Tag Archives: Building Wealth

Money and The Single Mom – Wealth Building

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I always believed that Wealth Building was something “rich” people did.  As I have schooled myself in the area of personal finance, I have learned that Wealth Building is not just for the wealthy.  It’s for everyone, even a Single Mom, like me.   Who knew, right?!?!

There comes a time to stop living like there is no tomorrow and start  making financial decisions that will support your longer term goals.  These could be to save for a down payment on a home, provide some money for the kids college, save for retirement, a newer car and/or simply to provide a comfortable cushion should life throw a few lemons your way.

None of these items are out of reach as long as you establish your priorities.

Wealth Building begins with a positive Net Worth.  What is Net Worth?  It is the mathmatical outcome of the value of your Assets minus the cost of your Liabilities.

Assets .v. Liabilities

Anything that is owned that has value, such as a home, auto, cash, art, and investments is an Asset.   Assets always have a positive impact to your Net Worth.

A Liability is anything in which money is owed and has negative impact to your Net Worth.  The more debt you carry, the more it offsets the positive influence of your Assets.

For Example

A spreadsheet adding all assets and making adjustments for liability will provide a clear picture of your Net Worth.  In the example below, Assets are listed on the left side based with their present value.

On the right is where all liabilities are listed and valued.  Home loans, car loans, student loans and credit card debt are all liabilities.  This would also include any outstanding money owed to the IRS or legal fees or liens against your property.

A house is an asset, except for the part of it that is financed.  Since this is a debt that will need to be paid (a liability) the asset is offset by the liability.  If the house is worth $200,000, but $150,000 is owed, the asset is only worth $50,000  (200,000 – 150,000 = $50,000).  Since the money owed is less than the value of the house, the house remains an asset but for only the amount of the equity (value – debt = equity) of the home, $50,000.

On the spreadsheet above, the house value is listed in the Assets column and the Mortgage is listed in the Liability column.   The Liability will offset the Value.

If the value of the house (the amount at which it could be sold) is less than the amount owed, then the house becomes a liability.  “Upside down” is a favorite term for this scenario.

Net Worth

When the two sides of the spreadsheet are added together Assets – Liabilities = Net Worth, the Liabilities will always devalue Assets dollar for dollar.   In this example, the Net Worth is listed at the top right-hand side at $165,500.  This person has a positive Net Worth and that is the beginning of building wealth.

Now imagine if that person only had a house debt.  Without liquidating any of their assets, that person worked really hard (took a second job, maybe) to pay off their debt and today only had a house payment each month, then their Net Worth would have increased to $210,000 (reducing the liabilities column to only the $150,000 owed.)

Building Wealth

A positive number in the Net Worth box is the start of Wealth Building.  Why?  Well, all things being equal and should someone call in all your debts, you would not be completely broke (assuming you sell all your assets).    I recommend that this exercise be done every quarter and if this number is climbing, then you are increasing your assets or decreasing your liabilities and, therefore, are Building Wealth.  If this number is declining, then chances are you have increased your debt load.

So, it is to be said that the first steps to a positive Net Worth is to create a budget, remove the liabilities, i.e. debt, and start saving.  Your goal each month should be to pay off debt and/or add money to your savings or your investments.  Both will have a dollar for dollar positive effect on your Net Worth.

There is no “Get Rich Quick” scheme for building wealth.  It takes planning, budgeting, saving and investing.  By the way, putting $5 a week toward the lottery is not an investment, nor is it a plan.

At this point in your financial development, investments should be limited to 401(k), IRA, or Mutual Funds.  I do not recommend investments in jewelry or art or even property until your Net Worth is in excess of $1M or you are comfortable paying cash for these items.

I will cover more of how to make your wealth work hard to make more wealth in my next blog in this series….. Money and The Single Mom – Investing.

On a Personal Note

I have been working on my financial plan since 2009.  At the time, I calculated my Net Worth and have tracked it quarterly for these past 3 years.  During that time, I paid off all my debt (except the house) and I am careful not to incur any additional debt by planning purchases and living within my means.  I have begun to give to my 401(k) and building my Emergency Fund.   As a result, I have consistently increased my Net Worth by at least 5-10% each year.  I am building wealth, as a Single Mom, and you can too.

Now You're Thriving!!!


Free Net Worth Spreadsheet – Excel

References: 

3 Simple Steps to Building Wealth, Investopedia.com

5 Ways to Build Wealth Automatically, Forbes.com

I recommend the following books for more insight into budgeting and other money matters:

The Total Money Makeover – Dave Ramsey

Debt-Proof Living – Mary Hunt

Next Wednesday – Investing

~Dona~

Money and the Single Mom – Savings

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Savings!

