Many financial planners do not understand the natural laws of money or how money works. We’ll explain it all to you today. Stay tuned.
From Philadelphia, the home of the Liberty Bell, Financial Freedom Radio starts now. Here’s your host, Raymond Jewell.
Welcome everybody to FinancialFreedomRadio.com weekly show. Today, we’re going to talk about the laws of money and how money actually works. As I said on the intro, financial planners do not understand that and I’m going to lay it out to you today and it’ll be clear to you and you’ll actually understand it better. Hey, Steve.
Hey, Ray. How are you?
You’ve got something against financial planners. I’m gonna go out on a limb and say that. It’s a little bit of Carnac psychics here, but I just think you’ve got an issue with them.
They’re good. They just missed the mark on many things. I’m gonna lay it out. We’re gonna work through this. We’re using the book leap. It’s entitled Lifetime Economic Acceleration Process written by Bob Castellone. You could follow along if you want to buy the book. I think there are limited copies left. You go to Amazon and I think they’ve got a few.
It’s a good program. You’ve taken me through it a couple of times and I like it.
It works really well and it’s very powerful. Before we dig into that, please share, like, and subscribe to our podcast. We build our radio or listener base and our viewer base based on referrals so please help us out. Send your friends to this and let them know that this is a place that they can learn some good information and we’d really appreciate it. Also, hit the bell because when put a new video podcast out, you’ll be the first to know. We do them once a week. They hit the Internet at 2 o’clock on Friday. That’s our deadline. So you’ll be the first to know if you make sure that the bell is clicked down at the bottom there. If you’re not first, your last and you don’t want to be last.
So, let’s talk about eroding factors this week. We worked on it last week a little bit, but let’s talk a bit about eroding factors. Just as the laws of physics say that an object at rest will tend to stay at rest, and erode over time. If the money stays at rest, it too will erode over time. Many financial advisors, as well as most members of the public, do not understand the natural laws of money or how money actually works. Many people believe they could create a successful financial plan by simply using mathematical calculations to meet their future needs and goals. We talked about math is not money. Remember the oranges? But first, this is what they do. First, they calculate how much money they will need in the future, they get that calculation done. Second, they subtract what they already have. Third, they plug in a rate of return by assessing their risk tolerance. Fourth, they calculate how much money they need to put into the plan annually to make up for the deficiencies. So they already know there’s deficiencies out there. Often, I see many clients who have such financial plans designed for children’s college, retirement or whatever they’re planning for and they have these problems. Although these plans look really great, wrapped in a nice binder and glossy cover and they have all these bars and pie charts inside, the novice eye will never pick up the flaws or understand why the plan, in all likelihood, cannot work.
So, let’s look at the reasons why such planning probably will not hold up over time and why using a plan like that may cause you not to meet or satisfy your real financial needs, goals, and desires. This is a problem in today’s day and age. The most obvious fallacy of most financial planning today and is overlooked by many consumers is the impossibility in the long run to keep constant the mathematical assumptions used in the calculations. I’m going to read that again. It’s impossible in the long run to keep the mathematical assumptions used in the calculations constant. These mathematical assumptions that people use when they create these plans include interest rates, investment returns, inflation rates, and these assumptions are certain to change. They wreak havoc on your financial plan. There’s no way you’re going to achieve anything based on math and not take it into consideration these eroding factors and that’s what we’re going to get into.
Even if you were to conduct regular reviews of a plan and make adjustments to these assumptions, time may not allow the plan to get back on course. Remember last week, we talked about having only one exponential curve in life. You don’t want to constantly relive everything you’re trying to do. Here’s a great example. We saw this, if the stock market declines or income tax rates take money away from your plan, it may take years to recover. You can’t reclaim time, so you lose time in your financial system that you’re trying to achieve. If you lose money, you’re losing time because you’ve got to reclaim it and it may not be able to be done. You may not have enough time, or worse, you may be required to put more money into your plan to get it up there where you want it. That’s not good either. So why do so many well-meaning financial advisors develop financial plans for their clients that have a high probability of failure? Just think about that, Steve. That’s a very powerful question. Financial planners are well-meaning. I’ve got no axe against these people. It’s just what they are doing, the way they do it, it’s wrong. Why are so many well-meaning financial advisors developing financial plans for their clients that have a high probability of failure?
