4. STOCK MARKET
STRATEGIES
TABLE OF
CONTENTS
S U C C E S S S T R A T E G I E S
5. WEALTH BUILDING
STRATEGIES 6
TABLE OF CONTENTS
Introduction 7
SECTION ONE: Financial Goals and General Principles of Wealth 9
Financial Goals 11
General Principles of Wealth 22
SECTION TWO: Personal Finance Basics 33
Savings Accounts 35
The Power of Compounding Interest 42
Insuring Your Family’s Future 46
SECTION THREE: Investing to Increase Personal Wealth 103
The Stock Market 106
Building an Investment Portfolio 124
Taxes 145
Protecting Your Wealth 157
Glossary of Personal Finance Terms 173
Worksheet for Financial Goal Setting 203
Budget Worksheet 204
Daily Expense Tracking Worksheet 205
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7. WEALTH BUILDING
STRATEGIES 8
INTRODUCTION
very great athlete, musician, professor, or mentor must master the basic
E techniques of their chosen art or passion before branching out into more
advanced techniques and methods. The exact same philosophy is true
when dealing with personal financial matters. It is important to learn how to
build personal wealth through various methods including smart choices
involving saving, real estate investments, stock market investments, and other
investment vehicles for building personal wealth, but first, you must master the
basic 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 and
venture into some of the sound vehicles you can use to build personal financial
wealth so that you can lay a sound foundation for your family’s and your
wealthy future. Everyone, no matter how much your income or how small your
income, 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 the
amount of money you make, enabling you to build personal financial security
and personal wealth. There are no magic tricks, just sound financial concepts to
help ensure your future ability to live the lifestyle you desire for yourself and
your family and to even leave a legacy for your children and their descendants
after your passing.
By reading this report, you will learn how to establish financial goals and how to
achieve them.The most common and most successful financial investment vehi-
cles for building wealth are explained so that you can fully understand how to use
these 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 situation
changes to help you reach your financial dreams.
After reading this report in full, it will be time for you to implement the concepts
that will put you on the road to building true personal wealth. Follow that road,
and your assets and wealth will continue to grow.
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9. WEALTH BUILDING
STRATEGIES 10
SECTION ONE: FINANCIAL GOALS AND GENERAL PRINCIPLES OF WEALTH
Introduction to Financial Goals and General Wealth Principles
In this section of this report, you’ll find information about financial goals and
how 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 a
set of worksheets to help you establish a family budget, personal financial goals,
and help you establish your goals and build your personal wealth.
11. WEALTH BUILDING
STRATEGIES 12
FINANCIAL GOALS
any people today live from pay-check to pay-check.When asked, they
M 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 them
to invest any money into stocks.Another common response is that they believe
they are too old to start saving or investing now and because that isn’t enough
time 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 turn
their 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 financial
security. It is also a fact that no one is too young or too old to begin saving and
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FINANCIAL GOALS
managing 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 a
millionaire, you certainly should have financial goals that set your sights on
becoming financially secure and preparing for your financial future and the
future of your family.
Everyone, no matter how large or small their income, makes enough money to
invest in their future wealth.Too many people feel this isn’t true because they tend
to spend money whenever and wherever they see something they desire at that
particular 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 tell
themselves 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 realize
that even small savings, when managed correctly, can ultimately grow into real
wealth.Today is the day to begin creating a better financial future for yourself and
your family.
Financial goals are very much like road maps that show you the pathway from
where you are today to where you wish to be in the future.Like a road map,if you
get off the best course, you must get back on the pathway defined and continue
your journey toward your goals. No one is perfect, and if you should happen to
venture 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 working
toward reaching your dreams. Learn from your mistakes, and promise yourself
not 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 very
large goal. Perhaps you have a goal of having one million dollars in savings when
you retire. That number seems awfully large and intimidating when you look at
it alone. If you thought of it as only a single, big goal, it might make it difficult for
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FINANCIAL GOALS
you to begin saving because you feel intimidated. Instead, you should be taking
small, manageable steps to achieve large, specific goals. You must realize that
everyone who has retired before you with one million dollars in savings began by
placing that first dollar into savings,keeping it there over the long term,adding to
it on a regular basis, and building their wealth over time.
Financial goals can be viewed in many different ways. You can set short-term
goals, which can be achieved in weeks or a few months.You can set longer range
goals, which cover a year or more. You can set very long-term goals that cover
years such as preparing for retirement or even beyond retirement toward leaving
a 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,
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FINANCIAL GOALS
if you set goals, track your progress toward achievements, and adjust your goals
periodically to meet your changing situation, you will obtain the wealth you
desire. The advantage of setting goals is that you will have a plan to work toward
rather than working in the dark, hoping things work out for you. Failing to plan
is said to be the same as planning to fail. This applies to personal finances as
much as to any other type of projects that you might become involved in; perhaps
it is even truer when applied to money.
