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Wealth e book

  3. 3. Wealth Building Strategies—Maximizing Your Personal Financial PerformancePublished by Financial Success 20074710 Eisenhower Blvd., Suite B-5Tampa, FL 33634www.financialsuccess2007.comThis book or parts thereof may not be reproduced in any form, stored in a retrieval system, or transmittedin any form by any means—electronic, mechanical, photocopy, recording, or otherwise—without priorwritten permission of the publisher, except as provided by United States of America copyright law.ISBN-10: 1-934225-04-5ISBN-13: 978-1-934225-04-2Copyright © 2007 by Financial Success 2007, Get Motivated Seminars, Inc.All rights reservedPUBLISHER’S NOTE: This publication is designed to provide competent and reliable information regarding thesubject matter covered. However, it is distributed with the understanding that the author and publisher are notengaged in rendering legal, financial, or other professional advice. Laws and practices often vary from state to state;and if legal, financial, or other expert assistance is required, the services of a professional should be sought. Thepublisher specifically disclaims any liability that is incurred from the use or application of the contents of this book. S U C C E S S S T R A T E G I E S
  5. 5. WEALTH BUILDING STRATEGIES 6 TABLE OF CONTENTSIntroduction 7SECTION ONE: Financial Goals and General Principles of Wealth 9Financial Goals 11General Principles of Wealth 22SECTION TWO: Personal Finance Basics 33Savings Accounts 35The Power of Compounding Interest 42Insuring Your Family’s Future 46SECTION THREE: Investing to Increase Personal Wealth 103The Stock Market 106Building an Investment Portfolio 124Taxes 145Protecting Your Wealth 157Glossary of Personal Finance Terms 173Worksheet for Financial Goal Setting 203Budget Worksheet 204Daily Expense Tracking Worksheet 205 S U C C E S S S T R A T E G I E S
  7. 7. WEALTH BUILDING STRATEGIES 8 INTRODUCTION very great athlete, musician, professor, or mentor must master the basicE techniques of their chosen art or passion before branching out into more advanced techniques and methods. The exact same philosophy is truewhen dealing with personal financial matters. It is important to learn how tobuild personal wealth through various methods including smart choicesinvolving saving, real estate investments, stock market investments, and otherinvestment vehicles for building personal wealth, but first, you must master thebasic techniques for managing money and building personal wealth. The pur-pose of this report is to help you to build a sound knowledge of the basics andventure into some of the sound vehicles you can use to build personal financialwealth so that you can lay a sound foundation for your family’s and yourwealthy future. Everyone, no matter how much your income or how small yourincome, must be conscious of their personal finances and work toward build-ing a bright financial future.The concepts in this report will work for you regardless of your age or theamount of money you make, enabling you to build personal financial securityand personal wealth. There are no magic tricks, just sound financial concepts tohelp ensure your future ability to live the lifestyle you desire for yourself andyour family and to even leave a legacy for your children and their descendantsafter your passing.By reading this report, you will learn how to establish financial goals and how toachieve them.The most common and most successful financial investment vehi-cles for building wealth are explained so that you can fully understand how to usethese methods to increase and protect your personal wealth.We’ll show you how to break large goals down into manageable,achievable goals.We’ll show you how to track those goals and how to stay on track toward achiev-ing those goals. We’ll even show you how to adjust your goals as your situationchanges to help you reach your financial dreams.After reading this report in full, it will be time for you to implement the conceptsthat will put you on the road to building true personal wealth. Follow that road,and your assets and wealth will continue to grow. S U C C E S S S T R A T E G I E S
  9. 9. WEALTH BUILDING STRATEGIES 10 SECTION ONE: FINANCIAL GOALS AND GENERAL PRINCIPLES OF WEALTHIntroduction to Financial Goals and General Wealth PrinciplesIn this section of this report, you’ll find information about financial goals andhow to establish these goals for you and your particular financial situation.You’ll also learn about general principles of building personal wealth.You’ll learn basics in this section and, to go with these helpful facts, you’ll find aset of worksheets to help you establish a family budget, personal financial goals,and help you establish your goals and build your personal wealth.
  11. 11. WEALTH BUILDING STRATEGIES 12 FINANCIAL GOALS any people today live from pay-check to pay-check.When asked, theyM respond that they do not make enough money to save any money and that they certainly do not earn enough money in order to permit themto invest any money into stocks.Another common response is that they believethey are too old to start saving or investing now and because that isn’t enoughtime for those savings or investments to build up into enough money to proper-ly fund their retirement years. The truth of the matter is that anyone can man-age their personal finances in such a way that they can save money on a regular,disciplined basis, invest money into wise investment choices and, thereby turntheir money into even more money. This is the way people become millionaires,and this is the way that people can build true personal wealth and financialsecurity. It is also a fact that no one is too young or too old to begin saving and S U C C E S S S T R A T E G I E S
  12. 12. WEALTH BUILDING STRATEGIES 13 FINANCIAL GOALSmanaging their personal finances in ways that will provide for a brighter future.Anyone can and should set financial goals. Even if your goal is not to become amillionaire, you certainly should have financial goals that set your sights onbecoming financially secure and preparing for your financial future and thefuture of your family.Everyone, no matter how large or small their income, makes enough money toinvest in their future wealth.Too many people feel this isn’t true because they tendto spend money whenever and wherever they see something they desire at thatparticular moment without any thought of their real, long-term goals. They sim-ply keep putting off until tomorrow what they need to be saving today. They tellthemselves they will put aside some money next week or next month, but soon-er than later it is next year or many years later. Instead, everyone should realizethat even small savings, when managed correctly, can ultimately grow into realwealth.Today is the day to begin creating a better financial future for yourself andyour family.Financial goals are very much like road maps that show you the pathway fromwhere you are today to where you wish to be in the future.Like a road map,if youget off the best course, you must get back on the pathway defined and continueyour journey toward your goals. No one is perfect, and if you should happen toventure from your defined path, which you probably will from time to time, sim-ply turn around, get back on the pathway you defined, and continue workingtoward reaching your dreams. Learn from your mistakes, and promise yourselfnot to repeat your errors when you do drift from your personal financial goals.You will find yourself a much happier person as a result.Financial goals can seem daunting if the goals are looked at as only a single verylarge goal. Perhaps you have a goal of having one million dollars in savings whenyou retire. That number seems awfully large and intimidating when you look atit alone. If you thought of it as only a single, big goal, it might make it difficult for S U C C E S S S T R A T E G I E S
  13. 13. WEALTH BUILDING STRATEGIES 14 FINANCIAL GOALSyou to begin saving because you feel intimidated. Instead, you should be takingsmall, manageable steps to achieve large, specific goals. You must realize thateveryone who has retired before you with one million dollars in savings began byplacing that first dollar into savings,keeping it there over the long term,adding toit on a regular basis, and building their wealth over time.Financial goals can be viewed in many different ways. You can set short-termgoals, which can be achieved in weeks or a few months.You can set longer rangegoals, which cover a year or more. You can set very long-term goals that coveryears such as preparing for retirement or even beyond retirement toward leavinga heritage or legacy for your children, grandchildren, and even great-grandchil-dren to enjoy. No matter how you look at your personally chosen financial goals, S U C C E S S S T R A T E G I E S
  14. 14. WEALTH BUILDING STRATEGIES 15 FINANCIAL GOALSif you set goals, track your progress toward achievements, and adjust your goalsperiodically to meet your changing situation, you will obtain the wealth youdesire. The advantage of setting goals is that you will have a plan to work towardrather than working in the dark, hoping things work out for you. Failing to planis said to be the same as planning to fail. This applies to personal finances asmuch as to any other type of projects that you might become involved in; perhapsit is even truer when applied to money.In order to generate personal financial wealth, you have to become passionateabout setting and achieving financial goals. If you must, think of your personalfinancial goals as hard milestones so that you will strive to achieve them. If youmaintain a mindset that nothing whatsoever has the ability to stop you fromachieving your goals, you will find yourself progressing steadily toward financialwealth. Let nothing stop you from achieving your financial goals.In order to set financial goals,you must think about what you want your life to bein the future.You must look at where you are today and where you want to be inthe future based on the money you have to work with. What do you want yourfinancial position to be in five years? Where do you want to be in ten years?Twenty years? How much money do you want to have when you retire? What sortof inheritance would you like to leave for your family when you leave this world?You certainly are already aware that you have income and expenses. You shouldalready have a budget in place,but a surprising number of people do not use thisessential tool.If you do not have a budget, now is the time to create one by sittingdown with your family and determining how to use the money that comes intoyour hands.If, on the other hand,you already have a budget in place but you findthat every month you just barely making ends meet,it is time to throw that budg-et away and start over by creating a budget that will support your financial goalsas well as meet your current needs by adjusting how the money is spent. S U C C E S S S T R A T E G I E S
