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The Threshold between Wealth Creation & Destruction
Wealth is simply the accumulation of money, and it can only be created by the amount of money that is received and never spent. If you want to build wealth, then anytime you receive money: dont spend all of it. Sure it is a very simple concept, but it is very difficult to continually achieve. Luckily there are readily available allies to help you: find some compelling reasons to start saving, build it into a habit, watch the results of your efforts build, and set some financial milestones to reward yourself.
Setting aside a percentage of any money that you receive is the best method to follow through and build the habit of saving money. There are a few misers among us who find saving easy to do, but most people want to spend far more than is earned; let alone have the discipline of spending less than what they earn. So it starts as an uphill mental and emotional battle that gets easier by following through with the habit, and seeing the results of your effort. Spending less than what you earn every week, every month, every year, is the only way to amass money.
How much money should you set aside to build up savings? It should be a percentage so that you automatically move it into a separate savings account anytime you receive income, without exception. It is my experience that the range of 3% to 10% is the most successful starting percentage for people who continue saving over long periods of time. Saving only 3% is so small that it is nearly painless to even the lowest income earners (this is actually where I began years ago). Selecting a percentage under 3% accumulates to such a tiny amount of savings that I havent heard of anyone sticking with it. And starting out by setting aside over 10% is too painful for even high income earners to withstand, because they are so accustomed to spending on every whim. As you repeatedly save a set percentage rate, it will become more habitual, automatic and expected. Then youll be ready to increase your percentage rate. And the higher the savings rate, your growing pile of money will create more motivation to continue to save. This summer, I spoke with a successful saver who lives very well on only 30% of his income. Because he saved diligently to continually buy rental homes, after a couple decades he earns over a million a year in rental income by Ashville, North Carolina.
In the fragile first years of saving money, it can take only a single wrong financial move to wipe out everything that youve saved so far. And the most common wrong move doesnt look like it when it is occurring. This draining move can also start insidiously small and build a different habit, the wealth-destruction habit. You know the problem: pay your credit card balance in its entirety, every month, without exception. As an example, if you havent saved money for a vacation before you depart, and then charge it all to your credit card, there is a giant probability that you wont pay it off for a very long time. The credit card companies know this and they are extracting interest dollars from you instead of earning interest yourself. Youve shifted to the dark side of wealth destruction where it is more common for your credit card balance to grow than shrink.
Lets get back to building your wealth. Once you start setting aside the savings percentage that youve decided and opened a dedicated savings account, you need to closely review your account statements for motivation. Reviewing the progress that youve made so far youll see how you are moving toward financial goals can be self-reinforcing. And another motivator is rewarding yourself by spending some money on yourself when youve reached certain milestones. For example, you could start with a goal of accruing $500, and reward yourself with something meaningful; and then each time you double your amount of savings you get another reward. My advice is to at least begin with a savings percentage, even as small as my 3%, and allow this simple concept be of great financial benefit to you.
The Four Mandatory Buckets Of Personal Finance
I have already written about the financial necessity of saving a portion of any income payment that you receive. This means that a percentage of every single source of income is set aside, marked, or tracked as money that you cannot spend. This task isnt optional if you want to have some basic financial stability or start growing some serious wealth. Saving is the first step and it is the easiest, simplest, but the most emotionally difficult step. I know that starting to save money is emotionally painful because spending money is easy and pleasurable, while saving money feels difficult and challenging. But like any behavior, it becomes easier and natural the more you do it.
As a review, the billionaire John Templeton started out working during the Great Depression but he saved 50% of his income. This guy was serious! OK, you may have a lot of fixed expenses that you just cant cancel immediately, but at least enroll in financial nursery school by saving 1% from all the income that you receive. Or start with only $3 a month and then ratchet up your savings rate continually until you are at least over 10%; or if you are ambitious get it over 30%. (If you are trying to find the loophole, this savings is your after-tax income that you can spend dont count your 401K or medical savings accounts or any other qualified money that you dont have full/immediate access to spending).
The remainder of this article is about what to do with that savings. Economics is the study of allocating scarce resources. Personal economics are similar, but I think that it is better described as: The allocation of your income that you cant spend. If you dont spend this money, and maybe have it setting aside in savings account, what do you do with it? Do you pay down on a credit card, save it for a car, donate it to a worthy cause, or purchase a bank certificate of deposit? How do you go about deciding?
