You must understand that in order to improve your financial life, it will be necessary to enlist a new thought process. Creating a new process will help you analyze your current financial situation and create more options and opportunities in your life.
There are many challenges in achieving financial success. Getting ahead and meeting life’s financial goals remains elusive to many. The reality is that, right from the beginning the deck is stacked against you.
This is not to blame all the professionals in the financial services industry, as there are many highly trained professionals out there. Some are better than others are. Their job as planners is very difficult because, whether they understand it or not, the deck is also stacked against them. If you need the services of a professional, you might be better off working with one who can explain the challenges that both of you face. Traditional planning and thinking is not a science. If it were, no one would lose money. It will be far more important to use a common-sense and logical approach in the attempt to secure your financial future. Even then, it will be difficult to achieve your goals. It should be understood why traditional thinking fails to reach its financial projected goals.
THEORIES & FACTORS
Traditional thinking is mired in the thought that the accumulation of money and rates of return are two factors that will determine your future success. Although on the surface these factors seem important, they will not secure or determine future success. Once again, your future success will determine your future success. Once again, your future success will be determined not only by the products you have but also how they will be impacted by the economic trends and shifts in the future. It is far more important to understand how your money works and the buying power of your dollar, so you can effectively and efficiently use your money.
THE ACCUMULATION FACTOR
Accumulating a lot of money is a good thing. Traditional thinking will establish goals of how many dollars you will need in the future to secure your financial success. Reaching accumulation goals are seldom achieved, which is not your fault or the fault of the planner. Here is why these goals are difficult to achieve. The reality is that we live in a country that has a “flexible currency,” otherwise known as fiat money. Our currency is created by the Federal Reserve (the banks) and distributed by the Federal Government. The dollar in its creation has no real value. That means it is not backed by silver or gold that would give it value. The flaw in the flexible currency had real value from the start; there would be very little, if any, inflation. It is almost impossible to nail down the value and buying power of flexible currency at any time in the future. Simply planning to reach an accumulation level in the future is good, but achieving this may fall short of your buying-power expectations in the future.
The accumulation factor also offers you some guarantees. FIRST, in trying to accumulate and make your money grow…you are the only one at risk. SECOND, that growth will probably be taxed, at what level it will be taxed is anyone’s guess. So, the accumulation factor has a lot of moving parts, such as flexible currency, its future buying power, risk in the marketplace, and the lack of consistent growth, taxes and the threat of even higher taxes in the future.
In the accumulation factor, the central thought is the more money you have, the better it is, but with all the hurdles, reaching fulfillment in this type of thinking is challenging. You must ask yourself: am I feeding the problems of taxes, risk, inflation, penalties, and the decreasing value of the dollar in the future or am I solving these problems? It is like a basketball coach telling his players that they better go out and score 200 points in the game because they have no defense or protection to stop the challenges and problems they face.
THE RATE-OF-RETURN FACTOR
Another reason why traditional thinking and planning falls short of its goals is the rate-of-return factor. People are of the belief that if they can grow their money at a certain rate of return, then all will be well in the future. Rates of return have been used by planners as a barometer of how you are doing over a period. They also use past performance rates of return as if they were some indications of the future. Although past performance is some indication of stability, management, and success, it really offers only a glimmer of possible performance in the future. When you buy an investment, your performance history starts that day, not 10 years ago.
Rates of return are a performance measurement. The reality is that you cannot spend rates of return; you can only spend money. Rates of return can be misleading and confusing when used for a measurement of your success. Everyone looks for that positive rate of return, but those returns create a false sense of security.
WHAT YOU SEE AND WHAT YOU GET
As an example, let’s take a look at a homeowner who bought a house nine years ago for $175,000. Over that period of nine years, the value of the house rose to $250,000. The owner of the home looks at this growth and says, “WOW, that is more than a 40% increase.” Although that state is true, I wouldn’t go out and buy that “I’m a Genius” T-shirt yet. The reality is that when you take into consideration that time frame of nine years, the real rate of return is 4.04% per year.
Another example of “what you see and what you get” will alarm you. In a time, frame from 2000 through 2007, the Dow Industrial averaged 2.57%. That is the average of the average. Using that when you take into consideration that time frame of eight years, one could assume that if he had invested $100,000 and received the average 2.57% rate of return, he would have accumulated $122,495.60. But…if a person had actually been in the market every day for those eight years and received the Dow’s actual return, he would only have achieved a 1.80% rate of return, not 2.57%. He would have accumulated $115,379.39. That is about 40% less than what the proclaimed eight-year average was.
When considering future assumptions, using a constant average rate of return in calculating future value, what you accumulated and what you thought you would accumulate will probably be totally different.
Rates of return are flexible and unpredictable in the future. Rates of return are a measuring stick. Like a thermometer, it can tell you your body temperature and can serve as a warning that you may be coming down with a cold or the flu; however, it doesn’t indicate specific serious conditions you may have.