  15. 15. WEALTH BUILDING STRATEGIES 16 FINANCIAL GOALSFinancial goals are different for different people because of differing circum-stances and differing desires. There is no set of goals that will work for everyone.You must examine your life and your desires, determine what you want yourfinancial future to become, and set goals accordingly. Although you can seekadvice from a professional financial counselor regarding how to meet your goalsonce you know what your financial desires include, this is something that no oneelse can do for you and your family. You may also find the advice of a financialadvisor essential in figuring out how to reduce your debt burden if you have beenoverusing credit cards or other debts and are now paying high rates of interestthat could better be used elsewhere. S U C C E S S S T R A T E G I E S
  16. 16. WEALTH BUILDING STRATEGIES 17 FINANCIAL GOALSIf you have children, your goal may be to have enough money to provide them aquality education while still having enough money to retire comfortably. Anotherperson might have a goal of retiring early and enjoying life without having towork every day. Still another person will have another answer to the questions ofwhere they want to be financially at certain periods in their lives. The one thingeach of these people has in common and every person who wants to have soundpersonal finances is the need to set aside money for the future and allow thatmoney to grow, untouched, until their goals have been reached.How to Set GoalsWhen setting goals for most situations, such as your career, you first set short-term goals that support long-term goals. With personal finance, you want tolook at your goals more or less in reverse order. First, you need to determinewhere you want to be financially during your later years of life such as whenyou reach retirement and are no longer earning money from your career orbusiness. Then, you should allow these long-term goals to drive your goal set-ting for the near term. However, you still have to be sure your financial goalsallow you to meet today’s needs as well, so you do have to look at that as well.It would not make good sense to set a financial goal to save x dollars if thatgoal means you cannot pay the mortgage payment on your home today. Afterall, your home is an investment and one of the biggest savings accounts mostpeople ever own.You should obtain and utilize a dedicated notebook or perhaps a computersoftware application for setting and tracking goals. Write down your long-term goals that reflect where you and your family want to be in twenty or thir-ty or more years. Lets look at an example of a person who wishes to retire inthirty years with one million dollars in assets available during retirement.Thatgoal would reflect the long-term, ultimate goal. It can be achieved, and per-haps even more can be achieved, with dedication and the willingness to applyself discipline. S U C C E S S S T R A T E G I E S
  17. 17. WEALTH BUILDING STRATEGIES 18 FINANCIAL GOALSNext, look at your family’s debt load. Paying off debt as quickly as possible canallow you to save and invest money into growth vehicles to reach your goal.Paying high interest rates on credit cards will only keep you from achievingyour personal financial goals.Establish a goal for paying off all credit card debtand any other short-term debt as quickly as your income permits. Determinethat the money you have been using to pay these debts will, once the debts arepaid off, be placed into your savings and investments to accumulate wealth.Since you have been spending the money by sending it to credit card compa-nies, you’ll be able to pay yourself that same amount without even missing iteach month!Set your own ultimate personal financial goal for yourself and your family,andwrite that goal down. Reflect on the goal, and keep it always in mind. Remindyourself daily of your goal, and remind your family members of the goal andthe benefits they will enjoy by working toward that financial goal. Know thatyou can achieve the goal if you focus on it daily. Never allow anyone to con-vince you that you cannot achieve your goals and dreams, because you trulycan if you only work methodically toward them.Next, you must look at your spending patterns as well as the spending patternsof your family. Where does your spendable money go? For a period of oneweek, keep a spending journal and ask every member of the family to do thesame thing. Write down every single thing you spend money on during eachday. This list isn’t for including the expenses you have to pay for the householdsuch as electricity, mortgage, and water. It should be used for tracking yourpersonal, unplanned spending decisions. While your children may only havean allowance to account for, you want to note any extra money provided tothem from your pocket. You also want to ask your spouse to keep the sametype of spending journal in order to get a complete picture of how your fami-ly spends money to make this exercise most effective. S U C C E S S S T R A T E G I E S
  18. 18. WEALTH BUILDING STRATEGIES 19 FINANCIAL GOALSAt the end of the week, sit down and study your expenditure journal. Youwill almost certainly see many things that are impulse purchases, moneyspent for things you didn’t really need and perhaps didn’t really want, ormoney spent for things you could have obtained in different ways at muchlower cost.Sit down and look at your list carefully. If you purchase coffee on the way towork at a coffee boutique that charges four dollars for a cup of exotic coffee,and you do this every work day for ten years, you can save over twenty thou-sand dollars over that same ten years just by placing that four dollars per dayinto your savings! That’s a lot of money to accumulate from simply makingyour own coffee at home instead of buying boutique coffee.Look at other expenses that are unnecessary or that can be provided for moreeconomically. Do you eat lunch in a restaurant every day? If you do this, couldyou cut back to eating lunch out to only two times each week and still be justas happy? Would once a week be sufficient to make you feel good and satisfied?The average lunch at a good restaurant, including something to drink and areasonable tip, costs at least ten dollars. If you choose to cut back from fivelunches out to one lunch out per week and you consistently place the moneyyou have saved as a result into investments or savings, over the course of tenyears you will have just gained over thirty thousand dollars in your savingsbased on calculating the savings to include compound interest over the peri-od of years.Notice that only two really very minor changes in lifestyle over a period of tenyears can have effectively put fifty thousand dollars into your personal sav-ings! Look for money you spend that isn’t necessary, and place that money intosavings instead of spending it on things that do not provide for the financialsecurity of you and your family. You’ll be truly amazed when you realize theamount and the places where your expendable cash is spent needlessly. S U C C E S S S T R A T E G I E S
  19. 19. WEALTH BUILDING STRATEGIES 20 FINANCIAL GOALSWhen setting your personal financial goals, you want to plan your expendituresand budget so that you do not feel deprived, but simply focus on cutting out theexcess expenses that really do not mean much to you and your family.If you takea family of four out to a nice restaurant to eat dinner every weekend, would youand the rest of the family members be just as happy and fulfilled if your familyonly ate out at this type of nice restaurant once per month and saved the moneyfrom the other weekend outings? Perhaps you would be happy if you chose lessexpensive restaurants but continued to go out regularly as a family outing.Determine what is right for you and your family to feel happy and fulfilled whilestill saving money. Choose the level of comfort that will allow you to save with-out feeling that you’re not living a full and happy family lifestyle today.You’ll beamazed at how much you can save by cutting out only a few things that havebecome habit and really do not add any real value to your life and the lives ofyour family.Using the information you have gathered from studying your financial situa-tion and focusing on your long range goal, write down goals for the near termsuch as paying off credit cards within two years, saving money from unneces-sary expenses equal to a specific amount each week, and others that apply toyour situation.When looking at the financial goals you are setting, do not think small. Insteadthink big—really big! Do you wish to retire in comfort and leave a legacy to yourchildren for their future? There is no reason that you can’t aim high with yourfinancial goals.After all,it is far better to set your goals high and come near reach-ing those goals than to set your sights low and achieve the goals too easily. It ismore meaningful to provide a challenge for yourself and your family.Now that you have set some financial goals, keep in mind that you can changethem or adjust them at any time to better suit your changing needs as well as the S U C C E S S S T R A T E G I E S
  20. 20. WEALTH BUILDING STRATEGIES 21 FINANCIAL GOALSchanging economy. As your family grows or family members reach maturity,your goals will certainly need to be reviewed and adjusted to reflect the changingsituation of your family life.If your or your spouses career situation changes, youshould again readjust your family’s financial goals to reflect those changes.During periods of unemployment or short-term disability, you may have tochange your financial road map for a period of time in order to adjust for thechanges in family income. Whatever you do, dedicate yourself to changing thegoals upward whenever possible rather than changing your goals downward,unless you must make a short-term change to reflect income changes due toshort periods of lowered income.Do not allow yourself or your family to becomevictims of falling into the pattern of spending part of your savings or liquidatingpart of your investments with the intention of putting it back later.It can be quitedifficult to ever return your investments and savings to the level you had before.Keep savings and investments intact so they can grow and allow you to reachyour goal of personal financial success.At the back of this report, you’ll find worksheets to help you set a budget, trackdaily expenses, and set goals. Use these as you build your own notebook of goalsand follow your goals to reach your dreams.
