Why the 'Made in China' model is weakening

Heesun Wee | @heesunwee

Tuesday, 19 Aug 2014 | 9:04 AM ETCNBC.com

AFP | Getty Images

 Workers in a clothing factory in Bozhou, Anhui province, China. 

China—a low-cost maker of goods—is falling behind in the global manufacturing race as rising wages and energy costs put pressure on the Asian country, synonymous with making super cheap stuff.
 
China is among several economies whose manufacturing price advantage over the U.S. is eroding, according to new data released Tuesday from The Boston Consulting Group. Other countries that are becoming less cost competitive include Brazil, Russia, the Czech Republic and Poland.
On the flip side, moderate wage growth and lower energy prices are making the U.S. and Mexico more desirable manufacturing destinations. The upshot? More U.S. businesses are likely to produce goods closer to home in the coming years.

"This means companies will start to move manufacturing out of those expensive countries if they can, to cheaper countries like the U.S.," said Hal Sirkin, a senior partner at The Boston Consulting Group.
Recent U.S. government data show similar gains. Industrial production increased 0.4 percent in July for its sixth-consecutive monthly gain, the Federal Reserve reported last week. Manufacturing output advanced 1 percent in July, its largest increase since February.


"It used to be a simple rule: Manufacturing is cheaper in Asia and South America," Sirkin said. "But it's fundamentally changed."

Less 'Made in China'

While thousands of U.S. manufacturing jobs that were lost to overseas production won't be recovered overnight, the landscape is changing. And the manufacturing shifts are especially dramatic in China.
Wages in the most populous nation are soaring. By comparison, Mexican manufacturing labor in 2000 was roughly twice as expensive as in China. But since 2004, Chinese wages have grown nearly five fold, and Mexican wages have risen by only 67 percent—less than 50 percent in dollar terms.
Higher energy costs also are dampening China's manufacturing prowess. The cost of industrial electricity rose by about 66 percent in China and 132 percent in Russia. The cost of natural gas soared by about 138 percent in China and 202 percent in Russia from 2004 to 2014, according to Boston Consulting research.
 
While Russia is a key exporter of natural gas, higher production of U.S. shale gas has pushed U.S. energy prices down sharply. Russia, meanwhile, still relies on conventional natural gas, which has become more expensive.
 
According to Boston Consulting's global manufacturing cost-competitive index—with the U.S. pegged at 100—China came in at 96 this year. In other words, it's 4 percent more expensive to manufacture in America versus China. China's reading used to be lower in the 80s, which means the cost of making goods in the U.S. compared to China has since narrowed.
"We see China as getting much more expensive," said Sirkin, co-author of several reports on the shifting economics of global manufacturing.

The case for American manufacturing

If manufacturing in China is getting dicier, the prospects for the U.S. and Mexico are improving. And cheaper energy prices are a key reason why.
 
Natural gas prices have fallen by 25 to 35 percent since 2004 in North America due to large-scale production of shale. Hydraulic fracturing, or fracking, forces natural gas and crude oil out of shale buried deep below the earth by using highly pressurized and treated water.
U.S. wage growth also has been slow. The current hourly, federal minimum wage is $7.25. Efforts to raise the federal minimum to $10.10 an hour, if passed, would affect the service industry.

Most manufacturing jobs, though, already are in the range of $10 to $15 an hour and would not be impacted by a federal wage change.

Brillo: 'Made in the USA'

Source: Armaly Brands

But as any business owner will explain, wages and energy costs aren't the only factors.
Logistics and the overall ease of doing business can influence potential manufacturing locations. For example, Armaly Brands' Brillo steel wool soap pad has never outsourced production or its labor overseas, and Brillo products are made in Michigan and Ohio. Armaly Brands employs about 125 people at two manufacturing plants, with plans for a third location in Michigan.
While manufacturing costs may have been cheaper in Asia in prior years, duplicating the company's synthetic sponge technology overseas would have been difficult. Keeping manufacturing local also makes inventory management easier and provides flexibility, said John Armaly, chief executive officer of Armaly Brands, based in Walled Lake, Michigan.
And domestic production means better quality control. "The quality of some of the products made overseas is not the same as we produce in the states," Armaly said.

Tipping-point industries

As businesses continue to recalculate the costs of manufacturing in China, some industries are forecast to reach a tipping point in around five years and begin shifting manufacturing to the U.S., according to a Boston Consulting report released in 2012.
Those sectors include computers and electronics; appliances and electrical equipment; furniture; and transportation goods such as truck components and bicycles. These industries have relatively low labor cost components and high transportation related costs so they likely would return to the U.S. first.

—By CNBC's Heesun Wee.

ELFS: Generational Wealth Creation

Generational Wealth Creation

The Vanishing Legacy

With the final breath, it all ended.  All the lifelong dreams, the fifty years of work, raising a family, the pain of losses, the memory of joys and happiness gone.  Now all that is left of that life are the memories of that person and the legacy of a lifetime.  To those left behind, the memories are theirs to keep, but everything else must be divided into two categories: What they are allowed to keep,  and  what  the  government  claims  to  be  theirs. What is truly unfortunate is that the government claims must be settled first, and what is left is divided between creditors of the deceased and members of the family.

A hundred years ago it was not uncommon for farms to be worked and owned by a family.  The grandparents were there working and contributing to the farm, along with their middle-aged children and their grandchildren. The family structure was whole.   Family pride was evident and this was passed on generationally.  The older members of the family were well aware of the idea of legacy.  They worked hard to create a better life for the next generation.   The farm, along with the memories, was their legacy.

Today that element of a family legacy has almost disappeared.   Although there are loving memories, the passing of the family “farm” today known as family wealth,   has   been   mismanaged   into   non-existence.  Interference from the government, an enormous lack of financial knowledge, pride and ignorance robs families from passing tremendous amounts of wealth to the next generation.  Along with it goes the lasting family legacy.

When no one pays attention to the everyday details of the farm, it will no longer be a productive entity to pass on, and in many cases, it will become a burden and a debt to the next generation of the family.  Today the idea of viewing the family as a single unit has been ignored by almost everyone, yet it remains as one of the only solutions for creating lasting family wealth, generationally.  The passing of the family wealth (the farm) doesn’t occur accidentally.  It is planned and well thought-out.  Rich people do this often and their families remain rich.  Poorer families, although their lives may prosper, believe in taking it with them when they die. Their legacy is usually a home, some savings, and other (for lack of a better word) stuff.  Although those things have value, they lack in comparison to what could have been passed on had the entire family planned the family legacy seriously.

The idea of keeping wealth in the family is opposed vigorously by the government because they have a harder time getting their hands on this money via taxes. Many politicians try to pit the rich against the middle class, all the while the middle class aspires to be rich pursuing their financial dreams via the lotto and casinos. The difference comes down to this:   Some families guarantee their ongoing legacy while others gamble it away.

The Social Fiber Of The Country

The United States started to lose an important social foundation in the 1960's.    Crisis after crisis, from Vietnam to civil rights, the drug culture to presidential assassinations, the once starry-eyed nation woke up with a reality hangover that would plague it forever.  What would suffer the most in this historic time would be the family structure.  The “What’s in it for me” and the “I want it now” generation blossomed and grew up to train and educate the next generation, flaunting the wisdom of ME and I.

The family social structure, once the cornerstone of ethics and morality, started to crumble and with it family opportunities also crumbled.     The  growth  of  single parent families left little room for financial success. Government social engineering only created more problems and greater dependence for its so-called “free” benefits. That dependency aided the problem not the solution. The after-effects of the loss of the family structure continue to cost the government billions of dollars.  Along with the costs, are increasing crime rates, suicide rates, divorce rates, abortion rates, personal debt and bankruptcy rates.   All of these have a direct correlation to the loss of the family structure.

Institutionalizing Educational Standards

With the fall of the family structure, the liberalizing of education took on the role of psychologist in making kids feel okay and being sensitive to their every need. The new educational goal is that no one would fail in school.   They would only fail after they were out of school.   The ability to apply school knowledge to everyday circumstances is non-existent.  Not only is the knowledge missing to grow wealth, but also missing is the family and its ability to grow wealth generationally. In the old days, this would be the equivalent to the grandparents leaving the farm before they taught their kids the  farming  process.  Obviously, nothing would grow, which is why in today’s family, nothing is growing either.  More time and energy is spent on teaching you how to spend your money, rather than how to save it. You end up unknowingly and unnecessarily giving away your wealth and wealth opportunities.

If tomorrow you discovered an opportunity that, by planning together with your parents or your kids, could create millions of dollars for your family (or charities), would you take advantage of that opportunity?   If you also discovered that the money could be transferred to your family, guaranteed and income tax free, would you do it?  I have reason to believe that you were not taught how to do this in school, any school.

