Lesson Component and Description

Transcription

1 Lesson Component and Description Purpose In the Topic, the students gain a fundamental understanding of the steps they can take to help their money grow and begin planning for life s financial events. Learning Objectives 1. Briefly describes the role of planning and maintaining a balanced budget. 2. Explains how goals, decision-making, and planning affect personal financial choices and behaviors throughout the various stages of life. 3. Formulates strategies for saving, investing, and transferring wealth. 4. Compares long, intermediate, and short-term investments. 5. Analyzes the power of compounding and the importance of early implementation of a saving and investment plan. Time Required 150 Minutes Materials Student Guide, Teacher Guide, PowerPoint, Quiz Procedure Follow the PowerPoint and/or use the Teaching Guide as the student follows along with the Student Guide. The guides are merely a framework for the teacher and students. Implementing additional resources to engage the students is highly recommended. Homework Recommended but feel free to develop your own Homework assignments. 1. Have the students discuss with their parents if they budget and how often. 2. Have the students write a 500-word essay on one or both: a. Why Is It Important to Build Wealth? b. What Are Your Short- and Long-Term Goals? 3. Have students complete a compounding interest table. 4. Have students write or type a letter to a friend about accumulating wealth. Assessment Quiz 10 questions (5 True/False; 5 Multiple Choice) Quiz Key 1.T 2.F 3. F 4.F 5.T 6.D 7.C 8.D 9.D 10.A

2 Alignment to Standards Common Core State Standards: Math 1. Uses units as a way to understand problems and to guide the solution of multi-step problems; chooses and interprets units consistently in formulas; chooses and interprets the scale and the origin in graphs and data displays (N-Q 1). 2. Defines appropriate quantities for the purpose of descriptive modeling (N-Q 2). 3. Chooses a level of accuracy appropriate to limitation on measurement when reporting quantities (N-Q 3). 4. Explains each step in solving a simple equation as following from the equality of numbers asserted at the previous step, starting from the assumption that the original equation has a solution. Constructs a viable argument to justify a solution method (A-REI 1). 5. Demonstrates that the graph of an equation in two variables is the set of all its solutions plotted in the coordinate plane, often forming a curve (which could be a line) (A-REI 10). 6. Recognizes situations in which one quantity changes at a constant rate per unit interval relative to another (F-LE). Common Core State Standards: English Language Arts and Literacy in History/Social Studies, Science, and Technical Subjects 1. Integrates and evaluates multiple sources of information presented in different media or formats (RI 7). 2. Writes arguments to support claims in an analysis of substantive topics or texts, using valid reasoning and relevant and sufficient evidence (W 1d). 3. Writes informative/explanatory texts to examine and convey complex ideas, concepts, and information clearly and accurately through the effective selections, organization, and analysis of content (W 2). 4. Produces clear and coherent writing in which the development, organization, and style are appropriate to task, purpose, and audience (W 4). 5. Develops and strengthens writing as needed by planning, revising, editing, rewriting, or typing a new approach, focusing on addressing what is most significant for a specific purpose and audience (W 5). 6. Integrates multiple sources of information presented in diverse formats and media in order to make informed decisions and solve problems, evaluating the credibility and accuracy of each source, and noting any discrepancies among the data (SL 2). 7. Acquires and uses accurately general academic and domain-specific words and phrases, sufficient for reading, writing, speaking, and listening at the college and career-readiness level; demonstrates independence in gathering vocabulary knowledge when considering a word or phrase important to comprehension or expression (L 6). 8. Determines the central ideas or information of a primary or secondary source; provides an accurate summary that makes clear the relationships among the key details and ideas (RH 2). 9. Integrates and evaluates multiple sources of information presented in diverse formats and media in order to address a question or solve a problem (RH 7). 10. Determines the central ideas or conclusions of a text; summarizes complex concepts, processes, or information presented in a text by paraphrasing them in simpler but still accurate terms (RST 2). 11. Integrates and evaluates multiple sources of information presented in diverse formats and media (RST 7). 12. Produces clear and coherent writing in which the development, organization, and style are appropriate to task, purpose, and audience (WHST 4) 13. Draws evidence from informational texts to support analysis, reflection, and research (WHST 9).

