You Can Have Anything You Want… When You Use the 60/20/20 Savings Rule
“Saving money has always seemed like a total impossibility to me,” says
Laura Preston*, a customer service rep from St. Louis. “I live for
today and putting money away for the future just didn’t thrill me
because I wanted to see immediate rewards for all my sacrifice. Then I
learned about Emotional Savings and that has made all the difference.”
Preston
is referring to the 60-20-20 Rule, a method of saving that makes the
necessity of putting money away more realistic and enjoyable. Emotional
Savings is part of that 60-20-20 Rule and it can change the way you
feel about saving money too.
Here’s how it works:
We have
found that when people track their spending, they will find on average
at least 1 percent of their gross income they are wasting. This money
can then be used for savings by putting it into three categories:
Emergency, Emotional, and Long-term (Investments). Using the 60-20-20
rule, you should allocate 20 percent to Emergency savings, 20 percent
to Emotional savings, and 60 percent to Long-term savings.
Why
split savings up in this way? Everyone knows they need money for
long-term security and a solid retirement and that this will require
the most amount of money to fund. So setting aside 60 percent of
savings for this purpose is obvious.
Most people also realize
that emergencies do happen, but few are prepared with available funds
that they can immediately access when trouble occurs. However, with a
specific category of say 20 percent set aside for this purpose, it’s
more likely that a person will have the money available when problems
arise.
The value of Emotional Savings is not so obvious, but
we have found this to be the most rewarding category that people can
spend money into. At Money Mastery, we teach that money is more about
emotions than it is about math, so it goes without saying that we will
often spend money for purely emotional reasons. This, in and of itself
is not a bad, thing. It is simply something we should plan for, just as
we would an emergency or for our retirement future. In today’s
product-oriented society where we are often enticed to make impulse
purchases, we will often spend money for things we want whether we have
the funds or not. Saving money for emotional spending takes into
consideration that there are many times we need to spend money for
reasons that go beyond the categories we have assigned for basic daily
survival. Tracking money will help you balance your spending to your
income, but it will not be enough when an emotional event occurs. You
must put aside even more money so that you will be prepared when these
emotional events arise.
What are some of the emotional needs
for which you should be saving? Typically they include such things as
family vacations, holidays, or new recreational vehicles. Some people
use their emotional spending money to purchase clothing for a special
occasion, to buy novelty decor or to treat a family member with a
surprise gift or getaway. Whatever the money is used for, it is
important that it be spent on something fun, and not for routine, daily
sustenance. When you have the desire to buy a new DVD player, or take a
quick trip for instance, wouldn’t it be wonderful if you could fulfill
those desires by dipping into a savings account that has money you have
actually put aside expressly for that purpose? Preparing for the need
to spend money for purely emotional reasons eliminates reckless
spending of the money that has been set aside for daily survival or
long-term investments. It helps curb debt, and it brings wonderful
psychological rewards immediately into your life and the lives of your
family members.
How to Save Using the 60-20-20 Rule
Let’s
suppose that Hayden and Rose have a combined gross monthly income of
$6,000. After tracking their spending, they find an extra $60 a month
(or 1 percent of their gross monthly income) that they can use for
savings. Hayden and Rose could do the following:
- Emergency Spending:
Deposit $12 per month (which is 20 percent of $60) into a low-risk fund
such as a certificate of deposit, money market account, etc.
- Emotional Spending: Deposit $12 per month (which is 20 percent of $60) into any type of savings or investment account.
- Long-term Investments: Deposit $36 per month (which is 60 percent of $60) into any long-term retirement account such as a 401(k), Roth IRA, etc.
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Compound Interest: Is it Working For You or Against You?
Every year, we help people who are losing the battle with debt by
teaching them the Power Down principle of prioritizing their debts for
quickest payoff. One couple I worked with, Dan and Alene* are well on
their way to eliminating all of their debt, including a mortgage, in
just over eight years by applying Money Mastery’s Power Down principle.
Powering Down their debt freed them from paying compound interest to
their creditors and made it possible for them to collect it for their
own benefit instead.
