100%(5)5 out of 5 people found this document helpful
This preview shows page 48 - 63 out of 124 pages.
Assets – Liabilities = WealthBuy more assetsPay off liabilitiesNeed cash to do either
Where does that cash come from?RevenueLess:ExpensesProfitMust have money left over from your incomeafter paying all your expensesIn other words:Must live below your means
Life with student loansLook at it differently than “I have a ton ofdebt”Focus:Net WorthMindset:Ask, Which is more important to me:Things I have vs. Wealth I have
Tale of a graduate studentGraduated grad school:Assets = 0,Liabilities = $100,000;Net worth =$-100,000
Made choice:Wealth more important thanthings1)Chose to live a little more modestly,enough to have an extra $500 per monthto pay on student loans.2) Enrolled in employer 401(K) plan:$500* per month, matched by employer*Note, pre-tax $, so if in 25% tax bracket, take-home down by $375, not $500Unsolicited advice:Don’t leave employer moneyon the table, always hit maximum match.
In one year…Assets:401K= $12,000($500 from self, $500 employer matching…no capital gains included)Liabilities:After regular payments*+$500 =$90,873* 20 year, level pmt. 5%:$659.96 per month(add $500 extra principle)Net worth:12,000 – 90,873 =$-78,873(Net worth up $21,127)
Net worth= WealthWhat is Wealth?
Get answer to your question and much more
Worth it?Spend your money… you might have some“things” to show for it at the end of theyear…Check your net worth every year, thatmoney paid on debt shows up there as anincrease in wealth,
In four years…Assets =IRA $62,240*FVA 6% per year, $1000 per month.Liabilities = $60,594(regular pmts, +$500)Net worth:62,240-60,594 = $1,646NOTE:This assumes you get no raises.As youget raises, your retirement match will go up.Choice, more in retirement/investments or livea little more easily.
Eight years…(same plan)Assets = 102,857Liabilities = $12,484.29Net worth = $89,573.01Bonus: the extra $500 per month means you payoff your student loans in 8.9 years rather than20.Interest saved:Would have paid:58,388.59Do pay:24,155.55Savings34,233.04
Wealth can accumulate fastAs you pay off debtAnd accumulate investments (retirement)Bonus:You get used to living a more modestlifestyleEven if others can’t see it, watching yourwealth grow can be very satisfying.Choice:Big hat, no cattleOrThe freedom and power of your wealth
Will you do it?Choice is yours…Put $500 per month into retirement account,with matchingBegin at age 25 – age 65… 40 years, 6% yr.$1,991.490.73
ResourcesSuze Orman “Nine Steps to FinancialFreedom”Dave Ramsey, “Total Money Makeover”
Simple Net WorthAssets – Liabilities = Net WorthUsedcurrentvalue of assets (i.e., appreciatedvalue)Usedcurrentbalance of liabilities
Review, when to useSimplenet worthTo determine someone’s net worth at a point intime.Divorce cases (to split net worth between couple)Criminal Cases (to determine motive as of a pointin time)To determine if someone has enough money torecover damages.