In order to generate personal financial wealth, you have to become passionate
about setting and achieving financial goals. If you must, think of your personal
financial goals as hard milestones so that you will strive to achieve them. If you
maintain a mindset that nothing whatsoever has the ability to stop you from
achieving your goals, you will find yourself progressing steadily toward financial
wealth. 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 be
in the future.You must look at where you are today and where you want to be in
the future based on the money you have to work with. What do you want your
financial 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 sort
of 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 should
already have a budget in place,but a surprising number of people do not use this
essential tool.If you do not have a budget, now is the time to create one by sitting
down with your family and determining how to use the money that comes into
your hands.If, on the other hand,you already have a budget in place but you find
that 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 goals
as well as meet your current needs by adjusting how the money is spent.
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FINANCIAL GOALS
Financial 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 your
financial future to become, and set goals accordingly. Although you can seek
advice from a professional financial counselor regarding how to meet your goals
once you know what your financial desires include, this is something that no one
else can do for you and your family. You may also find the advice of a financial
advisor essential in figuring out how to reduce your debt burden if you have been
overusing credit cards or other debts and are now paying high rates of interest
that could better be used elsewhere.
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FINANCIAL GOALS
If you have children, your goal may be to have enough money to provide them a
quality education while still having enough money to retire comfortably. Another
person might have a goal of retiring early and enjoying life without having to
work every day. Still another person will have another answer to the questions of
where they want to be financially at certain periods in their lives. The one thing
each of these people has in common and every person who wants to have sound
personal finances is the need to set aside money for the future and allow that
money to grow, untouched, until their goals have been reached.
How to Set Goals
When 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 to
look at your goals more or less in reverse order. First, you need to determine
where you want to be financially during your later years of life such as when
you reach retirement and are no longer earning money from your career or
business. 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 goals
allow 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 that
goal means you cannot pay the mortgage payment on your home today. After
all, your home is an investment and one of the biggest savings accounts most
people ever own.
You should obtain and utilize a dedicated notebook or perhaps a computer
software 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. Let's look at an example of a person who wishes to retire in
thirty years with one million dollars in assets available during retirement.That
goal 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 apply
self discipline.
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FINANCIAL GOALS
Next, look at your family’s debt load. Paying off debt as quickly as possible can
allow 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 achieving
your personal financial goals.Establish a goal for paying off all credit card debt
and any other short-term debt as quickly as your income permits. Determine
that the money you have been using to pay these debts will, once the debts are
paid 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 it
each month!
Set your own ultimate personal financial goal for yourself and your family,and
write that goal down. Reflect on the goal, and keep it always in mind. Remind
yourself daily of your goal, and remind your family members of the goal and
the benefits they will enjoy by working toward that financial goal. Know that
you 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 truly
can if you only work methodically toward them.
Next, you must look at your spending patterns as well as the spending patterns
of your family. Where does your spendable money go? For a period of one
week, keep a spending journal and ask every member of the family to do the
same thing. Write down every single thing you spend money on during each
day. This list isn’t for including the expenses you have to pay for the household
such as electricity, mortgage, and water. It should be used for tracking your
personal, unplanned spending decisions. While your children may only have
an allowance to account for, you want to note any extra money provided to
them from your pocket. You also want to ask your spouse to keep the same
type of spending journal in order to get a complete picture of how your fami-
ly spends money to make this exercise most effective.
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FINANCIAL GOALS
At the end of the week, sit down and study your expenditure journal. You
will almost certainly see many things that are impulse purchases, money
spent for things you didn’t really need and perhaps didn’t really want, or
money spent for things you could have obtained in different ways at much
lower cost.
Sit down and look at your list carefully. If you purchase coffee on the way to
work 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 day
into your savings! That’s a lot of money to accumulate from simply making
your own coffee at home instead of buying boutique coffee.
Look at other expenses that are unnecessary or that can be provided for more
economically. Do you eat lunch in a restaurant every day? If you do this, could
you cut back to eating lunch out to only two times each week and still be just
as 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 a
reasonable tip, costs at least ten dollars. If you choose to cut back from five
lunches out to one lunch out per week and you consistently place the money
you have saved as a result into investments or savings, over the course of ten
years you will have just gained over thirty thousand dollars in your savings
based 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 ten
years 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 into
savings instead of spending it on things that do not provide for the financial
security of you and your family. You’ll be truly amazed when you realize the
amount and the places where your expendable cash is spent needlessly.
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FINANCIAL GOALS
When setting your personal financial goals, you want to plan your expenditures
and budget so that you do not feel deprived, but simply focus on cutting out the
excess expenses that really do not mean much to you and your family.If you take
a family of four out to a nice restaurant to eat dinner every weekend, would you
and the rest of the family members be just as happy and fulfilled if your family
only ate out at this type of nice restaurant once per month and saved the money
from the other weekend outings? Perhaps you would be happy if you chose less
expensive 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 while
still 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 be
amazed at how much you can save by cutting out only a few things that have
become habit and really do not add any real value to your life and the lives of
your 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 term
such 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 to
your situation.