Well, I have given this some thought and have reached a few conclusions. It is my view that your monthly savings needs to be divided among four mandatory categories. By this, I mean that among the zillions of things you can do with savings, it is my view that four of them are absolutely mandatory. For example, if you earn a paycheck (and after all of the taxing authorities take their share) of $1,000 that you can deposit into your checking account and youve chosen a personal savings percentage rate of 8%, then you move $80 ($1,000 X .08) into a separate savings account. Now, you will take this $80 and divide it up into at least the four mandatory categories I am going to discuss, along with any other categories that you value. In this way youll have the whole $80 assigned to specific financial duties to meet your financial goals.
Here are the four categories in priority order:
1. The Vault this is your wealth account. Money gets deposited into this account and it never leaves, like a one-way valve. The Vault is invested and the principal is never spent. It will grow into the largest part of your net worth, generating nearly all of your investment income. If you dont start creating wealth penny-by-penny, youll never have any.
2. Soft Savings a delayed spending account. This money is marked for things that you want to buy, but cant afford to purchase with normal pocket money. For example, a house, car, boat, vacation, college fund for kids, planned medical care, clothing, jewelry, etc. But this also includes maintenance to your home, like a roof, new appliances, new siding, paint, landscaping, remodeling, etc.
3. Paydown Debt Balances making extra principal payments on your credit cards, car loans, and your mortgage. By chipping away at these expenses you will eventually eliminate them all, and then have more money available for other categories. Personal debt is the opposite of financial freedom and dramatically makes it more difficult to reach your financial goals. If you doubt this, look at the interest charges you pay each month and imagine if that money had been invested instead.
4. Financial Education books, magazines, newsletters, seminars, software, investment memberships. Also, hiring professional financial advisors, tax accountants, estate attorneys, etc. (Avoid free advice a buddy, your cousin, or a friends neighbor buy the best, most expensive professional advice you can afford).
As I mentioned before, you can put your savings into places that are only limited by your creativity. But it is my view that these four areas are so important that they need to be continually fed money in a systematic manner.
If you are missing the first account, The Vault, youll never have the money to start investing so youll never receive any investment income. This is pretty much the goal of all personal finance, to help you generate the most investment income. That is why this is the most important of the four categories, to get your money earning money so that you dont have to. (I do not consider any retirement accounts or qualified accounts to be Vault money. This is because you do not have direct control to invest the money or receive any investment income until the government decides that you can).
If you are missing the second account, Soft Savings, you either cant buy what you want, or you have to increase your personal debt. This is moving in the opposite direction of financial freedom you are reducing the amount of money that you can spend each month by the amount of the debt payment, and you are reducing your net worth by the principal and interest that youll be charged. Another symptom of a lack of Soft Savings is disrepair to your car, home, and health because you dont have the money for upkeep. Everything physical needs to be maintained, from your teeth to your vacuum, and it costs money to do so. This depreciates the financial assets that you own, and puts at risk the most important quality of life your health.
If you are missing the third account, Paydown Debt Balances, you are simply going to be the patsy in the financial game of life. People that are building their wealth collect lots of little interest payments from the people that are destroying their wealth by making lots of little interest payments money is transferred every month from one group of people to the other. Which group do you want to be in? Well, your Vault can automatically put you into the group of wealth-builders and your Paydown Debt account starts to extract you from the group of wealth-destroyers. The Paydown Debt account puts you on track to permanently extinguish all of your personal debt. The sooner a personal debt is paid off, the more rapidly you can take all of this money and put it into the other categories.
If you are missing the fourth account, Financial Education, you wont know how to captain your Vault, and you may run it straight into the rocks. Only you will manage your money in a manner that will be to your maximum benefit. So it is best if you pay to learn how to handle money and learn where to put it. But not everyone has an interest in these subjects, and that is fine. For them, instead of personally managing your money, you are going to personally manage your financial advisors. Youll be spending money and time to hire and manage the advisors to attend to financial details.
By allocating your savings into these four categories you are addressing the four most important elements of financial management. Youll be making certain that: Your investment income will always increase by adding to your Vault; youll have money available for extra expenses with your Soft Savings; your net worth will always be increasing with a Paydown Debt account; and youll intelligently learn how to lower your investment risk, raise your investment returns, and lower your tax liability with your Financial Education account. The only source of money to build these critical financial functions to increase your income, net worth, and stability is your savings you simply have to do it.