By
taking the money they had been paying on debts and putting it in a
savings plan, they are accumulating interest that will allow them to
retire with just under $1 million! Seems almost too good to be true
doesn’t it? But Dan and Alene aren’t the only people who are doing it.
Thousands have become disgusted by the crushing burden of compounding
interest and have determined to make it work in their favor instead —
by eliminating all of their debt.
Most people are successful
at some sort of orderly approach to paying off debt, and are usually
vigilant enough to stick to that system until at least one debt is paid
off. But without understanding the full impact that compound interest
has in their lives, most people lack the discipline it takes to remain
committed to debt elimination and are tempted to spend. That kind of
mindset forces them to pay three times the amount they actually borrow
— three times!
What happens when we let interest expense silently multiply?
Situation:
The amount owed on a credit card is $3,100; the credit card company
charges an interest rate of 19.9%; cardholder only pays the minimum
monthly payment of $51.43.
Consequence: It will take 39.4 years
to pay off the card. Only 29 cents will be paid in principle on the
debt in the first year. And it will take $21,216.10 in interest to pay
off the card!
Every person in debt must realize they have to
be just as committed to eliminating compounding interest as compounding
interest is committed to take their hard-earned money. Interest’s
relentless pursuit is evidenced by this insightful statement made by J.
Rueben Clark Jr. at the height of the Great Depression:
“Interest
never sleeps nor sickens nor dies. Once in debt, interest is your
companion every minute of the day and night; you cannot shun it or slip
away from it; you cannot dismiss it; it yields neither to entreaties,
demands, or orders; and whenever you get in its way or cross its course
or fail to meet its demands, it crushes you.”
While
compounding interest is relentless for those who are a slave to it, the
beauty of it is that it can also work in our favor if we understand how
to harness its power. Dan and Alene are a perfect example. Using
compound interest in their favor required a complete change in the way
they thought about and dealt with money. And it didn’t just start when
they began eliminating debt. It began the day they applied the other
Money Mastery principles they had been taught previously.
First
they got their emotions under control and began tracking and
controlling their spending. This led them to find money they had been
wasting. But rather than immediately consume that extra money the
minute they found it, as most people do, they began thinking about the
future. Instead of being seduced into believing that they could have
everything they wanted at that moment and everything they might want in
the future, they realized that they had to make a choice. People who
refuse to make a choice foolishly believe that they can spend all their
money on consumable goods and high-interest credit card purchases right
now and still have everything they want later, including a comfortable
retirement. This just isn’t so.
At some point we all have to
make a choice: We can either prioritize the way we spend and pay down
debt so that we can take advantage of the power of compound interest or
we can continue to recklessly spend and remain in debt and have nothing
for the future.
Remember, you can have anything you want, you just can’t have everything you want.
One
of the greatest minds of our time, Albert Einstein, looked upon
compound interest as the greatest discovery of the 20th century. We
like to point out that compound interest can also be the greatest
opportunity of this century for those who understand how to use it.
If
compound interest is still working against you rather than for you, we
encourage you register for a free account and download the full text of
MONEY: What Financial "Experts" Will Never Tell You. Learn more about how to eliminate compound interest before it eliminates your future!
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How Consumer Credit Counseling Services Actually Hurt, Not Help Y ou
People in serious debt are often enticed by the claims made by consumer
credit counseling services that they can help solve all their borrowing
problems. But relying on these services may not be any better than
declaring bankruptcy. To understand why, let’s take a closer look at
the history of credit extension in the U.S.
In
the 1970’s credit bureaus wanted to make money, so they began gathering
information on people’s payment histories and charged banks and other
lenders for this information. This seemed to be a violation of privacy,
but since people could not get a credit card or borrow money for a car
without allowing banks and creditors to use this information, they
couldn’t very well sue the bureaus for this violation.
In
addition, credit agencies that purchased the debt history from the
bureaus could change anything on the credit report at will. Some
agencies cheated, by offering to delete black marks by accepting money
from borrowers wishing to improve their credit report. These black
marks could be erased with a simple arbitrary, yet bogus “explanation.”