Creating the Legacy

It came to my attention while visiting the San Diego Zoo that every animal display had something in common. Each one of them was funded or sponsored by a family or family foundation,  a/k/a  generational  family  wealth. The question that came to my mind was: What did these families  do,  that  others  didn’t  or  don’t  do?     The revelation hit me like a ton of bricks:  They leverage the least amount of money to create the most amount of wealth by investing in their family.

  

RULE NUMBER ONE: In your family, use the least amount  of  money  to  create  the  greatest  amount  of wealth.

RULE NUMBER TWO:    Guarantee the wealth will occur and that the legacy will transfer, income tax-free.

That was the answer.  It was clear, and believe me, it was the best trip to the zoo I ever experienced.  On the way home though, one thought kept echoing through my head:  Rich people think like rich people,  poor people think like poor people.  It was troubling.  I asked myself one question:  Would someone want to create wealth for their family if they didn’t have to spend one more dime than they were spending right now?  If you could realign your assets to make wealth possible and still retain control of the money would you do it?  The key to all of this is to consider the family as an investment.

Controlling the Asset

Investing is not about where your money is, it’s about how can you use it to create wealth.  This is far different than buying a stock and praying that the stock will go up.   Warren Buffett never buys 100 shares and just holds it.  He, like Mark Cuban, buys shares of a stock to get some level of CONTROL of the company.  If you have the resources to take control of a company, and you think it’s a great investment, do it.  If you want to try to guess on some companies, buy their stock and hope it goes up, you might as well go to Las Vegas, because you have no advantage at all to CONTROL the value of that stock.

In the old days, the family had total CONTROL of the farm.  The family could affect the growth and outcome of the farm they owned and CONTROLLED. Today, in generating family wealth, dabbling in stocks doesn’t provide the ownership and control that is needed to pass on wealth successfully.  The elements that affect these types of legacies are taxes, risk, creditors, and luck. In defense of many who follow this strategy, professional advice  has  told  them  this  is  the  only  way  to  create wealth.

Leverage

Unfortunately, following traditional investment plans does not create multiples of wealth immediately.  If a family asset is not being used to generate income then that asset should be used to create family generational wealth.   You would want to insure and guarantee that the wealth be transferred to the family income tax-free. Most importantly you would want to expend the least amount of money to create the most wealth.  This is known as leverage.

The Contract

If you were able to invest in the oldest member of the family and they allowed you to do so to create the ultimate family legacy, what investment would be used? Life insurance.    It is the perfect solution  for family wealth creation.  It is a contract the family CONTROLS. The cash values and death benefit grow tax-deferred and income tax-free.    It is protected from creditors and passes outside of probate.   Any number of family members including the parents can contribute to the premiums.  This creates the greatest amount of death benefit that will pass on to the family.  All of this is centered on the legacy of love.   This will be a very emotional decision and should be viewed with the proper perspective.  In the old days, all members of the family would invest all their time and money to increase the wealth of the farm, knowing someday it would be theirs. They didn’t do this out of greed, but out of love for the family.

"Generation Wealth Creation" article is copyrighted by the Wealth and Wisdom Institute. 2012.

ELFS: Homeownership

Owning Your Own Home: The Most Misunderstood American Dream

One of the largest transfers one will ever encounter is the purchasing of a home. It is part of the traditional American dream.  It can turn into a nightmare with sleepless nights and difficult decisions.   Obtaining the maximum amount of house with the minimum price is the obvious goal.  Also, a must when considering a home purchase, are things such as neighbors, the neighborhood, schools, property taxes, city services, maintenance, and upkeep.  When you finally find this castle, there is excitement in the air and a commitment to purchase.  My friend, you are now entering into an unchartered universe, the twilight zone of the banking industry called the mortgage.

Hello, I’m New On This Planet

All you know about the mortgage process is that you have worked your behind off, saved money for a down payment, and found a house you would like to buy.  The next step, assuming you don’t have your mattress stuffed with cash, is to try to get approved for a loan to purchase it.  So you arrange to meet with your banker.  Your first impression of the people in the mortgage department, is that on the outside they look just like you and me.   They look friendly and seem polite.   But underneath that normal exterior they serve only one master, the bank.

Their first appraisal of you is to decide whether to satisfy their needs of consumption.  They want to see income statements, tax returns, lines of credit, and your credit scores.  It’s sort of funny that when you deposited $5,000 into one of their savings accounts they didn’t ask you for any of this information.  But let’s face it, they just want to make sure you are not a credit risk.  That’s why, in the bank’s eyes, every applicant is presumed to be a derelict and a liar.   You must prove, beyond doubt, that you qualify financially so that you can afford any monetary abuse that they may throw at you. At the end of the first meeting, you sign an agreement allowing them to do this.

Dirt

Now as much as they want to give you a loan, by the time you walk to your car, they have started the process of making sure this won’t be easy.  The hunt is on for problems in your past.  New or old, big or small they are fixed on the idea of finding any, and I mean any, financial problems you have had.

My personal experience is fairly common. I had purchased a home, sold it, and purchased another one.  I lived in the new house about two years and decided to refinance it to lower the interest rate.  All of these transactions were with the same bank and the same banker, all taking place in a seven year period.  It was of no importance to them that I held several lines of credit with them with no debt balances and that my business account deposits with them were greater than the amount I wanted to refinance.  At my expense, they wanted my credit scores and an appraisal of my home’s value.  The funny thing was, they had done this five months earlier for the other lines of credit I established with them.  What a con game!

I’ll Take The One On The Bottom

Your credit scores will vary from company to company.   Some banks and mortgage companies will get as many as six or seven credit scores on you.  Now, do you think they will use your best score?  Guess again.  How about the second or third best credit rating?  Try again.  How about the lowest or second to lowest score they can find? Bingo!   Although five of your credit scores were good, they found the one they were looking for.  In the bank’s eyes you are now “one of those kinds” of people.

Not So Perfect

You get the phone call about your questionable credit scores but are told not to worry. They are going to work this out for you so you can have this dream house.  You are told any additional costs will be handled at the closing.  They are now in control.

Now, have you ever heard of a credit rating company making a mistake?  Perhaps the rating company’s information was incorrect and they record a low score, but the bank is going to use that one anyway.  Chances of trying to correct any scores from a credit company in time for your closing are remote; it takes a long time.

What Flavor Would You Like?

I am now entering into an area where  you  will really have to think  from a different perspective.  Home ownership and mortgages are confusing and emotional.  As we discussed before, emotions are sometimes based on opinions not fact. I want to explore this confusion with you.

There is an array of different types of mortgages that you can select from.  Banks and mortgage companies are becoming more creative in the packaging of these products. Why?  They too see the ever-changing demographics of the country.  They understand that buying a home is based on the affordability of the monthly payment, not necessarily the cost of the house.  I can see how lending institutions would be considering extending the life of mortgages to 40 or 50 years. Why?  More expensive homes, less future buyers of expensive homes, and retirees downsizing from larger homes.   Banks and mortgage companies will want to create more buyers for these large homes while trying to maintain high values on these properties.   The government also would like to see these larger homes maintain their values because this is a taxable commodity in the future.  Property values continue to increase creating higher property taxes whether your house is paid off or not.  The possible solutions for lending institutions would be to extend the payoff time of mortgages.  Their thinking could be, “Hey, as long as we’re collecting interest, why not?”  The dilemma here is that no matter what type of mortgage you decide on, you will experience major wealth transfers.   The solution to reducing these transfers understands the opportunities that lie inside the mortgage itself.

Types of mortgages vary.  There are 15-year and 30-year mortgages, bi-weekly mortgages, interest-only mortgages, adjustable rate mortgages, and balloon mortgages that will assist you in paying off your house.   There is also the old standby of simply paying cash for your home.  No matter what you decide to do, transfers will occur.  If you get a mortgage, you are paying interest to the lender (a transfer of your money), and if you pay cash not only do you lose the money that you paid for the house, but also the ability to earn more money from that money (lost opportunity cost).

Which of these two situations will cause the least amount of transfers for you? Many financial experts, along with your parents and grandparents, will conclude that paying your house off as fast as you can or paying cash for it, will result in the greatest rewards.

If Something You Thought To Be True, Wasn’t True. . .

Two lessons we talked about earlier come into play.  Lost opportunity cost and liquidity, use, and control of your money will help you find the right solutions.   By paying cash for your house, you must be of the belief that this is a great investment and you are certain of the rewards.  After all, it’s not every day that you will plop down that kind of money on one investment.  Experts will try to convince you that this is a wise decision.  Let’s take a look.