When looking at the financial goals you are setting, do not think small. Instead
think big—really big! Do you wish to retire in comfort and leave a legacy to your
children for their future? There is no reason that you can’t aim high with your
financial 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 is
more meaningful to provide a challenge for yourself and your family.
Now that you have set some financial goals, keep in mind that you can change
them or adjust them at any time to better suit your changing needs as well as the
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FINANCIAL GOALS
changing economy. As your family grows or family members reach maturity,
your goals will certainly need to be reviewed and adjusted to reflect the changing
situation of your family life.If your or your spouses career situation changes, you
should again readjust your family’s financial goals to reflect those changes.
During periods of unemployment or short-term disability, you may have to
change your financial road map for a period of time in order to adjust for the
changes in family income. Whatever you do, dedicate yourself to changing the
goals upward whenever possible rather than changing your goals downward,
unless you must make a short-term change to reflect income changes due to
short periods of lowered income.Do not allow yourself or your family to become
victims of falling into the pattern of spending part of your savings or liquidating
part of your investments with the intention of putting it back later.It can be quite
difficult 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 reach
your goal of personal financial success.
At the back of this report, you’ll find worksheets to help you set a budget, track
daily expenses, and set goals. Use these as you build your own notebook of goals
and follow your goals to reach your dreams.
22. WEALTH BUILDING
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GENERAL PRINCIPLES OF WEALTH
any people before you have accomplished personal financial goals that
M allowed them to enjoy true personal wealth.All of these successful peo-
ple followed some general personal financial principles that helped
them accumulate money and build wealth instead of spending money frivolous-
ly.The following are some general wealth principles to help you plan your road to
personal wealth.
General Principle #1: Pay Yourself First
The vast majority of people who have achieved their financial goals say they have
accomplished the task by paying themselves first each payday. By having
reviewed spending practices and identifying ways to cut back on nonessential
expenses,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 the
amount, goes directly into a vehicle for savings.
In fact, the easiest way to save money toward your goals is to have direct payroll
deductions so that you never see the money. Many employers offer savings plans
that allow you to define an amount of money to be removed from your paycheck
and placed into a savings plan or a choice of savings plans. The plans may vary
greatly from employer to employer, but the common thread is the money that
never reaches your hands is seldom missed.
If you do not use this type of savings plan, you must practice self-discipline by
placing a defined amount of money into an account where it will be held and
not spent. It is far too easy to spend money that is simply placed into your
checking account. A passbook savings account is a good place to hold the
money until you are ready to invest it into investment vehicles that pay a much
higher return rate. Whatever you do, don’t put that money that you’ve defined
as savings into your pocket! It is too easy to spend without thinking about it if
you hold the funds in cash.
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GENERAL PRINCIPLES OF WEALTH
General Principle #2: Pay Off Credit Card Debt
First of all, the very best way to get rid of debt—credit card or otherwise—is to
avoid accumulating debt in the first place. However, there are certain debts that
must be incurred and we’ll discuss them later.
It can be so easy to pull out a plastic credit card and purchase something you see
that you don’t really need and perhaps don’t even want.With credit card interest
rates as high as 21 percent annual percentage rate (APR), your purchase can end
up costing you a great deal more than the amount on the price tag of that item. It
can take years to pay off credit card debt if you pay only the minimum monthly
payment each month. The interest continues to grow and costs you more and
more over time.
Strive to pay off all credit card debt,beginning with the credit card that charges the
highest rate of interest. Consider transferring the balance from high interest credit
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cards to credit cards that charge a lower rate of interest, making it easier to pay off
the 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 to
help you create a credit card payoff plan. Using an example, if you have $2,000
in 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 different
amounts,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 low
interest rate credit card and use it only in emergencies.As the other accounts are
paid 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 you
can 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 teaser
incentive 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 also
charge an additional sum that incurs interest, often high interest rates, and you
become tempted to charge more and more. Read these types of offers carefully
and understand them before you consider using these teaser offers or even before
accepting the new, usually unsolicited, credit card.
Also, be aware of and cautious about “teaser” rates offered by some major credit
cards. It is not unusual to receive an unsolicited offer from a charge card compa-
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ny that offers an amazing low interest rate. The questions you need to answer in
your 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 is
something you must determine individually. No hard and fast rule is true for
everyone. The rule you must follow is that knowledge is power, so learn all about
the offer before making any decision whatsoever.