3 14. Writes routinely over extended time frames and shorter time frames for a range of disciplinespecific tasks, purposes, and audiences (W10, WHST 10). Common Core College- and Career-readiness Anchor Standards: 1. Determines central ideas or themes or a text and analyzes their development; summarizes the key supporting details and ideas (CCR Reading 2). 2. Writes arguments to support claims in an analysis of substantive topics or texts, using valid reasoning and relevant and sufficient evidence (CCR Writing 1) 3. Writes informative/explanatory texts to examine and convey complex ideas and information clearly and accurately through the effective selection, organization, and analysis of content (CCR Writing 2). 4. Produces clear and coherent writing in which the development, organization, and style are appropriate to task, purpose, and audience (CCR Writing 4). 5. Develops and strengthens writing as needed by planning, revising, editing, rewriting, or typing a new approach (CCR Writing 5). 6. Writes routinely over extended time frames and shorter time frames for a range of tasks, purposes, and audiences (CCR Writing 10). 7. Prepares for and participates effectively in a range of conversations and collaborations with diverse partners, building on others ideas and expressing their own clearly and persuasively (CCR Speaking and Listening 1). 8. Adapts speech to a variety of contexts and communicative tasks, demonstrating command of formal English when indicated or appropriate (CCR Speaking and Listening 6). 9. Demonstrates command of the conventions of Standard English grammar and usage when writing or speaking (CCR Language 1). 10. Demonstrates command of the conventions of Standard English capitalization, punctuation, and spelling when writing (CCR Language 2). 11. Determines or clarifies the meaning of unknown and multiple- meaning words and phrases by using context clues, analyzing meaningful word parts, and consulting general and specialized reference Materials, as appropriate (CCR Language 4). 12. Acquires and uses accurately a range of general academic and domain-specific words and phrases sufficient for reading, writing, speaking, and listening at the college and careerreadiness level; demonstrates independence in gathering vocabulary when considering a word or phrase important to comprehension or expression (CCR Language 6). Web Resources Net Worth Statement Video Links None Life Smart Applications 1. Students complete a Net Worth Statement. 2. Students learn how to write out SMART goals. 3. Students reflect and write a description about themselves and how they deal with money.

4 Name Date True or False Questions: You are taking a financial literacy class in school. You want to explain what a budget is to your parents. You begin by saying a budget is an estimate, often listed out, of expected income and expenses for a given period in the future. This is the correct definition for a budget. 2. You spend money every day, and you believe in letting tomorrow take care of itself. Is this type of person called a struggler? 3. You live at home and work a part-time job. You only have to pay for gas. There is no reason for you to create a budget for yourself. 4. You work a part-time job as a server. You make an hourly wage plus tips and are saving your tip money ($7- $20 a shift) to buy a dependable car. This is not an example of creating wealth. 5. You are a sophomore in high school and occasionally house-sit for extra money. Saving your money to pay for a new iphone is an example of budgeting. Multiple Choice Questions: You want to start building wealth while you are young. How should you begin? a. Saving b. Controlling c. Protecting d. All of the Above 7. You work hard for your money and always prepare a monthly budget. This helps you avoid making poor decisions with your money. What is this called? a. Saving wealth b. Investing to create wealth c. Protecting wealth d. None of these 8. Because you haven t taken a financial literacy class, you don t realize that ignoring what you do with your money can cause problems later in life. What statement below best describes this type of behavior? a. Finds it difficult to budget b. Spends today and lets tomorrow and save take care of itself c. Budgets to save d. Refuses to see money problems and doesn t see a need to budget and save 9. You learned from your financial literacy class that a saving plan should include: a. How much you intend b. How much interest you make to save c. How often you d. Both how much you intend to save contribute and how often you contribute 10. You know that if you start to save and invest now, your money will compound much more quickly. What statement below best describes the concept of compounding? a. Money multiplies or grows based upon the type of investment or interest you earn b. A person who is a planner and lives on a budget, saves money for retirement, and automatically deposits money into a savings account c. Paying off a $1,500 credit card within one year is an example of a short term goal d. You want to earn $200 per week and to save 20%. The equation that helps you understand how much to save per check: $200 x.20 = $20; thus $20 should go into savings every week