Watch The Money Grow?  Paying Cash

Let’s assume you decided to pay cash for your home.  You paid $150,000.00 cash for a house in an area where housing values grew.  You bought the home six years ago and the current value of the home is now $200,000.00.  You would look at that gain and conclude that your investment in your home netted $50,000.00.  Simply put, that’s over a 30% increase in the value of the home.  So you go about telling all your friends how wise that decision was.

If you take the gain of $50,000.00 spread over six years, the real rate of return on that investment is 4.91%.  The problem is during those six years, other payments were made to help increase the value of your property.   New carpeting, painting, drapes, perhaps a new roof, furnace or air conditioner, possibly new windows and doors were improvements you made to increase the value of your home.  Do not forget that you also pay property taxes that steadily increased with the value of your home.

Let’s say that while you lived there you paid $2,000.00 a year in property taxes and paid $12,000.00 for improvements and maintenance.  Over a six year period, that would be another $24,000.00 paid.  The rate of return on your home, compounded annually, is now 2.35%.  How does that compare to other investments available to you? In a down market, 2.35% sounds okay, but in a good market, that return sounds puny. Remember how everyone was impressed with your $50,000.00 gain?

No More Payments???

I have to explain the financial implications when someone pays cash for their home. In exploring this idea, I need you to really think deeper financially than you ever had to before.  The lessons of lost opportunity costs, liquidity, use, and control and the Rule of 72 must be applied to your thinking.

Most people think they will save interest by selecting a shorter loan period.  With that in mind then paying cash for your home would save the most interest that would have normally been given to the bank.  The problem is, by paying cash you no longer have that money to invest, so you are losing earnings that you could have made from that money.   Also, if cash is paid for the house, you forfeit the tax benefits on the interest deduction.  By using the tax deduction, you can recapture dollars, which you couldn’t do had you paid cash.  You must understand that it costs you the same amount of money to live in your house whether you have a mortgage or you paid cash.  Let’s take a look.

If you have a mortgage of $150,000.00 at 7% for 30 years, the monthly payment would be $997.95. If the monthly payment of $997.95 was invested for 30 years at 7% it would equal $1,217,475.00.  If, rather than paying $150,000.00 cash for the house, you invested it instead at 7% for 30 years, it would grow to $1,217,475.00.  Presto, it’s the same number!

Both of these scenarios are examples of transfers, whether you paid cash for your home  or  are  making  payments  through  a  mortgage  it  is  costing  you  money.    The difference is that in the case of the 30 year mortgage at 7%, the mortgage would yield about $60,000.00 in tax savings in that 30 year period for someone in a 30% tax bracket. That is called recapturing some of your transfers.

15 vs. 30

The two most common types of mortgages sold today are the 15-year and 30-year mortgages. Once again, misinformation clouds the choice between these two types of mortgages.  In the 15-year mortgages, people assume the shorter the loan period, the less they will have to pay.  Secondly, they believe they will save interest payments.  With this line of thinking, you must conclude that, once again, the best alternative would be paying cash for the house.  Let’s get out the microscope and take a look at these two mortgages.

Person A chose a 30-year mortgage for $150,000.00 with a 6.5% loan rate. She knows that under those terms her monthly payment will be $948.10.  Person B obtained a 15-year mortgage for $150,000.00 with a 6.5% loan rate.  He knows that his monthly payment for that loan will be $1,306.66.

Person A believes that her monthly payment at $948.10 is a good deal because it is $358.56 per month cheaper than the $1,306.66 payment for the 15-year mortgage.  She is going to invest the savings of $358.56 per month into an account that averages a 6.5% return for 30 years. This grows to a tidy sum of $396,630.

Person B, who wasn’t born yesterday, plans to save $1306.66 a month for 15 years after he makes the last payment on his 15-year mortgage.  He too predicts a 6.5% average return for those 15 years, and his investment would grow to an impressive $396,630.00.  NOTE:  It’s the same amount as Person A’s account.  I have to ask you: Which person would you rather be?

In making the above comparison, I assumed a 6.5% mortgage loan rate and a 6.5% rate of return on their monthly payments.  What would happen if both Persons A and B thought they could get an 8% average rate of return over that period of time on their investments?   Person A’s $358.56 per month for 30 years at 8% would grow to $534,382.00.  Person B’s $1,306.66 per month for 15 years would total $452,155 at an 8% earning rate.  That’s a difference of $82,227.00 in the favor of Person A.  The compounding of interest works in Person A’s account, causing the money to grow to a larger sum.  Remember, Person B’s banker told him he would save money with a 15-year mortgage.

Hold on there, Kemosabe.  You’re thinking, “If I took a 15 year mortgage, my interest rate might be lower than that 6.5% 30-year note.”  You’re right.  Let’s say the interest rate was 6.0% on that 15-year mortgage.  Then both Person A and Person B invested  the  difference  at  8%  return  just  as  we  described  above.    You’re  probably thinking, “Ah hah!  Got you!”  Try again.  Person A’s savings still ends up $35,697.00 greater than Person B’s account.  Don’t forget, Person A also received 15 more years of tax deductions that created an even greater savings.

Jimmy Carter

To continue our comparison of Persons A and B, we need to step into the WAYBAK time machine.   Destination:   the 1970's.   It was a time of high inflation, hostages in Iran, and funny clothes.   Mortgage rates were extremely high.   It was not uncommon to see mortgage rates of 10%, 15%, 18%.  To proceed with our comparison, we must agree that since interest rates have been much higher in the past than they are today, that it is possible for mortgage rates to go higher, and of course, possibly, lower. O.K., back to the WAYBAK machine.  Destination:  the present.  Phew!  What a trip!! I want to thank Mr. Carter for the lesson we learned.

Knowing that interest rates could go up or down, let’s take a look at Persons A and B’s 30- and 15-year mortgage.  First of all, NOW READ THIS SLOWLY, there are more tax deductions in the first 15 years of a 30-year mortgage, than there are in the entire 15-year mortgage.  Second, in Person A’s 30-year mortgage, she knows for certain that her interest will remain the same for 30 years.  Meanwhile, Person B has just made his last mortgage payment in the 15th  year and is jubilant!  My question is, now that he has paid off his mortgage, if he wanted to borrow money from his paid-off home, what are the interest rates?  If he had a 15-year mortgage at 6.5%, and the interest rates are now 10%, you would have to say he was in a hurry to pay off his house at a lower rate so he could use his money at a higher rate.  You see, Person A knows what her rate will be in that 16th year of a 30-year mortgage and because you put that $358.56 a month away, she now has accumulated $124,075.00 in savings by the 16th  year.   She has enough money to pay off her house at that time, IF SHE WANTS TO.  If economic conditions are favorable to do that, she can.  If the stock market is yielding higher rates of return, she may elect to continue to pay on her mortgage and let her savings grow.  Now, in the 16th year, Person B is just starting his savings program.  Which of these two people would you rather be now?

Most people would want to be Person A.  Person A has more control and more options and opportunities in the future.  She also has retained some liquidity, use and control of her money.   This allows Person A to be more flexible in ever changing markets.  Person A has also been able to maximize the tax deductions in the 30 year mortgage.  Remember, taxes are the largest transfer of your wealth that you will see over your financial life.  Recapturing your money in the form of tax deductions is important.

From the bank’s standpoint, they would love to see everyone choose a 15-year mortgage.   They will also encourage bi-weekly payments and any additional mortgage payments you can make. Why?   These payments create the velocity of money for the bank.  That means, the more money and the faster the money comes in, the more they can lend it out, to generate more profits.  They disguise these payments as “interest saving techniques.”  THINK ABOUT IT . . .A bank, whose sole purpose is to collect interest, telling you how NOT to pay interest?  It doesn’t make sense.

Changing Landscape 

Banks continue to tweak ideas about mortgages.  It is their most lucrative product. The idea of interest-only mortgages is fairly new.  In these mortgages you pay only the interest, no principal.  They require you to put money into an account that the bank controls.  An example would be, for every $100,000 you want to borrow you would put $12,500.00 into a 7% account controlled by the bank for 30 years.   So, if you had a $200,000 home to finance, you would put $25,000 into their account.  That money, the $25,000.00  at  7%  would  grow  to  meet  a  balloon  payment  due  in  the  30th   year. Usually, the interest payments on this type of mortgage are higher than traditional mortgages.

Some mortgage companies tout a loan product that is totally flexible.  You name the interest rate, and you name your monthly payment.   They will tell you how many years it will take for you to pay it off.  Hire a lawyer to read this contract.  Of all these types of mortgages one thing stands out:  The lending institutions are there to charge interest and make as much money as they can.