Avoid adding to your credit card debt unless it is an absolute emergency. Never
make purchases for food,clothing,or incidentals with your credit card unless you
know you can pay off the entire balance as soon as the bill arrives and are only
using the credit card as a means of compiling budgeted expenses on a charge card
so 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 in
full each month.You may even find some credit cards that offer a zero interest rate
on balances carried forward for a short period of time and no yearly fee for the
credit card. Avoid maintaining any credit cards that carry a high interest rate or
that 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 really
good 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 keep
the card after using the special incentive benefit. If you find that you can obtain
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free 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 than
the price you had budgeted. Just be sure to use prudence and read all the fine
print before making the purchase!
General Wealth Principle #3: Invest Money in Growth
Opportunities
Initially, you may want to save money in regular savings accounts. However, to
make your money grow, you need to invest in the opportunities that offer the
largest 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 look
more closely at the investment growth opportunities in a later section of this
report.
General Wealth Principle #4: Small Amounts Add Up to Big
Amounts
Perhaps you think you don’t have enough income to save sufficient funds to tie up
any of your money in lucrative investments.This is completely untrue.Even if you
have only a small amount of investment money with which to begin, you can
make a start and keep adding to that initial investment. You will be amazed at
how your personal financial situation will change as you continue investing in
your future on a regular basis. Even a few dollars each week can be grown into a
large retirement fund if you are consistent in saving.
General Wealth Principle #5: Start Immediately
Don’t put off until tomorrow what you should be saving today. Even if you only
have a few dollars, that can be the start of a lucrative investment. Give up one
small but unnecessary item each day or each week,and place that money aside as
savings. It will grow and before you know it, you’ll have the funds needed to get
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involved 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,or
next year will only ensure that you will have less personal wealth later than if you
started right now.
General Wealth Principle #6: Don’t Allow a Set Back to Get You
Off Track
On your path to building personal wealth, you are certain to encounter some set
backs along the way. Perhaps a storm damages the roof on your home and you
need 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 is
another way to take care of the problem without touching your principal savings.
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Look 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 Techniques
Some people feel saving is very difficult.If you feel you will have problems saving
any significant sum, try some creative savings techniques. One woman who had
trouble saving vowed never to spend a one-dollar bill.Instead,she placed them in
a drawer until the stack reach one hundred dollars and then added them to her
savings account. When the account reached one thousand dollars, which only
required a few months to accomplish, she moved the funds into a more lucrative
investment 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 you
feel more comfortable about your ability to gain true personal financial wealth.
General Wealth Principle #8: The Power of Compounding
When 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 next
interest payment is made. This is the magic of compounding interest. Money
placed in interest-bearing accounts or investments will grow because of this
compounding.
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 but
over $37,000.That’s $18,000 more than if the money had simply been placed in a
box or noninterest-bearing account.Increase your yearly additions to the account
to 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 would
allow the savings to grow even higher in the same period.
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General Wealth Principle #9: Give Something Back—The Power
of Tithing
People 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 to
those who give something back.A good policy for giving is 10 percent,that being
the traditional tithe you may have been taught as a child. Give back not only of
your money but also of your time to those less fortunate than yourself.Teach your
children to do the same.
General Wealth Principle #10: Adjust Your Goals Upwards
As 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 adjusted
upwards. Perhaps you have enjoyed getting a raise. Could you better place that
money in savings rather than expanding your lifestyle? Are there more ways you
can stop “keeping up with the Joneses”and remain happy as a family? Adjust your
goals upward, but never adjust them downward. Expect more, and you’ll receive
more!
General Wealth Principle #11: Choose the Debts Your Incur
Wisely
There 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 real
estate values are not declining.Some areas are experiencing declines in real estate
value whether due to the economy or the neighborhood itself. Choose wisely
where you select your residence on which to take out a mortgage loan because it
takes years to pay off the mortgage.
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30. WEALTH BUILDING
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GENERAL PRINCIPLES OF WEALTH
The reason this is a smart debt is that you will be making payments of a set amount
that build equity in your home rather than spending money on rent.Also, you will
be making payments on your mortgage in the future when the value of the dollars
used 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. Major
home 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 consider
taking on debt for any reason whatsoever.
Sometimes emergencies must be dealt with by incurring debt. If a part of your
home is seriously damaged or deteriorates badly and the insurance you carry does
not cover that specific type of situation,you simply can’t allow the investment you
hold in your property to decrease by allowing the property to deteriorate.
If you must obtain reliable transportation in order to commute to and from your
job and your car has become so old that maintenance and repairs are extremely
costly, taking out a car loan might be a wise debt for your situation. Lifesaving
medical 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. Low
interest student loans for education can be wiser than removing money from
high interest investments when your children need college funds.