In order to combat this arbitrary change to the credit report, credit
bureaus created a separate corporation called the Fair Isaac Credit
Organization (or FICO). Because credit agencies can still alter the
report, lenders have come to rely completely upon the FICO score, which
can not be altered.
All of this history and the dilemmas caused
by it converge into one main problem for the consumer. If you don’t
control your spending, you will eventually end up with a bad FICO
score. This allows all your creditors to automatically increase
interest rates, fees, and renewal charges. Sometimes rates can get to
be so high that consumers are no longer able to pay even the minimum
balances on their cards and seek help through credit counseling
services. But there can be danger in this.
Because credit card
issuers want to be warned when a person is in trouble and might file
bankruptcy, they helped establish government-sponsored non-profit
consumer credit counseling agencies. When a person goes to a credit
counseling service to get help, they can actually get hurt. How? The
credit counselors have, in advance, received permission to drop
interest rates to zero and work out partial payments. All this is in an
attempt to help the person in financial trouble and to discourage them
from filing bankruptcy. In turn for this service, the credit counseling
agencies get compensated by the lender. Seems like a good deal right?
Not
really. As Dave Anderton of the Deseret News reported in his August 29,
2004 article on consumer credit counseling services, “What most credit
experts don’t tell you, is that the use of a consumer credit counselor
or debt management program is reported as a black mark on your credit
report. And that black mark could stay in place for seven years —
nearly the same length of time as a bankruptcy filing — even after late
payments and debts are brought current.” Anderton further reports that
according to Blair Drazic, a former assistant public defender for the
city of St. Louis, creditors “run a system of extortion and blackmail,
where they can legally take the food from your children’s
mouths...through late fees and usurious interest rates. Drazic said
high interest rates and exorbitant late fees are compounded when
working people seek out the services of credit counselors in order to
pay back their debts, only to find in the end that their credit rating
has been dashed. ‘The problem’, says Drazic ‘is that oftentimes these
counselors lead you to believe that you’re going to have great credit
when you get done, and we’ve found the opposite. In the eyes of
would-be lenders, credit counseling can damage your credit rating and
borrowing power just as much and sometimes more than bankruptcy.’”
In
our experience at Money Mastery, it seems best to go directly to the
lender and negotiate an interest-free, penalty-free payment instead of
trusting in these consumer credit bureaus, or these wolves in sheep’s
clothing, as it were.
Fortunately, there are consumer credit
laws in place to protect the consumer. If you use an attorney, they can
threaten credit issuers with huge fines if requests for help are not
answered and can even force that inaccurate black marks quickly be
dropped off a report.
While this information is helpful, the
best advice and the secret to true money mastery is to prevent getting
into this kind of bad debt in the first place. The best way to do this
is to track exactly how you spend and why. This will go a long way
towards keeping unnecessary debt off your back and the creditors at
bay. In addition, applying debt elimination techniques as taught by
Money Mastery will go a long way towards keeping FICO scores high and
excessive usury fees to a minimum. When you know the rules of the
credit card games you are playing and watch for those rules to change
by keeping a close eye on your credit card statements, you will feel
the self confidence and power that come into your life by taking charge
of your own financial situation.
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Understanding Your Credit Score...
Several years ago, credit agencies were altering the information they
received from credit bureaus for a small fee. When a creditor reported
information, a credit agency could delete some of the information if
the client supplied reasonable evidence that the information being
reported was incorrect. This ability to delete information began to be
abused. To gain control and regulate credit reports, a separate,
non-biased, third-party corporation (Fair Isaac Credit Organization or
“FICO”) was engaged to create a “credit score” based on a formula that
cannot be altered. Today, all lending institutions have come to rely on
this FICO score rather than trust the information contained in a
consumer’s credit report.
A
good credit score is 680 and above. A score below 640 makes it harder
to get a competitive interest rate on a home loan or car. Any score
below 600 greatly increases interest rates on credit cards, auto loans,
etc.
