Creating Personal Wealth

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. 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.
  

To develop a budget, you need to:

• Calculate your monthly income.
• Track your daily expenses.
• Determine how much you spend on monthly bills.

Start Early for a Comfortable Retirement

Many people don't start thinking about their retirement planning until they are well into their career – then they realize how much valuable time they lost. If you start saving for retirement now, you have the best shot at attaining long-term control over your finances and ending up your life in comfort.

A common way people take advantage of time and compound interest is through an Individual Retirement Account. If you open an IRA in 2007 you can invest $4,000, which is the maximum annual contribution. That $4,000 will be invested in mutual funds, stocks or bonds that will provide a return within the IRA account. By the end of the first year you'll have the original $4,000 investment, plus any income it has earned. Now you've got $4,000 earning interest plus interest earning interest. And on top of that, you can make a contribution in 2008. The entire sum will earn interest and so on.

If you start making annual $4,000 contributions to a Roth IRA at age 37, you'll have contributed $112,000 by the time you retire at age 65. At a 7 percent rate of return, you should have $345,386 in your account at retirement age.

Keys to Retirement Success

• Start early: the younger you are when you begin contributing to your IRA, the longer your money will have to compound, making it worth even more when you retire.
• Contribute every year: Even if you're tempted, don't skip your IRA contribution. Give your money the best possible chance to grow by socking away a little bit every year.
• Resist the temptation to withdraw the money early: You'll have to pay a penalty of about 10 percent and your retirement nest egg will be that much smaller.
• Aim for a high rate of return: The more your money earns annually, the more you'll have at retirement.
• Leave the money in longer: Money gets the greatest effect from compounding in the later years, so the longer you can leave it in your account, the more you'll have when you withdraw it.

10 Barriers to Success (from John Bishop of Teaching Moments)

1. No clear vision – the clearer your vision is of your goal, the faster you will achieve it.
2. Fear of failure – don’t let worry, fear and uncertainty hold you back from reaching your goal. Eliminate bummer words like never, can’t, maybe or if.
3. Lack of determination – turn challenges into opportunities. Come at them from the other side.
4. No action plan – write a detailed, step-by-step plan including a timetable and written strategy that you review every day or week.
5. Change –make adjustments as needed but don’t lose focus on the goal.
6. Negative thinking – everyone has some self-doubt. Ask yourself everyday: 1. Did I give my best effort and 2. Did I move closer to my goals?
7. Lack of enthusiasm – you are your own best cheerleader. Look at all days as good days, some are just better than others. You’ll find your enthusiasm is contagious.
8. Procrastination – You can have a great written plan, but you must take action. Be self-motivated, determine what motivates you and take action.
9. Making excuses – take responsibility for your success.
10. Learn from your mistakes – Everyone makes them. Successful people turn mistakes into learning opportunities.

Roadblocks can actually be stepping stones to success. Identify what holds you back and turn it into an opportunity!

WHAT IS YOUR MONEY PERSONALITY?

What are your attitudes/values about money? Do you tend to do things the way your parents did (or do you find yourself rebelling against their example?) A lot of people would argue that “understanding yourself” (i.e., what drives your spending and saving decisions) is critical to achieving financial success. It is very common for money personalities to get in the way of making good choices.

A study published by the American Psychological Association found that the #1 source of stress for 73% of Americans was money. This emphasizes the importance of exploring our feelings and attitudes about money. The ultimate goal is not necessarily to change your current personality/values to different ones, it is to learn to prosper with the one you have.

Different experts have different names for these money personalities. Jordan Goodman, author of “Master Your Money Type: Using Your Financial Personality to Create a Life of Wealth and Freedom” summarizes money types as:

STRIVERS You are all about achieving success and letting others know just how successful you are by buying lots of stuff. Money equals success. Ambition is the upside; overspending is the downside.

OSTRICHES You are uncomfortable with money, even confused, intimidated or embarrassed by it. So you bury your (financial) head in the sand. The upside is you’re not consumed by money and you focus on more important things in life; the downside is eventually you’ll wind up regretting your avoidance of money problems and not setting financial goals.

DEBT DESPERADOS You get a thrill from buying, which leads to overspending. You quickly accumulate debt and may find yourself on the run from creditors. If there is an upside, it is that you likely understand the anguish debt can cause and that can be used to motivate and provide the resolve to get out of it. The downside is overspending is a weakness that is often bailed out through credit cards.

COASTERS You may be coping or even thriving financially, but a lack of a money crisis has made you comfortable with the status quo. The upside is that you’re organized and responsible. But complacency means you’re missing out on opportunities and greater prosperity.

HIGH ROLLERS You’re a thrill-seeker and gambler with money, thinking you’re smarter than others and are certain you’ll get a ‘big score.’ The upside is that you’re comfortable with risk, which can pay off with big rewards. The downside is that unbridled risk-taking can be dangerous and can land you in financial ruin.

SQUIRRELS You hoard your money like a squirrel gathering nuts for the winter. You’re intensely afraid of losing money and exert a great deal of effort to spend less. The upside is you’re an excellent saver, but often at the expense of other things money is good for – spending, giving, etc.