Just as the accumulation factor, the rate-of-return factor has many variables and moving parts. Traditional thinking cannot control economic shifts and trends and predict future outcomes of all these variables successfully.
THE TAXATION FACTOR
The taxation factor is unique because we know taxes are going to impact us now and in the future, but we just don’t know to what extent. Realizing that a 15% to 40% guaranteed loss factor due to taxation looms in our future is a serious consideration that should not be ignored.
Our government tax policy is flexible (another moving part). It can go up and down, depending upon your success. Not only is your income and savings taxed, but also the government has created layers and layers of non-income and growth taxes. A phone bill may have two or three taxes on it. Your cable bill, staying at a hotel, purchasing an airline ticket, the gas that you pump into your car – all have two, three, or more taxes associated with the purchase. The government taxes businesses and the businesses simply pass on their taxation cost to the consumer, you and me, in the form of higher prices. Overall, tax rates have grown over 40% faster than our incomes over the last 20 years. Some government projections have reported that federal income taxes will have to double in the next several years due to uncontrollable government spending and its unsustainable debt.
Many times in using accumulation and rate-of-return planning and thinking, the marketing and selling of these concepts and products gloss over the taxation factor. Once again, the taxation factor has many moving parts that are unpredictable, as are the accumulating and rate-of-return factors. It is important to avoid feeding the problem as much as you can.
THE MARKET FACTOR
The market factor is pretty simple. An average person on his way home from work or at the end of the day is likely to hear how the market performed for that day. The Dow was up 50 points or the Dow was down 35 point; the S&P 500 was up or possibly down; the NASDAQ had a good day or bad day, etc. With that 10 second of information into two categories: that all is good, or oh well. The reality is that the markets are measured in volume, numbers of trades and the value of the trades (this is the simple explanation). The fact that the market went up or down has no bearing on the buying power that you control. The market indicators are a daily flexible measuring stick whose movement, if you choose to, can be watched by the second on television or websites. If you are making decisions based on market returns, you are betting that to do so into the future. The hope is that average people are smart enough or should be to understand that the slot machine that they are playing has won three times in a row, and their belief is that it will continue to win because it has won in the past. Now that’s scary.
There are professionals who play the market game very well and they know their stuff, but even they cannot control the trends and flexibility of the markets. These professionals do not use pas performances of a company to determine whether to invest in them or not. They use information based on the future opportunities that these companies have that will increase their revenues and earnings. The problem is, by the time most of this good information gets to the public, you and me, a lot of the opportunity in gaining value is already gone. If you are a hunter, it would be the equivalent of shooting where the duck was. Economic trends and shifts can impact the market tremendously.
Recently, the Federal Government has almost doubled the amount of currency in circulation in the United States. This should increase the number of dollars invested in the market. The increasing volume in the market does not mean the value of the dollar will increase. In many cases, printing more money will decrease the value of the currency. The market can go up, while the value of money goes down.
The daily market results and averages should not be the sole foundation for your financial strategies. I believe you must first have knowledge of how your money works and understand the buying power of your dollar. Knowing how money works in your life will help you maximize your money supply, create leverage for your future dollars and eliminate many of the flexible pitfalls that come with traditional thinking. Learn to think for yourself instead of being told by others what to think.
THE HUMAN FACTOR
Let’s face it: no amount of planning will ever prevent dumb luck. Unfortunately, many people are involved in “Poverty Planning.” Poverty planning takes no time, no money, and the results are pretty predictable. There is a reason why people are stuck in this mode: they have had little or no success with planning they feel they are not knowledgeable, and/or they are embarrassed to discuss their situation with anyone. They avoid and delay seeking help and simply hope that things will turn out okay, for some Americans, surviving and living week to week is difficult Confusion and embarrassment aside, one’s frustration is totally understandable. With more information and knowledge, you will have more opportunities to make better life decisions.
The other part of the human factor is consistency. Many people, after suffering losses or who continue to follow losing strategies, just give up. Some professionals do not know what they should know, and if they average person doesn’t know much at all financially, then these two ingredients become a dangerous combination in trying to produce positive results.
MOVING FLEXIBLE PARTS
I hope you now have a better understanding of what is happening in your life. With all the moving and flexible possibilities in traditional thinking, and with all the possible variables and outcomes of the accumulation factor, the rate-of-return factor, the taxation factor, the market factor and the human factor, you may have discovered why traditional planning and thinking fails to meet their goals. Any effort or attempt to plan for the future should be applauded, misguided as it may be. But with more information, you will be able to make better decisions. A new thought process will be your defining moment. I do believe some planning in your life, as confusing as it can get, is better than no planning at all. I also believe that what you know and understand today will shape your tomorrows, not only for you but also for the next generation.
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