Taxes (Defining Moment #2) Part 4

October 11, 2010

These two defining moments we have discussed so far – Your money will never be worth more than it is today and This may be the lowest tax bracket you will ever be in – are unique because they will have a direct impact on all the remaining conversations and even our videos (coming soon to YouTube – update: now on YouTube).

They certainly present a very clear challenge to our thought process. When combined together they confront head on some of the traditional thinking that has been branded into all of us.

If your money will never be worth more than it is today, due to inflation, and this may be the lowest tax bracket you will ever be in due to the demographics and government spending (my next set of blog posts – don’t miss these), then why is traditional thinking telling you to take as much of today’s money as you can and throw it as far as you can into the future, where it will have less buying power and be taxed the most?

That is such a strong question. I recommend you read it again.  Once you do, ask yourself, is that the thought-process or type of planning you want to pursue?

When you begin to apply these two Defining Moments to your everyday lives you may begin to process things a little differently. Like this: if you purchase a car which is a depreciating asset anyway, do you want to use as many of today’s dollars that have the most buying power and pay that car off as fast as you can?  Maybe not.

You may also think about the way you are approaching your retirement dollars. In qualified plans, such as IRA’s, 401K’s, one thing is very clear, the government controls the pen which gives them the ability…and the authorization…to change the rules at any point.

So you must then be able to answer this question:

who’s future are you financing, your’s or the government’s?

You must consider that whatever you have left after taxes, what will the buying power be of your money at that time? Understanding this may open your eyes to ideas other than what you’re hearing on TV or read in the financial magazines, and certainly today’s traditional thinking.

That’s what we do…we help you re-consider.  It’s Financial Caffeine.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook

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Taxes (Defining Moment #2) Part 2

October 1, 2010

Defining Moment #2 starts with a quote from the former Comptroller General of the United States, David Walker:

“We are heading for a future where we will have to double federal taxes or cut federal spending by 60%”.

The rapidly changing demographics of our country are going to impact everyone’s lives in our nation. Simply believing we are a great nation will not continue to make us one.  To compete and survive we will have to change and that change may not come easy.

Alan Greenspan said:

“As a nation we have already made promises to coming generations of retirees that we will be unable to fulfill.”

Keep in mind, this was well before the last two years of IMMENSE additional spending by the Obama Administration.

That’s why Defining Moment #2 is critical to understand, it states that “this may be the lowest tax bracket you will ever be in.”

As you are reading this post, the U.S. Federal Government continues to spend more than it takes in from tax revenues. The debt in our nation is growing over one million dollars an hour. And it keeps going up.

What does that mean to every person in the United States? Well, in order to pay for this government burden every citizen in the country would have to pay about $174,000 or for every household $664,000 (as of September 2010).

The purpose of telling you this is not to scare you but rather to make you aware that all the conditions are in place for everyone’s taxes to increase.

We know this isn’t new information you but you can’t just take this for granted anymore. You must understand the importance of planning for not only the demographic changes (be looking for future posts on this very topic) but the serious problem our government has created for itself and exactly what it means to you.

Traditional thinking professionals may be willing to avoid this problem that is out there right now until it becomes a crisis for you.  For example, are you still being told to defer your taxes now by contributing to a qualified plan (401k, SEP, IRA, 403b, etc) that will be most assuredly taxed at a higher rate later?

Times are changing and if you’re being told to just wait it out and see what happens, it is simply going to be too late to react to the problem.

Future taxes that you pay will be the largest transfers of your money that you will ever make. The size and amount of future taxes has not yet been determined but we do know that government debt will be a large determining factor.

You must not only understand this Defining Moment that this may be the lowest tax bracket you will ever be in but you also need to act upon that knowledge.

What if you in fact could be insulated against future tax increases and use your money tax free when you need it?  Would it make sense for you to do a little homework for yourself?  Truly, how much is that worth to you?  Look, you’re more than welcome, and of course encouraged, to let it all play out naturally and see just how much the IRS gets…but personally, that’s not a strategy…it’s stupidity.

If you don’t have a plan to counter this Defining Moment then please understand, THE GOVERNMENT DOES!

We’ll continue to do our part in providing you as much free information and analysis as you need.  But, you need to step up to the plate and ask some questions.

We call it Financial Caffeine.  You’ll see why if you simply do your part and educate yourself.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Taxes (Defining Moment #2) Part I

September 27, 2010

I’ve spent some time over the last few posts about, what we call, Defining Moment #1.  This post dicusses Defining Moment #2 but lets first start with a quote from the former Comptroller General of the United States, David Walker:

“We are heading for a future where we will have to double federal taxes or cut federal spending by 60%”.

