Today, we’re going to talk about the black hole of money. 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. We’re blessed that you’re here, joining us, and listening to us from wherever you are in the world. We are thankful that we get the listener base we do. I want to encourage you to like, share, and subscribe to our YouTube channel. When you do that, you get advanced notice when you ring the bell and you’re subscribed. We will send you information when we actually put this up. We also like to have you tell your friends. We work off referrals. It’s important to us that we build a huge referral base with the show. Thank you very much for sending people our way. So let’s bring in our fabulous producer Steve. Producer Steve, how are you today?
Hey Ray. How are you? I’m doing great, thanks.
Good. How was your weekend?
It was good. We’re recording this show on Tuesday and we’re right in the middle of hurricane iasis. It’s literally flying right over our heads as we speak. Hopefully the show will stay and we don’t lose power. I watch enough news. I’ve practiced it.
I had trouble with it. Anyway, it’s a tongue twister. I hope they go back to some normal names.
Not that you’re being judgmental.
I hope they don’t have any more hurricanes.
I have a feeling there’s gonna be more though.
You’re going to love this show today. It’s called the black hole of money.
Money just disappears. Have you ever wondered when you put money into the stock market and stocks go up and then it goes down. Where does all that money go? You ever thought about that, Steve? Where does all that money go?
Into somebody else’s pocket is all I know.
No it disappears in thin air. It could be in somebody else’s pocket. It’s a black hole right?
That’s right. I don’t know where it is.
So let’s talk about the black hole of money. People say that Einstein said that compounding interest is one of the wonders of the world. I’m not so sure he said that, but that’s okay. We’ll give him credit. One of the black holes that we see money go into is taxes. Just as money compounds on a growth chart and goes up, taxes compound in a negative way. Think about it. If you have money growing in an account and that account is going at a reasonable interest rate and it’s growing 3-4%, every year you pay taxes. So you’ve got that money in one bag. Out of another bag, you pay your taxes out of what? You pay it out of income, right? When you pay the money in taxes out of your income each year, you lose it. If you could invest it at the same interest rate that you’ve got money growing over here in this bag. What a lot of people don’t understand is when you have compound growth, you have compound taxes. That’s what we’re talking about today. Compound taxes. We pay our taxes on an annual basis. The taxes that we pay, we pay it out of income as I just explained. When we send that money to the IRS, wouldn’t it be nice if we could put those dollars in growth and had that money grow for us? Instead, it becomes a cost and that translates in what we call a lost opportunity cost and most people don’t understand that taxes are a cost. At the end of the day, they see that they’ve got a certain amount of growth in their accounts and they forget about all the taxes that they spent over the years in getting there.
That’s why a lot of people use 401ks or IRAs. They put the taxes away or they put the money away and they get tax benefits when they put it away, but they don’t realize that they have to pay taxes later on and they pay taxes when the money comes out on a larger amount. The money compounded. So you’ve got compounding of growth. As the growth compounds, more taxes will be paid when you take distribution. A lot of the financial people say well you’re in a lower tax bracket. That should not be the case. You should not be in a lower tax bracket because if you are, then your lifestyle has suffered. You want to retire with the same income you’re earning as the day before you retired.
One of the black holes today is taxes. It’s a loss and it’s a cost. We’ve got to find out what the cost is. We’ve put together an illustration that will explain this. I’ve already done this ahead of time. So we’ll be able to see it. So Steve, let’s roll that beautiful leap footage.
Go into looking at the anatomy of compound taxes. When we look at money that we put away, there are eroding factors that we want to take into consideration when we understand where our money goes and how people can systematically confiscate our wealth without our knowing it. This is one of the ways that it can be done. So we hear a lot about saving money, putting money away and if you can get x amount of interest rate over time, you’re going to have a great amount of money. So let’s analyze that and find out why it doesn’t work and why so many people following that strategy end up outliving their wealth.
On the screen, you can see that if we started out with nothing at age 21 and we save money for 44 years, which takes us to 65, and we put $1000 away a year, an annual payment of $1000. We did that for 44 years. Let’s give this an interest rate right now. 3%. It doesn’t really matter what the interest rate is, whether it’s higher or lower. Let’s assume there’s a tax rate of 15%. Although, we know the tax rates are not going to be static, they’re going to be dynamic. They’re going to flow up and down. Let’s give it a tax rate for illustrative purposes.
Let’s say that our cost of money, if we’re earning 3%, that’s our cost. If we went out to get money from somewhere else. What we’ve got here is money going into our calculator on a systematic and ongoing basis. Good old soldiers of the financial institutions. We end up with $85,484 that we’ve put away. The balance at the end of the year is $89,048. This is the interest earned that we calculate each year. The interest that is accruing at 3%. Now what we have to also understand is what are the taxes that we’re going to pay each year. At the end of the year, on our next year’s tax return, we’re going to pay taxes. So in this case, we earn $30. So we’re paying $5. Then we keep going and the taxes are compounding which means that even though we’re paying them out of pocket, our loss is compounding. So in one pocket, we’re growing our money. Out of the other pocket every year, we’re paying our taxes. So we’re seeing the tax rate come out every year, but we have to look at what that cost would be if we kept it in our pocket. Not if we kept it in our pocket, but if we were able to put it all together ongoing each year. It keeps continuing to climb because each year you’re putting out more money. If you put out $5 the first year, when you total up the next year, it totals $9. The next year is $14.