Insuring The Bank

Most banks and mortgage companies require down payments.  If you don’t have a down payment they will charge you points.  This extra money, above and beyond your mortgage payment, ensures them that in the event of foreclosure, their losses are covered. The standard down payment on a house is 20%.  Again, the bank feels comfortable, because should you not make payments and they must foreclose on your home, that 20% covers their losses.  I consider that a 20% up-front failure fee.  Don’t take it personally, they require this from almost everyone.

Black Hole In Space

Where does this down payment money go?  If you were to put $30,000 down for your new home, what is your rate of return on the money?  THINK HARD.  ZERO!  It will be zero percent forever.  Next question:  Can you borrow this $30,000.00 from the bank as part of your loan?  NO!  Why not?  It’s not part of the mortgage.  Now, the banks will argue that it lowered your monthly payments.  That may be true on the surface, but let’s take a look at what the bank got out of this deal.  They now have the use of your $30,000 for the next 30 years.   At a 7.2% rate of return, that $30,000 would grow to $240,000 in 30 years for the bank.  Just from the down payment they have earned more from you than what you paid for your house.  Is your down payment deductible on your taxes?  NO.  Someone please remind me why I would want to do this.  Remember, the bank is telling you the more you put down on the mortgage, the more you will save.  Part of the solution to this problem is to demand that all of your down payment money be accessible to you through an equity line of credit.

I’ve Hit The Jackpot

Meanwhile, back at the ranch . . . you just went through the meeting for the “closing” of your new home.  You have signed 27 different documents, none of which you understood.  What the heck . . . if you can’t trust the bank, who can you trust?

Now you’re a homeowner. You think you’re happy. The people at the bank gave you that congratulatory pen and calendar.  They have truly put themselves in control of your future. They are happy. The people who sold the house to you are also happy.  They even share their story of success with you.  They bought that house new 33 years ago paying $39,000.00 for it.  They remember how low the property taxes were back then, but even though they increased through the years, they still only averaged $1,000.00 a year in taxes.  They remember the additions and improvements they made over the years totaling about $20,000.00.   They feel it was their greatest investment.   After all, they think they made $111,000.00 on the property.

THE MATH 

Sale Price:                                                 $150,000.

Original Purchase Price:                         ($39,000.)

Gain on Sale                                              $111,000.

Years you owned the home                                33

If you have a gain of $111,000.00 over 33 years, the annual compound rate of return is

4.17%. But what really happened was this:

THE MATH INCLUDING TAXES AND IMPROVEMENTS

 Sale Price                                                 $150,000.

Original Purchase Price                          ($39,000.)

Taxes and Improvements (33 years)    ($53,000.)

Gain on Sale                                               $58,000.

Years you owned the home                                33

If you have a gain of $58,000.00 over 33 years, the annual compound interest return is 1.49%.

Now these people also had that house totally paid off for a few years.  Had they been able to invest this $150,000 they had in the house, at a 7% earning rate they would have made $10,500 a year without touching the principal.  That again is called a lost opportunity cost.  The last three years they lived there they would have almost another $31,500.00 in lost opportunities.  Plus, in losing the interest deductions, as little as they were, they became even more perfect taxpayers, which created more tax transfers of their wealth.

You congratulate them on their success, wish them well, and now you're asking yourself:  Will you have the same success they did?  After all, they were happy that they made such a huge profit on the sale of their house.

Home Equity

If you have accumulated equity in  your home, let me ask  you one question: What’s the rate of return on the equity built up in your house?  I mean, if you built up $70,000 of equity in your home, the bank must be sending you a hefty dividend check, right?      WRONG! The equity inside your house is growing at zero percent.  The argument here is, “Well my house increased in value therefore, my equity went up.” Well, whether you have $70,000.00 or $1.00 of equity, the value of your property would still have gone up.   If property values  went down, would  you rather lose $1.00 or $70,000.00 of equity?  Although we have been taught that our home is a safe place to park our money, we really have to take a look at this situation.

Who Is In Control

It is important for you to understand how to get liquidity, use and control of the equity in  your home.    This is  not  money that  you  would  invest,  gamble,  or spend foolishly.  But, it can open up a great number of opportunities for you in the future.

Be the Bank

If you do have equity in your house, it is important that you establish an equity line of credit.  Be advised, this is NOT used for investing.  This credit line should be used to establish your own personal “bank.”  Current tax laws may allow you to deduct the interest paid on your equity line of credit.  Consult with your accountant to make sure you qualify for these interest deductions.  Under most mortgage situations you will.  The government really doesn’t care what you purchase with your equity line of credit.  You will receive an interest-paid statement from the bank at the end of the year.  It is similar to your mortgage interest statement.  The rate of interest on equity line of credit may even be lower than your mortgage interest rate.

As previously stated, an equity line of credit should not be used to make investments, but can be used to eliminate interest payments that are not deductible.   If you could take $5,000.00 of credit card debt at 18% with a $300.00 monthly payment and reduce it to a 6% interest rate with a $100.00 monthly payment and be able to deduct the interest off your taxes, would you be interested?  That’s what an equity line of credit can do for you.       If you have $12,000.00 balance on your car loan and you are paying $350.00 a month for it, how would you like to pay $250.00 a month and deduct the interest from that loan off your taxes?  As you can see, there are many ways this could be favorable to you.

 Hello Bubba!

 You’re sitting in your home, looking out the window at the new landscaping project you just completed.  There’s a knock at your front door.  There, standing on your porch, is a guy you have never seen before.  You crack the door open and he says:

“Howdy!  My name is Bubba.  I’m your new neighbor.  I’ve got six dogs, they’re all pretty friendly except for that one with no hair. . . if I were you I wouldn’t try to pet him.  I’ve got four kids.  Aren’t kids a hoot?  I’ll tell you, between parole officers and social workers, kids sure keep you busy.   My wife, now there’s a fine woman.  You might see her from time to time.  She’s gonna re-upholster furniture right out there on the front porch, to make extra money.   Me, why I’m a work at home kinda guy.   I’ll be rebuilding truck engines right here in the driveway.  If you ever need my help, just let me know.  See you, buddy!” 

This is more like, see you later property values.  Now, that example may seem a little extreme, but such a neighbor would dramatically affect the value of your house, and the tax-free equity in your home.  Just some neighbor who didn’t maintain their property very well could affect your values.

Once, while my wife and I were searching for a home, we found a property that we really liked.   I happened to walk out into the backyard and a little dog next door started barking.  Barking and barking, followed by more and more barking.  I looked at the real estate person and said they would have to lower the price of the house quite a bit if I was going to spend the rest of my life trying to convince that dog to be quiet. What is the price of peace and quiet in your own backyard?

Federal Reserve

Another situation that affects your tax-free equity in your home is the Federal Reserve.  The Fed sets the interest rates that affect the bank loan rates.  Your ability to afford a house is based on your ability to make that monthly payment.  If interest rates are low, housing values are high, because less of the monthly payment goes to interest.  If interest rates rise, home values fall.  More money, on a monthly basis, would have to go to interest.  The seller might have to lower the price of the house so that it is affordable, on  a  monthly  basis,  to  attract  buyers.     Remember  Jimmy  Carter;  interest  rates skyrocketed, housing values plummeted.  There go the house values and the tax-free equity again.

You’re Dead

We’re just pretending here, but if you and your spouse die in a common accident, what becomes of the tax-free equity in your home?   It can magically become taxable again, this time at a higher rate, in your estate.  Let’s review quickly: You’re breathing, it’s tax-free; You’re not breathing, it may be taxable! Enough said.

Not Dead, Just Disabled

We just discussed situations that could affect your home’s value, and affect that tax-free equity that’s earning a whopping zero percent.  Without liquidity, use and control of this equity you may also be facing another danger.  Let’s say one of the breadwinners in a household is involved in an accident or has a mild heart attack and survives.  Now medical insurance covered most things, but the on-going therapy isn’t covered.  The spouse, needing financial help, goes down to see the friendly banker for help.  “I need some of the $70,000.00 equity I have in my home for medical reasons.”  The banker musters up enough dignity and tells the spouse this:  “Unfortunately, your mortgage payments were based on two income earners, not one.  We feel you don’t have the ability to pay back (YOUR) tax-free equity to us with interest.  Thank you, good luck.” Many foreclosures in the United States are caused by a disability.  Having proper liquidity, use and control of your money would prevent some financial calamities.