A rule of thumb to consider in these situations is: if incurring debt at low interest
allows you to keep investments that are paying a much higher rate of return than
that which will be a direct result of the debt you are incurring,then the debt should
be thoroughly investigated and considered as a possible sound solution. On the
other 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
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31. WEALTH BUILDING
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GENERAL PRINCIPLES OF WEALTH
to consider incurring the debt is crucial or extremely important to you and your
family 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 some
funds 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 and
solutions should also be discussed and determined with the assistance of your
financial advisor or unbiased financial counselor.
The general rule of thumb is to acquire as little debt as possible and, when you
do acquire debt, choose the debts you incur wisely. Do not incur debt for
impulse purchases or nondurable goods unless you can pay for the charges in
full within thirty days.
Some people like to charge their daily and monthly necessities simply because it
is easier to write a single check to pay off the total credit card balance each month
or because it provides a good means of tracking expenses for business needs.
This can build your credit rating and doesn't have to cause you to pay large
amounts of interest if you pay the balance in full each month. In fact, if you have
selected a credit card carefully, you should not have to pay any interest or fees at
all as long as you pay off the balance in full each month and pay it on or before
the date the payment is due.This can be a smart move since it allows you to avoid
carrying cash for purchases and makes keeping expense accounts and other
financial records much easier. The key here is to avoid overspending by sticking
to your budget even when charging to a credit card.
33. WEALTH BUILDING
STRATEGIES 34
PERSONAL FINANCE BASICS
Introduction to Personal Finance Basics
Now that you have established some personal financial goals, you need to look at
the basics of personal finance. Understanding savings, compounding interest,
insurance, and other financial basics is crucial to ensuring you protect yourself
and 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 you
and 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 and
potential benefits of each different type will be addressed in this section. These
types of savings accounts should be discussed with your financial advisor before
deciding which types are best for you and your particular financial situation, but
you still want to have a basic understand of what each type of savings method
offers 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 really
makes a huge difference in your savings and investment balances so you will
want to understand how interest compounds to help your money grow.
Insurance – Here you will learn about the many types of insurance that can help
make 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, as
well as benefits and details of each of these types of insurance.
35. WEALTH BUILDING
STRATEGIES 36
SAVING ACCOUNTS
nce upon a time, the only type of savings account commonly offered was
O 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 the
account.
Today, there are many different types of savings account that are offered that can
help 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 Savings
Instant access savings accounts, also commonly called regular savings accounts,
are accounts that allow you to have ready access to the funds in the account. This
type of savings account pays the lowest amount of interest but does allow you to
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SAVING ACCOUNTS
get to your money should you need to at any time. These accounts can even be
part of your ATM card, allowing withdrawals 24 hours each day, 365 days per
year. The minimum required to open this type of savings account is usually very
low, 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 account
holder. Some of these accounts have daily interest compounding while others
compound monthly or even yearly.
Use this type of savings account only for an emergency fund or as a holding place
to save up enough money to move into a better type of savings or investment.You
should avoid placing the bulk of your savings into this type of account for two
major 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 expenditure
However, this type of account is great to have on hand for holding the equivalent
of one-month’s salary as an emergency fund. Once you build your balance to
higher levels, move the excess money into a better form of savings that pays a
higher interest rate.
These accounts, when opened with a banking institution, are insured by the
Federal 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 that
resulted from the 1920s’ stock market crash, the United States government
insures your money will be paid to you.
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37. WEALTH BUILDING
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SAVING ACCOUNTS
Many banking institutions offer an automatic transfer from your checking
account 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 the
transfer, 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 on
the pre-set date.
Money Market Savings Accounts
Money 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 this
type of savings,the banking institution invests the money placed in their trust in
secure investments, allowing them to pay a higher return to you. Usually, money
market accounts require a minimum initial deposit to open that is much higher
than an instant access savings account,often one thousand dollars.Interest earn-
ings may be higher for larger balances. Often, banks offer the money market
account holder the right to write a limited amount of checks on this type of
account each month without penalty, but this varies greatly from institution to
institution. You must be sure to fully understand the policies of any bank with
which you are considering opening this type of account.
Money market savings can be a good next step up from regular savings once you
have built a balance greater than the minimum required for the minimum to
open a money market account.These accounts are also insured by the FDIC when
the funds are held by a bank.
Investment firms also offer money market accounts which are not insured by the
FDIC and therefore may have some risk.Those will be discussed later in this report.
Short-Term Certificates of Deposit
Certificates of deposit (CDs) are a type of savings where you deposit a sum of
money with a bank for a specified period of time at a set interest rate.Short-term
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SAVING ACCOUNTS
CDs 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, the
payoff 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 without
penalty.You can also arrange for automatic rollover, which means that if you do
not 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 be
invested in another CD of the same type.