A recent study by Putnam Investments outlined six financial beliefs and habits that they found to be most important in achieving financial security:

1. Realistic Expectations
2. Resisting temptation for quick rewards and fads
3. Patience in the face of adversity
4. Greater satisfaction from saving than spending
5. Ability to tolerate above-average risk
6. Receptivity to advice on how to save and invest

Source: Dr. Mark Oleson, University of Missouri – Columbia.

Controlling Credit Card Debt

Credit card debt can become overwhelming for some families. Here are some ideas to help you get your credit card debt under control. Feel free to pass this along to others not enrolled in Wyoming Saves.

Never ever pay the minimum. If you can afford to pay more than the monthly minimum on your credit card, do it! With $3,000 on a credit card, a 2% minimum payment and 18% annual interest, it takes over 30 years to repay provided you don’t add any new charges. In the end, you pay a total of $10,013 including interest of $7,013. For this reason, federal regulators have encouraged credit card companies to increase the percentage owed for their minimum payments.

Some experts recommend paying off cards with the smallest debt owed first and ignoring interest rates on the other cards. This costs a tremendous amount in unnecessary interest payments. Debts with higher interest rates grow more quickly. By tackling them first, you will pay off debt faster!

Found Money

We drive miles out of our way to save a few pennies on gas, then go around the corner and use an ATM that charges $2.50 for every withdrawal. There’s no doubt that saving a dollar on a fill-up is gratifying. Imagine how many gallons of fuel we could save if we watched ATM fees, bills and and other parts of life. Here are some easy ways to save money around the house.

Household Bills

• Shop around. Compare service providers for things like phone and internet. When buying big ticket items compare the offers of at least three providers (make a sheet with the features and options of each so that you’re comparing apples to apples).
• Cancel unused services. If you’re not watching cable, for instance, as much as you thought, then cut your cable bill down to the basic package, or cut it out of your life entirely.
• Cut heating bills. Reduce energy costs by as much as 30% using Energy Star appliances and making sure your house is well insulated.

Food

• Put in some effort. Convenience can be expensive. You’ll spend about twice as much on items such as pre-washed mixed greens and a jar of pasta sauce versus a head of lettuce and the ingredients for marinara.
• Go generic. Buying the store brand can save up to 50% according to Consumer Reports. And today’s store brands are typically very good quality.
• Brown bag lunch. Take your lunch to work.

Gasoline/Diesel

1. Don’t pamper your car. Unless a high-octane gas is specifically recommended for your car, buy regular unleaded.
2. Go slow. Improve fuel efficiency by 10% by observing the speed limit and accelerating slowly.
3. Drive a smaller vehicle. Drive a sedan instead of an SUV or truck.

Credits At Tax Time

April 15th, tax day is just around the corner. For many this can be a very stressful time, especially this year. Following is some information that I hope you will find helpful in preparing your 2008 taxes and/or planning for your 2009 taxes.

Having Trouble Paying Your Taxes?

For those of you who might be having trouble paying your tax bill be sure to still submit your tax return and notify the IRS of your inability to pay. The IRS has a specific form for this purpose. If you have questions on how to obtain the form or what you should do, give the IRS a call at 1-800-tax-1040 or go to your local IRS office to speak with someone in person.

Credits and Deductions at Tax Time Explained

A tax credit lowers your tax bill dollar for dollar. A deduction reduces your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.

Tax Credits You Should be Aware of

Home Energy Efficiency Tax Credits
The Energy Policy Act of 2005 established tax credits for energy efficiency retrofits and on-site renewable energy projects. Many of these incentives that were due to expire in 2007 or 2008 have been extended or expanded. Following are some of the energy efficiency and renewable energy project tax incentives that might be of most benefit to you.

Residential Efficiency Incentives
These incentives provide a tax credit of 30% of the cost of materials up to $1,500 for home envelope improvements. Home envelope improvements include improvements to windows, insulation, roofs, duct sealing, etc. This credit is also available for high efficiency heating, cooling and water heating equipment. When making improvements to your HVAC system, the tax credit also applies to the cost of the labor to install the equipment. In order to qualify for the tax credits the improvements must have been placed in service in 2009 or 2010 and installed in the taxpayer’s principal residence only.

On-Site Renewable Generation Incentives
These incentives provide a tax credit of 30% of the system cost for installing (materials and labor) solar energy systems, small wind systems and geothermal heat pumps. This tax credit can be used for systems put in service in 2008 through 2016. There is no cap on the tax credit for systems put in service starting in 2009. Those systems put in service in 2008 must comply with earlier caps. This tax credit is NOT limited to the taxpayer’s principal residence.

For the specifics of how to qualify and receive these incentives please visit the following web resources
www.aceee.org/energy/national/recovery
www.energytaxincentives.org
Dsireusa.org

Child Tax Credit
Many working families can qualify for the Child Tax Credit and get up to $1,000 for each child under 17— in addition to the EIC for which they may qualify. To be eligible for the CTC refund, a single or married worker must:

• have a qualifying child under age 17;
• have taxable earned income above $11,300; and
• have either a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN). ITINs are issued by the IRS to individuals who are unable to obtain a Social Security number.

