Enemies and friends of money

bydamotube

139 followers

6 years ago

ENEMIES AND FRIENDS OF MONEY

Money is primarily used as a means of exchange. It helps us to buy something anywhere in the world. Money is a coin or banknote. It is tangible but non-living thing. Can you believe if someone say money have enemy as well as friend? Yes, when we come to personal financial planning, money have a lot of enemies and also friends. Let me start from the enemies of money.

ENEMIES OF MONEY

Money is a game. The “Rule of the Money Game” is the same to all of people. If you know these rules you win. Win means making money. At this time, you may ask how the money works? It is so simple. It is your understanding about that money.

According to different surveys and my own experience money have a lot of enemies. The most common enemies of the money related to personal financial planning are inflation, taxation and you and me.

1) INFLATION

The first enemy of the money is Inflation. It is the general level of prices is going up. This mean at the time of inflation we need more money to be paid for goods and services. Normally inflation rate is expressed in percentage.

According to the U.S. Labor Department, current inflation rate for the U.S. is 2% for the 12 months ended April 2019. This means our value of money decrease by the 2% or our cost of living increase month to month for this specific year by 2%.

The question is how to beat inflation? We can’t avoid inflation but we can prepare and take necessary actions to fight this using some proven and effective methods.

2) TAXATION

The second enemy of money is related to taxation. As you know tax is a mandatory financial charge imposed upon taxpayer like you and me by the government in order to fund various public expenditure.

Currently, there are dozens of tax kinds (some say these are more than 90) American pay every year. The four major retirement taxes are: Social security tax, Capital gain tax, Interest income tax, and estate tax.

I love this quote. “Nothing is certain in this world except for death and taxes”, Benjamin Franklin. You make money. They tax you.

You spend money. They tax you.

You save money. They tax you.

You die. They still tax you.

So what is the solution? Looking for friends of money. We have three tax buckets.

3) YOU AND ME

The third and the significant enemy of the money is you and me. We affect the major part of our money. It is possible to be as enemy as well as friends of our money.

Now, it is time to discuss about the friends of money. Just like us money have number of friends. A friend is someone or something who goes with you in the good times and bad times. One of the best way to keep money as a friend is to keep its rules of the game. If we keep its promises as a rule of the money game then money would be our best friend. Let’s look at solution on how we can reduce the burden or eliminate the enemies of money.

1) SAVING

Time is money. Time and saving are the first friend of money. The sooner you save, the better for your future. Anyway, don’t wait. Start to save as much as you can, as soon as you can.

You may ask why people not saving. There are three common answers for such kind of question.

First, we have poor saving habits. I think we can learn something from Warren Buffet advice, “ Don’t save what is left after spending; spend what is left after saving.” Procrastination is the enemy of saving. When many people are young, they think they have a lot of time to save. As they enter mid-life and retirement age they will join the majority with little to no saving.

Second, people putting money in the wrong place. This means people don’t have the clue about how money works. We know that money doesn’t grow in our backyard tree. We must work for it and use the wealth formula to build on.

WEALTH = Money + Time + +/- Rate of Return - Inflation - Tax

The third reason for not saving money is people not making enough money. It is obvious that most of us currently living paycheck to paycheck.

2) INVEST AGAINST INFLATION

Inflation is a major factor to consider when you build up your financial future. For instance, if you save your money in bank with almost a zero rate of return per year, its value will certainly decline in the long run. This means you are actually losing some of your money because of inflation rate, in our case by 2%.

But, if you invest your saving in another investment opportunities like mutual funds, stocks, trust fund, etc, your money will give you some return i.e. higher interest than inflation rate and interest rate from the bank. Thus, you can beat inflation and get friend for your money. In this case, it is advisable to make some research and study before you place your money in the above investment opportunities. In addition, it is important to save regularly even a small portion of your income.

3) TAX

We all know that Uncle Sam take a big chunk of our money. Therefore, any saving and investment strategy must consider the tax impact on it. We have three tax buckets or options for our money. If we are smart it is possible to establish friendship with one or two of these options, but not all three. The following buckets show what tax item fall under the three categories.

TAX NOW means any earnings from these accounts must pay tax for that year. This include checking, saving, certificate of deposits (CD), stock, mutual fund, etc.

TAX LATER means the money we put in is pretax. It consists of 403b, Traditional IRA, Annuities, etc. The pretax money deposited in an account is money that we have not yet paid income tax on. But, surely paying tax later when we withdraw it. At the time of withdraw, please keep in mind the Rule of 59½ as well as Rule of 70½ .

In the first rule, withdrawing your money prior to age 59 ½ will incur an IRS Early Withdrawal Penalty (10%) and service tax 20% to 40%. In the second rule, mandatory withdrawals must be made at age of 70½ or incur tax penalties up to 50%.

TAX EXEMPT/ADVANTAGED simply means pay no tax when we withdraw money from our account because we have already paid taxes on it. This category include ROTH IRAs, 529 college saving plans, Cash accumulation in a life insurance policy, IRC 7702-a, etc

In conclusion, for most of us money is something much larger than it actually is. But, it is not. We need a simple shift in our mind setup. Let’s start to take the necessary step to follow the above rule of the money games.

If we follow the rules, practice the strategies to take money as a friend--saving, invest against inflation, and choose the best tax buckets, then there will be no enemy in your money world. Time is more expensive than money. Let’s make money our friend.

Damo

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