3000 Days

When it comes to your home, the country’s demographics could play an important role.  At a time when builders are building mega-homes for $300,000.00 to $500,000.00, we have to take a look at our aging population. With an increasing aging population, consider this:   A large portion of the population will be downsizing their homes.   As people  get  older,  they  don’t  need  these  6000  square  foot  homes.    Keeping  up  the payments and maintenance of these mega-homes will be a drain on retirement incomes. There may be a time when there is an over-abundance of these homes on the market. Prices lowered to attract more buyers, means loss of home values and lower equity values in the house.  Once again, it’s not a good place for your money to be when experiencing a down housing market.

Solutions

We have discussed the many aspects of home ownership and mortgages.  It is important to establish as much liquidity, use and control of your money as possible.  As previously discussed, a 30-year mortgage is more favorable than most other options. Further, you should limit the amount of down payment paid at purchase as much as possible.  Establishing an equity line of credit on your home can give you liquidity, use and control of your equity.   Refrain from paying cash for your home, as neighbors, interest rates, property taxes, and death taxes affect the value of your home.  You create unintended consequences when you live in a home that is paid-off, without understanding your options.  Failing to understand your options leads to lost opportunity costs, which in turn will create major transfers of your wealth.

Paying Yourself Back The Velocity Of Money

If you are the owner of your “bank,” your equity line of credit, you have created liquidity, use and control of your money.  If you purchased a car for $25,000.00 at 5% interest for 48 months, the payments would be $575.13 a month.  You borrow the money from your “bank” to buy the car, and pay yourself back the $575.13 a month for 48 months.  What happened here?  You charged yourself the loan company interest rate, replaced the money into your “bank” in 4 years, and took tax deductions on the interest. After 4 years, the money has been replaced and it’s time to buy another car with the same money. There is still some value in the old car to assist you on your next purchase, possibly $6,000.00 or $7,000.00.   Does it feel a little better being the owner of the “bank?”  Remember, a car is a depreciating asset.  Paying cash up front on something that will lose money is a losing strategy.

Our Goal

The objective of these exercises is to show you how to take back the liquidity, use, and control of your money.  We also want to reduce or eliminate transfers of your money that are unnecessary.  Recognizing these transfers and dealing with them can save you thousands of dollars. We want to create other “banks” of money for you that are tax efficient and help you retain monetary control.   We will create these other “banks” by using the money you saved when you have eliminated and reduced unnecessary transfers of your wealth.  Thus, you will not spend one more dime than you are already spending. By doing this, you will have more knowledge and money to make better financial decisions that profit you, not others.  This will be an exciting change in the way you think about money!

©2006 Wealth & Wisdom, Inc. All Rights Reserved.


Kevin is a member of the Wealth & Wisdom Institute. Wealth & Wisdom Institute is an organization of professionals from across the country dedicated to informing and educating the public regarding the follies of traditional financial thinking. This group of experienced professionals includes attorneys, CPAs, tax professionals, authors, financial professionals, and pension, employee benefit and retirement experts.

ELFS: Three Types of Money

The Three Types of Money

One of the most powerful discoveries you can make is that understanding how money works can change your life. What is more important than where your money is, and its rate of return, is knowing how it works. You may think that learning how money works would be a massive undertaking on your part, but it does not have to be that difficult. You must first learn how to categorize your money. This should simplify your thought process and enable you to improve your life. You have been marketed to death by companies telling you that all you have to do is to have the right products and higher rates of return to make your life better. Now, while that is important, the main focus of this marketing is for you to buy something. It sounds easy, and there is very little thinking involved. That type of marketing is aimed at the person whose life is so busy that he has very little time to pay attention. Remember, the product they sell is not the source for your knowledge; it should be the result of your knowledge. Owning more products does not make you smarter. With that being said, both you and I are going to need some products in the future. The point is that the products we have are not the center point of our knowledge. They are tools we use. Products alone will not teach you how money works.
Your thought process should begin with understanding the types of money you have. If you categorize your money into three types, then controlling your money should become easier. The three types of money can help you identify mistakes, problems, and solutions that surround your everyday life.

Power

The greatest financial tool you possess is your ability to earn money and generate an income stream. This continuous flow of new money is the heart of your financial life. This income can come from various sources. You can receive compensation from your career or occupation. Unless you work until you die, this source of money may end at retirement or, heaven forbid, you lose your job. Or even worse yet, you become disabled, unable to work again for the rest of your life. For many, working until you die is not an option it is a necessity. For others, an income flow can come from retirement plans and/or investments. This source of income is secured as the result of some planning in the past. Another source of income flow can come from government programs and benefits. These benefits, and the income stream they produce, are becoming less and less certain to be there in the future.

The demographic shifts, a decreasing work force, and an aging population are ingredients that may reduce or eliminate these benefits in the future. No matter what the source of your income is, it remains one of your most valuable assets. It is important to remember this
Defining Moment: Your money may never be worth more than it is today. Let’s now divide your money into three specific groups.

Show Me the Money

Your money is going to end up in one of three categories: lifestyle money, accumulated money, and money you transfer away, sometimes unknowingly and unnecessarily. Every dollar you have will filter through one or more of these categories.
Your thought process can be simplified by being able to identify how money passes through your life. Being able to track how your money enters and exits your life will uncover lessons you need to learn in understanding how money works.

Lifestyle Money

Your standard of living, the way you live, has taken a lifetime to achieve. Maintaining and increasing your lifestyle for the remainder of your life should be everyone’s goal. Your lifestyle money is the amount of money you need to maintain your current standard of living. The house you live in, the cars you drive, your vacations, the country clubs, all the comforts you are accustomed to they all fall into the category of lifestyle money. You have worked very hard, and you deserve an affordable quality of life. You are certainly aware of your lifestyle money more than the other types of money because you live and spend money on your lifestyle almost every day. Many of the financial decisions that you make are centered on your standard of living. Unfortunately, the cost of your standard of living continues to increase every year due to inflation. If you attempt to live above the standard of living that you can afford, you can run the risk of being buried in personal debt.
The challenge of maintaining your standard of living after your working years can get complicated. You may find yourself on somewhat of a fixed income at retirement. If you followed traditional thinking and achieved the goal of retiring on two thirds of your working income, your lifestyle could suffer dramatic changes. You may discover that everything you buy will probably continue to increase in price along with the taxes you pay on these goods. At 3% inflation, a dollar when you are 65 will have the buying power of fifty five cents 20 years later.

The majority of money you earn will end up in your lifestyle. It may consume an increasing amount of money in the future. A problem occurs when people start to fund their lifestyle with an increasing amount of debt and credit.

Accumulated Money

Accumulated money is that portion of your earnings that you attempt to save. With our best attempts and intentions, some of our money ends up in investments, saving programs, retirement plans, and banks. The average American is finding it more and more difficult to save and accumulate money. According to the GAO, the Government Accountability Office, we are saving at the lowest rate, per capita, since 1934 during the Great Depression. There are many reasons why this is happening, but the result of this is a great concern. Our inability to fund our future lifestyles could impact everyone. Banks, financial planners, and investment brokers are all competing for the money you are attempting to save. In the financial world, there is an enormous amount of information. You would think with all the financial magazines, news articles, TV and radio shows, and a record number of financial experts out there that it would be almost impossible to lose money. It has turned out to be quite the opposite. All of this information has caused a lot of confusion. Misinformation and the “sleight of hand” make good financial sound bites and headlines. For the average American trying to save, it is becoming more difficult to separate opinions from fact, myth from reality, and the truth from fiction. Greed and ambition motivate individuals, and corporations forgo the truth whenever it is convenient and profitable. You may discover that your accumulated money may be the smallest category or type of money that you have, but the most important. Your future and financial survival depend upon it. Your ability to save more money and increase your lifestyle may depend on understanding and controlling the third type of money in your life.

Transferred Money

The third and last category of money in your life is transferred money. It may surprise you that many people transfer away much of their wealth on an everyday basis, unknowingly and many times unnecessarily. Transfers of your wealth appear in the form of taxes, interest rates, finance fees, finance charges, maintenance and management fees, etc. The beneficiaries of these transfers are the federal, state, and local governments; banks; loan companies; and mortgage and investment companies. While everyone is focusing on their lifestyle and accumulated money, the answers to increasing your wealth lay hidden in the transfers of your wealth. Learning to recognize, understand, and recapture the transfers in your life could allow you to create more wealth without spending one more dime than you are already spending or facing any additional market risks. The more transfers of your wealth that you are involved in, the more your lifestyle and accumulated money decrease. You should learn to categorize all of your money. Your money ends up supporting your lifestyle, being saved and invested for your future, or being transferred away. Unfortunately, any attempt to increase your income, improve your standard of living, and save money for your future also triggers some unintended consequences in your life. As you increase your lifestyle and your savings, you will incur an increase in taxes now and possibly in the future. Even increasing the amount you save for retirement today could create greater amounts of taxation in the future. It seems every time you try to save a dollar, you will have to give a dollar away.

