Tuesday, August 23, 2016

Its A Matter Of Priority

Have you ever missed an opportunity to increase your financial position because you did not have the resources necessary to capitalize on said opportunity? There is merit to the phrase “It takes money to make money.” However, for many the excuse is “If they quit takin’ what I’m makin’ what I’m makin’ would be workin’ to make me more.” The inability to build wealth is often blamed on outside factors rather than ourselves. It has become passé to take responsibility for our own inability to build wealth. We like to blame the government, corporations, and the 1% for reducing our ability to have money to make money, but the real culprit is actually our priority system.

I have come to this conclusion. If I can legally take money away from the government, thwart the efforts of corporations to separate me from my income, and participate with the 1%, I can advance my cause to build wealth. These three fundamental actions are all you need to increase your ability to build wealth. First, keep as much money away from the government as legally possible. Notice the optimum word is legally.

The Income Priority strategy that I write about in my book, Simple wealth Building Strategies, starts with funding your Obligations. Obligations are financial “must haves” that are directly deducted from your paycheck. That means income taxes of course, but it also means fully taking advantage of tax-favored accounts (such as 401k’s, 403b’s and HSA’s) and selectively using company sponsored benefits.

If I have to rank the priorities within the Obligations category, I would say Income Taxes first, Company Sponsored Benefits next, and 401k/403b third. Most people who have medical benefits through their employer can choose a high deductible health care plan with the option to fund a health savings account, otherwise known as an HSA. Ironically, when you choose to prioritize your 401k and HSA in the Obligations category, you essentially put your investments ahead of your income taxes. That’s because tax favored accounts can significantly reduce your taxable income and actually give you the money you need to make more money.

This single action of funding your 401k and HSA directly contributes to the second action you need to take in order to build wealth. Thwart the efforts of corporations to separate you from your money by keeping as much money away from yourself as physically possible. Believe it or not, with one single action you can accomplish both of these objectives. Simply make it a priority to shelter money in tax-favored accounts. That’s it. Company sponsored retirement plans are the best place to hide money from the government, but these plans also keep money physically away from you by reducing your spendable income.

Taking advantage of tax favored accounts that are deducted directly from your paycheck is like taking a spending cut. Keep in mind that with less resources to spend, you must become more diligent about budgeting the resources you do have to spend. That is why I advocate using the O.N.C.E. Priority system. Chapter one of my book Simple Wealth Building Strategies fully explains the importance and process for prioritizing your income. The three most important actions you need to take (legally take money away from the government, thwart the efforts of corporations to separate you from your income, and participate with the 1%) can be accomplished with one comprehensive action. Take advantage of tax favored accounts.

To give you an idea of how tax favored accounts accomplish these three actions, consider the following example. Let’s assume a 50-year old woman who is planning on retiring at 62 implements the actions discussed above. She has an annual income of $71,750 that increases at 2% a year. Her strategy assumes that she will live about 30 years in retirement and wants to have 65% of her current income. Her estimated Social Security Benefit is about $1,639. She currently has $17,549 in a retirement plan and earns a modest 9% rate of return. The inflation rate is 3% a year. Her company matches 100% of the first 4% of her salary.

Just by making her 401k a priority, she can legally take money away from the government (at least in the present), reduce spendable income which reduces the stress of corporations trying to separate her from her money, and she can participate with the 1%. By doing the same thing, you get to ride the wave of the 1% while withholding your money from the government and not allowing corporations to interrupt your plan. If she changes her 401k contribution from 6% to 18% her results increase dramatically. Taking it to the next level, maxing out her contributions to her 401k at 33% increases her ability to participate with the 1%. The image below shows the results of the first year.

At 18% of her income, she can legally take over $3,200 away from the government. This money can be used to build greater levels of wealth. The 401k gives her the ability to use the government’s money to build wealth. She has also reduced her spendable income by over $15,700 which means that corporations have less influence over her plan because she now has to be more diligent about her spending behaviors. At 33% of her income, she can legally take over $4,900 away from the government. She has also reduced her spendable income by over $19,000 which means that corporations have no influence on her plan. One action, three significant results. It starts by having a plan to prioritize your income.

Let me show you how having a financial strategy can increase your wealth. How does participation and executing a strategic plan differ? Consider the example. The same person, using the same assumptions, executes her plan for the next 12 years. At 6% of her income (the participation rate), she amasses just over $215,000 and has a monthly annuity equal to her monthly Social Security Benefit. Her monthly Social Security Benefit is estimated to be $1,639 and her estimated monthly annuity is $1,678. However, making the 401k a higher priority, she saves over $414,000 and has an estimated monthly annuity of $3,230 which is nearly 2x her monthly Social Security Benefit. If she maxed out her 401k (the strategic plan), she would amass over $663,000 and could expect a monthly annuity of $5,170. Combined with her monthly Social Security Benefit, she would have an annual income in retirement of $81,700.

There are those who will argue that no one can save 33% of his or her income. I can tell you from personal experience, you can if you execute the right strategies. When you have prioritized your income according to the O.N.C.E. system, you open the door to take advantage of so many more opportunities. You have to lay the foundation of solid money management behaviors. The best way to do that is to learn from those who have accomplished what you want to accomplish. No process or strategy transfers from one situation to the next perfectly so you will have to determine which strategy is of more value and execute that one first. Once you get started, you will accomplish more than you imagined.

What you do today will have a direct impact on where you end up tomorrow. In a world of uncertainty, having a strategy for building wealth is a necessity. As a financial stability life coach, I wrote Simple Wealth Building Strategies for those who want to develop a comprehensive strategy for building wealth. Wealth is less about how much you make and more about how you think about money and what you do with it. It is behavior that is predictive of a person’s ability to turn the average income into a lifetime of wealth. Income is a poor measurement of a person’s wealth. Wealth is measured by accumulation of financial resources. You can earn a million dollars, but if you fail to preserve a substantial amount of that income, you are by no means wealthy. Wealth building must be a priority over material possessions and physical experiences. If you get this wrong, you have missed the entire reason for earning an income in the first place.

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