They don’t know any other way to do it. You don’t know what you don’t know.
It’s because they lack the knowledge and education to know how to create and build successful plans. Here’s another fallacy. Financial planning is the belief that mathematics is the only function needed in financial design. That’s not true. Many mathematicians have hijacked economics with their mathematical models. Economics is an emotional science. There’s too many inefficiencies and eroding factors that math never picks up. One of the greatest, this is a rabbit trail and I’ll try to get back on track, but Obamacare was a mathematical nightmare because, mathematically, it worked out, but economically, it didn’t because it didn’t take in the fact that many people may not do it. It’s assumptions were wrong.
I think that’s a problem. It speaks back to what you said before where economics is not math and money is not math. There’s so much more to an economic or a financial picture than just money. There’s emotion, there’s time, there’s family, and a lot of that stuff. The financial planners work based on mathematical models and things like that. There’s so many more variables you have to consider.
That’s right. Eroding factors, unknown variables. We’re gonna try it. We’re not gonna be able to get through them all today. We’ll hit on a few later on, but we’ll finish it up next week. Math is not the only function. Financial Advisors utilize numbers in mathematics to develop plans as if math were all that was necessary. Many times, you hear people say show me the numbers. These poor old souls do not understand the natural laws of money. I’ve said before and you just said it again, math is not money. 4+4=8 because mathematics is a pure science and we could study math with certainty that outcomes will always be the same number. But if we used handheld calculators or a computer and we input it, it’s always going to be eight. 4+4=8. The calculator will tell you that, but that does not hold true with money because there’s other variables that will come into play. We’re talking about them now.
If you take away nothing from this show today, I hope it would be that money is not math and math is not money. So let’s look at eroding factors. There are many ways in which money erodes immediately. You receive it and over time it starts to erode away. Therefore, you need to create defenses against the forces that can destroy your financial world. You want to make sure that they don’t hit you. Let’s look at one of them. Inflation. Over time, the purchasing power of money is eroded away by inflation. An inflation rate adjusts. Here’s some numbers. Steve, you’ll love this because you’re a numbers guy. An inflation rate of just 3% can take $10,000 and 3% will take your $10,000 and make 10,300 the next year. Conversely, it will cause it to erode away by $300. So that $10,000 will be $9,700. If you have a 3% inflation rate, it will erode away your $10,000. So over time, that $10,000 in 30 years will be worth $4,120. So you’ve gotta earn. That’s a 59% decline in purchasing power over that period of time. So you’ve got to constantly be struggling to offset inflation. So when you use math and you don’t program inflation in, you’re going to have a huge erosion and it will erode away an enormous amount of wealth. So when you look at it, you want to make sure that you also have inflation programmed in there and inflation to growth and inflation in reverse when it takes away your spending power.
So, you’d constantly have to be getting better than 3% to erode away a 3% inflation rate just to break even on inflation. So it’s kind of like you’re getting 3%. I don’t know where you can get that now. You’ve been looking for rates and the best you got was 1.55, right?
Yeah, and then the week after I signed up for that account, they dropped it to 1.3.
I saw that. So you’re not even keeping up inflation because inflation is running higher than they say it is.
But even still 1.3% is significantly better than 90% of the things out there that are like .1%.
I get that, but it’s still not keeping you ahead. So let’s look at taxes. Taxes are greater than people know. It’s one of the most serious wealth eroding forces that you face and we have to always understand the government uses tax revenue to operate and the tax laws are constantly changing. So no one knows what the future tax laws are going to be, ever. Since the tax laws in the future are uncertain, any financial plan using today’s tax laws to predict future outcomes is invalid and unreliable. Before there was income tax, many families were able to build enormous amounts of wealth because they didn’t have the government in their pocket. They didn’t have that silent partner always sticking their hand in your pocket to take money out. It’s like having a partner just show up to work and saying Steve, how about paying me and I’ll go away. You keep paying them just to get rid of them. So we want to offset that silent partner. Before income tax came around in 1913, people were building enormous amounts of wealth, but after income tax, and it started at 7% actually. I think it started at 1% and then it started to grow to 7% and it was only supposed to be temporary, to allow the government to clean up debt. It became permanent. So the average tax rate bounces around 30 to 40 percent. It could be a little less because they keep changing.
