Sunday, March 16, 2008

It's Your Money

If you keep up with the news you have no doubt heard that we are in a recession. This by itself is not our problem; The problem lies in our inability to keep our money out of the hands of our government. Our government, despite their good intentions, has led us into our current situation through out-of-control spending.

Regardless of which side of the isle you come from, or even if you consider yourself an independent, hopefully you can understand that YOU can take better care of yourself than Uncle Sam. If you can not, then you are destined to a life of financial slavery. That may sound a little harsh, but it's tough love.

We have to get our arms around the fact that our current tax system and the IRS confiscate our money regularly and by doing so, deny us the right to think and act on our own. Don't hear me wrong here, because I believe in paying taxes to support our government, so it can function and protect us from foreign interests. But, they are doing just the opposite.

It's easy to follow the crowd and do what our government recommends. However, by doing so you are increasing your risks and giving up your rights.

If you take a look at history, our country was actually founded because of a dispute of having to pay taxes and the Boston Tea Party. After which we actually had a 100+ year period of prosperity. Then came 1913 and the Federal Income Tax.

Our beloved Abe Lincoln and Franklin D. Roosevelt were the culprits that contributed the most to this ever increasing problem of the IRS. As taxes have increased over time we have lost control. Read for yourself on the IRS website:,,id=177655,00.html

And here's a chart on the history of income taxes:

Okay, so you say what does all of that have to do with me and MY Money? Let's take a look at the average American family, Mom and Dad with 3 kids. Dad earns $72,000 a year after 4 years of college and considerable work experience. He has the typical 401k and saves towards his employer sponsored retirement plan. If this isn't you, just stay with me, you'll get the picture.

Mom drives a 5 year old minivan that's paid for, and carries the kids all around to numerous games, parties and events. Dad drives a newer pickup and has a $500/mo truck payment. They live in a normal neighborhood and have 12 years left on a 15 year mortgage with a 6% rate.

Do you think they sound rich? Well according to IRS tax rate schedules that puts them in a 28% income tax bracket. See for yourself, here's the link:,,id=164272,00.html

Now you may be saying, "Yeah but I made that and I didn't pay taxes." Some people actually believe that because they get a refund check, or because they don't have to pay money in at the first of the year, that they didn't have to pay taxes. What about that withholding that came out of each and every check all year. Uncle Sam loves payroll deduction. And, let's not forget Social Security, Medicare and your 401k. "What? I thought that my 401k actually saved taxes?"

Let's look at each one of these "deductions" one at a time.

1. Fed Income Tax - This comes right out of your check before you have a chance to spend it. You do have an option here, but most don't exercise their rights to hold on to their money until the end of the year. Uncle Sam feels safer knowing you pay him first, and in many cases most individuals do as well. In this example it would be about $250 every 2 weeks.
2. State Income Tax - Don't forget your friendly state government, in this example we'll assume there share would be about $130.
3. Social Security Tax (OASDI) - Again, before you have a chance to count your money, it's gone. We'll talk about the failure of Social Security later, but in this example about $180
4. Medicare Tax - You can count on not seeing this either, but hey maybe it will be around when you really need it at retirement. In this example, it's about $40.
5. 401k - Conveniently, we'll let our All American Dad contribute 5% or $150 to this "plan"so he can fund his pre-tax investment. You can pay him now or you can pay him later.

Maybe this family has some health benefits and they'll contribute another $250 to these coverages.

After all is said and done this family brings home about $2,250 from the $3,000 he earned.

As if you don't already know this, here are 2 different examples to prove the above calculations.

Your Friendly Social Security Administration:

If you would like to calculate your payroll deductions, check out this cool site with lots of calculators:

To keep his mortgage company happy, they are also letting them hold in escrow the property taxes and insurance as well, so in reality they'll never see this money either.
After this family pays their mortgage, $2,000 PITI, car payment, credit card debt, and normal living expenses, they feel lucky if they have $50 left over to take the family out to eat.

Don't worry about the capital gain taxes, sales taxes and other miscellaneous taxes, we all pay them, right?

They feel fortunate because they are "getting by" and they feel "comfortable", but inside they strive for more. Our media feeds them advertisements of new cars, plasma televisions, wireless phones and movie star lifestyles, and, they eat it up. We can't help but want those things because "everybody" has them and we have to keep up with the Jones's. Sound familiar?

Okay, so back to the point about who's in control of your money. And, how can you keep more of your money? It's pretty simple really, take control.

Watch every penny. I'm serious, if you want control of your money, you need to document every expenditure. When you do, you will take notice. Once this is accomplished you can move forward, because you have to recognize that there is a problem. If you don't recognize the problem, you will not have the discipline to make a change.

Here's 3 steps to Take Control of Your Money:

1. Let's take a look at the paycheck first. Most of your payroll deductions don't have to be deductions at all. By changing your exemptions you can control who holds onto your pay. By doing so, you will have the use of this money. DO NOT change this unless you have the discipline to set this money aside in an interest bearing account with the sole intent of using it at the end of the year to pay your taxes.

The next deduction on your paycheck is your beloved 401k. Now I know Uncle Sam and all of the so called financial gurus tell you to max out this contribution, but you need to understand what is really happening. Your 401k only defers taxes, it does not save you taxes. While the argument is that you will be in a lower tax bracket at retirement, this is a myth. The reality is that you could be in a higher tax bracket at retirement. That's a whole other topic which we will examine another time.

2. In this example the family is paying about $500 per month for medical coverage because the employer is pitching in some of the premium. While that may sound good, it could actually be better. But, because we are so convinced that our employer needs to fund this, and that we need co-payments and low-deductibles, we let even more money slip out the door. Every situation is different and in many circumstances this example may very well be the best option.

If you want control, you should keep 6 months of income liquid in an emergency fund. Now this may seem impossible to some, but you have to start somewhere. If you do, you can raise all of your insurance deductibles and therefore control your money until you actually need it. Doing so will save you hundreds, if not thousands of dollars every year.

By the way, if you think socialized medicine will work, take a look at Social Security and Medicare. Here's the scenario. Social Security was created in 1935 by FDR. It was never intended to support people into their 70's, 80's and 90's. The debt for SS is $10 TRILLION. Medicare was created in 1965 by Lyndon B. Johnson. The debt for Medicare is over $60 TRILLION. Some quick math will tell you that's $70 TRILLION. And, don't worry about what the retiring baby-boomers will do to that.

3. The next way that many lose control of their money is with a 15 year mortgage. We've all been told that we save interest by paying off our mortgage sooner. While it is true that you can save interest, in reality this may cost the average family hundreds of thousands of dollars over their lifetimes. Again, don't hear me wrong. Each situation is different and if your goal is to pay your home off early, you can still do that in 15 years and have MORE CONTROL of your money along the way.

To grasp how a 15 year mortgage gives away control of your money, you'll have to understand some basics:

  • Your home will appreciate or depreciate regardless of the mortgage.
  • Because of the interest tax deduction, your net payment may actually be reduced.
  • Any payment going towards principle may actually increase your risk and decrease the mortgage lenders risk.

For more follow this link for a mortgage comparison using the LEAP financial calculator:

To summarize, with FINANCIAL EDUCATION and DISCIPLINE, you can take CONTROL of YOUR MONEY. When you are in control of your money, you can make informed decisions versus having someone else make decisions for you.

Until next time,

Legacy Insurance Agency

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