While expanding your standard of living, you purchase new homes, cars, televisions, home improvements, furniture, and many other items. Sometimes these goods are bought on credit. This debt has interest rates attached to it, which transfers some of your money to others. Let’s face it: Almost all the purchases in your lifestyle are depreciating assets and get replaced from time to time. When you buy a new car, by the time you drive it out of the dealership, the car value drops about 30% and continue to drop in value every year. Even purchasing a home is surrounded by transfers in the form of interest rates, property taxes, school taxes, water and sewer taxes, maintenance and improvement costs, and insurance costs.  Many banks, mortgage and credit companies, look at your buying habits as “a dollar from you is a dollar for me” opportunity. Unfortunately, with the possible exception of the mortgage interest you pay, almost all your other debt interest is not tax deductible. As you ca n see, these transfers can consume a lot of your money.
If you have the opportunity to recapture many of the dollars you are transferring to others and keep the money for yourself, would you do it? Absolutely! Unfortunately, most people do not know how to do this. There is a reason why no one is teaching you how to recapture transfers. If the banks, credit card companies, mortgage companies, investment companies, and the government taught you how to reduce your payments to them, well, they would get less of your money. These companies understand the lesson of the first defining moment. They know that money will never be worth more than it is today. Their goal is simple: to get as much of “your money” today, where it will have the most buying power for them.  Many Americans find themselves in the position of having to work so hard to pay for all these transfers in their lives that they do not have time to learn how to reduce or eliminate them.

Defining Transfer Labels

It is one thing to be held up by someone wearing a mask and carrying a gun; it is another to willingly give away your money freely, but the result of either one in your personal financial life is the same. Just as you can identify a thief by his mask and gun, you must learn to identify the transfers in your life that also take money from you. Many people have not been trained to recognize these transfers. Quite the opposite, people have been trained and brainwashed to accept that these transfers are just a part of life.
Some transfers in your life are inescapable, but many people create transfers in their life by the decisions they make or do not make. Bad judgment, bad investments, bad timing, indecisiveness, and sometimes doing nothing at can also create transfers and a loss of wealth to you. You must remember your economic situation is a matter of choice, not a matter of chance. The problem is that many of life’s decisions are made by default, without enough knowledge, and these decisions can create unintentional consequences in your future. A transfer of your money is nothing more than profit for someone else. Now pay attention. The government sees you as a taxpayer. The bank sees you as a borrower and interest payer. Investment companies see you as a fee payer, nothing more, and nothing less. These groups are not going to do you any favors. They are not your friends, and in most cases in dealing with them, you are the only one at risk. Here are transfer labels, what they are called and how they are active in your everyday life.

Defining Transfers

TAXES:

Taxes occur dozens of times a day in your daily life. There are federal, state, and local income taxes; sales taxes; telephone taxes; cell phone taxes; water and sewer taxes; gas taxes; business taxes; cable TV taxes; capital gains taxes; service taxes, and utility taxes. The list of taxes you pay goes on and on. Some of these taxes are unavoidable and impact everyone, whether you are still working or retired. Taxes impact your lifestyle, accumulated, and transferred money.

INTEREST RATES:

Debt in America is at an all-time high. The interest on this debt is a great concern. The interest rate on much of this debt is flexible, meaning it can go up. Interest is paid on mortgages, equity lines of credit, credit cards, auto loans and leases, college loans, and various other purchases. Interest rate payments come from your lifestyle money, after taxes. Paying too much money on interest could impact your ability to deposit more money into savings and accumulated money.

BANK FEES:

In my book, Learning To Avoid Unintended Consequences, I list about 100 fees that a bank can charge you. Once again, bank fees are transfers that come from your lifestyle money: check fees, check cashing fees, ATM fees, savings account fees, late fees, early withdrawal fees, etc. Why not just put on a mask, get a gun, and rob us while we are standing in line waiting for all that free service they proclaim to give us.

MAINTENANCE FEES:

You gave them your money, then they want to charge you a fee for giving it to them. These fees once again are typically paid out of your lifestyle money. Many times, a maintenance fee is simply subtracted from the money you gave them. It is not enough that they use your money to make tons of money for themselves; they charge you a fee. Using your money must be some kind of nuisance to them.

MANAGEMENT FEES:

Once again, these types of transfers are hidden from you by simply subtracting them from your accounts. Management fees guarantee the company of getting paid first, whether you gain money in their accounts or they lose it all for you.  Management fees are a transfer to your lifestyle and accumulated types of money.

FINANCE CHARGES:

It is not enough that companies that lend you money charge you interest on the loans, they want to charge you finance charges for processing the paperwork, billing you and sending you a late payment notice as well as a late fee.  These transfers, once again, impact your lifestyle money.

LOST OPPORTUNITY COST (L.O.C.):

If you pay a fee, a charge, an interest rate, or finance charge to some company, not only do you lose the dollar you gave them, but also the ability to earn money from the money you just gave to them. This compounds your financial troubles.

Product Transfers

Almost everything we attempt to do to help our financial situation results in some form of transfer. When following the financial advice of some experts, many times they gloss over or omit some of the transfers that you will have to face when purchasing financial products. I am not telling you not to buy financial products but rather to be aware of not only the positive aspects of your investment but also some of the transfers in your life that can occur from them. First of all, find competent professional help from someone who is versed in all aspects of products AND transfers.

©2012 Wealth & Wisdom Institute.

ELFS: Taxes

TAXES...

Major Transfers Of Your Wealth

In your everyday existence, you are confronted with transfers of your wealth. You continuously, unknowingly and unnecessarily, give or transfer money away. Not only do you give this money away but you also lose the ability to earn money on that money once it is transferred. This compounds your loss. To eliminate or reduce these transfers, you must first learn to recognize them and then understand how directly or indirectly they cost you money. You may have to confront conventional financial wisdom. Remember, the ones giving you these financial programs tend to profit from them. Always ask, who would profit from these transfers? Here is a list of the transfers of your wealth we will be discussing:

● Taxes

 ● Tax Refunds

● Qualified Retirement Plans

 ● Owning A Home

● Financial Planning

 ● Life Insurance

● Disability

 ● Purchasing Cars

● Credit Cards

 ● Investments

These ten transfers can create financial losses for you. You should study each one and determine how they will affect you. On the surface, the transfers seem pretty basic. It is not until you think a layer deeper that you find that these transfers may cause unintended consequences in the future. The future demographics of the country will affect everyone’s financial future.

Taxes

The Largest Transfer Of Your Wealth. . .Are You Financing Your Future, Or The Government’s

A common definition of the word “tax” might be: “A contribution for the support of a government, required of persons, groups, or businesses within the domain of that government.” “A burdensome or excessive demand, a strain.” The only power an elected official has is his ability to spend money, our money. The one thing the government does well is collect taxes. The problem is they spend more than they collect.

The government now spends a majority of its time trying to raise revenue through taxes in order to continue their increased spending. Forty percent of your income now goes to some form of tax, which is more than the average family spends on food, clothing and housing.₁

1 Michael Hodges Grandfather Economic Report, November 2011 http://grandfather-economic-report.com

According to a study conducted in 1996 by the Family Research Council, since 1948 for a family of four with an average income, Federal tax rates are up 1,250%.₁ Over the past 10 years, state and local government taxes have increased 168% faster than national incomes.₂ Income taxes have been the central focus of many debates. Most financial planners mention only a couple of taxes that may affect a client’s future. These are usually the income tax and the estate tax. These two taxes are formidable foes of wealth, yet they represent only the tip of the iceberg when it comes to the overall taxation that really exists. Here is a list of taxes that you are confronted with on a daily basis:

Overall, we are now being taxed at a higher rate than when we threw tea into the harbor, with no end of increases in sight. Now include the understanding of the demographics of our nation, and that light at the end of the tunnel is not a ray of sunshine, but a train coming our way and we’re on the tracks.