So the first 30 to 40% or maybe 20%, depending on what your income is, or 10 goes to the government. That’s that crazy uncle that shows up all the time wants to get his money so he can go back out and hit the bars.
Did you just call Uncle Sam a drunk?
I don’t know. It’s the crazy uncle that shows up with his hand out. When he comes in the door, you go oh God. Your heart starts racing and you think I’m kidding. Get a letter from the IRS and see what it does to you before you even open it. The income tax has become a tool for a redistribution of wealth. They don’t redistribute it evenly because our senators and our congressmen take a huge salary. Then you got all the government workers. By the time that things get down to benefits for the poor, it’s very little left. So it’s redistributing the wealth through the creation of social programs and enhancement and enlargement of national defense and anything else you can think of. The crazy uncle wants to spend money. I heard that they have had an abundance of welfare cheese all getting moldy in some warehouse. 60 million bars and I think each bar is five pounds each. 300 million pounds of welfare cheese. That’s a lot of cheese. There’s a lot of cheese. It’s nacho cheese. So when we look at a fundamental part of any financial plan, we need a strategy to help prevent or minimize the effect of income taxes on wealth. If you don’t have any kind of plan like that, you’re gonna lose because significant amounts of money goes to pay taxes. When you look at it, there are many saving concepts you can use, but unfortunately most of them are tax deferral and that’s not a good thing. A tax deferral is not a powerful weapon against income tax. It only delays them and many retirement savings plans today use this tax deferral approach. Many people are disappointed when they go to retire because they’ve got to pay taxes on the money. Usually the tax brackets go up. Now let’s look at taxes. There’s many other taxes. There’s state taxes, there’s city taxes, sales taxes, excise taxes, social security taxes, real estate taxes. Drive down the toll roads, that’s a tax.
You’re making me sad, Ray.
Well that’s the goal because I can fix all that. So when you take all these taxes in account, you’re gonna find that you’re paying over 50% in taxes or at least 50% if you’re in a lower, maybe 10% or 15% tax bracket. You’re probably gonna pay 30 or 40 percent taxes. So if you’re making $30,000 a year and you’re paying 30% in taxes, it’s $10,000 isn’t it?
No that’s $9,000, Ray.
Sorry, I missed him by a thousand. People just don’t see the other taxes because money comes in one pocket and the taxes go out of the other pocket. So it gets mixed up in the pockets and people don’t see it. They don’t calculate it, but in any kind of plan, you want to offset it. Now you can’t offset it directly because they’re gonna be there. But you could damn sure offset it indirectly and we want to try to make sure that we offset it as best as we can. That’s why we need a model. I could keep going. So next time, technological change, planned obsolescence, and we’ll talk about all of that. We’ll finish up on the taxes and dig deeper into it.
So the point of these shows is to make you think and if you really want to get a better insight, we’re doing 1-on-1 ½ hours as long as we can do personal appointments. All you have to do is go to RaymondJewell.com/meet. You can schedule a ½ hour appointment with me and I’ll walk you through it. I’ll tell you, a lot of what we do and see if it’s right for you. If you want to do it.
It’s good stuff.
Yes and you can ask questions, where you can’t on a video podcast like this. So I want to thank you all for coming and downloading and telling your friends about FinancialFreedomRadio.com. Our goal is to make sure that we give you information that makes you think. I’ve always said before, Albert Einstein said the mind that opens to a new idea never goes back to its original size. Also subscribe and ring a bell so that when these shows come up, they go right to you. You don’t have to hesitate. Please share it with your friends. I hope you have a great week and we’ll talk to you next week. FinancialFreedomRadio.com. Take care. God Bless.
Thanks for listening! Please remember to subscribe to the podcast. If you want to learn how to create real sustainable wealth like the extremely rich people do, or maybe you just want to sustain the wealth you already have, you need to check out Dr. Ray’s new book “Why the Rich are Rich”. Ray’s been coaching clients for 35 years and has completely unlocked the secret strategies that rich people use day in and day out to grow and sustain their wealth, regardless of what’s going on in the economy. His book is completely free, and you can get it by going to https://whythericharerich.com and entering your email address. Again, that’s https://whythericharerich.com. Head over there now.