As a rule, you should check your credit score twice each
year. But be aware that anytime you or any other party checks your
credit report, it will drop your score by about 10 points unless you
pull the information through a firm that has permission to check a
credit report for educational purposes. When reviewing your report,
verify its accuracy. Any errors or misinformation will need to be
corrected quickly to protect your credit. To get a copy of your report
online, visit www.myfico.com. Phone numbers and addresses of credit
reporting agencies can also be found on this site so you can correct
any inaccurate information you find on the report.
This detail
review of your credit score can save you a lot of money. Consider the
Stewart family of Phoenix who inherited some land that was being used
to construct a housing subdivision. When the Stewarts switched the
property titles to their name, they were not informed that the property
tax on the land had not been paid for two years. Even though the
Stewarts paid the back taxes, they failed to check their credit rating
until they began the process of refinancing their home at a lower
interest rate. To their shock, the tax liens showed up on their report
and kept them from securing a lower rate for their mortgage. It took
them a year to get the county government to correct the problem with
the credit reporting bureaus.
If the Stewarts had been able to
secure the lower interest rate of 7 percent they were negotiating, it
would have saved them $69 a month for 30 years. Paying even that much
more a month will cost the Stewarts $24,000 on their home mortgage.
If you are not sure about your credit score, logon onto www.myfico.com today. It might save you thousands of dollars.
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Debt Negotiators Can Save You From Drowning in Debt
Did you know that you can negotiate down the balance owed on unsecured
debt? If you feel like you’re drowning in bills, it may be time to
consider working with a debt negotiating company. Such companies
specialize in working with creditors to reduce your debt by as much as
40 percent! Why are creditors willing to negotiate?
Lenders
have found that people in serious debt will try to make all their
payments for a lengthy period of time and then collapse into
bankruptcy, with little or no warning that they need assistance. Rather
than suffer the losses that a bankruptcy incurs, creditors are willing
to take 60 percent of the debt as settlement. That’s why when a
creditor receives a call from a negotiator, it’s taken seriously.
Statistics
show that in addition to settling on as much as a 40 percent reduction
in debt, creditors will also wait up to three years to receive monthly
payments.
But what if a creditor will not budge when a
negotiator calls? “What we do when a creditor is unwilling to negotiate
debt is wait until they have gone three or four months without
receiving a payment,” says a spokesperson for a southwestern debt
negotiation company. “Then they will usually work with us,” she says
with a smile. To make the situation work for all parties, the debt
negotiator creates a formal contract signed by the creditor and the
debtor. The creditor agrees to report the debt “paid in full” when the
negotiated balance has been submitted within the agreed upon time
frame. This obviously has a very positive impact on the debtor’s credit
report.
If you are drowning in credit card debt, you do not need
to file bankruptcy and your credit can be restored within 30 months
using a debt negotiator program. The key to success, however, is to be
sure to:
* Register for a free account and get your spending
under control with a financial tool like Money Mastery’s Spending
Planner (along with a bunch of other free resources!).
* Learn more
about the Power Down principle of debt reduction by checking out by
registering for a free account and downloading and reading MONEY: What Financial "Experts" Will Never Tell You.
What’s It Worth?
When
these money saving secrets are put into practice, as much as 40 percent
of all unsecured debt can vanish, leaving no more interest expense to
accrue. A $20,000 debt for example, will typically drop to just $12,000
creating a monthly payment of only $400.
“When my husband and I
found ourselves owing $107,000 of unsecured debt, with a monthly
payment that had ballooned to $5,200, we were sure that our only option
was to file for bankruptcy,” says Wynona Miller*. “Then we discovered
Money Mastery and were introduced to the idea of debt negotiation. Our
monthly payment dropped to just $1,500 for 36 months! To us it’s a
miracle. We cannot express the feeling we had when this heavy burden
was lifted. Not only did we avoid having to file bankruptcy, we’re
actually going to be out of debt in less than three years!”
*Names have been changed to protect privacy.
