As I write this article the stock market has had a fantastic rebound from its last serious downturn and most investors seem to have a little more bounce in their step than several years ago. It seems that the market is hitting new all-time highs every other day. I am happy that people’s investments and retirement accounts are doing better and I hope they continue to do so in the future. However, as we all know the stock market goes up and goes down and the timing of your entrance and exit on certain investments can have a huge effect on your actual gains and losses. (never forget 1999,2001, 2008 just in recent history)
The stock market and all the emphasis put on it by almost everybody can act like a giant Magic show where you are paying attention to what the market is doing in the left hand but totally oblivious to what your overall financial picture is doing in all other parts of your life. The traditional media’s focus on stock market investing almost to the exclusion of everything else has made most Americans singularly focused on that one part of their financial life while not paying attention to where most of their wealth is being eaten up systematically month after month and year after year. This cannibalization of wealth happens no matter if the stock market is up or in the tank. I call these massive wealth drains and there are 4 huge ones (along with several other smaller ones) we will cover briefly in this article.
The first and biggest expense people have over their lifetime are income and other taxes. Even with that fact most people really have no clue how the tax system operates and that is by design by our old Uncle Sam. Books have been written on how to reduce taxes but since our time is limited take a couple of points away from this article. Since taxes are such a huge expense maybe you should spend some time studying one of those many books by a credible tested source and figure out how to reduce your taxes. The only thing I have time for today is to give you this huge general idea. The tax system is set up to penalize hourly and salaried workers while rewarding entrepreneurs and business owners. Salaried workers pay taxes based on that they gross while business owners pay taxes based on what they net for income. When that statement is made most people think of the fortune 400 companies getting something over on the little guys. Keep in mind you don’t have to be a massive business to get great tax advantages. Even the little businesses and start-up businesses get huge tax benefits. So since that is the case, rather than complain about it and say “oh well I guess I am out of luck because I have a normal job” dig a little deeper and realize that everyone should have a small business even if you run it from your home office or kitchen table. To qualify for tax deductions in that business The IRS says that you have to have the intent to make a profit and work in that business for a reasonable amount of time (he never defines reasonable). When that standard is met you automatically qualify for dozens of tax deductions that you don’t get to take as an individual. If you have losses and start-up expenses much of them can be written off against your other income from your job (limits apply so get a good business CPA to work with you) Realize that nobody (even your CPA or tax preparer) cares how much you are paying in taxes and if you don’t take time to know how it works and use it effectively you will cost yourself tens and hundreds of thousands of dollars in lost income over your lifetime plus the compounded growth that lost money would have given you over time.
Another huge wealth drain is market losses on any investment capital that you control. So when the stock market or a piece of real estate drops significantly in value it could take years for your money just to get back to even and of course, there are certainly no guarantees that it will come back during your investment lifetime. Compound interest is an amazing beast that even Einstein had trouble grasping so I will keep it brief. If the compounding curve of your money is broken by market losses or premature withdrawals it has a massive effect on your final pool of wealth. Just for fun, if you were offered a job that only lasted 36 days and you had two choices on the pay plan which one would you take? First, you could be paid $5,000 per day at the end of every day for 36 days for a total of $180,000 of income. Not bad for just over a month’s work! The second option is you would be paid one cent starting on day one but that one cent would be compounded by 100% daily and payable at the end of those 36 days. Well if you jumped at the $180,000 you missed the power of true compounding of money. If your coworker doing the same job chose the compounding penny they would not be a millionaire…………….they would be a stinking filthy rich multi-millionaire with a check of $343,597,384! Do the math and then tell me when you want to break your compounding curve with big losses or withdrawals. (did you know you can have money invested tracking the market without it being subject to any market losses?)
Next massive wealth drain is interest and fees paid to banks or finance companies over your lifetime. Loaning of money (financing) has been around in some form for thousands of years. Since the time you could pull your ox into the temple you could get a loan on it if you paid more back than you borrowed and left the ox as collateral. Any business model that has been around that long is a winner! However, when you’re on the borrower side of the transaction it is a wealth drain especially if most of your borrowed money is on depreciating assets such as cars, boats, equipment and any other item that goes down in value. Now people will tell you that if you can borrow money cheap and invest in something that makes more money than you pay in interest back to the bank then you are using leverage properly. That theory can be true but it comes with many caveats and other lessons we cannot cover here this week. Do a simple exercise and add up all the money you have paid out over your lifetime in monthly payments on everything. Then compare that number to the amount of money you have saved for retirement and tell me which one is bigger. Leave your results in the comment section. Then decide you should know more about how to be the lender and not the borrower.
