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Your Fiscal Future

If you are a wild animal most of your time is spent either pursuing food or sex. Human animals do a lot of this as well, but they also tend to like houses and BMWs. While a lion cub learns to hunt antelope between naps, people are brought up to work for a paycheck and sleep if they can. Even in this land of opportunity it seems that the animals have the better of it. But this doesn’t have to be the case. Let’s take a look at some of the money myths that too often hold people back from financial success and what you can do to insure your fiscal future.

Myth #1: Free Enterprise and the Job Market

When the first settlers came to the new world, they worked their little farms and built their own houses. Basically, everyone worked for themselves. By 1900 a more “advanced” economy had developed and 70% of people worked for themselves in a trade or business. In the 1990s only 7% of Americans own their own business, the rest have jobs. Having someone else take all the risks in return for your paycheck every week seems like a good deal, but remember your employer is going to be more concerned about feeding his wife and kids than he is about your wife and kids. Corporate loyalty is great, unless you work for IBM, Boeing or even a local restaurant. (A friend of mine was laid off just last night. The restaurant went out of business on 1 hour’s notice, even after the owner had posted a schedule for next week.)

It is a huge risk to start your own business, but it is well worth it. Remember that over 99% of millionaires are not baseball players or actresses, but business owners. If you own your own business you get paid based on what you produce. If you have a job you get paid a dollar less than the guy who wants to take your place is willing to work for.

This country was founded on free enterprise. Today few people take advantage of the opportunities it represents. If you don’t own your own business, you can’t take advantage of the tax laws, which are written specifically to reward those who take the risks and are productive in our society.

Myth #2: Debt or “Leveraging your Money”

Have you bought a house yet? Even if you haven’t you probably know that interest on a house is tax deductible. Sound’s good, doesn’t it? But let me ask you this – twenty years from now, when you are paying mostly principle instead of interest, will you be making more money or less money? Does that mean you will be in a higher or lower tax bracket in twenty years? By using the interest deduction you end up with deductions at the lower tax rate, so you can pay full price when you get to the higher rate.

Besides that, let’s pretend you make big bucks and you are in the 39.6% tax bracket. You take a $100,000 deduction for interest paid. Great – you saved $39,600 in taxes! But you paid $100,000 so you still lost $60,400 to the bank. Just remember, if you aren’t making interest, you’re paying it.

You can’t even deduct the cost of credit card interest. Credit cards are convenient, but the interest can be a real bind on your income. It might seem like $30 per month is a small price to pay on that $2000 balance, but when we consider “disposable income” below you will see what a big hit it really takes. If you want to do something really scary, add up all the interest you pay on the house, cars, credit cards, student loans and whatever else you have as debt. Figure the percentage of your after tax income that goes to debt service. If it is more than zero that isn’t good. But if it is less than 25% you are doing better than a lot of people.

Myth #3: Inflation doesn’t matter

How often do you think about inflation’s effect on your bottom line? Did you get a 3% cost-of-living adjustment last year? Too bad inflation was 3.9%. You went backwards.

Did you make a 10% return on your investment last year? Surprise! After inflation and taxes that 10% became 2%!

What if you put 55$ every week into a savings account that yields 10%? (If you find one let me know.) In just over 30 years you will have $1,000,000 to retire on. With a 10% interest rate you can live off 22,313 “1995 dollars” per year before you pay the taxes. Did you forget about inflation?

Myth #4: I make a lot of money

Let’s test this one. Let’s say you make $40,000/year. That’s well above average, but I figure most CGX readers are above average. If you work for 40 years you will cash in on $1.6 million. Excellent! (Did you get a raise? Don’t forget about inflation.) But wait, despite Newt Gingrich, taxes will take half of that. (federal income, state income, sales tax, Medicare, disability, social security) That leaves you with $800,000. The average house costs $100,000, but with a 30 year loan it costs $300,000 so you have $500,000 left. Two boys will cost you $120,000 each. (Don’t have a girl.) Now you are left with $260,000. 40 years times 52 weeks times $100/wk for groceries will cost you $208,000.

Now you have $52,000 to buy a car and some clothes. Should you get the BMW and the Armani or leave a little something for your wife? Sorry, but $52,000 divided by 40 years is $1300 per year. So, after you put gas in your new Yugo maybe you can find that $2680 for you savings account. (Remember $55/week for 30 years!)

Myth #5: I am a victim of the system.

That might be true. Six years of college and most economics students never learn what I just told you. I’ll bet you never had a class on how to succeed in business or life from any of you college professors. Americans aren’t taught about free-enterprise anymore. Corporate recruiters come to your school before you even graduate to put you right into a job. If you don’t have a college degree people are predicting even worse things for you.

Break out of the system. Create your own destiny. You are in charge of your life. You are the only one who can control you. Nobody else can, unless you let them.

Are you letting your boss control your schedule? Are you letting VISA control you with interest on debt? Are you just waiting around to retire while inflation eats you alive? STOP!

Practice delayed gratification. Odds are you can cut out 10% of your budget without even noticing. Use coupons, eat out less, put off buying that new dress or computer game. (Do you even have a budget? You better!)

Eliminate your debt. Stop paying interest to other people. Get a savings account and earn a little interest to beat off inflation.

Start your own business! Take advantage of the tax laws. But more importantly – take advantage of your full potential. Don’t let your boss “skim off the top.” You deserve it all. Go get it.