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Would You Rather Be Taxed on the Seed or the Crop
Taxes have such a subtle, yet profound effect on our money. That’s why
it’s important to organize retirement funds based on how those funds
will be taxed. By doing so, it becomes easier to see how taxes will
affect retirement money over time. In addition, using calculating tools
like the Money Mastery Master Plan software can help project how much
money will be available at retirement age and what percent will be
subject to some kind of taxation.
For
example, without the tools to play “what if” scenarios with your money,
it may be easy to get caught up in popular retirement and savings
programs that may actually end up costing you serious tax dollars when
it comes time to retire. Take 401(k) programs for instance. The
argument for these plans is that when a person begins to withdraw funds
at age 65, he or she will usually “be in a much lower tax bracket” than
they were during their working years, so theoretically, they should pay
much less in taxes. But that may not actually be the case.
Bart Croxford, a CPA writing for the Salt Lake Tribune, spells out what may be closer to the truth:
“I
have never seen anyone who promotes tax-qualified plans [such as IRA or
401(k) plans] run the figures through [the entire] retirement [period].
They run the figures to age 65...But in savings, as in sports, it’s the
final score that counts, not the score at half-time or even after three
quarters. The real clincher...is the fact that with tax-qualified
plans, one must pay taxes on the entire amount taken at retirement,
including the growth, which accounts for the largest portion by far.
Whereas on tax-free plans, one pays no taxes on the growth at all. In
other words, one can be taxed either on the seed or the crop. With
tax-qualified plans, one pays on the crop and on tax-free plans, one
pays on the seed. One does not receive the tax deduction now, but he or
she receives a far greater benefit by not having to pay taxes on the
amount received at retirement.”
Of course this does not mean
you should automatically dismiss 401(k) programs, and we strongly
encourage you to take advantage of matching contributions your employer
may make towards a fund. However, it is important to consider how
retirement funds will be taxed in the long-run. For more information on
how to look at the overall “big picture” for retirement and to get a
better idea of what you will actually have available at retirement,
read MONEY: What Financial "Experts" Will Never Tell You or check out
Money Mastery’s Retirement Worksheet (it's a PDF).
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8 Questions Credit Card Companies Don't Want You to Ask
If you’re like most Americans, there’s a pretty good chance that you
received at least one offer for a new low-cost credit card this month.
While some of those offers look tempting, with rates as low as 6
percent and no annual fee, you may want to use caution before
abandoning your present card (or cards).
Asking
the right questions will insure that you’re getting the best deal, one
that won’t end up costing you more in the long run. Before you sign,
be savvy. Make sure you review the fine print the credit card company
doesn’t want you to read, or get them to answer to your satisfaction,
the following questions:
- How long does the new rate
last? If the offer isn’t for at least six months to a year, it’s not
worth it. That’s because you’ll need at least that much time to pay
down your balance at the new rate.
- Does the introductory rate
apply to new purchases as well as transferred balances? Many people
assume when they transfer their balance to a new card that the low rate
applies to any new purchases they make on the card. Usually card
issuers offer the lower rate only on the transfer balance, and charge
high rates on any new charges made to the card after the transfer. Be
sure you know their policy before signing.
- How high will the rate go when the trial period is over? Make sure that rate isn’t higher than the one you’re already paying.
- Is
there an annual fee for the new card? Even though the interest rate
may be low, the offer may include a ridiculously high annual fee. Ask
the issuer if they’ll waive the annual fee; if not, wait for a better
deal.
- Is there a grace period for finance charges and how long
is it? Ideal grace periods should be between 25 and 30 days before a
charge appears on your account. But beware, some issuers begin
charging interest expense the very day you use your card.
- What
does “pre-approved” mean? It may mean that the credit issuer will
re-screen you after you sign, so if this is not disclosed in the offer,
look elsewhere. Bad or soft spots in your credit history can be ample
justification from a card issuer’s standpoint to bump you to higher
rates.
- What is the charge for late payments? Beware of cards that charge a penalty the very first day you’re late on a payment.
- Will
a late payment change the introductory rate? If you pay late, some card
issuers will bump you to a higher penalty rate during the introductory
period.