Last massive wealth loss is depreciation (money lost) on items such as cars, boats, equipment, appliances and almost any other large asset we buy over our lifetimes. Almost nobody discusses this (except me of course) and yet did you know that most people will lose more money on just their cars during their lifetime than they can ever save for retirement let alone all the other depreciation? Do your own math on your life and find out the truth.
Think of your financial life as a big pie and as such it has many pieces to the entire pie. Don’t fall for the magic trick of only paying attention to what is happening to your one slice of pie, which are your investment gains or losses. Pay attention to the entire pie and start to slow down and stop your 4 massive wealth drains.
John Jamieson is the #1 Bestselling author of two books “The Perpetual Wealth System” and “Wealth Without Stocks or Mutual Funds” as well as a nationwide wealth strategist with clients in dozens of states. Contact him at firstname.lastname@example.org or visit his site at www.wealthwithoutstocks.com
Part two of three part series.
Last week I wrote an article talking about how to save boat loads of money by purchasing the car of your dreams but only after it is two to three years old. For that article go here http://wealthwithoutstocksblog.com/2017/09/how-to-win-the-financial-battle-vs-your-automobile-2/ This week I want to talk about how leasing a car really works and some tips to save you more money on that next car purchase or lease.
What is a lease? A lease is an agreement you enter into to rent your car for a predetermined length of time (usually 24 to 36 months) for a predetermined monthly payment, and for a set number of miles. These payments are always less than the payment would be if you purchased the same car on the same day. The lower payment means that the car looks more affordable on the surface but inside of that lease agreement are all kinds of terms that can cost you far more than just the lease payments.
To begin with, why is the payment less expensive with a lease than with a loan for the same car? When you lease you are only paying for the estimated depreciation during the length of that lease rather than the entire loan balance you would pay back during that same time frame. As an example, you borrow $25,000 and sign a 36 month loan agreement at 5% giving you a payment of $749.00 which is a very hefty car payment by today’s standards and for many people that payment is not an option based on their income and budget. However, if you could swing that payment for those 36 months you now have a free and clear car with a lot of life left in it and if you were smart and disciplined you would continue to make that big payment but now into a tax-free account. (More on this in next week’s part 3)
In contrast, when you sign a lease on that same car for 36 months your payment might only be $300.00 for a 36 month lease which is much easier on your pocketbook. However, after the 36 month lease, you still have a balance to pay off if you want to own the car. This balance is called the residual value and must be paid off either by cash or with a new loan. Most people will not have the cash to pay off the car and so if they decide to own the car they now take on another loan for several more years to actually get the car paid off. Most people do neither of the above but turn the car in and get the next newest model and take another lease payment and so on and so on until they are old and gray.
In essence, a lease allows you to extend your payments on a car for 6 to 8 years paying far more in payments and interest (yes there is a hidden interest rate with a lease) for the same car. You have less of a monthly payment, but way more of them totaling more money out of your bank account. So how about we actually have a strategy for our next car purchase instead of just winging it? If you can’t afford the 3-year payment then how about committing to no more than a 5-year note on your car? Can’t afford that payment either? Then the truth is you really can’t afford that car. Shop for something less expensive and possibly a model year or two older http://wealthwithoutstocksblog.com/2017/09/how-to-win-the-financial-battle-vs-your-automobile-2/ Now make a commitment and plan that after you pay off the car you will not buy another one for just two more years but you will continue to make a car payment to yourself into a tax-free account. According to www.polk.com the average length of time people hang on to a car is almost 6 years so you will go one extra year for good reason.
It will look like this in real numbers. You borrow $25,000 at 5% for 5 years on your next car creating a $470.00 payment which you pay for 5 years. Now you own the car free and clear but what will you do with the payment you were making? Blow it on junk if you’re like most people but you are not like most people. You have a plan that you are working. So now you still write that payment from your checking account every month but now the money goes to a bank (or pool of money) that you control. You will do this for the next 24 months accumulating $11,322 plus the growth on that money (guaranteed and tax-free if we do it right) which would put you at a total of about $13,000 you have saved for yourself and your family. That $13,000 in a tax-free account that just gets 5% compound interest will be over $35,000 for you in 20 years. Could you do that on every car you and your spouse ever own? If you will do it you will have a couple hundred thousand dollars more for your family! According to The Employee Benefit Research Institute www.ebri.org the average American only has $56,000 in savings by the time they are 65 years old. So by mastering this car strategy, you could have 4 or 5 times that amount over your lifetime depending on when you start.