5 Sequence: - Solicit class understanding of the topic. - Introduce vocabulary and definitions to provide purpose for reading - Review Key Points - Teacher Tips - Large Group Discussion Questions Slide 2 Vocabulary: - Short-term goal that can be reached in one year or less. - Long-term goal that takes more than one year to reach. - Budget an estimate that includes expected income and expenses for a given time period in the future. - Income includes wages earned from a job, cash gifts, allowance, and other IN- coming money. - Expenses money owed or going out. - Debt something owed, such as money, goods, or services. Key Points: - Explain to students the difference between short-term and long-term goals with more examples. o Short-term concert tickets, new clothes, or a new car stereo. o Long-term senior trip, new car, or a new house. - Review the concept of income as incoming money. - Explain how expense and debt are one in the same and how it relates to a budget. - Review the meaning of a budget and show its relationship to short- and long-term goals. Teacher Tips: - Engage: Have students link their own experiences and ideas to wealth and realize that wealth is something that doesn t just happen; it needs a plan to happen. - Check for understanding Ask students to give personal examples of a short-term and a longterm goal. Have students give examples of expenses they would list in a budget. Large Group Discussion: - Ask students to discuss at what age they should begin to think about financial goals and building wealth. - Ask students to write down the difference between a need and a want. Continue the discussion by asking students how both affect their personal budgets. What is a budget? Why is it important to prepare a personal budget? Teacher Reflection:

6 Meeting Your Financial Money Goals Life Smarts: 1. Complete two Net Worth Statements 2. Write SMART financial goals 3. Identify your personality financial type The first step in building wealth is to determine and track how much money you are making and spending. Determining these amounts will allow you to set up a budget and identify how much money will be needed to pay your bills and save for the future. Of course, establishing goals will also help this process. There are two important time frames for establishing financial goals. The first is known as a short-term goal, which is reached in one year or less. Example: Save $200 in the next 10 months to purchase a cell phone. A long-term goal is any goal that takes more than bone year to accomplish. Example: Save $5,000 a year for two years in order to have $10,000 for a down payment on a house Nusenda Federal Credit Union. All rights reserved.

7 So what is a budget? A budget is an estimate, often listed by the type of expected income and expenses for a given time period in the future. Income includes wages earned from a job, birthday money received from your grandma, an allowance, or any other IN coming money. Expenses include any money owed or going out, for example, payments for your car insurance, buying clothes, or paying for your monthly cell phone bill. A budget will help you decide how much to save and invest. It allows you to determine how much money is available to pay off expenses, also known as debt. Preparing a budget provides an idea of how much money must be set aside to buy a car or pay the monthly rental on an apartment. A budget can also assist in planning for the purchase of a home and putting money away for retirement. 1. What is a budget? Answer: An estimate that includes expected income and expenses for a given time period in the future. 2. Why is it important to prepare a personal budget? Answers will vary. What does wealth mean to you? What does wealth mean to you? Most people think of wealth as tangible item such as a wallet full of money, valuable possessions, or property. Although having a big house and nice cars may indicate wealth; it doesn t mean you can afford to own them. Wealth can mean many different things. For example, it may include intangible items, such as having a happy family and lots of friends, or obtaining a good job. In financial terms, wealth can mean having more money than you know what to do with, living modestly (comfortably), or being able to pay your bills on time. When planning for wealth, you should save a minimum of eight months of expenses. For example, if your bills total $1,500 per month, you should have approximately $12,000 ($1,500 x 8 months) saved in an account that is easily accessible in case of emergency. 7

8 Slides 3 & 4 Vocabulary: - Wealth an abundance of valuable material possessions or resources; riches. - Intangible family, friends, job. - Tangible money, house, car. - Saving putting money in an account for later use. - Investing spending money in the hopes of receiving a future benefit. - Controlling ensuring that your money is growing based on your goals. - Protecting not losing money due to outside sources or to bad decision making. Key Points: - Explain to students that wealth can mean different things to different people. - Explain the differences between intangible versus tangible assets. - Explain to students that discipline is important to building wealth. - Share with students that consistent saving and investing is important in building wealth. Teacher Tips: - Engagement Solicit the students to share how much money they have in savings. - Check for understanding Ask students why they think it s important to build wealth and why they need to protect it. Large Group Discussion: - Ask students to identify famous people and estimate their net wealth. Teacher Reflection: 8

