There are books written on the best ways to protect what you have or shelter it from taxes, or hide it from nosy neighbors. This chapter will cover the more routine, every-day things that impact almost all of us. If you need specialized information on how to hide your wealth overseas, I’m afraid you’ll need to look elsewhere.
Most of us lose what we make in one of four basic ways:
- The “leaky bucket”
- We pay too much in taxes
- We fail to insure and protect what we have
- We don’t have an appropriate Will or Living Trust
#1: The Leaky Bucket
Almost all of us spend more in cash and with credit cards than we imagine. One of the challenges I give many of my clients is to track every single purchase for just one month.
Keep a notebook, and just for a short time, try to track every single dollar you spend. When they do that, almost without fail my clients call to tell me they are astonished, appalled and even ashamed at how much money “disappears” each month.
If you spend just $5 per day on lunch, that’s over $100 per month. If you buy a couple cans of pop, or stop for ice cream, or maybe bring pizza home for dinner once in a while, it’s not uncommon to have those small, every-day purchases total over $500 per month! Even an inexpensive dinner out, followed by a movie and maybe a drink on the way home can easily total over $100 for a couple. Take the kids, and Saturday afternoon at the movies can shrink your wallet in a hurry!
Now, none of these are bad things. I enjoy dinner in a nice restaurant or a movie as much as anyone. But, if you want to control your finances, you must add these things up, tell the truth about how much they cost, and make some decisions about how many of them you can afford.
It may help to realize that all of these things are purchased with after-tax dollars. That means that a $10 pizza actually costs you about $18 in time and effort, about $8 for the government, with $10 left for the pizza guy. Multiply that by the cost of a weekend at that nice resort, or the price of a luxury car, and pretty soon you’re talking about real money!
One of the observations Thomas Stanley makes in “The Millionaire Next Door” is that wealthy people are very cautious about spending money. Most do not own expensive watches, fancy cars or expensive suits. Those things simply cost too much for a rich person to afford them!
Here are some simple suggestions that can save you hundreds of dollars per year:
- Keep a simple notebook and record every purchase. Keep it simple, but tracking your daily purchases will almost certainly help you spend less, and spend more wisely.
- Rent movies, make popcorn at home. Obviously, just one example, but simplify!
- Healthy snacks and simple meals often cost less and take less time than commercial counter-parts. Eating an apple instead of a candy bar saves in many ways.
- Use coupons and shop when things are on sale. Always shop from a list, and never go to the grocery store when you’re hungry!
- Comparison shop for insurance. You might easily save $100 per year on car insurance. Installing smoke detectors is smart, and will save on home-owners insurance.
- Controversial, but consider driving an older, smaller or cheaper car. Annual costs for vehicles and transporation are typically far greater than most people realize.
- Greatly reduce credit card spending, unless you are one of the few with the discipline to use them wisely, buy little, and pay off your balance every month.
The examples are endless, but the point is the same. Don’t spend money you don’t have to!
# 2: We Pay Too Much in Taxes
Most Americans, particularly those who work for a paycheck, pay the bulk of all the taxes.
That may not be fair, but it’s the way the system is designed. To reduce your taxes and put more money in your pocket, become educated about the tax laws and learn to use them to your advantage.
Begin by learning the distinction between tax avoidance, and tax evasion. Tax evasion is illegal and stupid. You’ll eventually be audited, get caught and have a world of headaches. And, even before that, you’ll have the anxiety of knowing you’ve cheated. Don’t do it! But tax avoidance is not only legal, it’s recognized by the Courts as smart and ethical business. To reduce your taxes, consider the following steps:
- Always – always! – fund any tax-sheltered or tax-deferred investments first. Contribute the maximum to any IRA or Keogh accounts. Fund your 401-k, and other
tax advantaged accounts.
- Look for ways to reduce your personal property tax. Often appealing the assessment on your home can result in substantial savings, now and for every year to come.
- Understand the benefits of capital gains taxes, and invest for the long haul.
- Understand tax laws relating to certain types of real-estate and bond investments. The interest on many municipal bonds is partially or entirely tax free! Look into it.
I recently read that the odds are 1 in 4 that a healthy adult will be disabled for a year, sometime during their working life. That’s an amazing statistic! And yet, disability income insurance is one of the least understood and least appreciated forms of insurance. While you’re healthy, contact your local agent and find out about guaranteeing your income if you become injured or suffer a lengthy illness.
Beyond that, most Americans do not have the correct type or amount of life insurance. Almost everyone has either too little, or too much. If you are single and have no children, why do you need life insurance? But if you have small children, a new house and a pile of bills (who can afford life insurance?) you really, really need to protect those you love.
Consult with at least 2 difference independent insurance agents, and get solid advice. You should have appropriate insurance on:
- Your home and your belongings
- Your car
- Your life and your health
- Your income and earning capability
- Your business assets, including intellectual property rights
Again, read Consumer Reports and other magazines. Become informed. I strongly recommend Suze Orman’s book, “The 9 Steps to Financial Freedom”, listed in the appendix.
You can often save hundreds, even thousands of dollars by shopping around and buying the right insurance. But never try to save a nickel by not having insurance you need to protect yourself, your loved ones and your future.
#4: Have a Will and a Living Will
There has been much written in recent years about various forms of trusts and other forms of estate planning, so the term “will” in the title of this section is used generically to indicate that you have taken responsible, thoughtful steps to pass on your wealth when you die.
The fact is, every citizen does have a will, whether you know it or not. The state has written one for you. It’s clumsy, impersonal, and almost certainly does not suit your unique situation, but it is right there, in the legal code. If you die without having written your own will, that’s OK – the Courts will simply use the one the government wrote for you. Is that what you want? I doubt it!
Even a complex estate can often be handled with a simple will costing less than $500 and taking no more than a couple of hours to prepare. Is a basic will adequate and complete in your situation? Maybe not, but it’s a start, and it’s a whole lot better than nothing. Get started!
Here are just a few things to consider:
- If you have substantial assets, you will want to consider a trust or some legal way to transfer wealth to your loved ones before you die. Estate taxes can run as high as 80%. I consider that obscene, but it’s the law!
- Decide in advance who you want to receive the bulk of your estate, and be very specific about the details. Maybe one of your children should receive a particular family heirloom, while another should receive stock in your company. Spell it out!
- Consider the ramifications if you and your spouse should both die, perhaps in an accident or other disaster. Who do you want to receive your estate then? Who will care for your children?
- Decide if you want to leave something to your favorite charity, house of worship, or educational institution. There are very important tax advantages to setting this up ahead of time. Your attorney can advise you about the details.
Finally, a note about “Living Wills”. The odds are that you will not be hit by lightening or die instantly in an accident. Most probably, you will grow old, get sick, and for at least a short time, you will be unable to participate in decisions about your own health care. That’s when a living will is invaluable. Tell your loved ones what you want! Indicate if you wish to be an organ donor. Decide now, while you are healthy, what measures you want (or do not want) taken to keep you alive. Decide now, and write it down!
Most self-made millionaires have neither a large income, nor a flashy life-style. But they do hang on to what they earn, and they use it wisely. Paying attention to the costs of your lifestyle, and simplifying where you can, makes a huge difference.
And, there are often non-financial benefits that turn out to be even more important. An entire movement, often referred to as the “Voluntary Simplicity” movement has discovered the joys of being home more, working less, spending less and throwing away less. Often, by reducing expenses we add not only to our bank accounts, but to the quality of our lives.