  22. 22. WEALTH BUILDING STRATEGIES 23 GENERAL PRINCIPLES OF WEALTH any people before you have accomplished personal financial goals thatM allowed them to enjoy true personal wealth.All of these successful peo- ple followed some general personal financial principles that helpedthem accumulate money and build wealth instead of spending money frivolous-ly.The following are some general wealth principles to help you plan your road topersonal wealth.General Principle #1: Pay Yourself FirstThe vast majority of people who have achieved their financial goals say they haveaccomplished the task by paying themselves first each payday. By havingreviewed spending practices and identifying ways to cut back on nonessentialexpenses,the amount to apply to building personal wealth is set aside before pay-ing any of the other expenses. That money, no matter how large or small theamount, goes directly into a vehicle for savings.In fact, the easiest way to save money toward your goals is to have direct payrolldeductions so that you never see the money. Many employers offer savings plansthat allow you to define an amount of money to be removed from your paycheckand placed into a savings plan or a choice of savings plans. The plans may varygreatly from employer to employer, but the common thread is the money thatnever reaches your hands is seldom missed.If you do not use this type of savings plan, you must practice self-discipline byplacing a defined amount of money into an account where it will be held andnot spent. It is far too easy to spend money that is simply placed into yourchecking account. A passbook savings account is a good place to hold themoney until you are ready to invest it into investment vehicles that pay a muchhigher return rate. Whatever you do, don’t put that money that you’ve definedas savings into your pocket! It is too easy to spend without thinking about it ifyou hold the funds in cash. S U C C E S S S T R A T E G I E S
  23. 23. WEALTH BUILDING STRATEGIES 24 GENERAL PRINCIPLES OF WEALTHGeneral Principle #2: Pay Off Credit Card DebtFirst of all, the very best way to get rid of debt—credit card or otherwise—is toavoid accumulating debt in the first place. However, there are certain debts thatmust be incurred and we’ll discuss them later.It can be so easy to pull out a plastic credit card and purchase something you seethat you don’t really need and perhaps don’t even want.With credit card interestrates as high as 21 percent annual percentage rate (APR), your purchase can endup costing you a great deal more than the amount on the price tag of that item. Itcan take years to pay off credit card debt if you pay only the minimum monthlypayment each month. The interest continues to grow and costs you more andmore over time.Strive to pay off all credit card debt,beginning with the credit card that charges thehighest rate of interest. Consider transferring the balance from high interest credit S U C C E S S S T R A T E G I E S
  24. 24. WEALTH BUILDING STRATEGIES 25 GENERAL PRINCIPLES OF WEALTHcards to credit cards that charge a lower rate of interest, making it easier to pay offthe balance quickly.Get rid of any credit cards that charge annual fees.Study the payoff plan you intend to use for getting rid of your credit card debt.At Feed the Pig (http://www.feedthepig.com), you’ll find a handy calculator tohelp you create a credit card payoff plan. Using an example, if you have $2,000in credit card debt on a card that charges 17.5 percent APR, if you stop charg-ing anything new and the card does not charge an annual fee, payments of only$99 per month will get your balance paid in full within 24 months. Of course,the more you can pay, the faster the debt will reduce. Calculate differentamounts,find the best payment plan for you,and place that debt reduction pay-ment into your monthly budget.If you are the type of person who has five or six credit cards, choose a single lowinterest rate credit card and use it only in emergencies.As the other accounts arepaid off,cancel the credit card.There is no need to have more than two low inter-est rate credit cards at the very most,and you should never charge more than youcan pay in full each month.Be aware of and cautious about “teaser” offers provided by some credit cards,most often department store charge cards. An example of this type of teaserincentive is a card from a specific store where you shop that offers you thirty dol-lars in free merchandise the first time you use your new charge card. The prob-lem with these teaser offers is that you obtain the free merchandise but alsocharge an additional sum that incurs interest, often high interest rates, and youbecome tempted to charge more and more. Read these types of offers carefullyand understand them before you consider using these teaser offers or even beforeaccepting the new, usually unsolicited, credit card.Also, be aware of and cautious about “teaser” rates offered by some major creditcards. It is not unusual to receive an unsolicited offer from a charge card compa- S U C C E S S S T R A T E G I E S
  25. 25. WEALTH BUILDING STRATEGIES 26 GENERAL PRINCIPLES OF WEALTHny that offers an amazing low interest rate. The questions you need to answer inyour research include: ● How long do you get this great interest rate? ● How soon after the initial low interest rate ends can you cancel the card if paid in full? ● Are there any hidden expenses such as yearly fees to keep the card?Whether these offers are good for you and your particular financial situation issomething you must determine individually. No hard and fast rule is true foreveryone. The rule you must follow is that knowledge is power, so learn all aboutthe offer before making any decision whatsoever.Avoid adding to your credit card debt unless it is an absolute emergency. Nevermake purchases for food,clothing,or incidentals with your credit card unless youknow you can pay off the entire balance as soon as the bill arrives and are onlyusing the credit card as a means of compiling budgeted expenses on a charge cardso you can write one check and avoid carrying cash or writing multiple checks.Seek out a credit card that offers a zero interest rate as long as the card is paid infull each month.You may even find some credit cards that offer a zero interest rateon balances carried forward for a short period of time and no yearly fee for thecredit card. Avoid maintaining any credit cards that carry a high interest rate orthat charge a yearly fee to keep the credit card.If you are offered a credit card with a purchase incentive such as free merchan-dise,find out if you can use the special offer and then cancel the credit card with-out penalty. If this is possible, you might find yourself in a position to get a reallygood deal on a purchase you already wanted or needed. Be certain, before mak-ing that purchase, that you can cancel the credit card and are not forced to keepthe card after using the special incentive benefit. If you find that you can obtain S U C C E S S S T R A T E G I E S
  26. 26. WEALTH BUILDING STRATEGIES 27 GENERAL PRINCIPLES OF WEALTHfree merchandise or deeply discounted purchases on items you already have bud-geted, this can be a great way to obtain your budgeted merchandise at less thanthe price you had budgeted. Just be sure to use prudence and read all the fineprint before making the purchase!General Wealth Principle #3: Invest Money in GrowthOpportunitiesInitially, you may want to save money in regular savings accounts. However, tomake your money grow, you need to invest in the opportunities that offer thelargest growth potential to maximize the increases offered by compounding.Don’t stick your money under a mattress; instead find the best investment oppor-tunities and put your money into these wealth-generating vehicles. We’ll lookmore closely at the investment growth opportunities in a later section of thisreport.General Wealth Principle #4: Small Amounts Add Up to BigAmountsPerhaps you think you don’t have enough income to save sufficient funds to tie upany of your money in lucrative investments.This is completely untrue.Even if youhave only a small amount of investment money with which to begin, you canmake a start and keep adding to that initial investment. You will be amazed athow your personal financial situation will change as you continue investing inyour future on a regular basis. Even a few dollars each week can be grown into alarge retirement fund if you are consistent in saving.General Wealth Principle #5: Start ImmediatelyDon’t put off until tomorrow what you should be saving today. Even if you onlyhave a few dollars, that can be the start of a lucrative investment. Give up onesmall but unnecessary item each day or each week,and place that money aside assavings. It will grow and before you know it, you’ll have the funds needed to get S U C C E S S S T R A T E G I E S
  27. 27. WEALTH BUILDING STRATEGIES 28 GENERAL PRINCIPLES OF WEALTHinvolved with wealth-generating investments such as stocks,bonds,or real estate.The key is that you must start now—today.Waiting for next week,next month,ornext year will only ensure that you will have less personal wealth later than if youstarted right now.General Wealth Principle #6: Don’t Allow a Set Back to Get YouOff TrackOn your path to building personal wealth, you are certain to encounter some setbacks along the way. Perhaps a storm damages the roof on your home and youneed to spend money on repairs.Perhaps a medical emergency causes a set back.Whatever the reason for a set back in your savings program,accept it as a tempo-rary issue and jump right back on track, sticking with your defined savings plan.Before dipping into your savings and assets,however,determine whether there isanother way to take care of the problem without touching your principal savings. S U C C E S S S T R A T E G I E S