9 Some requirements for building wealth 1. What does wealth mean to you? Answers will vary. 2. Differentiate between tangible and intangible wealth. Answer: Tangible is physical and materialistic Intangible can relate to personal relationships. In order to build wealth, you need to be disciplined. Once your income and expenses are determined and a budget is prepared, you will have a better idea of how much money to save. In fact, this amount should be included as a line-item called Savings. Investing means spending money in the hopes of a future benefit. Savings may be used for investment purposes, but first, you must educate yourself about the different ways to invest money. Purchasing stocks, a mutual fund, or real estate are all examples of investment. Over time, you hope to make money on your original purchase. You might consider investing for the purchase of a home, a car, or investing for retirement. After determining how much to save and for what, you must control and protect that wealth. Controlling means periodically checking to see how much your investments are earning and if you are meeting your goals. If not, some adjustments in your budget may be required. Lastly, ensure you are protecting your wealth from creditors, fraud, poor decision-making, or a potential lawsuit. Net worth Life Smarts: Complete a Net Worth Statement - Attached As discussed above, setting financial goals is critical to building wealth. As you increase your wealth, your net worth increases. Net worth refers to how much you are worth. Net worth is calculated by subtracting what you owe (liabilities) from what you own (assets). Net Worth = Assets Liabilities 9

10 Slides 5-8 Vocabulary: - Assets physical items that you own; can be converted into cash. - Liabilities money or assets that are owed. - Net Worth refers to how much you are worth after subtracting your liabilities from your assets. - SMART Goals the process of setting goals so that they are specific, measurable, attainable, relevant, and have a realistic time frame. - Trade-off something you give up to get something else. - Opportunity Cost the cost of giving something up for the next best alternative. Key Points: - Explain to students how important it is to track your net worth if you wish to build wealth. - Explain to students the importance of setting goals. They should follow the SMART goal guidelines, so there is no vagueness in what they are trying to accomplish. - Review each key point in the SMART goal process. Teacher Tips: - Engagement (1) Ask students to brainstorm a list of assets; and (2) Ask students to share some of their goals for this school year. - Check for Understanding Have students determine what they would like their desired net worth to be for various stages of their life. Large Group Discussion: - Have students share one SMART goal they have for the year. Life Smart Activity: - Complete two Net Worth Statements. (Activity is at the end of this topic.) Teacher Reflection: 10

11 Assets are items you own that can be converted into cash; liabilities are considered monies owed, known as debt. Owning a home, property, and vehicles all increase your net worth. Staying away from debt (owing people and businesses) also increases your net worth. In the space below, indicate your desired net worth at various stages in your life. You may use the attached Net Worth Worksheet to guide you. Estimate your desired net worth at each of the following ages. Be prepared to explain your answers there is no wrong answer. Answers will vary. Age 25: Age 35: Age 45: Setting smart goals to build wealth Like budgeting, setting goals is crucial to building wealth. It provides a how to guide for reaching your financial goals. These financial goals, also known as SMART goals, should include the following characteristics: S Goals should be specific. Determine exactly what it is you want. M Goals should be measurable. Determine the value of your goal. A Goals should be attainable. Ask yourself: Is this a realistic goal that I can achieve? R Goals should be relevant. Is the goal something that is necessary, or can it wait? T Goals should be time-bound. Set a date as to when you intend to meet the goal. 11

12 Slides 6-8 (Continued) Teacher Tips: - Engagement Ask students how often they buy clothes or pay for entertainment. - Check for understanding Review students SMART goal development in their Student Guide. Large Group Discussion: - Ask students to explain the difference between a SMART goal and an ordinary purchase. Life Smart Activity: - Write a SMART goal. Teacher Reflection: 12