I recommend you fund these accounts simultaneously do not focus only on debt or only on education because I have seen how it is financially detrimental to do so. For example, lets say that you really want to paydown your debt so you dont contribute anything to The Vault. I have found that if you dont have any investments, your investing skills will be under developed. You will not know how to invest once your debts have been paid off, youll have no investment income to manage, you wont be looking for investing opportunities because that is something you cant afford right now, etc. And as a result, it will be harder to get into the investing game later, youll have more to learn in a shorter amount of time, and may just avoid it altogether and put Vault money into a low paying account.
How much do you allocate among the four categories? Anything more that zero! It is up to you, and your financial situation will fluctuate and be different from others. Just to get some starting percentages, below is my allocation. It is not a recommendation for anyone, it is just what works for me right now.
My current savings rate = 20% of all after-tax income.
(This does not include 401K, medical savings accounts, or other deferred/qualified withholding). This means that 20% of all cash income that hits my checking account each month is set aside into these categories:
1. The Vault receives 50% of total savings each month.
2. Soft Savings receives 20% of savings each month.
3. Paydown Debt receives 20% of savings each month.
4. Financial Education receives 5% of savings each month.
5. And that leaves 5% for other categories each month.
You may receive continual, ongoing income, in addition to some rare, one-time inflows of money. The percentages detailed above are how I allocate regular income savings. But if there is any one-time inflow of money (garage sale, bonus, extra project), then I take 90% of the proceeds and split it among the four accounts, and the other 10% is just spent. You can create your own money rules for different types of income; you can tell by my allocation percentages that my primary focus is to build up the balance of the Vault.
The amount of money that you can save from every source of income is your key to a brighter financial future. Contrarily, a risky and dimmer financial future awaits those that refuse to systematically save money. So be sure that you take the steps necessary to set savings aside and then simultaneously divide it among the four mandatory accounts by consistently allocating money to them. You dont have a financial foundation without these four accounts, but with them, you can build as high as your ambition takes you.
Top 5 Reasons To Opt For An Internet Bank Account
Top 5 Reasons To Opt For An Internet Bank Account
Over recent years online banking has become increasingly popular, and many consumers have started to enjoy the benefits of banking online. There are many different reasons why people decide to opt for an online bank account, and in the space of around six years the number of consumers using online banking has more than doubled. Here are some of the top reasons for opting for online banking.
1. Convenience and ease. With online banking you do not have to even leave the house or pick up the phone in order to conduct your banking transactions. Thanks to the Internet you can now perform these transactions from the comfort and privacy of your own home, and at any time of the day or night, so there are no time constraints to worry about.
2. No queuing or rushing necessary. Many people with full time jobs have had to rely on their lunch hour to try and get to the bank and conduct a transaction in the past. Often this resulted in lengthy queues and rushing around, with little time to actually enjoy your break and have a bite to eat. With online banking this becomes a thing of the past.
3. Choice of transactions. With online banking you can perform most transaction that you would be able to perform by visiting the branch or calling the bank. This includes setting up or calling standing orders or direct debits, transferring cash, making bill payments, checking your statement, and even ordering a new check book or card. You can also apply for other services such as a credit card via the Internet.
4. Special offers and incentives. Often you will find that online banks offer special incentives and offers to those that open up a bank account or savings account with them, such as a sum of cash credited into the account once you have been a customers and met the necessary requirements for a specified amount of time.
5. Saving valuable time. In this day and age time is of the essence, and people simply dont have much time to dedicate to their finances. With online banking you can conduct your transactions or check your statement at the touch of a button, saving you time and hassle when it comes to managing your bank account.
Tips to Know Before Buying an Annuity Policy
Annuities may be a useful tool for those who want a steady stream of income throughout their lives. While most annuities include a death benefit, an annuity is almost the opposite of a life insurance policy – annuities offer financial protection against outliving your income.
Buying an annuity can be a complicated decision. Following are a few key considerations for buyers before deciding whether to purchase annuity policies:
* Review all of your other savings plans, pensions or retirement funds to determine whether you need an annuity and whether the annuity you are considering is the right one for you based on your age, financial status, investment objective and risk tolerance. Is there a possibility that you could outlive your assets? Will you keep the annuity long enough so that the charges do not eat up your investment?