Yes, John but why do I need to make a payment back to myself instead of just letting the unused money sit in m checking account? Simple, human nature will not allow you to truly “save” your car payments unless you get the money out of your day to day cash flow and super easy access. Money is only saved if it is focused and not frittered away on other things we really don’t want or need.
Focused cash flow is the key to wealth and the disposition and growth of that cash flow are critical if you want to get ahead and have more options later in life. Did you ever “save” money on a big item? Where are those savings now? Precisely! Get in the habit of taking “savings” and truly making them savings by taking them out of your cash flow account and into a separate tax-free account.
Automobile ownership is a luxurious necessity in this fast paced world (in most places) and is a source of pride in owning a nice automobile. However, the dollars at stake here are massive over time and you need a strategy on how to stop the wealth drains of depreciation and interest on these purchases.
Next week we will show you a proven system on how to actually make money on every car you ever own which is a game changing piece of information. You can also get a jump on next week by watching a video on this very topic. Make sure you sign up for my Youtube page when you’re there watching this video! https://www.youtube.com/watch?v=JjERU7KY16c&t=74s
And You Don’t Even Know It
The first and biggest “wealth drain” is taxes.
Our tax system is designed to penalize hourly and salaried workers while rewarding entrepreneurs and business owners. Salaried workers pay taxes based on what they gross, while business owners pay taxes based on what they net. To that end, most people think Fortune 500 companies getting something over on little guys. Keep in mind, you don’t have to be a big business to get great tax advantages. Even startups get huge tax benefits. So rather than complain, maybe you should run a business from your kitchen table
To qualify for tax deductions in that business, the IRS says you must intend to make a profit. When that standard is met, you automatically qualify for dozens of tax deductions that you don’t get as an individual. Most losses and startup expenses can be written off against other income from your job (limits apply, so get a good business CPA to work with you). Realize that nobody else (not even your CPA or tax preparer) cares how much you pay in taxes, so it’s your job to understand how the system work and how to use it effectively.
Losing the Chance at Compound Growth
Another set of huge wealth drains are market losses on investment capital that you control. When a stock or a piece of real estate drops significantly in value, it could take years for you to get back to even. And, of course, there are no guarantees that it will come back during your investment lifetime. The less capital you have invested, the less you can benefit from the power of compounding growth.
If the compounding curve of your money is broken by market losses or premature withdrawals, it has a massive effect on your final pool of wealth. For example, if you were offered a job that lasted only 36 days and you had two choices on the pay plan, which one would you take? (A) You could be paid $5,000 per day at the end of every day, for a total of $180,000. (2) Your second option is to be paid one cent starting on Day One, but your pay would double each day — be compounded by 100 percent — and payable at the end of those 36 days.
If you jumped at the $180,000, you missed the power of true compounding of money. If your coworker doing the same job chose the compounding penny, he wouldn’t be a millionaire. After 36 days … he’d be a filthy rich multimillionaire with a final check of $343,597,384. Obviously, your investments won’t experience such rapid (or consistent) compound growth, but do the math —
the power of the compounding curve is strong over time — if you don’t break it with big losses (which you can’t always control) or withdrawals (which you can).
Money Lost in Fees and Interest to Banks and Financial Companies
The next massive wealth drains we face are interest and fees paid to banks or finance companies. Money-lending has been around for thousands of years, and any business model that’s lasted that long is a winner — for the business. But when you’re on the borrowing side of the transaction, it’s a wealth drain, especially if most of your borrowed money is spent on depreciating assets
Now, people will tell you that if you can borrow money cheap and invest it in something that has a higher rate of return than the interest rate you’re paying, then you’re using leverage properly. That can be true, but those attempting such a move should be aware of the caveats. Try this simple exercise: Add up all the money you’ve paid out over your lifetime in monthly payments. Then compare that total to the amount of money you have saved for retirement and see which one’s bigger. (If you’re willing, we’d love to hear about your results in the comments section below.) Then think about how to be a lender, and not a borrower.