13 Developing a SMART goal involves gathering facts before actually writing your goal. For example, the facts for wanting to go to the prom might look like this: S = I want to go to the prom. M = Total costs for attending the prom are $250. I will save $25 per week for 10 weeks. A = Yes. My part-time job will provide more than enough income to cover prom expenses. R = Yes. I am a graduating senior. This will be my last chance to attend the prom. T = April 1st is the deadline for paying for all prom expenses. Following my proposed savings plan, I will save enough money to pay all my debts by the last week of March. Combining the facts, your short-term SMART goal would look like this: I want to attend prom. I will need to save $250 by April 1 to pay for everything. I will save $25 per week for 10 weeks. Life Smarts: Learn to write your goals! Write a SMART goal for one of the following events: 1. Purchasing clothes OR 2. Eating out SMART goal:answers will vary. Determine the SMART elements of the goal you selected. List below: Answers will vary. S = M = A = R = T = 13

14 Vocabulary: - Planner someone who plans out their finances. - Struggler someone who doesn t plan or set budgets. - Denier someone who denies they have a money problem and lives paycheck to paycheck. This type of person normally falls deeper and deeper into debt. - Impulsive personality Someone who makes purchases on an impulse. This type of person rarely plans and purchases items without hesitation. Key Points: - Review the four types of financial personalities. Be sure the students are able to provide specific examples of each type of financial personality type. - Drive home the point that being SMART with your money is important. Identifying their personality type will help them to make better decisions regarding their finances. Teacher Tips: - Engagement Have students describe four different individuals based on their understanding of the four types of financial personalities. - Check for understanding Have students explain why they believe their financial personality type is a planner, a struggler, a denier, or an impulsive personality. Have students share what they can do to make wise choices concerning their money habits. Large Group Discussion: - Ask students why it is important to self-analyze when it comes to their own spending and saving habits. Life Smart Activity: - Have students write a five-sentence paragraph explaining their type of financial personality type. Teacher Reflection: 14

15 Lastly, when setting goals, we always think about what we are giving up to get something else. This is known as the trade-off. In the goal you chose to write above, what might you have given up to buy clothes or take a short trip? For example, you might have given up going to the movies with your friends so that you can save for the trip. If you choose not to go to the movies (so you can go on a trip), what value did you give up by choosing the trip over the movie? This is known as the opportunity cost. The opportunity cost is the price of the admission fee plus any food you might have purchased. 1. What would have been some of your trade-offs in the goal you selected above? Answers will vary. 2. What would have been the opportunity costs for making those trade-offs? Answers will vary Financial personality types Knowing your financial personality type will help you later in life. The four types consist of planners, strugglers, deniers, and impulsive personalities. A planner is someone who always plans out their finances. They set goals, prepare budgets, and try hard to follow them. A struggler is someone that doesn t plan or set budgets. They usually live paycheck to paycheck and most of the time struggle to get ahead financially. Deniers are somewhat similar to strugglers with the exception that they don t live paycheck to paycheck. Deniers normally fall deeper and deeper into debt, because they deny they have a money problem. They usually spend more than they can afford. When bills come due, they neglect to view them, put them in a drawer, or throw them away. Lastly, there is the impulsive personality. This individual makes impulse purchases. In other words, they rarely plan or budget. They purchase without hesitation. It s always wise to have a list when you shop to prevent impulse buying. 15

16 Tina is a single parent with two children. She has to budget to live on a modest income. She started putting her money in a mutual fund when her first child was born, for his education. She purchased a home and provides solely for her children. What is Tina s financial personality type? Tom likes to spend money on things that appeal to him without planning. He makes good money but his bank account tells a different story. He has no savings or investments, owns no property, and lives paycheck to paycheck. He has nothing that resembles a budget. What type of financial personality does Tom have? Life Smarts: What is your personality type? In the space below, write a five-sentence paragraph explaining your financial personality type. Give specific examples to support your selection. Tips on saving Here are a few tips you should consider as you think about building wealth. Write out a plan so you have access to it all the time. Save a certain amount every week, two weeks, or monthly. Have money electronically transferred automatically to a savings, checking, or retirement account. *Hint: o The first hour of pay you get from working should go into savings. (Pay Yourself First) o Try and save a minimum of 20% of what you make at work. o The earlier you begin saving, the more you will accumulate. 16