The rapidly changing demographics of our country are going to impact everyone’s lives in our nation. Simply believing we are a great nation will not continue to make us one.  To compete and survive we will have to change and that change may not come easy.

Alan Greenspan said “As a nation we have already made promises to coming generations of retirees that we will be unable to fulfill.” Keep in mind, he said this in 2004…well before the last two years of continued spending.

That’s why Defining Moment #2 is critical to understand, it states that “this may be the lowest tax bracket you will ever be in.”

As you are reading this post, the U.S. Federal Government continues to spend more than it takes in from tax revenues. The debt in our nation is growing over one million dollars an hour. And it keeps going up. What does that mean to every person in the United States? Well, in order to pay for this government burden every citizen in the country would have to pay about $174,000 or for every household $664,000 (as of September 2010).

The purpose of telling you this is not to scare you but rather to make you aware that all the conditions are in place for everyone’s taxes to increase.  We know this isn’t new information for you but you can’t just take this for granted. You must understand the importance of planning for not only the demographic changes but the serious problem our government has created for itself and exactly what it means to you.

Traditional thinking professionals may be willing to avoid this problem that is out there right now until it becomes a crisis for you.  For example, are you still being told to defer your taxes now by contributing to a qualified plan that will be most assuredly taxed at a higher rate later?  Times are changing and if you’re being told to just wait it out and see what happens, it is simply going to be too late to react to the problem.

Future taxes that you pay will be the largest transfers of your money that you will ever make. The size and amount of future taxes has not yet been determined but we do know that government debt will be a large determining factor.

You must not only understand this Defining Moment that this may be the lowest tax bracket you will ever be in but you also need to act upon that knowledge.

What if you in fact could be insulated against future tax increases and use your money tax free when you need it?  Would it make sense for you to do a little homework for yourself?  Truly, how much is that worth to you?

If you don’t have a plan to counter this defining moment then please understand, the government does.

We’ll continue to do our part in providing you as much free information and analysis as you need.  But, you need to step up to the plate and ask some questions.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Velocity of Money Part 4

September 24, 2010

We just discussed how this first Defining Moment, that your money will never be worth more than it is today, motivates banks and why they live by it, but how does it impact your mortgage?

If you own a home and have a mortgage on it you are probably the proud recipient of a lot of junk mail. Much of this mail is from financial institutions who want to inform you that making additional payments on your mortgage is a good thing. For whom it is a good thing is not clear to most but for those who understand this Defining Moment it’s very clear.

We touched on this a little bit before but let’s take it a little deeper.  Let’s start with this question: would you like to make more house payments now with dollars that will never be worth more than they are today? Or, make more payments later when the buying power of that money is far less?

Let’s look at some math.  If your mortgage payment is $1,000 per month, do you want to make more payments now when your money has the buying power of $1,000 or make more payments later when the buying power of that money is $412 thirty years from now? (Which is the buying power of $1,000 with a 3% inflation rate for 30 years).

What you need to understand is that the value of your home is going to go up or down no matter what your monthly payment is as well as no matter what your mortgage balance is at the time.

To prove that point, if there are two identical homes side by side and one is paid for but the other is mortgaged, at any point, the houses are worth the same.  Neither the payment nor the mortgage have any effect on the value of the property.

But by making additional payments or paying cash up front for the house, you have used the most expensive buying power dollars you could to do this. At the same time by using today’s money to make additional payments you have made the banks and mortgage companies very happy. Remember they are in a win-win situation. So what do you do?

We’d highly recommend you read our Mortgage blogs when they’re posted…so that means you’d have to subscribe. There is one thing I know that WE can do for you right now.

We can prove, again not with concept or fancy theory but good ‘ol 8th grade math, that paying extra and sending more of your most value dollars to the bank ahead of schedule actually hurts you financially.

Big paradigm shift, we get it.  Call us crazy but we also can prove that a 30 year mortgage can actually pay off FASTER than a 15 year mortgage using the exact same budget for both…even with a higher interest rate on the 30 year. Read that again. This can be proven with math and no investments are needed to accomplish this fact.  It’s true and can be backed up with simple math.

So, we’ll do our part for free by showing you. You just have to challenge us and be willing to learn something new.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


Velocity of Money Part 3

September 18, 2010

We hear every day, “I thought that I should pay extra principle to lower my interest expense?”

First, the banks are in a win-win situation no matter what you do. You see, if you don’t make additional payments because you understand that you are giving the bank control of more money, then they will just collect more interest over time.