So we’ve got to continue to look at what it costs us. So we pay even though we end up earning $45,000 in interest. We have spent in taxes $6757. So we’re now at like $39,000. So then we look at years to maturity. 44, 43 on down. If we were to take that $5 and put that away at interest for 43 years, we’d have $16. If we took the $9 each year, it compounds. When we look at the compounding of our taxes, if we were to put that into a savings account. Remember, taxes are a loss. We spend that money, it goes away. We don’t have it anymore. We cannot recoup those dollars. Those dollars are gone. What could we have done with it had we been able to put it in a bank account at the same 3% we’re earning? So when we look at the taxes, we call this taxes that are spent, and the lost opportunity that we could’ve earned on those taxes. So since we didn’t put it in our pocket, that becomes a cost to us.
As that continues to climb, we now have a cost of $10,474. So if we earn $45,000 in interest, our cost that is occurring each is $10,000. So we’re only at $35,000 in actual growth because we spent an additional $10,000. Now this is where people get pulled. They have $45,000 in their pocket or in their account. They don’t realize that they spent $10,000 over the time that would cost them money. In effect, you should’ve had $55,000. So it really doesn’t matter how much you put away. You’re going to have taxes and lost opportunity cost. So when you have taxes, you’ve got to look at the compounding of the taxes. That’s why whenever we look at people putting money away, we eliminate this as best as we can and that eliminates that.
So when you look at putting money away, you want to be as efficient as possible. This is not efficient. This is a loss that occurs. When you put the money away, you have to consider what you could have earned had you been able to put it to growth. Now a lot of times, people will be putting money away into a retirement plan, a 401k. 401k may defer the taxes and you may get a tax credit or a tax deduction on your taxes credit. But the money coming out at the end of the year is taxed, but it’s not the end of the year. When you go to take it, it’s taxed on the full amount. So even though, you may not pay taxes each year, but you’re paying taxes on the compounded amount which is even greater.
So, you want to look at that and see how that illustrates so that when you put your money away, you want to make sure that you’re not getting the compounding of the taxes in a deferred plan. We take everybody through this in our leap process and we show them how they can offset this. How they can get growth, recover that $10,000 and have $55,000 instead of the $45,000 less the 10 the 35. So there’s a swing there in just basic numbers of $1,000 a month assuming that you continue to put that money away for 44 years starting at age 21 going to age 65, which seems to be the magic retirement age. I think it’s actually higher now for younger people. I think it’s 67 or 68. I’m not sure, but it’s a moving number. Just to show you that losses occur and how when you focus on them in a model, you can actually offset them. The financial planners will not tell you this. They’ll try to get you to put money into a 401k and defer the taxes and then pay taxes on the compounded amount which is even greater. But they’ll tell you you’ll be in a lower tax bracket. Well that’s crazy because if you retire, you don’t want to go backwards. You want to be in the same tax bracket you’re in and continue to grow your wealth so that your lifestyle doesn’t change. You want to continue that same lifestyle as you go into retirement. So when you slide from what we call people at work. Which is what you do for 44 years in this example, to money at work which is what happens in retirement. You want to slide into it without going backwards and without seeing a reduction in your income. You want to just continue to rise as your life moves on. So while we have people at work earning the money, we want to make sure it’s as highly efficient as we possibly can. So that when we slide into money at work, the money is working very hard with very little erosion.
So I thought you might like this example. You can see a little bit each show, I’ll take you through what we call calculators. They’ll actually show you different things that you’ve been fooled by the financial institutions to do, put your money in a savings account. Big deal. This is what happens. I’m not so sure you can find 3% of the savings account, but you get 3% in investments. Actually you get 5 and even more risk-free. So we want to look at this and each week, I’ll take you through a calculator and show you how you can literally recover these losses. Thanks.
I want to constantly take a look at the erosions that will occur when we’re putting our money into various places within our model. I call them the black hole. We’re going to start uncovering all the black holes and let everybody see them, step-by-step. Next week, we’ll work on another black hole. I can call them inefficiencies, but a black hole is much more meaningful and gets people’s attention.
That was definitely inspirational for me.
Good. I’m glad. I dragged it out a little too long. I did it yesterday, so I’ve got a different shirt on. I can’t remember to keep the same shirt on. I’ll do them ahead of time and we’ll just play them. They won’t take that long next time. Anyway, I hope that helps. I want to thank you all for coming and listening and referring people to us. Go to FinancialFreedomRadio.com and get on the email list and we’ll send you an email whenever we do the shows. Go to YouTube.com/FinancialFreedomRadio and subscribe, like, ring the bell. Whatever it is you do. I don’t know whether Steve’s putting this out on Facebook or not, but wherever you are, please Like, Share, and pass on to others. So take care care, have a great week, great weekend. We’ll see you back here next week. FinancialFreedomRadio.com. Take care. God Bless.
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