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. Bob began by learning the language of wealth creation 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 a savings account, retirement plan, stocks, bonds, or a house. Some possessions like a car, TV, boat or clothes are assets but they do not create wealth because they don’t earn interest or rise in value.
A liability, also called debt, is money you owe such as a home mortgage, credit card balances, car loan, hospital and other medical bills.
Net worth is the difference between your assets and liabilities. Your net worth is your wealth!
Most people who have built wealth didn't do so overnight. They got wealthy by setting goals and striving to reach them. Bob set two short-term goals: (1) to save and invest enough in four years to have $6,000 for a down payment on a house, and (2) to pay off his $3,000 credit card debt within two years. Bob also set two long-term goals: (1) to save and invest enough to have $25,000 in 15 years for his children's college education, and (2) to have $5,000 a month to live on when he retires in 30 years.
A personal wealth-creation strategy is based on specific goals that are realistic and have time frames (like Wyoming Saves).
Develop a Budget and Live by It
When it comes to finances, people generally fall into the following groups. Where do you fit in?
Planners control their financial affairs. They budget to save.
Strugglers have trouble keeping their heads above rough financial waters. They find it difficult to budget to save.
Deniers refuse to see that they're in financial trouble. So they don't see a need to budget to save.
Impulsives seek immediate gratification. They spend today and let tomorrow take care of itself. They couldn't care less about budgeting to save.
Knowing what kind of financial manager you are will help determine what changes to make. To maximize your wealth-creating ability, you want to be a planner, like Betty.
Betty is a single parent with one child. "I have to budget in order to live on my modest income. I have a little notebook I use to track where every dime goes. Saving is very important to me. When my son was born, I started investing every month in a mutual fund for his college education. I am proud to say that I control my future. I have bought my own home and provided for my son, and I've never bounced a check. You must have common sense regarding money!"
Lynne, by contrast, is a struggler. Lynne has a good job, makes good money and lives a pretty comfortable life, but her bankbook tells a 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 paycheck to paycheck and doesn't budget.
You can choose to be like Lynne, or you can follow Betty's road to wealth creation by learning to budget and save.
A budget allows you to:
- Understand where your money goes.
- Ensure you don't spend more than you make.
- Find uses for your money that will increase your wealth.
- Calculate your monthly income.
- Track your daily expenses.
- Determine how much you spend on monthly bills.