  28. 28. WEALTH BUILDING STRATEGIES 29 GENERAL PRINCIPLES OF WEALTHLook for creative solutions. Can you get the problem solved with a “90-days-same-as-cash” plan? Ask questions and learn of available options before choos-ing how to handle the situation.General Wealth Principle #7: Use Creative Savings TechniquesSome people feel saving is very difficult.If you feel you will have problems savingany significant sum, try some creative savings techniques. One woman who hadtrouble saving vowed never to spend a one-dollar bill.Instead,she placed them ina drawer until the stack reach one hundred dollars and then added them to hersavings account. When the account reached one thousand dollars, which onlyrequired a few months to accomplish, she moved the funds into a more lucrativeinvestment plan. By continuing her practice of never spending a one-dollar bill,she built up savings of over fifteen thousand dollars within only two years.A lit-tle technique like this can go a long way to building your initial savings so that youfeel more comfortable about your ability to gain true personal financial wealth.General Wealth Principle #8: The Power of CompoundingWhen money is placed in an investment vehicle where it earns interest,the inter-est is paid to the account and becomes part of the principal on which the nextinterest payment is made. This is the magic of compounding interest. Moneyplaced in interest-bearing accounts or investments will grow because of thiscompounding.Here’s an example of how compounding helps you increase your personal wealth.If you have $1,000 in a savings that pays 5 percent interest, compounded daily,and you add $1,000 per year for 20 years, you will end up not with $21,000 butover $37,000.That’s $18,000 more than if the money had simply been placed in abox or noninterest-bearing account.Increase your yearly additions to the accountto only $2,000 and you’ll have over $71,000 in 20 years. Of course, many invest-ments may pay a higher return on investment (ROI) than 5 percent,which wouldallow the savings to grow even higher in the same period. S U C C E S S S T R A T E G I E S
  29. 29. WEALTH BUILDING STRATEGIES 30 GENERAL PRINCIPLES OF WEALTHGeneral Wealth Principle #9: Give Something Back—The Powerof TithingPeople who have accumulated wealth are also people who give something back.Whether you tithe to your church,give to charity,or whatever meets your person-al beliefs and spiritual support system values, wealth always seems to come tothose who give something back.A good policy for giving is 10 percent,that beingthe traditional tithe you may have been taught as a child. Give back not only ofyour money but also of your time to those less fortunate than yourself.Teach yourchildren to do the same.General Wealth Principle #10: Adjust Your Goals UpwardsAs you find yourself moving toward goals you have set, review those goals peri-odically. Sit down with your spouse and look at goals that can be adjustedupwards. Perhaps you have enjoyed getting a raise. Could you better place thatmoney in savings rather than expanding your lifestyle? Are there more ways youcan stop “keeping up with the Joneses”and remain happy as a family? Adjust yourgoals upward, but never adjust them downward. Expect more, and you’ll receivemore!General Wealth Principle #11: Choose the Debts Your IncurWiselyThere are certain debts that are not only necessary but actually wise to incur.There are very few people who can purchase their primary residence without tak-ing out a mortgage loan. This is a wise form of debt, provided you select a mort-gage you can afford to pay on a monthly basis and you live in an area where realestate values are not declining.Some areas are experiencing declines in real estatevalue whether due to the economy or the neighborhood itself. Choose wiselywhere you select your residence on which to take out a mortgage loan because ittakes years to pay off the mortgage. S U C C E S S S T R A T E G I E S
  30. 30. WEALTH BUILDING STRATEGIES 31 GENERAL PRINCIPLES OF WEALTHThe reason this is a smart debt is that you will be making payments of a set amountthat build equity in your home rather than spending money on rent.Also, you willbe making payments on your mortgage in the future when the value of the dollarsused for payments may not be equal to the value of the dollars you spend today.Real estate investments, whether for your own residence or for investment prop-erty are, in general, wise debts. They are not always the only wise debts to incur.Really big ticket items sometimes must be paid through loans or debt. Majorhome improvements, for example, that increase the equity in your property sig-nificantly, can fall into the area of a wise debt. Just be sure you carefully considertaking on debt for any reason whatsoever.Sometimes emergencies must be dealt with by incurring debt. If a part of yourhome is seriously damaged or deteriorates badly and the insurance you carry doesnot cover that specific type of situation,you simply can’t allow the investment youhold in your property to decrease by allowing the property to deteriorate.If you must obtain reliable transportation in order to commute to and from yourjob and your car has become so old that maintenance and repairs are extremelycostly, taking out a car loan might be a wise debt for your situation. Lifesavingmedical emergencies may require that you incur some debt to pay for that por-tion of the cost that is not paid by your insurance or health care coverage. Lowinterest student loans for education can be wiser than removing money fromhigh interest investments when your children need college funds.A rule of thumb to consider in these situations is: if incurring debt at low interestallows you to keep investments that are paying a much higher rate of return thanthat which will be a direct result of the debt you are incurring,then the debt shouldbe thoroughly investigated and considered as a possible sound solution. On theother hand, if the debt you are thinking of incurring carries a much higher inter-est rate than your investments are currently paying and the expense causing you S U C C E S S S T R A T E G I E S
  31. 31. WEALTH BUILDING STRATEGIES 32 GENERAL PRINCIPLES OF WEALTHto consider incurring the debt is crucial or extremely important to you and yourfamily or your life and the lives of your family,then you may want to seriously con-sider finding a lower interest means of financing or even consider removing somefunds from your investments to avoid incurring the high interest rate expense.These situations and the possible solutions to resolve them must be studied care-fully and completely and made on a case-by-case basis. These situations andsolutions should also be discussed and determined with the assistance of yourfinancial advisor or unbiased financial counselor.The general rule of thumb is to acquire as little debt as possible and, when youdo acquire debt, choose the debts you incur wisely. Do not incur debt forimpulse purchases or nondurable goods unless you can pay for the charges infull within thirty days.Some people like to charge their daily and monthly necessities simply because itis easier to write a single check to pay off the total credit card balance each monthor because it provides a good means of tracking expenses for business needs.This can build your credit rating and doesnt have to cause you to pay largeamounts of interest if you pay the balance in full each month. In fact, if you haveselected a credit card carefully, you should not have to pay any interest or fees atall as long as you pay off the balance in full each month and pay it on or beforethe date the payment is due.This can be a smart move since it allows you to avoidcarrying cash for purchases and makes keeping expense accounts and otherfinancial records much easier. The key here is to avoid overspending by stickingto your budget even when charging to a credit card.
  33. 33. WEALTH BUILDING STRATEGIES 34 PERSONAL FINANCE BASICSIntroduction to Personal Finance BasicsNow that you have established some personal financial goals, you need to look atthe basics of personal finance. Understanding savings, compounding interest,insurance, and other financial basics is crucial to ensuring you protect yourselfand your family.The following chapters in this section of this report will focus on personal finan-cial basics that you need to understand in order to make sounds decisions for youand your family.In this section of the report you will find information about:Savings Accounts – Types of savings accounts available as well as the details andpotential benefits of each different type will be addressed in this section. Thesetypes of savings accounts should be discussed with your financial advisor beforedeciding which types are best for you and your particular financial situation, butyou still want to have a basic understand of what each type of savings methodoffers you as well as restrictions to watch for in the fine print.Compounding Interest – This will help you understand how interest com-pounds in order to help your money earn even more money. This concept reallymakes a huge difference in your savings and investment balances so you willwant to understand how interest compounds to help your money grow.Insurance – Here you will learn about the many types of insurance that can helpmake certain your family is cared for in various situations that you cannot con-trol. Included will be the various types of life insurance, home, auto, medical, aswell as benefits and details of each of these types of insurance.