17 Slides Vocabulary: - Interest money that is added to an original amount that is saved or invested. - Principal the original amount of money that is deposited into an account. - Compound Interest money that is earned on both principal and interest. Key Points: - Review the tips on saving. - Review the chart on compound interest and indicate the differences in waiting to save or invest. Teacher Tips: - Engagement Show students the following video on compounding your money: - Check for understanding Show students the following website: - Provide several examples of principal and interest amounts. Have students explain what they see. Large Group Discussion: - Discuss as a class what the difference in net worth would be if you started saving at 18 years old compared to someone who started saving at 30 years of age. Teacher Reflection: 17

18 Compound effect The chart below shows the compound impact of saving. accumulate more wealth as you get older. Starting to save now allows you to As you begin to save money while you are young, your money will grow with interest. Interest is the amount of money that is added on to the original amount (principal) that you saved or invested. For example, if you deposited $100 into a savings account and left it there, in a year your savings account might have $ The $3.00 ($ $100) is referred to as the interest. At the end of year two, your account balance might be $ You earned another $5 on top of the $103 that you had in your account at the end of year one. As you can see, you begin to earn interest on interest. This is referred to as compound interest. Compound interest is interest earned on both principal and interest. As the years go by, your compound interest begins to multiply faster; thus, you begin to accumulate more wealth. The table below shows the compound impact of saving. accumulate more wealth as you get older. Starting to save now will allow you 18

19 Slides Vocabulary: - Rule of 72 a rule that allows you to compute how long it will take to double your money given an interest rate or number of years. - Trust legal way to have an independent party hold and manage a title to property or assets for the benefit of a beneficiary. - Trustor a person who sets up the trust. - Living Trust a trust that is in effect during the trustor s lifetime. - Testamentary Trust a trust that is created through a will of a deceased person. - Will a legal document that is set up prior to death that transfers a person s assets to a beneficiary upon death. - Estate refers to the value of all of your assets at any point in time. Key Points: - Rule of 72 allows you to compute how long it will take for your money to double. - It s a SMART idea to protect your wealth while you are alive and upon your death. - Trusts and Wills are smart legal documents to create as you build your wealth. - You should hire a lawyer to prepare a Will and a Trust. - Having Wills and Trusts intact allows you to transfer your wealth upon your death Teacher Tips: - Engagement Have students make the Rule of 72 computations in the Student Guide. - Check for understanding Check their answers for accuracy. Large Group Discussion: - Ask students if they know of anyone that has passed on and left either them or their family part of their wealth. Teacher Reflection: 19

20 The Rule of 72 The Rule of 72 is something that you should memorize when it comes to building wealth and letting your money work for you. The rule allows you to compute how long it will take to double your money given an interest rate or number of years. Here s how it works: If you are given an interest rate, divide the interest rate into 72 to compute how many years it will take to double your money. Example: If you invest some money earning 8% interest, it will take 9 years (72 8) to double your money. In contrast, if you know how long you want to take to double your money, simply divide the number of years into 72. Example: If you want to double your money in 4 years, you will need to invest it at 18% (72 4) Interest for it to double in 4 years. 1. How long will it take you to double your money if you invest it earning 3.5% interest? Answer: years 2. What interest rate must you earn in order to double your money in 10 years? Answer: 7.2% 20

21 Transferring your wealth wills, trusts, and estates A Trust is a legal way to have an independent party hold and manage title to property or assets for the benefit of a beneficiary (a named person who inherits your assets). A trust is usually set up if the trustor, person setting up the trust, wants their assets to be given to a beneficiary at some point in the future with certain guidelines. There are two types of trusts, a living trust and a testamentary trust. Living trusts are in effect during the trustor s lifetime; a testamentary trust is created through a will of a deceased person. A will is a legal document that transfers a person s assets to a beneficiary upon their death. If you die and don t have a will, your property will be divided up according to the state. This means that the people you would like to get your assets may not necessarily get them. Your estate refers to the value of all of your assets at any point in time. Prior to your death, you should legally determine who should receive your estate when you die. You should hire a lawyer to set this up so that your estate goes to the people that you want to receive it. You can divide up your estate and give certain things to certain people. Two ways to distribute your assets and/or estate is through a will or a trust. Having a sound strategy for protecting the assets you have built will ensure that the wealth you have created will be there for you and your loved ones. Activity: For each initial investment below, calculate the amount accumulated over time given the following factors for each. Use to determine the amount. Initial Investment Interest Rate Regular Investment (per month) Years Compounded Amount $1,000 5% $50 10 Monthly $9, $1,000 5% $50 20 Monthly $23, $1,000 5% $50 30 Monthly $46, $1,000 5% $ Monthly $32, $1,000 5% $ Monthly $85, $1,000 5% $ Monthly $171,