Take the time to learn the rules of the complex
financial games you are playing (like owning a credit card) by reading
the fine print on the offer. Remember, knowing the rules puts you on
an even playing field with the credit card issuer. Don’t be satisfied
with skimming over these rules. And don’t be satisfied with any credit
issuer who can’t answer your questions fully.
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Never Worry About an IRS Audit Again!
This content was contributed by Money Mastery and The Tax Reduction Institute.
Wouldn’t
it be great if you never had to worry about getting audited by the IRS,
especially if you run a home-based business? And how can you avoid
giving 30, 40, or even 50 percent in over-inflated tax payments to the
government? Simple. By taking the time to properly document your
activities every day. Without keeping track on a daily basis of your
business activities you cannot boldly and confidently deduct every
expense to which you are legally entitled. Recording your daily
activities using a systematic and orderly tracking approach can help
you save thousands of tax dollars and will help you “audit-proof” your
records.
Habit #1: Keep a Detailed Tax Diary.
This diary, which can be your appointment book or daily planner, is the
focal point of your documentation system. It should include:
- All of your appointments.
- Where and when you travel.
- Where you go by automobile.
- Where and when you entertain business contacts.
Habit #2: Keep Permanent Records.
These include prior years’ tax returns, stock purchases and sales,
equipment purchases, etc. Generally, you want to keep any record that
relates to more than one tax year. If you purchase property, your
permanent files should include the purchase documents, closing
statements, deeds, and other expenses related to the purchase.
Habit #3: Keep Business Records.
These include time sheets for part-time help, receipts, invoices,
cancelled checks, and other evidence that you do business on a regular
basis.
Failure to keep accurate records can result in very stiff
penalties if you are ever audited. But you need never worry if you
document your activities. The key is to record everything!
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How to Take Tax Deductions With Confidence
This was written by my friend Sandy Botkin C.P.A. He's a former attorney for the I.R.S.
Creating
a legal and proper tax documentation system is vital if you want to
take (and keep) all of the business deductions you are entitled to.
Why? Because proper documentation is required by law. Without it, you
could end up losing all of your bone fide deductions.
When it
comes to justifying your deductions, the burden of proof is on YOU. IRS
examiners are not required to help you keep your records. It is your
responsibility to prove and properly document your deductions. The
consequences of not following the rules are huge penalties.
However,
if you abide by the following simple strategies, you can rest assured
that allowable deductions will be 100 percent accepted by the IRS.
Some strategies to master your records:
1. Build a documentation system.
No matter what form of business entity you have (S Corp, C Corp, LLC,
or sole proprietorship), you need three separate and distinct tax
records:
- Permanent files
- Regular files
- Daily tax diary
Permanent Files:
These include your prior year’s tax returns, stock purchases and sales,
equipment purchases, and sales and similar entries. Generally, you want
to keep any record that relates to more than one tax year in your
permanent file. If you purchase property, your permanent files should
include the purchase documents, closing statements, deeds, and other
expenses related to the purchase.
Regular Files: These include time sheets for part-time help, receipts, invoices, canceled checks and other corroborative evidence.
Daily Tax Diary:
Your daily diary, which can be your appointment book, is the focal
point of your documentation system. This is especially true if you
operate a personal service business. The smaller the business, the more
important this information becomes. Your daily diary should include:
- All of your appointments
- Where and when you travel
- Where you go by automobile
- Where and when you entertain contacts
2. Use three-part checks.
Keep a separate business checkbook and use three-part checks.
Regardless of how you have structured your business, the three-part
check is necessary to build good, easy-to-use records for your regular
files.
- Send part one, the original, to the vendor.
- Staple supporting evidence such as receipts or invoices to part two of the check and file it alphabetically in the vendor file.
- Put part three in a numerical file for later viewing by the IRS (should you be audited) and for your own reference.
3. Keep form 1099 information separate.
Negligence penalties are automatic if you fail to report all the income
that’s reported to the IRS on form 1099. The negligence penalty applies
to your total underpayment of tax, not just the portion due to the
negligence. Any deposit that would not normally be included in 1099 or
W-2 should be copied. Thus, if you get a large gift (or give a large
gift), insurance reimbursement, or transfer money from one account to
another, make copies of the checks. Failure to do so may result in the
IRS treating the deposit as income.