  35. 35. WEALTH BUILDING STRATEGIES 36 SAVING ACCOUNTS nce upon a time, the only type of savings account commonly offered wasO a passbook account.You were given a little book, and you brought it to the bank with your deposits. Each record was stamped into this little pass-book, both deposits and withdrawals, always including a total balance in theaccount.Today, there are many different types of savings account that are offered that canhelp you save. In order to choose the ones that are right for you and your person-al financial goals and situation, you need to be aware of all the choices.Instant Access SavingsInstant access savings accounts, also commonly called regular savings accounts,are accounts that allow you to have ready access to the funds in the account. Thistype of savings account pays the lowest amount of interest but does allow you to S U C C E S S S T R A T E G I E S
  36. 36. WEALTH BUILDING STRATEGIES 37 SAVING ACCOUNTSget to your money should you need to at any time. These accounts can even bepart of your ATM card, allowing withdrawals 24 hours each day, 365 days peryear. The minimum required to open this type of savings account is usually verylow, some banks offer this type of savings with an initial deposit of only $50 or$100.The interest rate paid on this type of savings account fluctuates as the econ-omy changes and can go up or down in the rate of interest paid to the accountholder. Some of these accounts have daily interest compounding while otherscompound monthly or even yearly.Use this type of savings account only for an emergency fund or as a holding placeto save up enough money to move into a better type of savings or investment.Youshould avoid placing the bulk of your savings into this type of account for twomajor reasons: ● The interest rate is lower than other types of savings account or investments ● Ready access allows you to spend the money without giving careful forethought to your expenditureHowever, this type of account is great to have on hand for holding the equivalentof one-month’s salary as an emergency fund. Once you build your balance tohigher levels, move the excess money into a better form of savings that pays ahigher interest rate.These accounts, when opened with a banking institution, are insured by theFederal Insurance Deposit Corporation (FDIC) up to an amount of $100,000.This means that should the bank go bankrupt for any reason, such as those thatresulted from the 1920s’ stock market crash, the United States governmentinsures your money will be paid to you. S U C C E S S S T R A T E G I E S
  37. 37. WEALTH BUILDING STRATEGIES 38 SAVING ACCOUNTSMany banking institutions offer an automatic transfer from your checkingaccount each month to help you save money without thinking about it. However,you must be certain the funds are in your checking account at the time of thetransfer, so be sure this option is for you before establishing an automatic trans-fer. Overdraft fees usually do apply if the funds are not available for transfer onthe pre-set date.Money Market Savings AccountsMoney market savings accounts are a way to get a higher interest rate than regu-lar, instant access savings, but still maintain easy access to your funds.With thistype of savings,the banking institution invests the money placed in their trust insecure investments, allowing them to pay a higher return to you. Usually, moneymarket accounts require a minimum initial deposit to open that is much higherthan an instant access savings account,often one thousand dollars.Interest earn-ings may be higher for larger balances. Often, banks offer the money marketaccount holder the right to write a limited amount of checks on this type ofaccount each month without penalty, but this varies greatly from institution toinstitution. You must be sure to fully understand the policies of any bank withwhich you are considering opening this type of account.Money market savings can be a good next step up from regular savings once youhave built a balance greater than the minimum required for the minimum toopen a money market account.These accounts are also insured by the FDIC whenthe funds are held by a bank.Investment firms also offer money market accounts which are not insured by theFDIC and therefore may have some risk.Those will be discussed later in this report.Short-Term Certificates of DepositCertificates of deposit (CDs) are a type of savings where you deposit a sum ofmoney with a bank for a specified period of time at a set interest rate.Short-term S U C C E S S S T R A T E G I E S
  38. 38. WEALTH BUILDING STRATEGIES 39 SAVING ACCOUNTSCDs are usually considered to be any specified deposit length of one year or less.If money is removed from this type of account before the date of maturity, thepayoff date of the CD, a substantial penalty must be paid.CDs that mature in as little as one month can be found,but most short-term cer-tificates of deposit are based on a three-month, six-month, or one-year maturity.On or after the date of maturity,the money can be removed from the CD withoutpenalty.You can also arrange for automatic rollover, which means that if you donot notify the bank you want the money removed from the CD without a specif-ic number of days before or after maturity, the money will automatically beinvested in another CD of the same type.Certificate of deposit accounts usually require a larger initial deposit amount thanother saving vehicles, but you may find that your local banking institution offersshort-term CDs for as little as one thousand dollars. Some other banking institu-tions require a minimum of five thousand dollars or more for an initial deposit.The short-term CD is a good way to earn a higher,defined interest rate on savingsthat you might need to have access to in the future without penalty. Just be cer-tain that you can leave the money in the CD until it matures or the penalty forearly withdrawal will result in earning even less return on your investment thanif you had held the money in your money market account. A good strategy forusing this type of CD is to purchase multiple CDs that mature on different dates,perhaps one month apart,so that you can gain access to funds reasonably quick-ly should the need arise.Long-Term Certificates of DepositLong-term certificates of deposit are those that require your money to remain inthe interest-bearing account for a predefined period that is longer than one year.These CDs earn a defined rate of interest over the life of the CD, compounded asdefined by the account terms. The rate of interest is higher than for short-term S U C C E S S S T R A T E G I E S
  39. 39. WEALTH BUILDING STRATEGIES 40 SAVING ACCOUNTSCDs and with larger CDs the interest rate can be quite good. The interest rate onthis type of investment vehicle will not adjust should the average rate of interestbeing paid on other accounts increase—but it also will not decrease should theaverage rate of interest go down either.These CDs offer secure savings when purchased through a banking institutionbecause they are FDIC insured. You know exactly how much the CD will growover the life of the CD and what amount will be paid to you at maturity. Usually,this type of CD requires a minimum deposit of one thousand dollars or more.If purchased during a period of high interest, this can be a good vehicle for sav-ing for retirement, college for the children, or for a family legacy. You must becertain that the money will not be required during the entire life of the CD,whichcan be as long as twenty years, or you will have to pay a high penalty, negatingthe higher interest rate.Again, this type of CD can be great if you purchase sev-eral that mature on different dates, allowing your money to be available at stag-gered dates.No-Risk Certificates of DepositA newer type of certificate of deposit that is being offered by some banking insti-tutions is the no-risk CD. These CDs require a large initial deposit in most cases,but after a short period of time, money can be withdrawn without penalty. Theinterest rate on these CDs can fluctuate with the economy,meaning that the inter-est can go up or down. The basic idea behind the no-risk CD is that the CD isactually a short-term CD that automatically rolls over without your having to doanything. These CDs, like all bank-issued CDs are FDIC insured.Laddering Certificates of DepositOne way to effective use certificates of deposit to your benefit is what is known as“laddering.” CD laddering applies the strategy of purchasing CDs of variousamounts with varying maturity dates. This strategy allows you access to money S U C C E S S S T R A T E G I E S
  40. 40. WEALTH BUILDING STRATEGIES 41 SAVING ACCOUNTSwithin a short period of time without penalty since one of your CDs purchasedwill mature soon.Most people who elect to use CD laddering invest in several smaller, short-termCDs that mature at monthly or quarterly periods, and investment in severallonger term CDs that mature at varying periods such as every three to sixmonths.If you choose to invest a part of your personal savings in CDs,this strategy makesit both practical and a way to take advantage of increasing interest rates. Wheneach CD matures,you have the choice to renew it at the then-current interest rate.However,if interest rates go down,the current rate at maturity is the rate that willbe offered to you for renewal.