* Determine whether you want your investment to be steady and fixed or variable. While variable products offer an opportunity to capitalize on market highs, they also carry additional risk in a downturn.
* Be careful about exchanging one variable product for another. For instance, exchanging a variable annuity for a fixed or equity-indexed product may result in a “surrender charge” and higher annual fees, along with a new period of time during which you cannot withdraw money from your account without substantial surrender charges. Always check the schedule of surrender charges and other fees. They may be higher on the variable annuity with the bonus credit than they were on the annuity you already own.
* Make certain the company from which you are considering buying an annuity product is reputable. A good place to start is to look for the Insurance Marketplace Standards Association logo. Only companies that have proven through extensive outside review that they adhere to IMSA’s stringent Principles and Code of Ethical Market Conduct can display this logo.
Tips to Consider Before Buying an Annuity Policy
Annuities may be a useful tool for those who want a steady stream of income throughout their lives. While most annuities include a death benefit, an annuity is almost the opposite of a life insurance policy – annuities offer financial protection against outliving your income.
Buying an annuity can be a complicated decision. Following are a few key considerations for buyers before deciding whether to purchase annuity policies:
* Review all of your other savings plans, pensions or retirement funds to determine whether you need an annuity and whether the annuity you are considering is the right one for you based on your age, financial status, investment objective and risk tolerance. Is there a possibility that you could outlive your assets? Will you keep the annuity long enough so that the charges do not eat up your investment?
* Determine whether you want your investment to be steady and fixed or variable. While variable products offer an opportunity to capitalize on market highs, they also carry additional risk in a downturn.
* Be careful about exchanging one variable product for another. For instance, exchanging a variable annuity for a fixed or equity-indexed product may result in a “surrender charge” and higher annual fees, along with a new period of time during which you cannot withdraw money from your account without substantial surrender charges. Always check the schedule of surrender charges and other fees. They may be higher on the variable annuity with the bonus credit than they were on the annuity you already own.
* Make certain the company from which you are considering buying an annuity product is reputable. A good place to start is to look for the Insurance Marketplace Standards Association logo. Only companies that have proven through extensive outside review that they adhere to IMSA’s stringent Principles and Code of Ethical Market Conduct can display this logo. Visit www.IMSAethics.org to see if the company is listed and for other information.
* Be sure the company offering the annuity product is financially strong. Many independent services rate the financial strength of insurance companies, such as Standard & Poor’s Insurance Rating Services (www.standardandpoors.com), Moody’s Investor Services Inc. (www.moodys.com), Fitch Ratings Inc. (www.fitchratings.com) and A.M. Best Co. (www.ambest.com).
* Check with your state’s insurance department to be sure the company you’re considering buying from is licensed to do business in your state.
* Remember, an annuity is a legally binding document. Read the annuity contract carefully and be sure your agent has answered your questions thoroughly before you buy. – NU
The Truth About Direct Deposit- Survey Uncovers Payment Myths
Despite 95 percent of Americans having heard or read about identity theft, a new survey reveals that many are unaware of the security differences between direct deposit and paper checks-placing them at greater risk for identity theft and fraud.
The survey, sponsored by the U.S. Department of the Treasury and the Federal Reserve Banks, is the latest public service initiative of the Go Direct campaign. Go Direct aims to motivate people who receive Social Security by paper check to switch to the safer, easier option of direct deposit.
Despite the fact that direct deposit has been around for more than two decades, the survey found that four out of 10 Americans (40 percent) do not use it.
According to the Treasury, direct deposit is simply the best way to receive federal benefits. Direct deposit eliminates the risk of lost or stolen checks, reduces fraud, protects against identity theft and gives people more control over their money. Plus, direct deposit provides people with immediate access to their money from virtually everywhere.
In addition, the survey found many Americans don’t know the facts about safeguarding their money and identity. Key myths about direct deposit and paper checks are:
• MYTH: Sixty-two percent of those surveyed said a paper check with your name on it can only be cashed if you sign or endorse it.
FACT: Checks can be forged-some more easily than others. Payments that come in the mail are especially vulnerable to theft and forgery.
• MYTH: Nearly half of those polled said direct deposit of payments such as wages, salary or government benefits go through the Internet to be deposited into your account.
FACT: Direct deposit works by transferring funds directly into your account through a highly secure electronic banking system-not the Internet. It is the same system used by the world’s leading financial institutions.
