Are you 100% sure you are going to have a great retirement or do you have some doubts? If you are like most Americans, you probably have some doubts.
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Most people have $2 million of lifetime income going through their hands. Yet, at age 65, they wind up with about $60,000 in assets. This is certainly not the American Dream. Since people are only saving 3% of their income, you may be curious as to where the rest of their money is going. About 34% of their money is going to pay interest on cars, credit cards and whatever they finance. Another 40% is going out in taxes, which leaves retirees with just 23% of their money left to live on. This lifestyle money is used to pay for everything else. Most financial professionals concentrate on the 3% of savings and tell you to save more money. Unfortunately, most people can’t save more without changing their lifestyle.
Advisors should be trying to reduce their interest and taxes so they can have more lifestyle money. The problem is not what they are doing, but how they are doing it. I want to show you how to accomplish this and be debt-free in 10 years or less without spending anymore money than you currently are. These 10 principles can be applied to your life and create wealth on any income.
Principle #1 - Spending is Emotional
People are comforted by the fact that math is always constant. For example, 3+1 always equals 4. No one likes unexpected math when it comes to their finances. Let’s say your finances are like oranges. While 3 oranges plus one orange does initially equal 4 oranges, there are other outside influences we can and can’t control. Our oranges could encounter negative influences like getting eaten, rotting or squished. A positive influence would be planting the seeds to create more oranges.
Principle #2 - When You Track Your Money, You Control It
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Budgets rarely work because they are like diets; they tell us what we can’t do, which no one likes. However, if you learn to track your money and realize where the money is spent, you’ll be able to control your money and know exactly where it’s going to go.
Principle #3 - Savings are Delayed Spending
You should split your savings into three separate categories: Emergencies (20%), emotional spending (20%), and long-term savings (60%). We know emergencies will come up, like roof leaks or car trouble, so you need to plan for those things. There will also be emotional spends, like that vacation you are dreaming of, so it’s necessary to plan for that too.
Principle #4 - Power Down Your Debt and Power Up Your Fortune
The more money you can take away from the institutions that you pay interest to, the better off you will be. Let’s look at an example: Mark and Joyce were not going be out of debt for another 29 years and had three options. They could either power down their debt, do a proportional saving, or do nothing at all. By choosing the first option without spending any more than they were already spending and not reducing their lifestyle, Mark and Joyce were able to power down their debt and become debt-free in nine years instead of 29! Not only were they out of debt, they were able to save an additional $900,000 tax-free for retirement! If it worked for Mark and Joyce, it can work for you!
Principle # 5 - Know the Rules
You have to understand how rules and money work in regards to taxes, interest and compound interest.
Principle #6 - The Rules are Always Changing
There are constantly new tax laws coming out, and they are always changing. For this reason, it’s important that your advisor goes over new rule changes every year. Be aware of any updates regarding tax laws that may affect you.
Principle # 7 - Always Look at the Big Picture
It is important to know exactly when you are going to be debt-free. Having a plan is a great way to know what you will have in retirement while giving you the big picture on how to get there.
Principle #8 - Organize Your Finances
Organizing your finances enables you to create more wealth. You can organize them one of two ways. You can either ABC your assets, which is an alternative approach in managing risk, and/or organize your assets according to how they are going to be taxed. There are many kinds of accounts that are taxed in different ways, such as tax accounts, tax-free accounts, tax-deferred accounts, insurance and capital gains taxes. Do you think taxes are going up or are they going to be the same? Most people believe they are going up, and the best time you can start planning for taxes is now.
Principle #9 - Understanding Taxation Enables You to Retain More of Your Money
We have to understand that taxation does make a difference in how we take our money out and accumulate it. Let’s look at a comparison of taxed, taxed-deferred, and tax-free money. We will start with a $10,000 investment at 28 years, at 7% with a 25% tax rate. Your account would be worth $41,000 in a taxable investment, $49,000 in a tax-deferred investment, and $66,000 tax-free. If you can start moving your money into a tax-free environment, it can make a huge difference on how much you’ll have in your savings.
Principle # 10 - Money in Motion Creates More Money
Make your money work harder than you work. The velocity of money creates more money. This is what the banks do, and this is what you can learn to do as well!
When you put the 10 principles to work in your life, you will be able to accomplish your financial goals and have the retirement you always dreamed about!
Source: 10 Principles of Money Mastery created by Larry McLean, Your Family Bank