To get the Child Tax Credit you must file a federal income tax return — Form 1040 or 1040A, but not 1040EZ and file form 8812.

Earned Income Credit
If your family works but doesn’t earn much money, there’s a way to reduce taxes or get a refund, even if you don’t earn enough to pay federal taxes. It’s the Earned Income Tax Credit.

The EIC is a special tax benefit for working people who earn low or moderate incomes. Workers who qualify for the EIC and file a federal tax return can get back some or all of the federal income tax that was taken out of their pay during the year. They may also get extra cash back from the IRS. Even workers whose earnings are too small to owe income tax can get the EIC. What’s more, the EIC offsets any additional taxes workers may owe, such as payroll taxes.

Who can get the EIC and how much is it worth?
Single or married people who worked full-time or part-time at some point in 2006 can qualify for the EIC, depending on their income.

Workers who were raising one child in their home and had income of less than $32,001 (or $34,001 for married workers) in 2006 can get an EIC of up to $2,747.
Workers who were raising more than one child in their home and had income of less than $36,348 (or $38,348 for married workers) in 2006 can get an EIC of up to $4,536.
Workers who were not raising children in their home, were between ages 25 and 64 on December 31, 2006, and had income below $12,120 (or $14,120 for married workers) can get an EIC up to $412.

Workers with investment income exceeding $2,800 in 2006 may not claim the EIC.

Here’s an example of how it works. In this case eligible workers can pay less in taxes and get a check from the IRS.

Mr. and Mrs. Johnson have two children, ages 20 and 21, in college. They earned $29,000 in 2006 and owe the IRS $550 in income tax, none of which was withheld from their pay during the year. Their income makes them eligible for an EIC of $1,936. So, the EIC eliminates their $550 income tax — now they don’t owe IRS anything — and gives them a refund of $1,386.

Getting the Credit
If you have children in your home then to get the EIC you must file either Form 1040 or 1040A and must fill out and attach Schedule EIC. Workers with children cannot get the EIC if they file Form 1040EZ or do not attach Schedule EIC. The children must meet some qualifications.
Workers who were not raising a “qualifying child” in their home in 2006 can file any tax form — including the 1040EZ.These workers write “EIC” (or the dollar amount of their credit) on the Earned Income Credit line on the tax form. They do not file Schedule EIC.

Tax Preparation Assistance
Low-income workers can get free help with tax preparation through a program called VITA (Volunteer Income Tax Assistance). To locate the nearest VITA site, call 1-800-829-1040.

enroll now for a chance to win Suze Orman's 2009 Action Plan

It's not too late to enroll in Wyoming Saves and be eligible for the drawing for Suze Orman's 2009 Action Plan book. Wyoming Saves is part of a national effort called America Saves in which over 67,000 Americans have committed to achieving a savings goal. To help people save, Cole Ehmke, UW Extension specialist, collected several resources of interest. The information given herein is supplied with the understanding that no discrimination is intended and no endorsement by Cooperative Extension is implied.

In addition to managing the Wyoming Saves program I am also a participant. Today I transferred my first installment of my savings goal into my savings account.

If you have any questions or concerns about your participation in Wyoming Saves, please let me know. I am here to support you and be a resource for you to help you achieve your savings goal.

Following is the first article that was sent to Wyoming Saves Participants.

Two great ways to establish automatic savings

(1) Online Savings Accounts – provide high yields; all of the following currently pay 5%+, with no minimums to establish (or maintain) an account, no fees, and are FDIC insured.
a. Emigrant Direct
b. FNBO Direct
c. HSBC Direct

(2) Mutual Funds – while many mutual fund companies require a large initial investment to open a mutual fund account, some companies will waive the initial investment if you establish an automatic investment (typically $50/month). T.Rowe Price and TIAA-CREF are a couple of notable ‘no load’ fund companies; AIM Funds and American Funds are examples of load fund companies that allow for automatic investments to open accounts. The Mutual Fund Investor Center provides a search tool to find companies that accommodate people looking for automatic investment opportunities.

A recent Federal Reserve Board study identified successful saving strategies:

- Have a reason to save. Households with an identifiable goal for saving were more likely to have financial assets (and also have higher levels of assets). Setting a goal is an important part of any saving strategy.
- Think ahead, plan ahead. Looking into the future can be an important motivational tool to help people anticipate and be prepared for future expenses. The most prominent goal of the Savers in the program is to develop an emergency fund. Many experts recommend having a fund that could cover three or more months of living expenses.
- Develop a savings habit. It is no secret that getting started is the biggest challenge people face financially. Once the habit is developed, people comment on how “second nature” saving becomes.
- Make savings automatic. Automatic savings via payroll deductions or automatic transfers from a checking or savings account is one strategy found to be very effective in “creating” Savers.