"The market can stay irrational longer than you can stay solvent."
--John Maynard Keynes
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"The return of my money is more important to me than the return on my money."
--Mark Twain
"The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." --Ronald Reagan
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Don’t Forget about Taxes
Whether you are a Liberal, Independent or Conservative, one thing is for sure, you will have to accept the reality that you will have to pay taxes. Whether you are rich, middle class or in a lower income tax bracket, your financial prosperity with be affected by taxes. As Franklin said, death and taxes are the only certainties. Any sound financial plan must have a tax strategy to minimize the effect of taxes and to know their impact.
I remember my first job which paid $1.25 an hour. When I got that first check, I was expecting $50.94 but after taxes my take home pay was only $45.49. I thought that 10.7% of my earnings for taxes was highway robbery! That was my first experience of being affected by taxes. Oh how I wish for a return to those days of only 10.7% in taxes.
In my professional career after a particularly successful year, my tax preparer informed me that I had not withheld enough taxes and would have to pay a penalty and an additional heavy tax. It took me several payments to take care of the tax liability. I asked him to give me some suggestions to reduce my taxes in the future. He gave me some of the best tax advice I ever received.
“Make as much money as you can and then just pay the taxes due.”
Planning for your financial future should include a careful consideration of the taxes you will pay. Many financial planners and programs calculate inflation and even medical inflation but do not capture how taxes will devour the earnings.
How do you estimate the taxes that will be taken out of your earnings when you retire?
1. Ask your payroll department to estimate the tax deductions which will be taken out of your retirement pay if you have a company pension or 401k plan. You may be in for a surprise if you think your taxes will be a lot lower. They may not be.
2. If you don’t have a pension plan or 401k but have an IRA, ask whoever administers your IRA portfolio to estimate your taxes when you schedule distribution.
3. You can make a rough estimate yourself. Take a recent check stub and add up the taxes withheld from your check and divide them by the gross amount of earnings. Exclude social security taxes. This will give you a percentage of the taxes that might be withheld from your retirement distribution. Deduct that percentage from your retirement income. That is the amount you will have to live on. If you can’t live on that, you haven’t accumulated enough assets to retire.
In summary, the tax factor isn’t always given the appropriate consideration regarding how much it reduces your take home pay in a retirement distribution. As Fidelity’s Private Portfolio Service states:
“Smart investors… know the true measure of a portfolio’s worth is determined after taxes—not before.”
Please consult your financial advisor and tax preparer to discuss how the general insights in this letter may apply to your particular situation. The application of the principles suggested in this newsletter may not apply to all circumstances.
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| How to Become Financially Prosperous
Fox News host Neil Cavuto recently mentioned at the end of his show that he frequently gets asked by viewers the best way to become financially prosperous. Below is my paraphrase of what Mr. Cavuto said:
If you want to become financially prosperous it is quite simple. All you have to do is simply spend less money than you make. If you continue to do that, your money will accumulate and you will become financially prosperous.
Brilliant!
BD 6/19/2009
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First Things First
After considering all the options available to you when it comes to building wealth, it may be easy to become overwhelmed and discouraged. What if you don’t have enough money to invest in stocks or bonds? What if you’re just having trouble paying your bills? If you only have a little money, a lot of big expenses and a lack of experience you may feel very tempted to delay putting your financial plan together. The purpose of this article is to give you three simple concepts that will get you started on your financial plan. Keep in mind it is never too early and it is never too late to put together a financial plan. Today is the best time for you to put together a financial strategy and game plan.
Concept #1: Get a job.
Start where you are. Use what you have. Do what you can. Unless you were born to wealth, the first and only step to take towards acquiring wealth is to get a job. Your greatest tool to build your wealth is your job. Through your job you will not only receive a steady income stream but you may have access to health and life insurance coverage paid by your employer. You may have retirement, medical and dental plans through your employer which add to the value of your overall compensation. So the first place to start is to get a job. Get the best job you can. But don’t take too long doing it. Then do your best on the job so that you can keep it and advance to higher paying jobs. Your entire financial plan will build on that foundation.
Concept #2: Get into the savings habit.
The amount you save isn’t as important as the regularity. The easiest way is to have your employer direct deposit your payroll check. Then have your bank automatically withdraw an amount from your checking account into a savings or money market account. You will never see the money and so you will never miss it. First save 3-6 months of living expenses. After this emergency account is fully funded consider saving into a retirement account such as a 401k or an IRA. If your employer offers a 401K, deposit at least as much as your employer will match. That’s found money. If you don’t have a 401K then save into an IRA. Your bank can set you up with an IRA. The accumulated earnings on these types of retirement accounts will not be taxed until you withdraw them so they will grow faster than regular savings accounts. The catch is that there are large penalties and tax is withheld if you withdraw from a retirement account prior to retirement. That’s why you need an emergency fund.
Concept #3: Pay off your bills.
Get in the habit of paying your bills on time. Debts and bill collectors are a heavy burden to bear. A borrower ends up being a slave to the lender. Yes, you should pay yourself every month too, when you deposit into your emergency or retirement accounts. However, if you owe money pay it. Always honor your word and financial commitments. It is the greatest feeling in the world to be debt free and to know that you have honored all your financial obligations. If you can’t pay everything off in one month then just make regular monthly payments on your debts until they are gone. It will happen. Pay off bills with the highest interest rates first. When you pay your bills you are moving towards prosperity.
Conclusion:
To build a financial plan that will give you financial freedom you must put first things first. The three most important first steps are to get a job, regularly save and pay off your bills.
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Benjamin Graham’s book of practical counsel for The Intelligent Investor as reviewed by Buck Dopp.
“I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.”
--Warren E. Buffett |
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Core Principles of Benjamin Graham
A stock isn’t just a ticker symbol but an ownership interest in an actual business.
The market is a pendulum that swings between optimism and pessimism. The intelligent investor is a realist who sells to optimists and buys from pessimists.
The future value of every investment is a function of its present price. The higher price you pay, the lower your return will be.
Insist on the “margin of safety”—never overpay, no matter how exciting an investment seems to be. This will minimize your odds of error.
The secret of your financial success is inside yourself. Invest with patient confidence and refuse to let other people’s mood swings govern your financial destiny.
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Speculators analyze securities while investors use principles consistently to maximize the return on their investments.
He said that in his fifty years of stock market experience and observation he never knew a single person who made money by “following the market.” So it comes down to patiently and consistently investing in businesses you believe are solid and will yield growth and profit long term. There are then two kinds of investors. The passive investors want to avoid serious mistakes and the annoyance of having to make frequent decisions regarding their investments. The enterprising investors are willing to devote extra time in studying securities that are sound in the hopes of increasing their rewards for the extra effort.
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