  42. 42. WEALTH BUILDING STRATEGIES 43 THE POWER OF COMPOUNDING INTEREST oney placed in an account with compounding interest will growM because you get to earn interest on the money previously paid to you interest. This concept of compounding impacts so many investmentissues that it is important to understand as a basic of personal finance. It maysound quite complicated, but it truly isn’t that difficult to understand when it isbroken down and explained.Simple Interest: The Opposite of Compound InterestFirst, let’s look at the opposite of compound interest. Simple interest is verystraightforward and easy to understand. If you have $100 principal and someinstitution were to offer you an interest-bearing account that pays simple interestof 5 percent one time per year, you would, at the end of that year, have $105. Theformula to calculate this type of interest is very simple: simply multiple the prin-cipal amount, in this case $100, by the simple interest rate, 5 percent in the caseof our example. Then multiple by the number of times each year the interest ispaid,in our example this would be one because the example interest is paid onceper year to make the example simple to understand.Now, clearly there is money being earned on the money held as a savings in thissimple interest example, but once you learn about compounding, you’ll quicklysee why this is not the best type of interest and you’ll want to earn compoundinterest on all your investments.Compound InterestWhen you place a deposit into an interest-bearing account of any kind that offerscompound interest, the money you placed in the financial institution’s trust willearn at a specified rate of interest that will be paid at specific periods of time.Once the interest is paid, it is treated as if it were part of the initial deposit and itbegins to earn interest. Therefore, your money is earning money on the moneythat has been earned in interest already! S U C C E S S S T R A T E G I E S
  43. 43. WEALTH BUILDING STRATEGIES 44 THE POWER OF COMPOUNDING INTERESTWhat can you expect of a compound interest account? There are accounts avail-able that provide interest compounding on a yearly,quarterly,monthly,weekly,ordaily basis.The very best of these choices is an account that provides compound-ing on a daily basis, maximizing your earnings.The rates offered for compound interest rates vary based on the economy and thecurrent interest rates paid to account holders at your banking institution orinvestment firm.To get the best possible earnings,locate the highest interest ratesfor the type of deposit you wish to make. This amount can vary drastically, espe-cially between instant access savings accounts and long-term CDs. If you chooseto commit to the financial institution to keep your deposit intact, without with-drawals, for a long period, you can expect to earn a much higher rate of com-pounding interest than you will earn on funds deposited into an account that letsyou remove money at any time without notice.To learn the current compound interest rates offered by the banking institutionyou are considering, check their web sites or telephone them and inquire. Rates S U C C E S S S T R A T E G I E S
  44. 44. WEALTH BUILDING STRATEGIES 45 THE POWER OF COMPOUNDING INTERESTcan change quite quickly, so be certain that you know the exact compound inter-est rates you will receive when you actually make deposits with your banking insti-tution and also find out how often the rates are subject to change if you are notchoosing a fixed-rate vehicle such as a long-term, fixed-rate certificate of deposit.A Closer Look at Compounding and How It WorksLet’s break it down into very simple terms.If you have $1,000 and are paid 10 per-cent interest on that $1,000 compounding daily, then after a year you will haveearned $105.16. That’s $5.16 more than the $1,100 you would earn if the interestcompounded yearly.While this example is for a small amount to make it easy tounderstand,you can easily see how if the interest is being compounded on a sumof, let’s say, $100,000 each day, compound interest will really make your moneywork for you.While the rate of interest shown is simply to make the example sim-ple to follow, no matter what the current interest rate is on a compound interestsavings vehicle, your money will grow and grow.Annual Percentage Yield (APY)Annual percentage yield (APY) is a term used for the effective yield as a result ofcompound interest. The formula for calculating APY is a bit tricky. But there aremany handy online calculators for checking APY such as the one at Bank ofInternet (http://www.bankofinternet.com/interest-calculator.aspx). You simplyneed to understand that if you place funds into an account that pays 6 percentinterest but that interest is compounded daily, your APY will be 6.183 percent. Inother words, you will earn more than you expected due to compounding interestmaking your annual percentage yield higher. This is part of the magic of com-pounding interest rates.
  46. 46. WEALTH BUILDING STRATEGIES 47 INSURING YOUR FAMILY’S FUTURE nsurance is a topic that no one really likes to think about. However, it can beI a necessity for ensuring your financial future. There are many types of insur- ance that will be presented here. Insurance, as a rule of thumb, is not some-thing that is used for covering moderate expenses or losses. If your loss is only asmall amount, perhaps a few hundred dollars, insurance for that loss can costmore than the loss itself. However, large losses, natural disasters, loss of life orproductivity, and events that can truly impact the financial future of you or yourfamily are things you need to consider insuring against.No one wants to be forcedto spend all of their hard-earned savings in order to recover from a major loss.Neither do they want to find themselves without the means of recovering from amajor loss.No one likes to think of a time that you or your spouse will no longer be living.However, it is a fact of life that people do pass on. Unfortunately, this passing canoccur before it is expected through accident or illness. This makes insurance abasic of personal financial security and wealth. Your personal financial goal isnot only for you to live comfortably but also for your entire family to live comfort-ably and securely. That means thinking of what could happen to surviving fami-ly members if one or all of the major breadwinners were to pass away.Every day people pass on due to medical conditions that can’t be predicted. Caraccidents and accidents in the home kill millions each year. Death due to crimesoccur whether we like to think of that or not.While it is hoped that none of these things ever shortens your life or the life ofyour spouse, you simply must think about that possible future. We cannot fore-tell the future therefore, preparations are important.What would happen to your family if you or your spouse suddenly passed? Wouldthe loss of one of the major breadwinners cause your family to lose the family res-idence? Would they be forced to change their lives from a comfortable lifestyle to S U C C E S S S T R A T E G I E S
  47. 47. WEALTH BUILDING STRATEGIES 48 INSURING YOUR FAMILY’S FUTUREa struggle to get enough food and clothing to survive? Would the children have nomeans of attending college and beginning their adult lives with proper educa-tion? Would the cost of basic health care cause your surviving family members tosacrifice basic needs such as food or clothing?But insurance isn’t only for death. There are medical and health care insurancepolicies to protect you from expenses in these areas. There are home insurancepolicies to cover your home, and there is auto insurance to cover your liability andlosses should you be involved in an auto accident.Think about what you would do if your child experienced a catastrophic illnessand only expensive medical care, possibly costing hundreds of thousands of dol-lars could potentially save him or her. Also, think about what would happen ifthis type of illness happened to you or your spouse.Would you be able to affordto care for you, your spouse, or your children properly?Social Security Disability Insurance (SSDI) and SupplementalSecurity Income (SSI)What would happen if you or your spouse experienced a physical or mental dis-ability that prevented either of you from working any longer? While there is SocialSecurity Disability Insurance (SSDI) for those who have worked long enough andpaid into the system, would the payments provide for the needs of your family?The number of periods you need to have worked varies based on age,and it is notsimple to calculate this for yourself. It is much easier to obtain the facts from theSocial Security Administration.For those people who have not worked enough to quality for social security dis-ability insurance payments, there is another program called supplemental secu-rity income (SSI). The exact facts and determination as to whether you would fitinto the SSDI or SSI programs can be learned by contacting your local SocialSecurity Administration office or contacting (http://www.ssa.gov). S U C C E S S S T R A T E G I E S
  48. 48. WEALTH BUILDING STRATEGIES 49 INSURING YOUR FAMILY’S FUTUREThere is a significant waiting period (six months in most situations) before anypayments are made to you,and that waiting period is only begun after your claimis approved by the Social Security Administration.The process of getting a claimapproved can require a very significant period of time in itself. It is not uncom-mon for the claim processing to require a year, or even several years, and for theapplicant to experience being denied and having to appeal more than once.Youmay require the assistance of an attorney in order to get your social security dis-ability claim approved.In most cases, SSDI payments will not provide for a really secure financial futurefor your family. Take this into account when considering insurance policies.Youcan easily learn an estimate of the amount of SSDI or SSI payments that wouldbe available to you in the event that you become disabled as well as those avail-able when you retire by simply contacting your local social security office or vis-iting their web site (http://www.ssa.gov) and filling out a simple form requestinga printout of the information contained in your file.A word of caution: with the current government financial situation regardingsocial security, you must decide if you wish to count on payments in your retire-ment years or should you become disabled. Here again, the decision is up to youand your family.A Note Regarding Required and Optional Insurance CoveragesBefore we get into the facts about the various types of insurance available, itshould be noted that some insurance such as automobile and home owner’sinsurance may be required by the lender who provides financing for yourhome or car. Also, some states require certain insurance to legally own andoperate a vehicle. This report is not intended to provide advice about whattypes of policies to purchase. You must consult your own state’s agencies oryour lender to learn what is required rather than optional. However, we dowant to make you aware of the various types of insurance that can protect you S U C C E S S S T R A T E G I E S
