How you are losing your A—Even though the Stock Market is way up!

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 john@wealthwithoutstocks.com  or visit his site at www.wealthwithoutstocks.com

Can You Really Afford Your Car Lease?

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 

 

 

https://www.polk.com/company/news/u.s._consumers_hold_on_to_new_vehicles_nearly_six_years_an_all_time_high

How to win the financial battle vs. your automobile

This time of year many people’s fancy turn to owning a new shiny car during the upcoming New Year.  Dealers will need to liquidate their current year inventories to clear space for the new models.  They will be pulling out all the stops including colorful free brochures, demonstrations, and pitches by beautiful ladies telling you all about the New Year models.  Be careful not to get sucked into these sweet offers.  A new automobile is one of the biggest wealth drains for you and your family.  However, that being said a car is very close to mandatory to survive and thrive in most areas of the country.  Let’s talk about some tips on how to save a fortune on every car you ever own over your lifetime.  Many families own at least two cars which means you are getting robbed twice as fast.  Use these simple yet powerful tips to take control of this expensive item.

  • Buy the car you want but only after it is at least two years old and three years old would be better. When you choose this option you automatically will save yourself hundreds of thousands of dollars over your lifetime.  A very real life example of this comes from my own life.  When I was 23 years old I decided I wanted to buy a nice 4 door sedan and I was drawn to the Cadillac STS model and began doing some research.  The brand new model year of that car was stickered at over $50,000 and with any kind of little extras the sticker was almost $55,000.  I was very fortunate to be doing very well financially at a young age but I was not doing that well to blow 50 grand on a new car.  I was thumbing through my local paper (yes this was before the internet changed everything) and saw an ad for a 2 ½ year old Cadillac STS for $19,500.  The car had less than 40,000 miles on it and came with an extended warranty to 90,000 miles.  It was gorgeous, shiny, and just serviced.  Of course it seemed too good to be true but then someone shared with me the secrets of buying automobiles.  The largest depreciation losses on cars occur in the first three years.  According to Edmunds.com the average car will lose 11% of its value the second you roll it off the lot and additional 15 to 20% the first year you own the vehicle. That makes your first year loss of value 30%!  The second year depreciation (loss) is another 15% for a total first two year loss of at least 45%!

 

It is important to keep in mind that the depreciation is usually calculated off of the base price and does not take into account all the extras you pay for when the car is new.  This could be the sport package that raises the price $10,000 but only gives you $2,000 back after the first year or two.  So it is very possible to find beautiful cars with manufacturer warranties still in place and pay 35 to 50% less than the first owner did when purchased new.  Since the biggest percentage of depreciation occurs in the first three years, let someone else eat the depreciation and buy it used (or pre-owned as the car dealers like to say) after the second or third year.

 

I was able to drive a gorgeous car with a warranty for far less than it would have cost me new and I drove that car for 4 years and still sold it for $3,500 and had very little repairs during my ownership that came out of my pocket. This strategy works with exotic cars as well.  When I was a young man one of the dream cars then was a Ferrari Testarossa and its price tag was around $200,000.  You can buy one now for right around $50,000 and most don’t have that many miles on them because they are babied by the owners.

 

  • Another way to save a lot of money is to try and keep your term for your loan (assuming you finance through a bank or finance company) for no more than 36 months to build equity in the car faster and save on additional interest. This will be the most difficult suggestion for most people to utilize because of that seemingly large payment if you finance it for 3 years instead of 6 or instead of just leasing the car new for less money per month.  If you finance $25,000 with a bank at 5% interest for 3 years your payment will be $749.27.  If you extend that loan out to 6 years your payment drops to $402.62 which seems much more reasonable and affordable.  It may be more affordable monthly but will cost you much more in interest and less loan buy down.  You could also lease a newer model of the car for even less monthly (read part two of this article to see why you might not want to do that even though on the surface it looks attractive)

 

If you pay over 6 years you will pay out $28,989 vs. $26,974 for a difference of $2,015 more out of your pocket to own the car.  In addition, by financing it for the 6 years your loan pay down is going at a much slower pace than the depreciation on the vehicle creating an “underwater situation” on the car almost from the initial purchase date. (Assuming you buy the car with a small down payment)  During the 3 year program you are paying down the car faster than it is depreciating giving you options if you should have to sell the vehicle.  If you truly can’t afford that 3 year payment take out the 5 year option and try to send a little extra every month toward the principle to pay it off sooner.

 

There are several other ways to save loads of money when purchasing an automobile that we will discuss in part two of this article next week.

Revealing the Self-Directed IRA

There are 11 types of IRA’s; that’s right Eleven! But do you know about the Self-Directed IRA and what the benefits are?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their choices to a few investment types. Within your plan, you can choose stocks, mutual funds or bonds. And while you may have hundreds and even thousands of choices of where to put your money inside that account, chances are you won’t be able to invest in nontraditional retirement assets — especially if your IRA or 401(k) rollover is with a traditional brokerage house.

So just what is a true self-directed IRA? It’s an account allows you to invest in many other options within your IRA, including:

  • Rental real estate
  • Fixer uppers to resell at a profit (flip)
  • Private loans made at higher interest rates to other investors
  • Discounted private notes
  • Tax liens or tax deeds
  • Privately held companies and startups
  • Precious metals
  • Leases and lease options
  • Straight options (real estate options, not stock options)
  • Partnerships

Such investments receive the same tax treatment as more traditional IRA assets. Any tax due is deferred until withdrawal, typically at age 70½, when your are required to start drawing down your savings, or possibly sooner.