• MYTH: Nearly 40 percent of respondents replied false to the statement, “No direct deposit has ever been lost or stolen.”
FACT: The direct deposit system creates records of transactions so payments can be traced, and that means problems-although very rare-are quickly fixed. It’s also a fact that you are 30 times more likely to have a problem with a check than with direct deposit. In 2004, more than 70,000 checks issued by the Treasury fell prey to endorsement forg-eries. These checks totaled more than $61 million.
These are all reasons why the Treasury and the Federal Reserve Banks are encouraging people who receive Social Security and other federal benefits to use direct deposit-the safest, easiest way to get payments. With direct deposit, people can be confident their payment will be in their savings or checking account on their payment day-on time, every time.
The Truth about Offshore Banking
Many people believe that there is a fine line between those who bank offshore and criminals who launder money and evade taxation – but the truth about offshore banking and those who legitimately place assets offshore is that the action of placing money offshore is not illegal, will likely never be illegal and can be of benefit to almost all of us!
The word offshore in the financial sense is synonymous in many peoples minds with saving tax, and while some who bank offshore are legitimately entitled and able to save tax by having interest paid on their savings before the deduction of tax, there are many more real benefits available to those who choose to open an offshore bank account.
For a start the tax saving advantages of the offshore world are really only available to a few people who are usually expatriates, non-resident in a high taxation country and with tax liability in a country where taxation is low or even non-existent however, the asset protection benefits, personal privacy advantages and the potential to access better account structures and services are available to the majority of us when we choose to bank offshore.
Even Americans, British and Europeans can potentially benefit in one way or another from opening an offshore bank account. But before I continue to explain the advantages we can all potentially reap from offshore banking, its important to mention that placing assets offshore without informing ones relevant tax authorities can be illegal and that before one makes any significant decisions or takes action relating to finances, qualified independent financial advice should always be sought.
Many offshore jurisdictions in this day and age are regulated heavily to protect investors and to prevent money laundering – which can afford those who bank offshore a greater degree of confidence and security. Furthermore many jurisdictions have strict guidelines covering maintenance of client privacy which can further afford those seeking personal and asset protection with assurance that their identity and transactions will remain confidential. And when it comes to protecting assets from potential unfair litigation, offshore structures such as bank accounts and trusts are often used.
Another significant advantage of an offshore bank account is the fact that such structures are usually far more flexible and accessible, pay better interest rates, often have lower charges and can offer those who regularly travel for work or pleasure the flexibility they need from a bank account through which they can transact in multiple currencies and to which they can have access from anywhere in the world; therefore the truth about offshore banking is that it can offer many real benefits to many real people!
The Style, Why, When, Where, How To Retire
Early on, it wont hurt just thinking about how, when and where you would retire in order to prepare for the inevitable advantage of living a full hassle-free living after working for a number of years.
The following are a number of tips to ensure you are set for life.
Decide where you want to settle
According to a demographic survey most retirees, seem to be content living for a number of years in the same place and in the same community until retirement age. But think about it, downsizing your expenses makes more sense. Moving to a less expensive community can help you keep your resources intact and your expenses less. This ensures you will have more income for future wants, needs and luxuries.
Decide what you want to do
It helps to think now about what you plan to do upon reaching retirement age than waking up one morning with no job after being used to having one for a number of years.
The idea is as financially troubling as well as psychologically disturbing. There are retirees who were able to lick the problem of what-to-do by pursuing a career or a task they were not able to do during their younger years. Primarily it should be a career one is genuinely interested in. It makes doing it more fulfilling and less stressing.
Pay it off now
Any debt, especially the mortgage, when finally paid off, helps most retirees sleep soundly at night. This is literally a load off your mind and your wallet. It helps if you have money left over that is sufficient enough to fully pay your mortgage as well as a little for something extra for you or your significant other. If your mortgage is fully paid, the tendency is for you to take less from your savings therefore allowing your money to increase via tax-deferred methods thus decreasing your total tax bill.
Know what to expect
There are three standard sources of income for retirees as according to experts: Social security payments, pensions, and the retirees savings. Do not forget to review your yearly Social Security benefit. For information, call 800-772-1213 to know your estimated monthly check. Make sure to contact your previous employers to see if you have other pensions available as well as to determine how much you could receive. Compute your income from the investments you made in the past. The total of these three could help you determine where you stand as well as how much.