If you do make additional payments the bank doesn’t just sit on it. Remember, they’ve mastered Defining Moment #1 and the velocity of money.  That additional money from you is used and lent back out to start the process all over again.

What would you rather do, follow traditional planning and make all attempts to have your $10 earn $1 more?  Keep in mind, you have to deal with all the other flexible factors that we discuss in our Why Traditional Planning Fails To Reach Its Goals (future posts).  Or, function more like a bank and have your $10 do the work of $50?

Yeah, I think the bank model works quite well. So what do we do? Well, here’s an important question: do you believe banks have your best interests at heart?  Most people say no. If you said “no”, then have you ever asked yourself why banks offer a lower rate on a 15 year mortgage than a 30 year?  If they don’t have your best interest at heart and they are giving you an incentive to go with a particular product, then maybe we should do a little math.

They understand perfectly AND IMPLEMENT the Defining Moment that money will never be worth more than it is today? They want as much of your money as soon as possible (ie a 15 year mortgage) in order to keep it moving, working, and earning for them.

They’ll even entice us by offering gifts for our deposits and they promote like crazy just how convenient it is to deposit our money.  You’ve seen the recent TVcommercials about the new technology for ATM deposits.  Isn’t it ironic that they also make us rely on credit scores which are a directly determined by just how quickly we pay them back?

If we apply this defining moment to our everyday lives the lesson becomes more and more apparent.   By taking a look at the country’s savings rate, there’s no doubt that our ability to hang on to today’s money, the money that has the most buying power, is dwindling.

In reality more of our dollars are going to someone else in the form of debt payments, taxes, and other financial transfers more than it’s working for us. The ability for Americans to save “today’s” dollars has all but diminished.

The traditional approach must change, and the sooner the better. What is really needed is more financial literacy.  It is so important to understand that “your money will never be worth more than it is today.” And equally important, how it may impact your thought process in your everyday life.

If you do, then maybe you’ll question the various strategies recommended to give your money as soon as possible to other entities.  Even if it means incurring some more interest expense.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


The Velocity of Money #2

September 13, 2010

Do you remember the scene in the movie “Miracle” about the 1980 Olympic Hockey Team when coach Herb Brooks told the young men that today was NOT going to be the day that the Russian team would win?  It was a defining moment for that team.  Well, we talk about financial Defining Moments.

I don’t care how successful you are, if you do not understand how these financial Defining Moments effect you as you accumulate, preserve, and certainly as you distribute your wealth…well, then today they’ll probably beat you.

Defining Moment #1 is, “your money will never be worth more than it is today.” That sounds really simple and if you think about it, you’ll agree that EVERY financial institution masters this one lesson. Because of this, they also understand the phrase “the velocity of money.”

Money that doesn’t move or have velocity is like money that is stuffed in a mattress; it doesn’t create wealth or profits. To give you an example, the average bank in the United States spends a dollar about five and a half times. Have you ever thought how they do that?

Wouldn’t you love to spend YOUR dollar 5 ½ times?  Well, it’s simple.  First they TOTALLY embrace this Defining Moment.  You see, they take money, and it is not even their money, that is deposited in their bank and lend it to other people.

These people who borrowed the money make payments back to the bank and pay interest. The bank then takes those monthly payments and lends that money out again, over and over. This process continues repetitively about five times on each dollar they touch.

The collection of interest alone is very profitable for the bank. But they understand one rule that creates more profit for them than just collecting interest. They understand that MONEY WILL NEVER BE WORTH MORE THAN IT IS TODAY.

Due to inflation the buying power of a dollar decreases over time. The buying power of $1,000 today with a 3% inflation factor built in will have the buying power of only $412 in 30 years. The banks and lending institutions understand this clearly and they may even encourage you to make additional monthly payments on the money they lent you.

Wait a minute Kelly, I thought that I should pay extra to lower my interest expense?

Well, if you understand and, more importantly, apply Defining Moment #1, then maybe you should ask some questions.

More Financial Caffeine coming your way.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

Website  –  YouTube  –  Facebook


The Modified Endowment Contract

April 29, 2010

A modified what? It’s called a Modified Endowment Contract (MEC) and was a creation of the terrible twins TAMRA (Technical And Miscellaneous Revenue Act of 1988) and DEFRA (Deficit Reduction Act of 1984).