  49. 49. WEALTH BUILDING STRATEGIES 50 INSURING YOUR FAMILY’S FUTUREand allow you to choose what is right for you and your own personal financialsituation.First, let’s look at types of insurance that can protect your family in the event ofuntimely death or that can provide a financial investment if untimely death doesnot occur to a covered family member. These types of coverage all fall under theumbrella of life insurance even though some of them actually build cash value.Types of Life InsuranceLife insurance is, quite simply, a type of insurance that pays benefits in the eventof untimely death.Some types also pay benefits in the event of loss of limbs,eye-sight, and other similar losses involving body parts.Life insurance can be purchased for adults and even children. In some cases, itrequires proof of insurability, which means that a physical examination provingthat no major existing health conditions likely to result in loss of life are present.Other types of policies do not require this proof. Some types of policies willinsure those who use tobacco, but they are more costly than for the nonsmokerdue to the proven increased health risks to tobacco users.Term Life InsuranceTerm life insurance is the least costly type of insurance and covers the insured fora specific period of time. It builds no cash value, so if the insured does not passaway during the term of the insurance,there is no recovery of the premiums paid.It provides a flat benefit amount to the named beneficiary should the insured die.Term life insurance may, in some cases, also pay a benefit in the event of loss oflimbs,eyesight,or other physical loss,but you must read and understand the pol-icy to learn if this applies to the policy you are considering.The commonly avail-able term periods are ten, twenty, and thirty years, but other terms may be avail-able. The premiums remain the same for the entire life of the policy. Should aninsured wish to purchase term life insurance after the term policy has expired, S U C C E S S S T R A T E G I E S
  50. 50. WEALTH BUILDING STRATEGIES 51 INSURING YOUR FAMILY’S FUTUREthe cost will certainly be greater due to the increased age and increased likelihoodof death during the term. There are some term life insurance policies that allowthem to be converted to whole life or universal life insurance policies. These willbe explained later in this section of this report.Term life insurance is the simplest form of life insurance to understand.Basically,if you purchase a term life insurance policy for twenty years with death benefitsof one hundred thousand dollars, you will pay a monthly premium each monthfor the life of the policy. Should the person insured die during the term, a flat,one-time payment will be paid to the named beneficiary equal to the amount ofcoverage, in this case one hundred thousand dollars. The beneficiary is then atliberty to use the funds as they wish, ideally to invest into investments that willhelp them replace the lost earnings of the insured. The funds can also be used topay final expenses such as funeral costs.Term life insurance can be practical for several reasons: 1. Term life insurance can be very practical for expenses that will go away in the future. For example, if your home mortgage payments last for another twenty years, covering the life of the major breadwinner for that term and at least the amount of the mortgage and other debts to help ensure that the family will be able to pay off these obligations in the event of the death of the breadwinner. During the years that chil- dren must be financially supported by their parents,this type of insur- ance can help provide the surviving parent with the means to raise the children to the age they can support themselves, and the amount of insurance should reflect the anticipated needs that only you can decide if you choose this as your major type of life insurance coverage. 2. Higher coverage amounts can be obtained with term life insurance than with whole or universal life insurance for lower premiums due to the fact that no cash value is built with this type of policy. S U C C E S S S T R A T E G I E S
  51. 51. WEALTH BUILDING STRATEGIES 52 INSURING YOUR FAMILY’S FUTURE 3.The benefits of a term life insurance policy are usually income tax free (consult your accountant or financial advisor for the most current information). 4. Depending on your term life insurance policy, conversion to whole or universal life can be an option. 5. Benefits are paid to the person or persons named as beneficiaries in the term life insurance policy. Therefore, one term life policy could name a child as a beneficiary to provide for college while another pol- icy benefits go to the spouse to cover the cost of the mortgage and loss of the income of the deceased spouse. 6. Beneficiaries can be changed easily should your situation require a change in who receives the death benefits upon your death,should the event occur during the period your life is insured by the term life pol- icy. These types of changes can be driven by marriage, divorce, wid- owhood, children growing up, additional children being born, and many other reasons. It is usually as simple as submitting the proper form to the insurance company to alter the death benefit payouts to meet your changing needs.Disadvantages to consider about term life insurance: 1.There is no cash value built by this type of policy. This type of insur- ance coverage only pays the beneficiary a flat sum based on the insurance amount no matter how long you have paid premiums on the policy. 2. Employers often provide a level of term insurance for their employ- ees—so you may be duplicating what you already have. However, should you change employers, that situation might change. 3. It can be difficult to determine the amount of term life insurance to carry to meet your family’s needs due to inflation and the general S U C C E S S S T R A T E G I E S
  52. 52. WEALTH BUILDING STRATEGIES 53 INSURING YOUR FAMILY’S FUTURE economy as well as whether or not your spouse will work or be unable to continue working should you pass away.Whole Life InsuranceWhole life insurance, unlike term life insurance, covers an insured person fortheir whole life from the point of purchase to the point of their death or, inmost cases, until age one hundred, whichever comes first, as long as the pre-mium payments are submitted on a timely basis. It is a form of permanentinsurance. There are, in actuality, several sub-types of whole life insurancethat will be discussed, but first we need to understand fully the basic conceptsof whole life insurance before going into the details of sub-varieties of wholelife insurance.One of the great differences between whole life insurance and term life insur-ance is that a whole life insurance policy actually builds cash value over time.This means that if you choose, after years of paying premiums, to access thecash value of your policy, you can surrender all the benefits or a part of thebenefits based on your cash withdrawal and get a portion of the premiums youhave paid back. You can even take out loans against the cash value of yourwhole life insurance policy.You should realize that in no case will the cash value of a whole life insurancepolicy equal the benefit amount, nor will the cash value necessarily be equal toall the premium payments which have been paid.In some cases,the cash valuewill be equal to the premiums paid plus interest earned. As the investmentsearned change, in many cases the interest rate earned on those policies thatoffer interest earnings may fluctuate while some may have a minimum guar-antee stated in the initial policy.The cash value is based on the fact that the insurance company held and invest-ed the money they received as premiums and are offering a portion of this back S U C C E S S S T R A T E G I E S
  53. 53. WEALTH BUILDING STRATEGIES 54 INSURING YOUR FAMILY’S FUTUREto the policy owner in exchange for the benefits that would be paid at the time ofdeath of the insured.This concept is explained best by Life Insurance Quote (http://www.lifeinsurancequote.com/universal_ compared_to_whole_life_web_article.htm). At thisweb site,they explain that there are four parts of whole and universal life policies(universal life will be covered later in this report). The following is quoted fromthe above named web source: ● Mortality cost - the part of the deposit that covers the pure cost of the life insurance death benefit. We recommend that this cost of insur- ance be level or the same over the insured’s lifetime. ● Administration charge - This is the charge for administering the policy and premium tax. ● Savings or investment - This is what is left from your deposit after the above two charges—the cost of insurance and the administration charge—are deducted.You will have been provided with an illustra- tion of how your savings will grow. It is frequently referred to as the cash value, fund value, or cash surrender value of your policy. ● Return on the savings - This is the interest rate that is credited to the cash value in your account each year. ● In addition, some policies guarantee that the above costs will not change and a minimum return on investments.As you can see from the above excerpt, the insurance provider must use aportion of the premium paid to cover the cost of the payouts required when acovered insured within their many whole life or universal life insurance poli- S U C C E S S S T R A T E G I E S
  54. 54. WEALTH BUILDING STRATEGIES 55 INSURING YOUR FAMILY’S FUTUREcies dies and benefits must be paid. A charge for the accounting, administra-tion, and other overhead costs of providing insurance coverage as well astaxes must be covered by the cost of premiums paid by insured policyhold-ers. The remainder of the premiums is used to cover the cash value of poli-cies, and the return on investment (ROI) allows the insurance company toadd interest to policyholder’s money when they ask for a cash value with-drawal. Of course, all the costs named above will not be revealed to policy-holders, but the general idea is that you can build up cash value and possi-bly even some interest on this type of life insurance while covering yourfamily against the impact of the loss of the insured in the event of untimelydeath.The charge noted as mortality cost is a factor that increases as the personinsured by the whole life policy ages. This is simply because of the fact thatthe older a person gets, the more likely they are to pass away. Also, the cashvalue of the policy, in many cases, can fluctuate greatly based on the stockmarket and other investments in which the funds from premiums have beeninvested.The great benefit with whole life insurance is the fact that should the insuredpass away, a benefit equal to the policy benefit amount is paid to the named sur-viving beneficiaries, just as with term life insurance. Also, when purchased at ayoung age,the cost of the insurance is relatively low and does not increase as theperson ages.You can expect to be required to prove that you are in good health by submittingto a physical by a doctor chosen by the insurance company or by releasing med-ical information from your own doctor. However, once you are approved forinsurance, you will not be canceled due to changing health conditions.Whole life insurance can be practical because: S U C C E S S S T R A T E G I E S