Certificate of deposit accounts usually require a larger initial deposit amount than
other saving vehicles, but you may find that your local banking institution offers
short-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 savings
that 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 for
early withdrawal will result in earning even less return on your investment than
if you had held the money in your money market account. A good strategy for
using 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 Deposit
Long-term certificates of deposit are those that require your money to remain in
the 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 as
defined by the account terms. The rate of interest is higher than for short-term
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39. WEALTH BUILDING
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SAVING ACCOUNTS
CDs and with larger CDs the interest rate can be quite good. The interest rate on
this type of investment vehicle will not adjust should the average rate of interest
being paid on other accounts increase—but it also will not decrease should the
average rate of interest go down either.
These CDs offer secure savings when purchased through a banking institution
because they are FDIC insured. You know exactly how much the CD will grow
over 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 be
certain that the money will not be required during the entire life of the CD,which
can be as long as twenty years, or you will have to pay a high penalty, negating
the 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 Deposit
A 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. The
interest 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 is
actually a short-term CD that automatically rolls over without your having to do
anything. These CDs, like all bank-issued CDs are FDIC insured.
Laddering Certificates of Deposit
One 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 various
amounts with varying maturity dates. This strategy allows you access to money
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40. WEALTH BUILDING
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SAVING ACCOUNTS
within a short period of time without penalty since one of your CDs purchased
will mature soon.
Most people who elect to use CD laddering invest in several smaller, short-term
CDs that mature at monthly or quarterly periods, and investment in several
longer term CDs that mature at varying periods such as every three to six
months.
If you choose to invest a part of your personal savings in CDs,this strategy makes
it both practical and a way to take advantage of increasing interest rates. When
each 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 will
be offered to you for renewal.
42. WEALTH BUILDING
STRATEGIES 43
THE POWER OF COMPOUNDING INTEREST
oney placed in an account with compounding interest will grow
M because you get to earn interest on the money previously paid to you
interest. This concept of compounding impacts so many investment
issues that it is important to understand as a basic of personal finance. It may
sound quite complicated, but it truly isn’t that difficult to understand when it is
broken down and explained.
Simple Interest: The Opposite of Compound Interest
First, let’s look at the opposite of compound interest. Simple interest is very
straightforward and easy to understand. If you have $100 principal and some
institution were to offer you an interest-bearing account that pays simple interest
of 5 percent one time per year, you would, at the end of that year, have $105. The
formula 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 case
of our example. Then multiple by the number of times each year the interest is
paid,in our example this would be one because the example interest is paid once
per year to make the example simple to understand.
Now, clearly there is money being earned on the money held as a savings in this
simple interest example, but once you learn about compounding, you’ll quickly
see why this is not the best type of interest and you’ll want to earn compound
interest on all your investments.
Compound Interest
When you place a deposit into an interest-bearing account of any kind that offers
compound interest, the money you placed in the financial institution’s trust will
earn 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 it
begins to earn interest. Therefore, your money is earning money on the money
that has been earned in interest already!
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43. WEALTH BUILDING
STRATEGIES 44
THE POWER OF COMPOUNDING INTEREST
What can you expect of a compound interest account? There are accounts avail-
able that provide interest compounding on a yearly,quarterly,monthly,weekly,or
daily 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 the
current interest rates paid to account holders at your banking institution or
investment firm.To get the best possible earnings,locate the highest interest rates
for 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 choose
to 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 lets
you remove money at any time without notice.
To learn the current compound interest rates offered by the banking institution
you are considering, check their web sites or telephone them and inquire. Rates
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44. WEALTH BUILDING
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THE POWER OF COMPOUNDING INTEREST
can 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 not
choosing a fixed-rate vehicle such as a long-term, fixed-rate certificate of deposit.
A Closer Look at Compounding and How It Works
Let’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 have
earned $105.16. That’s $5.16 more than the $1,100 you would earn if the interest
compounded yearly.While this example is for a small amount to make it easy to
understand,you can easily see how if the interest is being compounded on a sum
of, let’s say, $100,000 each day, compound interest will really make your money
work 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 interest
savings 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 of
compound interest. The formula for calculating APY is a bit tricky. But there are
many handy online calculators for checking APY such as the one at Bank of
Internet (http://www.bankofinternet.com/interest-calculator.aspx). You simply
need to understand that if you place funds into an account that pays 6 percent
interest but that interest is compounded daily, your APY will be 6.183 percent. In
other words, you will earn more than you expected due to compounding interest
making your annual percentage yield higher. This is part of the magic of com-
pounding interest rates.
45. INSURING
YOUR
FAMILY’S
FUTURE
S U C C E S S S T R A T E G I E S
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 be
I 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 a
small amount, perhaps a few hundred dollars, insurance for that loss can cost
more than the loss itself. However, large losses, natural disasters, loss of life or
productivity, and events that can truly impact the financial future of you or your
family are things you need to consider insuring against.No one wants to be forced
to 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 a
major 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 can
occur before it is expected through accident or illness. This makes insurance a
basic of personal financial security and wealth. Your personal financial goal is
not 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. Car
accidents and accidents in the home kill millions each year. Death due to crimes
occur 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 of
your 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? Would
the 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
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47. WEALTH BUILDING
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INSURING YOUR FAMILY’S FUTURE
a struggle to get enough food and clothing to survive? Would the children have no
means of attending college and beginning their adult lives with proper educa-
tion? Would the cost of basic health care cause your surviving family members to
sacrifice basic needs such as food or clothing?