I’m not talking about what you “could have” spent if you didn’t get those shoes on sale.  I’m talking about purposeful, methodical accumulation of funds.  A savings attitude will serve you well when Wealth Building for retirement and kid’s college funds.  However, first and foremost,  you will need to build a healthy Savings account.  This Savings Account, known as an Emergency Fund, will be the buffer between you and that sense of doom, that horrible overwhelming feeling when disaster calls.  Believe me when I say disasters come in spades.

Surviving or Thriving?

A well-funded Emergency Fund is the key difference between surviving and thriving as a Single Mom.  As a Thriving Mom, you are taking control of your money.  You are on a budget, out of debt and now you are building a safety net to keep you and your kids safe from the unexpected pitfalls of life.  Things like illness, job loss, or any interruption in income can be difficult for most two-income families.  It can be devastating to a Single Mom.

Last October, my son had to be hospitalized for 3 days from an infection from an indoor swimming pool.  While still paying for what the insurance didn’t cover, he then had to have his front teeth rebuilt from a biking accident.  This month alone, my slab has sprung a leak ruining my laundry room and hallway flooring and my car bumped fenders with another car (so not my fault but no one wants to believe me).  Of course, I have insurance, but I also have deductibles that need to be met before my insurance will kick in for the rest.

The point is… disasters will happen and sometimes they just refuse to wait until you have recovered from one before the next disaster takes up residence in your life.

Enter the Emergency Fund!

As recommended in my blog “Money and the Single Mom – Debt” , you should have a small emergency fund of $500 – $1000 to cover unexpected emergencies as you focus on getting out of debt and stop using credit as a safety net.   The next step is to make a BIG Emergency Fund.  This fund should be large enough to cover your minimum living expenses for up to 3 – 6 months.  This fund can support you should you lose your job, or have to take time off from work for a child’s illness, or even replace a refrigerator or buy a reliable used car.  This is not the “Momma needs a Cruise or a New Car” or “The Kids Deserve an Xbox” fund.  This fund is your security blanket and your Superpower.

How to Start Saving

The rule of thumb is to take 10% off the top of each paycheck and start socking it away into a savings account.  Sounds easy enough, but most people who don’t have a habit of saving will most likely find this a difficult step.   Most of us are stretched to the limit, as it is.  Here are a few ideas to help you get your Big Emergency Fund started:

I recommend reading “Live Your Life for Half the Price”  by Mary Hunt (Everyday Cheapskate) to get great ideas on how to live well for less.  Borrow the book from the library and start shaving that 10% off your lifestyle and moving it into your savings account.

Look closely at your budget and start getting rid of unnecessary expenses.  Revisit your insurance, your electric company, your cable and phone bills and find out if switching companies can get you cheaper rates or remove features that you really don’t use or could otherwise live without.  Do this on an annual basis.  You will be surprised how many new luxuries make their way into your budget each year. 

Selling stuff is a great way to clear out the clutter and beef up your Big Emergency Fund.  When I sell stuff, I immediately put the money into my SmartyPig account.  Do you have anything that you can sell in a garage sale, eBay or Craigslist?  Then take a picture and get it posted.

If you have successfully paid off all your debt, then move that payment into your savings.  You’ve been living without it all this time, you won’t miss it.

A second job or overtime is always a great way to stockpile money quickly, but is not always an option for a Single Mom.

Remember that 10% should be your target, but if you can only scrap together 3% or 5% for a while, then don’t let that stop you from getting started.  You will be surprised how fast it can grow even from the smallest input.

Where to put that Money!

That money needs to be some place where you can get to it when you really, really, really need it, but not so easy that you can just transfer it over to your checking account to cover an unexpected “retail therapy” shopping spree.

I recommend having it in a different bank all together and have found that some of the online banks like SmartyPig, ING,  Ally can give you the best  interest rates available.  Do your research  and you can set up an online account tied to your regular checking account with $25 or less.   Then set up automatic withdrawals on your pay dates.

Patience!

It will take some patience, some sacrifice  and some time to reach your 3 or 6 month goal and there will be setbacks, since emergencies come unannounced all the time.  Don’t give up.   There will be a peace like you’ve never know when an emergency comes to take a bite out of your fund.  While you will be sad to see the money go, (and it will be done with a lot of kicking and screaming) it will feel less like doom and more like a simple inconvenience.

Now You’re Thriving!

I recommend the following books for more insight into budgeting and other money matters:

The Total Money Makeover – Dave Ramsey

Debt-Proof Living – Mary Hunt

Next Wednesday:  Wealth Building

~Dona~