One of the most powerful discoveries you can make is how money works in your life. Knowing how money works in your life is more important than where your money is, and its rate of return. You may think that learning how money works would be a massive undertaking on your part, but it does not have to be that difficult. You must first learn how to categorize your money. This will simplify your thought process and enable you to improve your life.
You have been marketed to death by companies telling you that all you have to do is to have the right products and higher rates of return to make your life better. Now, while that is important, the main focus of this marketing is for you to buy something. It sounds easy, and there is very little thinking involved. That type of marketing is aimed at the person whose life is so busy that he has very little time to pay attention. Remember, the product they sell is not the source for your knowledge; it should be the result of your knowledge. Owning more products does not make you smarter. With that being said, both you and I are going to need some products in the future. The point is that the products we have are not the center point of our knowledge. They are tools we use. Products alone will not teach you how money works.
Your thought process should begin with the understanding of the types of money you have. If you categorize your money into three types, then controlling your money will become easier. The three types of money will help you identify mistakes, problems and solutions that surround your everyday life.
POWER
The greatest financial tool you possess is your ability to earn money and generate an income stream. This continuous flow of new money is the heart of your financial life. This income can come from various sources. The largest source of income will come in the form of compensation from your career or occupation. Unless you work until you die, this source of money may end at retirement or, heaven forbid, you lose your job or, even worse yet, you become disabled, unable to work again for the rest of your life. For many, working until you die is not an option – it is a necessity. For others, an income flow can come from retirement plans and/or investments. This source of income is secured as the result of some planning in the past. Another source of income flow can come from government programs and supplemental benefits.
These benefits, and the income stream they produce, are becoming less and less certain to be there in the future. The demographic shifts, a decreasing work force and an aging population are ingredients that may reduce or eliminate these benefits in the future. No matter what the source of your income is, it remains one of your most valuable assets. It is important to remember your money will never be worth more than it is today. Let’s now divide your money into three specific groups.
SHOW ME THE MONEY
Your money is going to end up in one of three categories: lifestyle money, accumulated money and money your transfer away, sometimes unknowingly and unnecessarily. Every dollar you have will filter through one or more of these categories. Your thought process can be simplified by being able to identify how your money enters and exits your life will uncover lessons you need to learn in understanding how money works.
LIFESTYLE MONEY
Your standard of living, the way you live, has taken a lifetime to achieve. Maintaining and increasing your lifestyle for the remainder of your life should be everyone’s goal. Your lifestyle money is the amount of money you need to maintain your current standard of living. The house you live in, the cars you drive, your vacations, the country clubs, all of the comforts you are accustomed to – they all fall into the category of lifestyle money. You have worked very hard, and you deserve an affordable quality of life. You are certainly aware of your lifestyle money more than the other types of money because you live and spend money on your lifestyle almost every day. Many of the financial decisions that you make are centered on your standard of living.
Unfortunately, the cost of your standard of living continues to increase every year due to inflation. If you attempt to live above the standard of living that you can afford, you can run the risk of being buried in personal debt.
The challenge of maintaining your standard of living after your working years can get complicated. You may find yourself on somewhat of a fixed income at retirement. If you followed traditional thinking and achieved the goal of retiring on two-thirds of your working income, your lifestyle could suffer dramatic changes. You may discover that everything you buy will continue to increase in price, along with the taxes you pay on these goods. At 3% inflation, a dollar when you are 65 will have the buying power of 55 cents 20 years later.
Most of the money you earn will end up in your lifestyle. It will consume an increasing amount of money in the future. A problem occurs when people start to fund their lifestyle with an increasing amount of debt and credit.
ACCUMULATED MONEY
Accumulated money is that portion of your earnings that you attempt to save. With our best attempts and intentions, some of our money ends up in investments, saving programs, retirement plans and banks. The average American is finding it more and more difficult to save and accumulate money. According to the Government Accountability Office (GAO), we are saving at the lowest rate, per capita, since 1934 during the Great Depression. There are many reasons why this is happening, but the result of this is a great concern. Our inability to fund our future lifestyles will impact everyone.