This is an account for hands-on active investors with unique knowledge of some of the asset classes in the approved list, not for a “set it and forget it” investor.

By using this type of account it is possible to make some sizable returns from a relatively small amount of money. Here’s an example:

You have an opportunity to buy a rundown house from an estate that would like a quick sale. You determine the house is worth $200,000 — after you have spent $40,000 in upgrades. You contract to purchase the property for $120,000. But lacking the $160,000 to proceed with the sale, you enlist a partner who agrees to provide the full amount, provided you handle all the details, including closing, rehabbing and reselling the home.

You further determine that you would like your share of the profits to go inside of your IRA for the obvious tax benefits. You only have $10,000 inside your IRA with which to invest. The proper play given these set of circumstances is to have your partner buy the property in his name or an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half ownership in this property. You pay $100 from your self-directed IRA and fill out option paperwork and give all the papers to your plan administrator.

This deal now moves forward, and the property is rehabbed and ready for sale in 60 days and sells and closes quickly for $200,000. You have $10,000 worth of sales and holding expenses, netting a $30,000 profit on this deal in five months. The actual title owner to the property agrees to pay you $15,000 for you to close out your option. This $15,000 is a return on the $100 option investment and is deposited back inside your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor put up $160,000 and received $15,000 for a five-month investment. This represents more than a 20 percent annualized return on his money, which is pleasing to almost every investor. If he used his IRA money for this investment, then his profit would be tax-deferred as well.

Rental Income

Here’s another example: An investor from New York became aware of the self-directed IRA and used some of his IRA to acquire four rental homes in Metro Detroit. Each home was purchased for around $55,000 and rents for about $900, and the cash flow goes back to the IRA on a tax-deferred basis. If he sells these for big gains years from now, that profit will also be tax-deferred.

Be warned: There are also some prohibited investments with your IRA (see IRS Publication 590-B):

  • No loaning of money to yourself, your spouse or any family member in your direct linear family chain.
  • No investing in collectibles.
  • Your IRA can’t personally guarantee any loans in which it borrows money. This means that any money borrowed by your IRA must be “non-recourse” funds, which means that only the asset can be put up for collateral and may be foreclosed upon for nonpayment. The creditor may not file suit against the IRA for any shortfall in the loan goes delinquent.

Christmas Shopping Equals Creating Wealth?

christmas-gifts-pexels-photo-190931

Here comes the end of year and Christmas season bargains you just can’t resist! Many of us will be spending more money than usual this holiday season.  Instead of worrying about it, create a simple wealth building game for you and your family. Combine wealth principles, Christmas, and technology to create additional wealth for you and your family starting this holiday season.

The question you need to ask yourself is, are you a “saver” or a “wealth builder”? There is a huge difference because most “savers” die broke and “wealth builders” die wealthy and live a wealthier lifestyle, especially in later years. So this holiday season and for 2017 try this little trick to get ahead and be a “wealth builder”.

When you are shopping for bargains this holiday season on gifts, food, wrapping paper, etc. save as much money as you can off of normal retail. Do this by shopping as wisely as time will permit either online or at some of the special sales events by retailers. So let’s assume you would have spent $1,000 on average this holiday season on gifts and holiday extras like meals and wrapping paper. According to the November 2016 Gallup poll the average American spends $752 just on gifts so the $1,000 is very realistic when you factor in food, decorations and wrapping paper.

Now assume you are a good shopper and you are able to save $300.00 off of your total retail bill of $1,000. That is fantastic but what happened to the $300.00 you saved or did not spend? For most of us it stayed in our checking account and we spent it on other items that were “non holiday” items. So the goal is not just to save money but to use those savings to create wealth. We will only accomplish this goal by focusing cash flow and getting it out of the spending account once it is saved. If you don’t do this the money is not “saved” contrary to popular belief but it’s just spent on something else.

Let’s use technology to our advantage when it comes to cash flow. First of all make sure you have a checking and a savings account at the same bank. Then pay for your items and run your life out of your checking account. Get set up for online banking, and if possible, mobile banking on your smart phone. Now you just have to do a little fourth grade math twice per week. Keep track of every item you buy on sale or use a coupon for and make a note of its retail or close to retail price. Then add up what you actually paid versus what you would have paid without the discount. The difference goes into your “wealth account” which is your savings account. This whole process will take no more than 10 to 15 minutes twice per week and does not even require a trip to the bank. So during the week you were going to spend $500.00 anyway on different items but you got discounts or used coupons and got that bill down to $400.00. Now take the wealth step and go on your mobile banking application and move that $100.00 savings over to your “savings account” and have it start to build wealth for your future. You pull out your smart phone and do a 15 second transfer from your checking to your savings account and without breaking a sweat or missing the money you are taking the first steps on creating more wealth.

In the Christmas example above that $300.00 savings is put away and generates even a 6% compounded rate of return will turn into almost $1,000 in 20 years if it is first put away and then put somewhere where it will grow. So if this is done for one year faithfully and you are able to “save” $5,000 and move it over to your savings and then invest it at the 6% rate of return you will have an extra $16,500 in 20 years for your retirement savings. Now do this every year and get better at it and you will have saved hundreds of thousands of dollars for your retirement years because you focused your savings. You’re not just a “saver” like every other shopper out there you are a “Wealth Creator”!

So next time you get a discount on something make sure you pay yourself the difference and you will very quickly establish a savings account and fund your retirement savings with tens or hundreds of thousands of extra dollars for you and your family. Now make this a truly Merry Christmas and Wonderful Holiday Season!