Building Wealth

1
Building Wealth

• Over the Long Term

2
Insurance

• Insurance- think of a safety net for the what
  ifs in life
• What are the types?
• home, life, auto,health, flood, renter, ect.
• Why insurance?
• Pay a little every month instead of a lot all at
  once

3
Insurance

• How much do I pay?
• Premium (monthly payment) is determined by many
  contributing factors
• - age, liability, income, lifestyle, health,
  records, ect.
• Am I fully covered?
• Even if you have full coverage on an insurance
  policy, you may have a deductable

4
Deductible

• What is a deductible?
• A deductable is the sum of that the policy
  holder owes out of pocket before the insurance
  company will pick up the tab after a claim
• - Ex. Hospital Bill 5,000
• Deductible 500
• You pay 1st 500, insurance pays 4,500

5
Deductible

• Can I avoid a deductible?
• Yes, but the insurance company will charge you a
  higher premium each month to compensate
• Translation- You are going to pay for coverage
  one way or the other. An insurance company is a
  business, not a charity!

6
Three Rules For Building Wealth

• Start early
• Give money time to grow.
• 2. Buy and hold.
• Keep your money invested.
• 3. Diversify
• Dont put all of your eggs in one basket

7
Income

• Income- flow of payments to an owner in exchange
  for the use of a productive resource
• Wealth- the collection of assets owned by an
  economic actor
• Assets- things of value owned by an economic
  asctor

• Different types of income
• For labor WAGES
• For loaned money INTEREST
• For use of land RENT
• For entrepreneurship PROFIT

8
Interest Rate

• Interest rate is the financial return to lenders
  that they are paid for the benefit of using their
  money
• When interest rates are high, investors are more
  willing to supply (loan) funds because of the
  promise of a high return

9
Interest Rates

• Simple Interest
• - rate that is applied only on the value of the
  principal
• - (each year the interest will only equal the
  rate of the original amount invested)

• Compound Interest
• rate that is applied to both the principal and
  accrued interest
• (interest piles up on interest)
• Ex. Credit Cards

10
The Magic of Compounding

• When you save, you earn interest.
• When you take the interest out and spend it, it
  stops growing.
• If you leave the interest in your account so it
  can grow, you start to earn interest on the
  interest you earned previously.
• Interest on interest is money that you did not
  work for. It is money your money makes for you!
• Over time, interest on interest can increase your
  total savings greatly.

11
Buy and Hold

• In order to leave money in savings or
  investments, you have to do these things
• 1. Spend less than you receive. How?
• Perhaps you could
• Earn more by improving your formal education or
  job skills.
• Spend less by using a budget to keep track of
  where your money is going.
• 2. Become connected to financial institutions.
  How?
• Open and maintain accounts at mainstream
  financial institutions-banks, credit unions, and
  brokerages.
• 3. Manage your credit responsibly. How?
• Limit the number of credit cards you have.
• Limit your purchases to what you can pay off each
  month.
• Apply for loans when you are confident that your
  current income (in the case of college loans,
  future income) will allow you to repay the loan.

12
Risk and Return (Reward)

• The higher the amount of risk in an investment,
  the higher the amount of return
• The lower the amount of risk in an investment,
  the lower the amount of return
• High riskHigh return
• Low riskLow return

13
Forms of Saving and Investing Low to High Risk
in Order

• Savings accounts provide a small but steady
  return.
• Certificates of deposit very safe, but instant
  access carries a penalty.
• Bonds lending money to a corporation or
  government with a promise of higher returns than
  those offered by bank savings accounts and CDs.
• Mutual Funds see next slide
• Stocks part ownership in a company, offering
  higher risks and, potentially, higher returns
  than some other investments.
• Real estate the risks and benefits of being a
  landlord.

14
Mutual Funds

• A mutual fund pools investors money.
• The fund puts its investors money into the
  markets on their behalf.
• In effect, investors own small amounts of many
  different assets.
• Mutual funds enable investors to avoid risk that
  comes from owning any one asset. In other words,
  mutual funds make it easy to diversify.

15
Investment Situations

1. You have 5,000 to invest. No other information
   is available.
2. You have 4,000 that youll need six months from
   now.
3. You inherited 10,000 from your great-aunt she
   has suggested that you save it for use in your
   old age.
4. You are just starting a career and can save 50
   per month for retirement.
5. A new baby arrives and Mom and Dad plan to save
   100 a month for the childs college education.