Banks, financial planners, and investment brokers are all competing for the money you are attempting to save. In the financial world there is an enormous amount of information. You would think with all the financial magazines, news articles, TV and radio shows, and a record number of financial experts out there it would be
almost impossible to lose money. It has turned out to be quite the opposite. All this information has caused a lot of confusion. Misinformation and the “sleight of hand” make good financially sound bites and headlines. For the average American trying to save, it is becoming more difficult to separate opinions from facts, myth from reality and the truth from fiction. Greed and ambition motivate some individuals, and companies and financial institutions may use selective portions of the truth whenever it is convenient and profitable.
You may discover that your accumulated money may be the smallest category or type of money that you have, yet it is the most important. Your future and financial survival depend upon it. Your ability to save more money and increase your lifestyle will depend on understanding and controlling the three types of money in your life.
TRANSFERRED MONEY
The third and last category of money in your life is transferred money. It may surprise you that many people transfer away much of their wealth on an everyday basis, unknowingly and many times unnecessarily.
Transfers of your wealth appear in the form of taxes, interest rates, finance fees, finance charges, maintenance, and management fees, etc. The beneficiaries of these transfers are the federal, state and local government; banks; loan companies; and mortgage and investment companies.
While everyone is focusing on their lifestyle and accumulated money, the answers to increasing your wealth lay hidden in the transfers of your wealth. Learning to recognize, understand and recapture the transfers in your life will allow you to create more wealth without spending one more dime than you are already spending or facing any additional market risks. The more transfers of your wealth that you are involved in, the more your lifestyle and accumulated money decrease.
You should learn to categorize all your money. All your money will end up supporting your lifestyle, being saved, and invested for your future, or being transferred away to others. Unfortunately, any attempt to increase your income, improve your standard of living, and save money for your future also triggers some unintended consequences in your life. As you increase your lifestyle and your savings, you will incur an increase in taxes now and possibly in the future. Even increasing the amount, you save for retirement today could create greater amounts of taxation in the future. It seems every time you try to save a dollar, you will have to give a dollar away.
While improving your standard of living, it is possible you will purchase new homes, cars, televisions, home improvements, furniture, and many other items. Sometimes these goods are bought on credit. This debt has interest rates attached to it, which transfers some of your money to others. Let’s face it: almost all the purchases in your lifestyle are depreciating assets and get replaced from time to time. When you buy a new car, by the time you drive it out of the dealership, the car value drops about 30% and continues to drop in value every year. Even purchasing a home is surrounded by transfers in the form of interest rates, property taxes, school taxes, water and sewer taxes, maintenance and improvement costs, and insurance costs.
Many banks, mortgage companies and credit companies look at your buying habits as “a dollar from you is a dollar for me” opportunity. Unfortunately, apart from the mortgage interest you pay, almost all your other debt interest is not tax deductible. As you can see, these transfers can consume a lot of your money.
If you have the opportunity to recapture many of the dollars you are transferring to others and keep the money for yourself, would you, do it? Absolutely! Unfortunately, most people do not know how to do this. There is a reason why no one is teaching you how to recapture transfers. If the banks, credit card companies, mortgage companies, investment companies and the government taught you how to reduce your payments to them, well, they would get less of your money. These companies understand the lesson that your money will never be worth more than it is today. Their goal is simple: to get as much of “your money” today, where it will have the most buying power for them. Many Americans find themselves in the position of having to work hard to pay for all these transfers of wealth in their lives.
Unfortunately, most planners focus on the 3% or 4% of money people think they can save from their lifestyle money. Most planners will advise you to try to save even more money than that, reducing your standard of living to grow your accumulated money. When more money flows out of your lifestyle money, your standard of living is decreased. Do you think it would be important to find the money for savings from somewhere other than your lifestyle? If you continue to divert money only from your lifestyle, pretty soon, you can’t afford to go on vacation, buy a new car or make home improvements.
This educational material is provided by the Wealth & Wisdom Institute.
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