But insurance isn’t only for death. There are medical and health care insurance
policies to protect you from expenses in these areas. There are home insurance
policies to cover your home, and there is auto insurance to cover your liability and
losses should you be involved in an auto accident.
Think about what you would do if your child experienced a catastrophic illness
and only expensive medical care, possibly costing hundreds of thousands of dol-
lars could potentially save him or her. Also, think about what would happen if
this type of illness happened to you or your spouse.Would you be able to afford
to care for you, your spouse, or your children properly?
Social Security Disability Insurance (SSDI) and Supplemental
Security 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 Social
Security Disability Insurance (SSDI) for those who have worked long enough and
paid 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 not
simple to calculate this for yourself. It is much easier to obtain the facts from the
Social 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 fit
into the SSDI or SSI programs can be learned by contacting your local Social
Security Administration office or contacting (http://www.ssa.gov).
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INSURING YOUR FAMILY’S FUTURE
There is a significant waiting period (six months in most situations) before any
payments are made to you,and that waiting period is only begun after your claim
is approved by the Social Security Administration.The process of getting a claim
approved 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 the
applicant to experience being denied and having to appeal more than once.You
may 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 future
for your family. Take this into account when considering insurance policies.You
can easily learn an estimate of the amount of SSDI or SSI payments that would
be 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 requesting
a printout of the information contained in your file.
A word of caution: with the current government financial situation regarding
social 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 you
and your family.
A Note Regarding Required and Optional Insurance Coverages
Before we get into the facts about the various types of insurance available, it
should be noted that some insurance such as automobile and home owner’s
insurance may be required by the lender who provides financing for your
home or car. Also, some states require certain insurance to legally own and
operate a vehicle. This report is not intended to provide advice about what
types of policies to purchase. You must consult your own state’s agencies or
your lender to learn what is required rather than optional. However, we do
want to make you aware of the various types of insurance that can protect you
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49. WEALTH BUILDING
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INSURING YOUR FAMILY’S FUTURE
and allow you to choose what is right for you and your own personal financial
situation.
First, let’s look at types of insurance that can protect your family in the event of
untimely death or that can provide a financial investment if untimely death does
not occur to a covered family member. These types of coverage all fall under the
umbrella of life insurance even though some of them actually build cash value.
Types of Life Insurance
Life insurance is, quite simply, a type of insurance that pays benefits in the event
of 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, it
requires proof of insurability, which means that a physical examination proving
that 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 will
insure those who use tobacco, but they are more costly than for the nonsmoker
due to the proven increased health risks to tobacco users.
Term Life Insurance
Term life insurance is the least costly type of insurance and covers the insured for
a specific period of time. It builds no cash value, so if the insured does not pass
away 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 of
limbs,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 an
insured wish to purchase term life insurance after the term policy has expired,
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50. WEALTH BUILDING
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INSURING YOUR FAMILY’S FUTURE
the cost will certainly be greater due to the increased age and increased likelihood
of death during the term. There are some term life insurance policies that allow
them to be converted to whole life or universal life insurance policies. These will
be 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 benefits
of one hundred thousand dollars, you will pay a monthly premium each month
for 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 of
coverage, in this case one hundred thousand dollars. The beneficiary is then at
liberty to use the funds as they wish, ideally to invest into investments that will
help them replace the lost earnings of the insured. The funds can also be used to
pay 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.
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51. WEALTH BUILDING
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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
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economy as well as whether or not your spouse will work or be unable
to continue working should you pass away.
Whole Life Insurance
Whole life insurance, unlike term life insurance, covers an insured person for
their whole life from the point of purchase to the point of their death or, in
most 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 permanent
insurance. There are, in actuality, several sub-types of whole life insurance
that will be discussed, but first we need to understand fully the basic concepts
of whole life insurance before going into the details of sub-varieties of whole
life 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 the
cash value of your policy, you can surrender all the benefits or a part of the
benefits based on your cash withdrawal and get a portion of the premiums you
have paid back. You can even take out loans against the cash value of your
whole life insurance policy.
You should realize that in no case will the cash value of a whole life insurance
policy equal the benefit amount, nor will the cash value necessarily be equal to
all the premium payments which have been paid.In some cases,the cash value
will be equal to the premiums paid plus interest earned. As the investments
earned change, in many cases the interest rate earned on those policies that
offer 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
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to the policy owner in exchange for the benefits that would be paid at the time of
death of the insured.
