Today’s Money and Taxes

Look in your savings, checking account, or wallet right now. The money in there is worth more today than it ever will be in the future. The reason is something called inflation, and recently it is getting a lot of press. Going back 30 Years to 1981, the average rate of inflation has been 3.31% per year. This means if you had $1,000 in 1981; it only has the spending power of $364.29 today as it did in 1981.

The next topic is taxes. Today there are record deficits and large unfunded liabilities by both state and federal governments. Our population is aging, and our workforce reduced. Politicians have two choices either they can cut benefits or raise tax revenues. So this begs the question, which direction do you think taxes are headed?

So why does traditional thinking say take as many pre-tax dollars today and defer them for use as far in the future as possible? Think about it, we are taking our most valuable money (today’s dollars); deferring taxes in what most likely will be our lowest tax bracket. So one day in the future we will have less buying power and our money will be taxed the most.

How long do you want to do this?

Would you like an alternative?

If you would like an alternative please email me @: josh.smith@gmail.com

The “1” Question you need to ask and consider before you put your money anywhere?

Many people find out the hard way, once it is too late. That once seemingly great place to put their money has now handcuffed them or not available when they need it the most. Even if they thought they would never need that money sometimes life happens. Some of these events include but not limited to:


• Unemployment
• Disability
• Divorce
• Treatment for Medical Illness
• Education Expenses
• Wedding
• House Down Payment
• Business opportunity


The “1” question most people never ask:


How do I access my money and how quickly can I get it in an emergency?


Due to not asking this very question many people are forced to put items and expenses on high interest credit cards or pay unnecessary taxes and penalties at the very moment they can least afford it.


Some factors to consider and ask when placing your money in an account:


• How quickly can I get my money? (Ideally you would want less than a week)


• If I ask for my money, will I get it automatically or will I have to go through an approval process and qualify to get access to my own funds?


• Will I owe a penalty and taxes when gaining access to my savings?


• Will all my money be there when I need it the most or will it be subject to the ups and downs of the stock market?


• Can I use my money for anything I see fit or am I forced to use it only on certain expenses?


Throughout the years I have heard some terrible stories about folks struggling financially. Many times they are struggling financially not because they are not responsible people. They always had good intentions, however due to where they chose to put those savings has caused them many unintended consequences they never thought possible. That is why I think you should always ask this “1” question before putting your money in any account:

How do I access my money and how quickly can I get it in an emergency?

What’s the best place to put my money?

What’s the best place to put my money?

Listen to just about any financial talk show and within the first fifteen minutes they always get to this same question. What I’ve learned over the years instead of answering the question directly it’s better to name the attributes the person would be looking from this financial product. The reason is many people have prejudices over certain financial products simply because of their name and not from any real world experience. People kick many products to the curb too quickly, and give some products a lot more praise than they are worth. The underlying cause, I think, is very few people explain how these products work, and over time if you hear something often enough many people will begin to think it is true without any real proof (think about the earth being flat etc.).

I thought I’d share characteristics of two places you can put your money:

• The first (Account #1) is the most popular place people say to put your money and has drastically changed the way people are forced to view retirement.

• The second (Account #2) is the place I put most of my own personal wealth and I think if more people really looked into would want to put theirs as well.

Account #1:
• Your money grows tax deferred
• Limited contributions per year
• No or limited access to your money (Not even for cars, houses, college, unemployment, or vacations etc.)
• All distributions are fully taxable at an unknown future tax rate
• 10% penalties + 100% taxable withdrawals are incurred if taken prior to age 59-1/2
• Creditor protected in most states
• Put in place by an act of congress a little over 30 years ago
• In 2001-2002 and again between 2008-2009 many people lost over half of their savings
• No guaranteed future value or growth
• Cannot be used as collateral
• Unknown total fees paid

Account #2:
• Your money grows tax deferred
• Unlimited contributions per year
• Complete access to your money at any time (For cars, houses, college, unemployment, or vacations etc.)
• All distributions can be made completely tax-free if structured properly
• No penalties if taken prior to age 59-1/2
• Creditor protected in most states
• Has been around for over 200+ years
• Competitive rate of return that can only go up year to year
• Guaranteed future value and growth
• Can be used as collateral
• No hidden fees paid

Let me know in the comment section which account you would prefer.

The 3 Places you can Spend your Money

The 3 Places you Spend Money

Have you ever thought about every dollar you have ever made and exactly where you spent it? Sometimes big purchases stick out like when I bought my wife’s engagement ring, or the $100 I spent on a pager when I was a senior in high school (I know I am showing my age a little). Throughout a lifetime there is only a single pool of money we will earn and even for the average person that can be multiple millions of dollars. Creating wealth however, depends on the stewardship we have towards this money and where we chose to place it. Below are the 3 places we can put money:

#1 Lifestyle: This is the money we use in our everyday life to buy things like food, clothing, and entertainment. One of the biggest influences on lifestyle expenses is your home (typically the bigger the home the bigger the expenses associated with it). Often when trying to focus on creating more wealth Lifestyle is the only place most folks (and “so-called” experts) concentrate. If you’re like most people working hard 40+ hours a week only to eat beans & rice, and drive a beat up used car is not your idea of Lifestyle then we think very much alike. However, this is exactly how most financial experts help folks try to create wealth. I am not saying lifestyle should not be reviewed to help create wealth, but it should not be the sole source.