22 Net Worth Statement #1 A Net Worth Statement is a snapshot of your financial situation at any point in time. It allows you to track your progress financially. Just like a marathon runner running for their personal best, focus your attention on your financial numbers. Your net worth will change from year to year. By evaluating your net worth periodically (once per year), you can tell if you are accomplishing your financial goals or if some changes are in order. Recall from the section above that Net Worth = Total Assets Liabilities. Preferably your net worth is a positive number. This would imply that you own more than you owe. If it is a negative number, you might consider making some financial changes down the road. Using the information below, complete the attached net worth statement: Imagine you are in your late forties and have been working in a career of your choice for several years now. You have made some great financial choices and have accumulated lots of wealth. You are currently earning $120,000 per year. You re married with two children. One child is in middle school, while the other child is in the fourth grade. Your spouse also works and earns around $50,000 per year. You have accumulated lots of assets and some debts. You are considering getting a loan from a financial institution, and they requested you complete a net worth statement for them. After gathering all of the data below, you are now ready to prepare the net worth statement: You determined that you and your spouse have $350 in cash on hand. Your bank accounts are currently showing $3,200 in checking, $8,200 in savings, and $15,000 in a money market fund. You also have a cash value of $50,000 in a life insurance policy. As for Real Estate/Property values, your home is worth $350,000; however, you still owe $250,000 on it. (Hint: $100,000 of the home is considered an asset, while the $250,000 you owe is considered the mortgage.) You have no other real estate or land that you own. Because you learned a great deal about finances in school, you and your spouse were wise enough to begin investing at an early age. The following balances are the amounts you have in various investments: stocks - $42,000; bonds - $20,000; $35,000 in mutual funds; $12,000 in IRAs; $38,000 in a 401(k); and $8,000 in a pension plan. 22

23 Both you and your spouse have a vehicle. One of the vehicles was given to you by your brother; the other vehicle was purchased two years ago for $28,000 and you still owe $16,000 (Hint: this is considered an automobile loan.) All of your home furnishings were purchased when you first bought your home; however, you recently purchased a new refrigerator, dishwasher, washing machine, and dryer. These appliances totaled $2,800. Lastly, you and your spouse accumulated some jewelry worth around $7,200 and some art collections that have a total value of $12,200. In looking at what you and your spouse owe, you determined the following: medical bills, $2,400 and credit cards, $7,800. You have a mortgage on your house and the vehicle loan mentioned above. You took out a couple of loans, one from a bank and another from a credit union, to do some home remodeling that amounted to $4,500 and $2,800, respectively. Both you and your spouse also have college loans outstanding that you are paying back that total $18,200. You have no other outstanding debt. Net Worth Calculation, Worksheet #1 An important step in gaining financial control is to calculate your net worth (assets - debts). Every year, your net worth should be computed to review your progress and compare it with your financial goals. In addition, a net worth statement is a valuable aid in planning your estate and establishing a record for loan and insurance purposes. 23

24 Net Worth Calculation, Worksheet #1 Assets (What You Own) Cash: Cash On Hand Checking Account 2, Savings Accounts 8, Money Market Funds 15, Cash Value of Life Insurance 50, Other Real Estate/Property: Home 100, Land Other Investments: (Market Value) Certificates of Deposit Stocks 42, Bonds 20, Mutual Funds 35, Annuities IRAs 38, (k),403(b), 457 Plans 8, Pension Plan Other Personal Property: (Present Value) Automobiles 12, Recreational Vehicle/Boat Home Furnishings Appliances and Furniture 2, Collections 12, Jewelry and Furs 7, Other Total Assets 365, Liabilities (What You Owe) Current Debts: Household Medical Credit Cards Retail Store Cards Back Taxes Legal Other Mortgages: Home Land Other Loans: Bank/Finance Bank/Finance Automobile Recreational/Vehicle Education Life Insurance Personal Other Total Liabilities 2, , , , , , , , Total Assets Minus Total Liabilities = Net Worth 64,

