth.

Start Your Own Business

You can also start and invest in your own business as part of a wealth-creation plan. This requires planning, know-how, savings and an entrepreneurial spirit. Starting a small business can be risky, but it is one of the most significant ways individuals have to create personal wealth.

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Duncan had a dream-he wanted to own a business. He worked for a printing company for 10 years and learned every aspect of the business. He and his wife saved every month until they had a sizable nest egg. When they felt the timing was right, they bought a printing press and computer equipment and set up shop in an old warehouse. Duncan's wife kept her job so they would have steady income and benefits while the business got off the ground.

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 For the next five years, Duncan worked long hours and put all the income back into the business to help it grow. He gave his customers good service, attracted more customers and paid close attention to his expenses. By the sixth year, the business was profitable and Duncan and his wife were well on the way to owning a successful, ongoing enterprise that will increase their personal wealth.

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None of this would have been possible without budgeting and saving. Duncan was able to use the couple's savings to invest in his talents and entrepreneurial spirit.

 Take Control of Debt

Remember the definition of net worth (wealth) ?

Assets - Liabilities = Net Worth

Liabilities are your debts. Debt reduces net worth. Plus, the interest you pay on debt, including credit card debt, is money that cannot be saved or invested-it's just gone. Debt is a tool to be used wisely for such things as buying a house. If not used wisely, debt can easily get out of hand. For example, putting day-to-day expenses- like groceries or utility bills- on a credit card and not paying off the balance monthly can lead to debt overload.

Why People Get Into Trouble With Debt

Many people get into serious debt because they:

1.) Experienced financial stresses caused by unemployment, medical bill or divorce.

2.) Could not control spending, did not plan for the future and did not save money.

3.) Lacked knowledge of financial and credit matters.

Tips for Controlling Debt

1.) Develop a budget and stick to it.

2.) Save money so you're prepared for unforeseen circumstances. You should have at least three to six months of living expenses stashed in your rainy day savings account, because as the poet Longfellow put it, "Into each life some rain must fall."

3.) When faced with a choice of financing a purchase, it may be a better financial decision to choose a less expensive model of the same product and save or invest the difference.

4.) Pay off credit card balances monthly.

5.) If you must borrow, learn everything about the loan, including interest rate, fees and penalties for late payments or early repayment.

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Contact Michael K. Peacock with questions and comments