  55. 55. WEALTH BUILDINGSTRATEGIES 56 INSURING YOUR FAMILY’S FUTURE 1. The policy builds cash value that can be withdrawn in exchange for some or all of the death benefits, and loans can be taken out against the cash value of the policy to meet expenses without extracting funds from more lucrative investments. 2. When purchased early in life, the cost is affordable even though it always costs more than term life insurance. 3. The policy covers the insured as long as premiums are paid on time for life or until age one hundred (in most cases), whichever comes first or until the full cash value is withdrawn from the policy,thereby canceling it. 4. The whole life insurance benefits can be used in any way needed such as paying off a mortgage, providing college education, or other needs of the surviving family members. The death benefits are paid to one or more named beneficiary or even to trust funds. 5. The payments made for this type of insurance can act as a good investment for people who do not have any interest in learning about investments. 6. The amount of death benefits will not change as the insured person ages and payments do not go up as the person ages or their health changes as long as the premiums are paid on time and the insurance is kept in effect. 7. Under current laws, the benefits paid upon death of the insured are usually not subject to income tax on the part of the beneficiary. However, this should be verified with your financial advisor because legislation changes and your specific situation may vary sufficiently to impact this point. 8. You are guaranteed a cash value on your whole life insurance policy regardless of stock market changes or changes in the commonly offered interest rates on savings accounts. Should the stock market go down greatly, your cash value is guaranteed at a certain limit. S U C C E S S S T R A T E G I E S
  56. 56. WEALTH BUILDING STRATEGIES 57 INSURING YOUR FAMILY’S FUTURE 9. It is simple and easy to change the benefit beneficiaries should you wish to change who receives the payment of benefits upon your death or if you wish to alter the percentages of benefits paid to various ben- eficiaries.This can be very helpful should another child be born, or to change the benefits when a child reaches adulthood and no longer requires benefits to ensure they have funds to obtain their college edu- cation., or for any of a multitude of other reasons including marriage, divorce, or your spouse passing away. 10.Should you be in a financial position that you know you will leave your spouse in a position that,upon your death,there will be unavoid- able estate taxes which are this insurance can serve as a means of ensuring your spouse can pay these expenses or pay capital gains tax if the spouse chooses to sell the large family home and move without making a qualified purchase of a new home within the required peri- od of time. These points, however, require that you seek advice from your financial counsel or tax accountant.Disadvantages to consider about whole life insurance: 1. While the premiums paid into the insurance company for whole life insurance are invested, you do not have any input as to what type of investments or where the funds are invested. The decisions are made by the insurance company alone. 2. It can be difficult or impossible to purchase additional whole life insurance later in life or if your health deteriorates. 3. Certain causes of death may not be covered by the whole life insurance policy in certain situations, and you must be certain that you fully understand the terms of the policy you are purchasing. 4. While there is a cash value built on whole life insurance policies, the return on the investments may be much lower than if the same amount S U C C E S S S T R A T E G I E S
  57. 57. WEALTH BUILDING STRATEGIES 58 INSURING YOUR FAMILY’S FUTURE of money were invested into other investment vehicles or funds. If the stock market soars or interest rates on other investment vehicles soar, your whole life insurance policy may continue to build cash value at a limited maximum rate stated when purchasing the policy. 5. If you decide, some time a few years or many years after purchasing your whole life insurance policy, that you want a different level or amount of coverage,the new insurance policy purchase is treated as if you do not already carry any insurance with that insurance provider or any other insurance provider. Physical proof of insurability will be required and premiums will be more costly because of the purchase as a later age. There are no provisions to convert the insurance to another type of insurance. However, some insurance providers may offer some options so you must research your specific insurance com- pany to learn exactly what your options might be should you wish to increase or change your coverage. 6. This type of insurance may be offered through your employer or your spouses’employer.However,you may or may not be able to convert the employer-provided policy to continue coverage should you voluntari- ly change employers or when you retire.Whole life insurance is great as a means of insuring that your spouse is able toraise your children and provide for their education should your death occurduring the child rearing years. It can also provide a legacy for your childrenand grandchildren should you live a lengthy life and your spouse proceed youin death.Universal Life InsuranceUniversal life insurance is one of the newer types of insurance and,like whole lifeinsurance, is a permanent form of insurance in that it covers the named insuredas long as the policy is carried in force and the premiums are paid on a timelybasis. It also builds cash value. However, unlike whole life insurance, the benefit S U C C E S S S T R A T E G I E S
  58. 58. WEALTH BUILDING STRATEGIES 59 INSURING YOUR FAMILY’S FUTUREamount can be adjusted, allowing you much more control over the amount ofpremium you must pay each month.In addition, universal life insurance allows you to determine the portion of eachpayment that will be used for death benefits and how much of each payment willbe used for your plan’s investments. Universal life frequently returns significant-ly higher investment yields, increasing the cash value sometimes so much thatthe increases will even pay the premiums.This type of life insurance has a predetermined, set minimum rate of return oninvestment that is stated in the insurance policy. Each year, you will be providedwith an annual report showing the current cash value of your insurance policyand other pertinent information about the insurance policy, much like a state-ment from any other type of investment.Universal life insurance is a much more flexible type of insurance than whole life.As the insured ages and their financial needs change, perhaps due to childrenreaching maturity or mortgages being paid in full, the insurance policy can beadjusted to pay a lower death benefit, lowering the monthly premium significant-ly without the problem of proving insurability.This type of insurance allows the insured to select one or more beneficiaries toreceive the death benefits, and the beneficiaries can be changed at any time easi-ly by completing and submitting a form.Universal life insurance can be practical because: 1. You can adjust the benefits paid to the beneficiaries as insurance cov- erage needs change. 2. If necessary, you can borrow money against the cash value, and the loan funds are usually nontaxable. S U C C E S S S T R A T E G I E S
  59. 59. WEALTH BUILDING STRATEGIES 60 INSURING YOUR FAMILY’S FUTURE 3. Because you can change the amount of coverage, you can also control the amount of the monthly premiums to a greater extent than with other types of insurance. 4. The death benefits paid to the beneficiaries upon the passing of the named insured may not be subject to income tax in many situations. Of course, you must seek the advice of your accountant or tax advisor to determine if this applies to your situation. 5. Your premiums invested in this type of insurance will return at least a minimum stated rate per the insurance policy and,if the funds earn more,the return can be significantly greater than the stated minimum return.Disadvantages to consider about universal life insurance: 1. The return on the money invested in this type of insurance could be only the minimum defined in the policy if the insurance carrier does not invest wisely.You do not control how or where the money will be invested, only the amount that will be invested. 2. Your monthly premiums can change over time based on the returns on invested premiums making it uncertain exactly how much you may have to pay to keep the same amount of insurance coverage in future years. 3. Some universal life insurance policies guarantee a specific rate of return only for a defined period, and you must know and understand how long the return rates are guaranteed and how they will change once the guarantee period has expired. 4. Not all universal life insurance investment return rates are calculat- ed the same way, and you must understand how your policy’s returns are calculated and how this may impact the value of your policy. S U C C E S S S T R A T E G I E S
  60. 60. WEALTH BUILDING STRATEGIES 61 INSURING YOUR FAMILY’S FUTUREVariable Life InsuranceVariable life insurance, like whole life insurance, is a permanent type of insur-ance protection.However,the amount of benefits paid should the named insuredpass away varies with variable life insurance based on the return on the invest-ments the insurance company has made with your premium payments.While itis a bit more risky than term life insurance, whole life insurance, or universal lifeinsurance,it does offer a reasonably low-risk means of accumulating money thatmay be income tax free, depending on your situation, should you choose toremove cash from the cash value of the policy or when death benefits are paid toa named beneficiary.Unlike the previously discussed types of life insurance, variable life insuranceallows you to determine into which investment funds your premium paymentswill be invested. These choices usually include fixed income investments,stocks,bonds,money market funds,or similar secure investments. You can change yourchoices of where your premium funds are invested at time periods and frequen-cy determined by the specific terms of your insurance policy. Some allow you tochange investment funds only twice each year while other policies may allow youto change investment funds as many as six times per year.Because you have control over the investments made with this type of lifeinsurance, many people feel much more empowered when purchasing this lifeinsurance. However, because there is no guaranteed return on your investment,the choices you make on the investments could result in the return going up ordown, causing the cash value of the insurance to vary up or down. Due to thefact that you, the insured, determine where the money paid to the insurancecompany is invested, this form of life insurance is legally considered a securityand laws controlling securities apply to the insurance. For example, by law aprospectus must be provided by the insurance company offering the insuranceto any potential buyer. S U C C E S S S T R A T E G I E S