Depreciation of Vehicles and Other Large Assets
Another massive wealth drain comes from the depreciation of cars, boats, equipment, appliances and most other large assets we buy. Most people will lose more money on cars during their lifetimes than they’ll ever save for retirement, let alone all the other depreciating assets they’ll buy. But there’s a way to make money on these items.
Think of your financial life as a big pie. Don’t fall for the old magic trick and focus only on what’s happening to your one slice of the pie (i.e., your investment gains or losses). Instead, pay attention to the whole pie and put a stop to your massive wealth drains.
Just a few short years ago, I was staunchly opposed to whole life insurance, because that’s what I was taught by national “gurus” 25 years ago. I wholeheartedly believed (as many people still do) that if you need life insurance, you should buy a term policy, then take the difference in premiums between whole life and term and invest it in mutual funds.
So when a good friend of mine sat me down and tried to show me a whole life insurance plan, I nearly refused to listen. Many of you reading this will feel the same way, and nothing I say will change your minds. That’s fine — you’re entitled to your opinion just as I was entitled to mine.
Thankfully, my friend showed me how a properly designed whole life insurance policy works. I soon realized that the gurus in my early years and the gurus of today were correct — based on the information they’d been given. The problem was their information was incomplete.
Whenever I hear a financial consultant (or anyone, for that matter) talk about less expensive premiums for term, I know they really don’t understand how this animal of properly designed whole life insurance really works.
With a properly designed whole life insurance policy, you get:
1. Principal protection guarantees of your money.Your cash value isn’t subject to market losses, as it is with mutual funds and other programs. When the stock market tanks again (and it’s never a question of if but when), you won’t lose a dime.
2. Guaranteed growth of your money every year. This will be interest-rate-driven based on the economy, but your account will move forward every year regardless of what the market does. This is compound tax-free growth and not the “average rate of return” you get with mutual funds. To be fair, in our current low-interest-rate environment, the growth rates are only in the 2 percent to 4 percent range but as you study further you start to realize the real wealth is not in the growth rate even when rates go higher.
Many financial advisers will tell you that your money would do better in a good mutual fund. But remember: When someone shows you an “average rate of return,” they can start taking that average from any time that benefits their example. This is not compounded growth but rather a factor of timing as to when you enter and exit the market. The stock market has wild swings; if that is acceptable to you, you should have much of your money in stocks. If not, maybe it’s time to consider a different way to think about investing. (Remember the period from March 2000 to October 2002, when the Nasdaq lost 78 percent of its value? It’s been 14 years since the dot-com bubble started to pop, and the tech-heavy index still hasn’t quite recovered to that level. If you like guarantees and stability then you have no business putting most of your money in the stock market.)
3. Dividends paid to policy owners are not taxable. Dividends aren’t guaranteed, but many reputable life insurance companies have been in business for more than 100 years and they’ve paid out dividends every year. The amount of that dividend will depend on several factors, but it boils down to how much profit the insurance carrier made. When properly paid to the policy owner, those dividends are not taxable.
4. A high starting cash value amount, based on what you contribute to the policy. Whole life policies that aren’t properly designed will have very little cash value in the early years.
But a properly structured life insurance policy will have high cash value percentages, even in its first year, and they increase every year. This becomes an important fact when you realize that access to your cash will help you grow wealth systematically regardless of market conditions
5. Access to your cash value at any age, at any time, for any reason — without taxes or penalty. This is a huge benefit of whole life policies compared to 401(k)s and IRAs, which impose multiple obstacles if you want to access your cash before retirement, and penalize you if the funds you borrow from them are not paid back by a certain time and at a certain interest rate. No such obstacles exist with a whole-life policy. So leave your cash in the policy if you wish, or borrow it back out and use it, the choice is yours.
6. The ability to use your account’s cash value to recapture lost depreciation on major purchases and interest and fees paid to banks. If you treat this pool of money inside the life policy like your own personal bank, you can loan it out to yourself and others to create wealth. (More on this in future articles, but suffice it to say for now that banking has been around in some fashion for thousands of years. Any business model that lasts that long is worth understanding and using to your advantage.)
7. Guaranteed insurance. Once the policy is in place, your insurance is guaranteed for the rest of your life. Many people assume they’ll be able to buy new insurance at any point in their life. But nothing is further from the truth — especially for those who’ve been diagnosed with chronic or terminal diseases. If you become seriously ill, don’t expect to be able to buy a new policy.