25 Net Worth Statement #2 Current Financial Status in New Mexico The latest U.S. Census states that the median household income for New Mexico is $44,631. The average mortgage debt in Albuquerque is $157,537 (as of May 8, 2013) according to Albuquerque s Business and Economic website. In addition, CNN Money cites that the average New Mexico household owed $6,820 in credit card debt in In the following scenario, the couple does not own a home but exhibits many of the financial characteristics of a typical young couple in New Mexico. Using the attached worksheet, calculate their net worth. Joe and Susan are in their late twenties, have been married for two years, and have no children. Joe works for the local school district as a Level 2 Maintenance and Operations laborer and has worked for two different schools over the last seven years. He works 260 days per year at an annual salary of $34,817 and is paid bi-weekly. He invests $50 bi-weekly in a 403(b) account currently valued at $9,100. Susan works as a part-time hostess at a restaurant near the community college campus where she also attends school part time. She makes $9,690 per year with no benefits. She would like a better paying job, but her employer is flexible with her schedule as she completes a two-term, Phlebotomy Technician program. She charged $500 on her credit card recently to cover tuition, fees, and books. This is in addition to the existing balance of $6,325 (to cover unanticipated medical expenses and holiday gifts). Joe and Susan rent a one-bedroom apartment a few blocks from the community college campus, which enables Susan to walk to classes. Their rent is $655 a month with seven months remaining on their lease. They own bedroom and living room furniture valued at $1,895 and a sewing machine with cabinet valued at $2,025. Their sporting and camping equipment is valued at $1,250. Joe drives a 1995 Toyota 4Runner with 175,000 miles that is currently valued at $4,425 on NADA Guides. He secured a loan from the Nusenda Credit Union and currently owes $3,425. Susan walks and uses the city bus for her transportation needs. 25

26 Their remaining assets on hand include: Cash on hand = $75; cash in checking account = $532.32; and savings = $1, Compare and Contrast Net Worth Statements 1 & 2: After completing the Net Worth Calculation Worksheet #2, write a one-page paper comparing and contrasting the two scenarios. In your paper, explain the difference in income and expenses. Also elaborate on the difference in the standard of living for both families. Explain what it means to have a positive net worth balance and if having more income precludes you from having a negative net worth balance. Your report should be typed using a size 12 font. Notes: Net Worth Calculation, Worksheet #2 An important step in gaining financial control is to calculate your net worth (assets - debts). Every year, your net worth should be tabulated to review your progress and compare it with your financial goals. In addition, a net-worth statement is a valuable aid in planning your estate and establishing a record for loan and insurance purposes. 26

27 Net Worth Calculation, Worksheet #2 Assets (What You Own) Cash: Cash On Hand Checking Account Savings Accounts 1, Money Market Funds Cash Value of Life Insurance Other Real Estate/Property: Home Land Other Investments: (Market Value) Certificates of Deposit Stocks Bonds Mutual Funds Annuities IRAs 401(k),403(b), 457 Plans 9, Pension Plan Other Personal Property: (Present Value) Automobiles _1,000.00(4,425-3,425) Recreational Vehicle/Boat 1, Home Furnishings Appliances and Furniture _3,920.00(1,895+2,025) Collections Jewelry and Furs Other Total Assets 17, Liabilities (What You Owe) Current Debts: Household Medical Credit Cards Retail Store Cards Back Taxes Legal Other Mortgages: Home Land Other Loans: Bank/Finance Bank/Finance Automobile Recreational/Vehicle Education Life Insurance Personal Other Total Liabilities 4,585.00(655x7months) 6, , ,835 Total Assets Minus Total Liabilities = Net Worth 3,

28 Homework or Class Assignment: You have been talking with one of your friends about this class. Although this is only the first topic covered, you understand what wealth is and what you need to do to start building it. Type a letter to your friend explaining how to start to build wealth and what it will mean to him or her to start now. Your letter should include the following: 12 pt. font Date Greeting A plan on how to build wealth Closing You may use the format below to type your letter: Date Dear : In the first paragraph, explain to your friend what wealth is. In the second paragraph, explain to your friend ways to build wealth. In the third paragraph, summarize what you have learned to your friend. Sincerely, Your Name 28