It’s important you understand why the MEC was created, who created it, and how it can effect your money.  IRS Code, Title 26, Subtitle F, Chapter 79, Section 7720 is the description.  If you’re bored feel free to read it. Here’s the point.  The very fact they, the government, made the effort to craft and pass this type of restriction and limitation on what you could do with your money, keep in mind, it wasn’t like this prior to 1988, tells us one thing: it must be good in regards to taxation.

You see, prior to 1988 you could put virtually an unlimited amount of money into cash value life insurance and get all the benefits.  What benefits?  Here’s a list:

  • money grows tax deferred,
  • can be used tax free,
  • has a competitve rate-of-return (remember no fees and no tax),
  • has guarantees,
  • returns a tax-free dividend based upon company performance,
  • the money is credit proof,
  • you could contribute an unlimited amount of money,
  • you were unlimited in your investment options because you had
  • liquidity, use and control of the money,
  • it could be used as collateral,
  • it was estate tax-free, and
  • had disability protection – meaning if you became disabled the insurance company would continue to contribute your annual outlay (what 401k will do that one?).

Take a look at this pdf and line up the benefits you have with your money compared to how these policies are designed…click here.

The government didn’t like this; therefore, they decided to “further limit the perceived abuses by preventing policyholders from paying large single premiums to purchase life insurance and borrowing the cash value, tax-free.”  Heaven forbid we have some financial tools that they don’t have their hands ALL over.  The founding fathers of this country would be up-in-arms.  Folks, this type of policy, and the benefits associated with it, had been a LONG standing tool used by virtually all the wealthy families in the country…here’s a great book that describes this very thing, The Pirates of Manhattan.  I have no association with this book it’s just a good read.  Check this out, this is an article from November of 1999 in the Denver Business Journal.  They did a special publication called The Century Book. This publication dedicated one page for every year from 1900 to 1999 and covered something from Denver’s history for each year.  For the 1929 page they talked about the Crash and introduced you to Claude Boettcher – “Denver’s most famous investor”.  Anyone who has lived in Colorado for any length of time has heard of the Boettcher family.  This article mentions how he lost everything but waited for banks and stocks to drop so low that he borrowed $2,000,000 from his cash value life insurance to buy them all up (notice he lost his investments but he didn’t lose his insurance values).  I love the line right after the mention of this – “the reason he is still known to history. Most investors had no other resources to call on.”  Read it here.  The “Infinite Banking Concept” is NOT NEW!  It has been around for over a century.

In 1988, the government created a limit.  So think about this: who determines the minimum one can pay for a death benefit of, let’s say $500,000?  Come on, who determines the minimum you, the consumer, can pay for a death benefit of half a million?  The insurance company.  They decide what they can charge you and still make a profit.  This is called term insurance.  You pay the least amount and get one benefit – death benefit.  On the other side of the spectrum, who determines the MOST you can pay for that same $500,000 death benefit?  Most people say, “I do. I determine the most I’m willing to pay.”  Wrong.  The government.  The very fact that the government limits what you are able to do with your money tells you that it must be good in regards to taxes.  You know what, they’re right.  Of course they’re right. Taxes are their biggest concern.  If they aren’t getting them then you bet your $SS they’ll go out and find them.

It then begs the question as to why whole life insurance policies are still around then, right?  Well, you can still get all the above benefits, EVERY one of them, you just have to now capitalize the policy a little slower.  Before 1988, you could put, for example, $200,000 as a lump sum into a policy and get all the benefits.  Today, you have to spread that out over, typically, a five to seven year period.  The argument of “cash value life insurance is too expensive” is plain elementary.  Those supposed experts who make that claim are right if someone is using CVLI purely for protection…i.e., focused on one benefit.  Buy term and do something with the rest.  However, if you want to act and function just like a bank then you’d pay the most amount of money for the smallest death benefit to dance just below the MEC line and get ALL the benefits above on your money.  Read that sentence again. Around year five you’d have available every single dollar you put in.  This then becomes a pool of money that you can use to replace any financing or lost opportunity for paying cash.  It’s exactly what banks do.  Take a look at this graph (it’s nothing fancy as I created it, but the data is straight from the FDIC website). I broke down the top five banks and their holdings in cash value life insurance, in the BILLIONS, and more importantly, how they have increased their holdings over the past few years.

JPMorgan Chase is the only one who’s values went down between 2008 and 2009; however, their loan balances went up by almost the exact same amount.  They very well likely utilized this powerful tool to borrow from.  We’ll know at the end of this year when we see their numbers.  Folks, these are the top five banks in the country making double digit percentage increases in their cash value holdings!  Why?  Because they are masters of liquidity, use and control, and leverage.  I ask you, are you?

You can be.  It’s my job to teach you.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

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