This concept is explained best by Life Insurance Quote (http://www.lifeinsur
ancequote.com/universal_ compared_to_whole_life_web_article.htm). At this
web 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 from
the 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 a
portion of the premium paid to cover the cost of the payouts required when a
covered insured within their many whole life or universal life insurance poli-
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cies dies and benefits must be paid. A charge for the accounting, administra-
tion, and other overhead costs of providing insurance coverage as well as
taxes 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 to
add 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 your
family against the impact of the loss of the insured in the event of untimely
death.
The charge noted as mortality cost is a factor that increases as the person
insured by the whole life policy ages. This is simply because of the fact that
the older a person gets, the more likely they are to pass away. Also, the cash
value of the policy, in many cases, can fluctuate greatly based on the stock
market and other investments in which the funds from premiums have been
invested.
The great benefit with whole life insurance is the fact that should the insured
pass 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 a
young age,the cost of the insurance is relatively low and does not increase as the
person ages.
You can expect to be required to prove that you are in good health by submitting
to 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 for
insurance, you will not be canceled due to changing health conditions.
Whole life insurance can be practical because:
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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.
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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
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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 to
raise your children and provide for their education should your death occur
during the child rearing years. It can also provide a legacy for your children
and grandchildren should you live a lengthy life and your spouse proceed you
in death.
Universal Life Insurance
Universal life insurance is one of the newer types of insurance and,like whole life
insurance, is a permanent form of insurance in that it covers the named insured
as long as the policy is carried in force and the premiums are paid on a timely
basis. It also builds cash value. However, unlike whole life insurance, the benefit
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amount can be adjusted, allowing you much more control over the amount of
premium you must pay each month.
In addition, universal life insurance allows you to determine the portion of each
payment that will be used for death benefits and how much of each payment will
be used for your plan’s investments. Universal life frequently returns significant-
ly higher investment yields, increasing the cash value sometimes so much that
the increases will even pay the premiums.
This type of life insurance has a predetermined, set minimum rate of return on
investment that is stated in the insurance policy. Each year, you will be provided
with an annual report showing the current cash value of your insurance policy
and 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 children
reaching maturity or mortgages being paid in full, the insurance policy can be
adjusted 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 to
receive 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.
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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.
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Variable Life Insurance
Variable life insurance, like whole life insurance, is a permanent type of insur-
ance protection.However,the amount of benefits paid should the named insured
pass away varies with variable life insurance based on the return on the invest-
ments the insurance company has made with your premium payments.While it
is a bit more risky than term life insurance, whole life insurance, or universal life
insurance,it does offer a reasonably low-risk means of accumulating money that
may be income tax free, depending on your situation, should you choose to
remove cash from the cash value of the policy or when death benefits are paid to
a named beneficiary.
Unlike the previously discussed types of life insurance, variable life insurance
allows you to determine into which investment funds your premium payments
will be invested. These choices usually include fixed income investments,stocks,
bonds,money market funds,or similar secure investments. You can change your
choices 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 to
change investment funds only twice each year while other policies may allow you
to change investment funds as many as six times per year.
Because you have control over the investments made with this type of life
insurance, many people feel much more empowered when purchasing this life
insurance. However, because there is no guaranteed return on your investment,
the choices you make on the investments could result in the return going up or
down, causing the cash value of the insurance to vary up or down. Due to the
fact that you, the insured, determine where the money paid to the insurance
company is invested, this form of life insurance is legally considered a security
and laws controlling securities apply to the insurance. For example, by law a
prospectus must be provided by the insurance company offering the insurance
to any potential buyer.
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The death benefit paid on variable life insurance is, however, an amount which
cannot fall below the benefit you purchased. It can, however, increase based on
the return on investment.
Since you choose where the funds paid as premiums on your variable life insur-
ance policy are to be invested, this form of insurance is legally considered to be a
security and is governed by the laws which apply to securities. This means that
the company offering this type of life insurance must provide a prospectus which
include facts about the company offering the security and about the security
itself, in this case the life insurance policy.
The cash value of variable life insurance, under current regulations, is not
impacted by income tax until the cash value of the policy is cashed in. The
income tax impacts when death benefits are paid by this type of insurance poli-
cy should be determined by your financial advisor or tax advisor.
Variable life insurance can be practical because:
1. It is an easy way to build reasonably low-risk,income tax–free invest-
ment savings and can be great for people who are leery of“playing the
stock market.”
2. You can borrow against the cash value of the insurance policy in the
event of an emergency requiring access to funds, without canceling
the insurance.
3. Because the money from premiums is invested, the cash value of the
policy and the death benefits from the policy can be greater than
expected due to high returns on investments.
4. The policyholder has control over what types of investments the
money from their premiums is invested into and therefore can enjoy
a sense of control over their money.
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