• FEDERAL INCOME TAX
• SOCIAL SECURITY TAX
• STATE TAX
• CITY TAX
• COUNTY TAX
• PROPERTY TAX
• PERSONAL PROPERTY TAX
• SCHOOL TAX
• LONG CAPITAL GAINS TAX
• SHORT CAPITAL GAINS TAX
• SALES TAX
• ESTATE TAX
• GASOLINE TAX
• WATER TAX
• SEWER TAX
• TAX ON ENERGY – GAS, ELECTRIC, HEATING OIL
• BUSINESS TAX
• AIRPORT TAX
• TELEPHONE TAX
• LICENSE PLATE TAX
• HOTEL TAX
• CABLE TV TAX
• USER TAXES
• UNEMPLOYMENT TAX
• WORKERS COMP. TAX
• 100’S OF REGULATORY FEES
• CIGARETTE TAX
• CORPORATE INCOME TAX
• INHERITANCE TAX
• ACCOUNTS RECEIVABLE TAX
• INVENTORY TAX
• MARRIAGE LICENSE TAX
• LIQUOR TAX
• BUILDING PERMIT TAX
• MEDICARE TAX
• FISHING LICENSE TAX
• REAL ESTATE TAX
• FOOD LICENSE TAX
• FUEL PERMIT TAX
• HUNTING LICENSE TAX
• ROAD USAGE TAX (TRUCKERS)
• LUXURY TAX
• RECREATIONAL VEHICLE TAX
• UTILITY TAX
• SEPTIC PERMIT TAX
• WELL PERMIT TAX
• ROAD TOLL BOOTH TAX
• VEHICLE SALES TAX WORKERS COMPENSATION TAX
• TRAILER REGISTRATION TAX
• WATERCRAFT REGISTRATION TAX
• LONG TERM CAPITAL GAINS TAX
• SHORT TERM CAPITAL GAINS TAX
• TELEPHONE FEDERAL EXCISE TAX
• TELEPHONE STATE AND LOCAL TAX
• TELEPHONE USAGE CHARGE TAX
• TELEPHONE FEDERAL UNIVERSAL SERVICE FEE TAX

1Michael Hodges, Tax Report - A chapter of the Grandfather Economic Reports, April,

2002, at <http://mwhodges.home.att.net/tax.htm>.

2Id.

It is probably safe to say that if something is not taxed it must be illegal. Drugs, prostitution, theft, money laundering, etc. would be at the top of the non-taxed industries.  After examining this list of taxes one could come to the conclusion that taxes, now and in the future, represent the largest transfer you will face in your life and possibly after your death. If instead of taking taxes out of our paychecks and taxing us for our purchases, they sent everyone a tax bill at the end of each month for us to pay, there would be a revolution!

No One Told Me

If it came to your attention that you were unknowingly and unnecessarily paying a tax you didn’t have to, would you continue to pay it? If you were told to pay a certain amount of tax, would you purposely overpay that amount due? If you could legally recapture or keep some of the money you pay in taxes, would you do it? If no one has taught you techniques of reducing taxation when you can, that is truly unfortunate. The most common belief is that using qualified plans is the best way to reduce taxation. This is what you are told to believe. Don’t be surprised to find out that this is not necessarily true. The tax savings we’re talking about here is not about loading up your IRA or 401(k) plans. Once again it may be quite the opposite.

It’s Only Temporary

In 1913, the 16th Amendment of the U. S. Constitution was passed, allowing the federal government to impose an income tax on the citizens of the United States.1 Ironically, 20 years prior to that, as part of a trade bill, the government passed into law an income tax that the Supreme Court struck down as unconstitutional. But persistence paid off, and Congress ratified the 16th amendment in October, 1913.2 The tax measure was passed as a temporary measure. The original federal marginal tax was around 6%, and initially only about 5% of the population had to file tax statements.3 Clearly, the federal government wasn’t shy about raising income taxes. During World War I and World War II, the marginal tax rates were high and remained at a level of over 50% for almost 50 years.

1Id.

2The Century Foundation. Tax Reform. New York: The Century Foundation Press,

1999.

3Id.

Understanding The Math

Recently, I happened to come across my father’s 1960 tax return. The federal marginal tax rate that year was 87%. I thought, how did my parents ever survive with four kids and a dog? My father worked two jobs and we survived without having to eat the dog. Back then he was told the same story that we sometimes hear today about retirement income: That he would probably retire to two-thirds of his income, thus being in a lower tax bracket. In 1960, although the marginal tax rate was 87%, just about everything my father purchased was deductible on his tax return. After his deductions, his realized tax bracket was around 12%. Twenty-five years later, my father did retire to two-thirds of his income, but retired to a 28% tax bracket. Now, you might say that the difference between a 12% tax bracket and a 28% tax bracket is just 16%. Not quite. It was an increase of almost 140% in his taxation level. Soon after retirement the dog disappeared.

In the tax reform acts of the 1980's, the government professed to give its citizens one of the lowest federal tax brackets in the history of the country. Numerically they did, but they quietly took away most of the deductions. It created one of the largest windfalls in the government’s taxation history. It was amazing . . . politicians proclaimed lower taxes while we actually paid more. The next leader came in and said “Read my lips, no new taxes.” The next thing you know the federal marginal tax rate went from 31% to 39%. Check your math. Is that an eight percent increase? NO! It’s about a 27% increase in taxation. Remember, all those increases were put in place with no tax deductions. A double whammy. Once again, even with the record tax revenues being collected, the country’s debt continues to grow. In the near future, the demographics of the country will compound the taxation issues causing major problems. Does anyone really believe taxes will go down in the future? If your income is so small when you retire that your taxes actually go down, I feel sorry for you. Get help. No matter how you look at it, taxes will continue to be the largest transfer of your wealth now and in the future. If you believe what the government tells you about its retirement plans and deferring taxation to a later date, I would encourage you once again to study the demographics of the country. I believe the government’s main objective is to thrive and survive. Meanwhile, on the streets of America, we the public struggle to do the same thing. Remember, you and I the taxpayers, are the only ones paying for this.

There is no such thing as a free lunch. Every time you earn a dollar, spend a dollar, and save a dollar, you face possible taxation. Any attempt by you to thrive or survive will be taxed. The real unfortunate fact is, they can change the tax rules anytime it suits or profits them. Trying to plan your financial future without understanding the inevitable changes the government must make, is like building a home on quicksand. Is the government’s goal to finance their future or yours? Their plans may also create unintended consequences for you.

Sit Doggy Sit

Around and around he went as fast as he could with the never ending quest of catching his tail. At first, watching a dog chase his tail is sort of funny. As the dog persists and starts panting it becomes less humorous. Pretty soon you feel sorry for the animal and try to stop him. “Sit doggy sit.” He stops for a second then starts all over again, chasing his tail. You think to yourself what would he do if he caught it? What’s the point? First of all, this dog needs help, but to him it’s a normal way of life. To me, the dog catching his tail is like someone trying to get a tax refund. You go round and round, get dizzy, work really hard pursuing it, spend a lot of time and effort to get it, only to find out it was yours in the first place.

Tax Refunds: Avoiding Tax Exuberance

The concept of overpaying for something really makes my blood boil. Have you ever been on an airplane and overheard the couple next to you say they spent $200 less than you did for your ticket on CheapTickets.com? First you’re mad, then you feel stupid. You would have to be tortured to admit you overpaid.

I can never understand the exuberance people feel when they get a tax refund. They worked all year and paid taxes then went round and round, got dizzy, worked hard to get it back, spent a lot of time doing it, only to find out it was theirs all along. They act as if they won something when in all actuality, they lost.

What is the rate of return the government gives you on overpayment of taxes, otherwise known as a refund? Zero percent. In some cases, you have to hire an accountant to help you get this overpayment back. After they used your money all year long, did you even get a thank you letter? Let me get this straight. You gave them too much money. They gave you a zero percent rate of return. You had to pay an accountant to help you get it back and they didn’t say thanks. You will have to torture me to admit that I received a tax refund.

The average refund is almost enough to make a car payment every month for the whole year. A $3,000 refund would create $250 a month to improve your standard of living. You would also have the opportunity to invest it and earn even more money. The most important result of adjusting your withholding on your paycheck is that you would have liquidity, use, and control of your money that you normally would have overpaid to the government. I would rather owe the government $100 on April 15th than have them owe me something.

Say you go to a clothing store and find a jacket that you like. You walk to the cashier to pay for the $110.00 garment, hand her $200.00 and she rings it up. She comes back and says, “Thank you. Your change will be mailed to you in about a year.” You in turn say, “That will be fine.” Yeah right! But isn’t that the way the government deals with us? Make sure your withholdings are adjusted properly so you won’t suffer from tax exuberance.

The Problem Is The Solution…And The Solution Is The Problem

The government SEEMS to have gone out of its way to help you save money and taxes. The important word there is “seems.” They have created savings programs with the idea you will save taxes by participating in them. Why? Possibly out of guilt for having overtaxed you in the first place. Possibly because high current taxation has forced us, as a country, to save at a negative rate. Possibly the government’s own fear that social security and other social programs will be forced to change dramatically. Possibly because the government understands the demographics of the changing population and the effects it will have on social programs. Possibly to shift the blame for less retirement income from them to you. Possibly because introducing these programs may help them get re-elected. Maybe, just maybe, they are interested in financing their future not yours.