4. Become a pack-rat.
Because its virtually impossible for you to know all of the receipts
you are required to keep in case of an audit, save every receipt,
whether personal or business, for all money spent. Since you don’t know
what will be important and what’s not, its safest to save everything
for at least three years. Remember, you carry the burden of proof.
5. Use a business credit card.
To keep your record-keeping burden to a minimum, use a separate charge
card for all your business expenses. The charge card copy acts as a
receipt for your travel, entertainment and gas and oil purchases. It
also eliminates the need to make an audit trail for the deductible
interest. By using one or more credit cards solely for business, you
can deduct the finance charges on the business cards as well as the
annual fees on all cards used solely for business.
6. Think like a prosecuting attorney.
You must understand that in the case of an audit, the IRS agent is not
there to be your friend and help you get your tax information in order.
They are there to shoot holes in it, and disallow deductions, and
assess penalties and fines. You carry the burden of proof. So, you must
think like a prosecuting attorney and gather all of your evidence in a
manner that unquestionably supports your deductions.
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Four Myths About Tax Paying Your CPA Won't Tell You About
This content was contributed by Money Mastery and The Tax Reduction Institute.
The
following quote by the 17th-century French finance minister, Jean
Baptiste Colbert, very aptly sums up the subtle ways taxes are
extracted from us:
“The art of taxation consists
in so plucking the goose as to obtain the largest possible amount of
feathers with the smallest amount of hissing.”
Why
is it that our feathers are being plucked so extensively? Could it be
that it’s because we have bought into a host of dangerous tax myths
that can rob us of our wealth?
Let’s take a look at some of these myths:
Myth #1: A huge tax bill is inevitable and inescapable.
This pernicious myth has evolved over the years due to the continual
expansion of government, which has required more taxes from Americans
to sustain its girth. Taxes have now become the largest expense for
most people, exceeding what they pay for food, clothing, housing and
transportation combined. While many Americans grumble over the high
cost of taxes, few seem to question what they can do about it. The
truth of the matter is, believing this myth is forcing Americans to pay
the IRS more money than even it requires by law because they don’t know
any better.
Myth #2: A large and complex government is necessary.
Through an attitude of “entitlement,” many Americans are unknowingly
subjecting themselves to larger tax burdens. As we demand more services
and greater benefits from government, we are beginning to sag under the
weight of supporting such programs. Abandoning an attitude of
entitlement and embracing self-reliance will go a long way to reducing
overall tax burdens.
Myth #3: Questioning the system increases my chances of getting audited.
This is absolutely untrue. If you believe this myth it’s only because
you are not aware of all the “good” tax laws and are therefore living
in fear of the IRS. Remaining in the dark about tax law and just paying
what you think you have to pay, without learning what is really
expected might seem like the “safe” path to take, but it’s actually a
foolish one. By applying Money Mastery’s Principle 5: “Know the Rules,”
you no longer need to cower in fear; knowing the rules changes
everything because it puts you in control.
Myth #4: My accountant takes care of my taxes.
This is the most pernicious tax myth of all. It is one of the worst
wealth killers and makes more money for the IRS than anything else.
Believing such a myth is like eating nothing but fatty fried foods,
ignoring the symptoms of heart disease, an then going to your doctor
and expecting him to make you well. Likewise, if you don’t know the
rules for good “tax health,” you can’t go to your accountant and expect
he or she to save you thousands of dollars in taxes at the end of the
each year. If you don’t know what to tell your accountant by December
31, there is very little he or she can do for you. In addition,
accountant will usually err on the side of conservatism with regard to
deductions in order to avid the severe IRS penalties that they will
incur if they wrongfully counsel their clients. This protects their
pocketbook, but not usually yours. If you want to stop wasting money on
excessive taxes, it is up to you to learn the rules and make sure your
accountant is helping you take full advantage of them. Remember, your
accountant is only as good as you are.
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