#2 Future Savings: This is the money we are able to save. This could be money in your checking account, savings rainy day fund, life insurance cash values, or a retirement plan. Ultimately this is the measuring stick for wealth for most people. Until the recent financial crisis many people were saving next to nothing for the future. Fortunately the savings rate is up over the last few years; however I think it could go even higher if we all could focus on the third place our money goes (see below).

#3 Transferred Money: This is the money we transfer to other institutions with no real apparent value lifestyle wise or economically. Transfer money includes but it not limited to things such as:

• Interest on debt (such as credit cards, car loans, personal loans, and home loans)

• Taxes (such as federal, state, local, S.S. taxes, Medicaid/Medicare, sales tax, gas tax, property,
and on-on i.e. there are too many taxes to list)

• Insurance expenses (such as health, car, home owners, and term life)

• Fees (401k admin fees, bank fees, late fees, mutual fund fees, etc.)

There is also a concept within transferred money that is called “Opportunity Costs”. The idea is when you transfer money not only did you lose those dollars, but you also lost the interest those dollars could have earned had you avoided the transfer altogether.

For instance if you had a regular savings account you were saving $5,000 per year into and was earning 5% per year (interest rates are historically low now so I have assumed a higher Rate of return for illustrations purposes only). You would earn $250 in interest in year 1 and owe $75 (30% assuming 25% federal and 5% state) in taxes. An opportunity cost says not only did you lose the $75 but you also lost the future interest the $75 could have made (because you could have saved more if you did not have to pay the $75 tax). If this happened every year for 30 years at a modest rate of return of 5% then your account value would be $348,804, however you would need to subtract the taxes paid and opportunity cost of those taxes. The total taxes paid plus their opportunity cost = $94,829. This would leave you with a net account value of $253,975. So in summary this one decision alone costs this individual almost more than they earned in interest. See below:

$150,000 (total investment $5,000 * 30)

$198,804 (gross interest) – $94,829 (Taxes + Opportunity cost on taxes) = $103,975 (Net Interest Earned)

See the survey to the right and click on which you think might be a better option to create more wealth.

Relationships and Finances on Valentine's Day

On this day (Valentine’s Day) that is special to some and dreaded by others I thought I would share the importance of finances in a relationship. I know many couples who are married or in a long-term relationship, however one of the key ingredients to those that are happiest seems to be their similar thoughts about money. The reason I think this is important is the way a couple treats their finances is indicative of the love and mutual respect they have with one another. I am lucky to have found someone to share my life with who also shares these same philosophies.

If there is no respect for finances in a relationship it may be a pretty good indicator of where that relationship is headed. It’s kind of like the old saying goes: “When the money is gone love goes out the window”.

Let me know how you feel using the poll to the right:

Straight Forward Word's from Mark Cuban

Mark Cuban is an outspoken entrepreneur. Unlike most men of his wealth he has an uncanny ability to get his point across and best of all most his statements are not always politically correct. I recently was forwarded the article which is linked below. He hits home on three fronts that I always do my best to confront when talking to others about their money.

#1 Cuban says: No longer does Wall Street want you to consider buying what you know. Today, your investment advisors want you invest in things you have absolutely no fricking clue about and have pretty much absolutely no fricking ability to learn about.

-The reason I stress this is: How can you judge how good or bad something is and matches up with your needs without even knowing how it works?

#2 Cuban says: Remember this. It’s better to make less, or next to nothing than to lose everything. Don’t get greedy. Don't get desperate. The stock market can’t save your financial future, but it can end it.

-The reason I stress this is: Never put any money more at risk than you are willing to lose. Most people are risking their entire financial future playing the slot machine (See #1), when the casino (ie Wall Street) is the one controlling the odds.

#3 Cuban says: Ask them (Your advisor) if they are making the exact same investment with their money.

-While an advisor wouldn't necessarily have the same holdings as they are suggesting, it is a good insight into how/where they are saving their money (if they're saving any money at all for that matter). If you are taking off your financial clothes for an advisor they should be willing to do the same for you.

To read more click below:
http://www.businessinsider.com/wall-streets-new-lie-to-main-street--asset-allocation-2011-1

Self Reliant, Doers, Independent Thinkers

Below is a link to a website I frequently view. In principal this is how I live my life financially. While it's not right for everyone I thought Pamela Yellen's recent blog post was worth discussing.

What caught my attention is the focus on those who think for themselves and do not look for others (being people or institutions) to provide solutions in their lives. It got me thinking about those that I admire or whom I view as being successful. The trait that has separated themselves from the pack is that they were all doers who were self reliant independent thinkers. They didn't simply go with the flow, or do what everyone else told them to do. The difference was they blazed their own trail!

http://bit.ly/nationintro