Everyone will agree that tax deferred savings is a good idea. But the government will decide what rate of taxation will be assessed when you take withdrawals. Wouldn’t it be a coincidence if the government were able to collect more tax revenues from you by using these programs? If they were truly that concerned about our savings, wouldn’t they simply lower taxes? If they were that concerned, why do they even tax what little we are able to save?

Who Pays?

There are many types of government-sponsored savings plans. They allow you to save money, if you qualify, in tax-deferred programs. Some of these plans such as defined benefit, defined contribution, and profit sharing plans to name a few, require the employer to make contributions to these plans on your behalf. The plans are disappearing more and more because it is becoming very costly for companies to maintain them. This first group of plans, although laden with regulation, is a great benefit to the employee. None of the workers’ money goes directly into these plans.

These plans are funded by the employer.

The second type of plan enables the employer and the employee both to contribute to the plan, with restrictions of course. The employer will match a certain dollar amount or percentage of the employee contribution. Matching contributions by the employer is an option. It is not uncommon for the employer not to contribute anything. One of the most familiar plans that fall into this category is the 401(k). The 401(k) made it easier and less expensive than the old traditional retirement plans for the employer. Why? For the cost of administering the plan, a company can proclaim that it offers benefits for its employees. Even though the employee is funding most, if not all, of the plan.

The third type of plan that was created is one where the participant funds the entire program. IRAs, 401(k)s, and others are the most widely used plans by most individuals. Since these are the most commonly used I am going to focus on these plans. When it comes to transfers of your wealth I want to simplistically separate these plans by one factor: Who pays for these programs. If you can get someone to help fund

your retirement with money, terrific, do it! But as for the money you contribute into these plans without company matches, I want you to start thinking a layer deeper. If you’re funding the full amount for these plans, there are things you need to know in considering whether or not to participate in them. My intent here is not to explain and describe how these plans work and all their complexities, but simply to examine where the funding is coming from, and to discover who is encouraging the use of these plans and why.

Magician’s Assistant

Step right up, come one come all, to the greatest disappearing act ever performed. Watch in amazement as the master of deception makes things disappear with the help of his assistants. Watch as entire fortunes vanish into thin air. Your participation is mandatory and our assistants will prepare you for the show. Welcome to the greatest show on earth.

The government creates the plans, and financial professionals deliver them. With little or no questioning, it is believed that life can not exist without government savings plans. They are marketed by banks, accountants, brokers, insurance and investment companies. All of these companies promote these savings programs because they profit from their existence. It would also be logical that the ones who created them would also profit. The popularity of these plans is based on blind faith. It is assumed, if the government and all these professionals support these programs, they must be good. Even companies offer these programs as a benefit to their employees. All of these seem to be tremendous tools for saving for retirement. When you get to retirement, HOCUS POCUS, POOF! A whole lot of your money disappears, along with the magician and the assistants.

WHOSE FUTURE ARE YOU FINANCING . . .

YOURS, OR THE  GOVERNMENT’S?

The Government: Your Partner In Life And Death

God created morons, he also created politicians. I’m sorry, I’ve repeated myself. The passion of politicians, and the harm that they cause, leads me to wonder why more of them don’t commit suicide. We have invented the government of compromise. For the past 100 years or so, the government has passed on compromised solutions to our problems. Years later even the compromises are compromised. This, over a period of time, waters down the original solution, thus creating loopholes in the law that now need new compromises to close up the loopholes. If the Ten Commandments had been compromised over the years in this fashion, you would end up with the rules for big time wrestling.

In my opinion, there is greater disdain for the government and its failures by the public in general than ever before. Two monolithic political parties bent on destroying each other and willing to use the public as pawns, fight for ultimate control and power.

Their goal is to fulfill their agenda, not the public’s. I am tempted to run for president in the next election, independently of course, under the name of Mr. Neither. Mr. I. M. Neither. I bet the votes would flow in. I believe that NONE OF THE ABOVE should also be a choice for voters. This would give politicians time to reflect just how disconnected from reality politicians can get.

Other than what I stated above, I believe our form of government is almost perfect. Remember, our country’s decisions are being made by a small minority of the population. If only 50% of eligible voters vote, and the winners of the election average 53% of the votes by 50% of the voters, thus about 26% of the public voted for the winner.

When you take into account the people who never registered to vote, the winning politicians move to Washington with only about 15% of the people believing in them. Soon, all that may be left are compromised fragments of a once promising, powerful society.

Something For Nothing

Every time the government concedes to do something, it costs you money. No matter how impractical or how generous government programs sound, they are expensive. With the proper amount of media exposure and a loud special interest group, a politician would promote a hog-calling contest in Alaska at your expense. This is a government that believes it can produce medical benefit coverage for elderly people considerably lower than the going rate. They continue to foolishly and recklessly spend money and create more debt. Here are just a few of the bargains we’re getting for our money, from Martin L. Gross’ book, The Government Racket 2000 and Beyond:

• A $1,000,000 study on how to cross the street in Utah

• $90,000 to study the social life of vegetarians

• Millions to fund over 150 government owned golf courses

• Hundreds of thousands of dollars to fund the National First Ladies Library

• Over $200,000 to study horseflies’ sex lives

• Over $20 million to study mail delivery

• Over $25 million for political conventions

• Over $20,000 for 3 elevator floors in congress

• Over $300,000 for a barber shop and beauty salon in congress

• Over $200,000 on a study why women smile more than men

• Over $100,000 for the plans to design an outhouse in Delaware. (Over $300,000 to build it.)

• $4 million for a parking lot in Illinois

• $40 million for the National Animal Disease Center in Ames, Iowa

• $400,000 for manure management research at the National Swine Research Center

• $800,000 for a project on red imported fire ants

• $880,000 for cotton research in Texas

• $5,670,000 for wood utilization research

• $484,000 to the University of Connecticut for Food Marketing Policy Center

• $260,000 for asparagus technology in Washington

• $239,000 for fruit practices in Michigan

• $1 million for University of Alaska Stellar Sea Lion recovery

• $750,000 to prevent Atlantic salmon from escaping state stream in Alaska

• $250,000 to prepare discussions regarding Columbia River’s hydro system in Alaska

• $3,350,000 for Institute of Politics in New Hampshire

• $3 million for Hawaiian Sea Turtles

• $300,000 to develop a virtual business incubator at Lewis and Clark College

• $50,000 for a tattoo removal program in California

• $15 million for financial aid at the Citadel in South Carolina

• $1 million for math teacher leadership

• $750,000 for minority aviation training at William Lehman Aviation Center (this money goes to only 12 students, making Florida Memorial College more expensive than Harvard or Yale)

• $2 million for the House of Food and Friends (This program is being run by a convicted criminal who had previously stolen money from another charity)

• $5 million for computer equipment and internet access for schools in Armenia

• $1 million for the Conflict Transformation Across Cultures program at the school of International Training. Problem is only 40 students per year participate making this a $25,000 per student subsidy.1

1Gross, Martin L., The Government Racket 2000 and Beyond. New York: Harper-Collins

Thousands of these government giveaways happen every year. These drive up the country’s debt, which you and I are responsible for paying. Ironically, the politicians want to tell us what we should be doing financially. The real problem is every time you try to financially help yourself and your family, you’re taxed. If we followed their model of fiscal responsibility, the country would collapse economically. Historically, we saw the fall of the U.S.S.R. due in part to the cost of the “Cold War.” Their debt buried them.

I fear our country’s debt, compounded by personal debt, leaves very little wiggle room for the government to do the things they are promising to do. The problem is compounded by the future demographics of our country. With individuals carrying record amounts of debt, politicians feel they may be committing political suicide by adding more debt to the public in the form of tax increases.

Financially Speaking

The reason I have brought all this up is this: The largest financial transfers of your wealth are created by the government in the form of taxes. Their actions will affect your money more than anything else in your entire life. The real bad news is they can make up the rules as they go along. There is an interesting debate simmering. Is the money we earn ours, or does it belong to the government and we are just using it? Think about it.

The uncertainty of taxation rates in the future continues to be a problem. The growing aging population problem, over-spending, growing debt, increased costs of health care, the never ending war on terror, increased spending on security, will all affect the amount of money that you will be able to keep and spend in the future. Qualified retirement savings plans could become a bigger tax revenue target in the future. Just understanding that this could happen and searching out alternative savings for retirement could save you thousands of tax dollars in the future. The government has a vested interest in all the money you are saving. They are taking it seriously. You should too.

©2012 Wealth and Wisdom