With many whole-life policies, you can add an “accelerated death benefit rider” for little to no cost, which will give you access to a large portion of your death benefit during your lifetime if you have a terminal or chronic illness. I just had a colleague with a client who was diagnosed with Lou Gehrig’s disease, or ALS, and was sent a check from his insurer for more than 70 percent of the eventual death benefit. He’ll be able to enjoy his remaining time without worrying how he will pay his bills.
8. The ability to combine your life policy with the worlds of real estate, private lending and auto financing to accelerate your wealth, both inside and outside of the policy. Just remember that any funds inside the policy are tax-free for life.
9. Death benefits. In addition to all the benefits you can make use of while you’re still here, at heart, this investment is still a life insurance policy, so when you eventually die, there will be a sum of money left behind to your beneficiaries — tax-free.
There’s a reason family dynasties have been using life insurance for generations to grow and protect their wealth. Even when subject to estate limits, these death payouts go a long way toward promoting the tax-free, inter-generational transfer of wealth.
Of course, insurance company policies and riders will vary by state due to state regulations and depending on the actual insurance carrier. But you won’t find another type of account or investment that has all these benefits in one investment — not 401(k)s, IRAs, mutual funds, stocks, bonds, precious metals, real estate, nor any other account.
Many have heard of an IRA but do they really know what it is or how the different types work? An IRA is an Individual Retirement Account. IRA’s are a way for you to save for retirement; something like a savings account but with limits on deposits, tax deferral, and restrictions & penalties on accessing the funds. Also, an IRA is an account and not an investment. The money is in the account and applied to different investments depending upon your choice of investment. Typical investments are stocks, bonds, mutual funds and/or other assets depending upon the type of IRA you opened.
Here is a breakdown of different IRA’s:
- Traditional IRA – Generally, you pay taxes on the money (what you put in) when you begin your withdrawals; the money you initially put in is therefore tax deferred. The thought process on this is when you begin your withdrawals (currently mandatory at age 70-1/2 but can start as early as age 59-1/2 penalty free) your income will be less so your tax bracket is lower therefore you will owe less in taxes than if you paid them as you earned the money. With the advent of the 401k many people that leave their employer with a 401k then move the money into a Traditional IRA account.
There are annual limits on how much money you can contribute to a Traditional IRA based upon your income and age. As an example, currently in 2016, if you are under age 50 you contribute $5,500 annually. If you currently contribute through an employer plan consult a tax advisor before contributing to your IRA as it many impact your tax deductions allowed.
You can request an early withdrawal from your account however it will be taxed and you will pay a penalty (currently 10%) if it is requested before age 59-1/2.
- Roth IRA – With a Roth IRA you pay the taxes on the money going into the account and then your future withdrawals, including earnings, are tax free. However, the account must be open for at least five (5) years and the distributions begin after age 59-1/2. There are allowances for penalty free withdrawals such as for a first time home buyer. Also, other withdrawals can be made tax-free; however, you might still have to pay a penalty. Always consult a tax advisor before making a withdrawal.
- SEP IRA – Generally just referred to as a SEP this is a Simplified Employee Pension IRA. The SEP IRA is used by business owners with one or more employee’s, those that are self-employed or have freelance income for a simplified method to save and contribute to the employee’s and their own retirement. A SEP IRA is opened for each individual and contributions are made to the IRA by the employer. The SEP IRA follows the same rules as a Traditional IRA.
- SIMPLE IRA – This is also for small business owners/employers and provides a simplified method for them to contribute to their and their employee’s retirement. SIMPLE stands for Savings Incentive Match Plan for Employees. This differs from the SEP IRA. Here employees may chose to make salary reduction contributions and the employer then makes matching or non-elective contributions. Each employee has their own SIMPLE IRA set up and contributions are made directly to that account.
- Self-Directed IRA – This is similar to the Traditional IRA. However, the big difference is that you have control of the investments. To open a Self-Directed IRA you must contact one of several companies out there that act as the custodian for your account. You work through the custodian on where you want the money invested. There are many more options for investing using this type of IRA. Some options are real estate, tax lien certificates, precious metals and so much more. However, there are strict rules on the self-directed IRA so be sure to do your research. For example: No loaning of money to yourself, your spouse or any family member in your direct linear family chain.
If you are interested in knowing more about IRA options you can check out information available on Roth Conversions and a Perpetual Pension that I have available for you. Also, there are two great videos from Frontline and 60 minutes for you to watch.