There are only three types of money in your life – lifestyle money, accumulated money, and transferred money.  Now that you know that, you probably won’t be surprised to find out that there are only a few things that you can do with your money. You can simply spend it, save it, transfer it, or give it away. By far, your savings consumes the least amount of your money compared to the money that flows through your lifestyle money and money you simply transfer away. But, your ability or inability to save money receives more publicity than the other two types of money combined.

 

Being helpless, broke, and bald is not the way we should end up in life; it is how we begin life. The last couple of generations of Americans have developed an appetite for consuming goods well beyond their ability to pay for these goods. As a result, there is an enormous amount of personal debt in our country. This debt must be paid for with money that many have not earned yet. The pledging of future incomes to pay for debt leaves many in harm’s way. Any interruption of income flow, rise in the cost of living, increased taxes, an illness, or an accident could leave the average American household in a desperate setting. 

 

Understanding how money works and how money flows into and out of your life can help you control your personal finances more efficiently. 

 

 

 

The consumer price index (CPI) measures the cost of buying goods and services for the average American. On a regular basis, 95,000 items from 22,000 stores are surveyed, and 35,000 rental-housing units are measured. The result concludes how the average American spends their money. According to the Social Security Administration, the breakdown of spending looks like this… 

 

Housing                    41.4%

Apparel                    6.0%

Transportation          17.0%

Medical Care           6.9%

Entertainment           4.4%

Food & Beverage    17.4%

Other                       6.9%

 

This looks fairly normal, but it should be noted that the housing figure is based on rental property and does not take into consideration the huge inflationary aspects of owning a home. Also, it should be pointed out that food and housing represent about 58% of the total. In addition, it is very important to understand that the average American pays more in taxes than they do for food and housing. The funny thing is that the CPI ignores the fact that we all must pay taxes and the cost of taxes is NOT included in the CPI. The cost of taxes eats up about 43% of our dollars. When the consumer price index is adjusted with taxes included, the average American’s spending now looks like this…

 

 

Taxes                       44.0%

Housing                    23.0%

Food & Beverage    10.0%

Apparel                    3.0%

Transportation          10.0%

Medical                    4.0%

Entertainment            2.0%

Other                       4.0%

 

Note that when taxes are included in our spending that more is spent on taxes than food, clothing, and housing combined by the average American. Because of taxes, the average person is limited on what he can spend on himself. Unfortunately, this also dramatically reduces the ability for someone to save money for the future (remember most attempts to save money for the future may also be taxed). Having less money to spend on our personal lives forces many average Americans into debt. The problem is, the government continues to outspend what the average consumer spends. This may create an even greater percentage of your money going to the government in the future. 

 

There are marketing companies, financial institutions, and experts from the government who work 24/7 on new ways of separating YOU from your MONEY. Spending money is easy, but remember, it takes more money to "play” than it does to work. By understanding how your money flows out of your life via transfers, you can now focus on the problem you face instead of chasing another quick fix, marketing scheme. You must understand that the solution is not difficult. It is based on logic and knowledge. It is time to take a stand against the money changers of the world. 

 

When thinking about your spending habits and learning the Defining Moments, the goal is not to have you go through life without the lifestyle you deserve. It is quite the opposite. Learning how your money works can afford you many of the things you ever wanted. Your spending should be proportionate not to just your income but to the amount of your income you are allowed to keep. Therefore, the solution to some of the financial problems you face is not your income, but rather to reduce or eliminate the transfers of wealth you experience in your everyday life that reduces the amount of income you are allowed to keep. Do not make the mistake of believing that the amount of credit you have for spending is an amount you can safely afford above and beyond your income.

 

 

 

Compared to spending money, saving money is much more difficult. More of our time and attention is focused on spending our money. Very little time is centered on saving. The last two generations of Americans have drifted away from taking some amount of their incomes and saving it. If you were paying attention, there was not a category in the consumer price index (CPI) for savings. Savings in the United States have plummeted to an all-time low. This is amazing when you factor in that many households have two income earners. Still, over the past few years, consumers found it necessary to draw down their savings just to maintain their lifestyles and to make up for the declining buying power of their incomes. This is occurring at the same time when there are significant negative trends in company benefits and pensions, health insurance, social security, and dramatic increases in government spending that can result in higher personal taxes. The Government Accountability Office (GAO) reported recently that personal savings were at a negative rate in our country. The spending and costs needed to maintain an average family’s lifestyle robs them of any opportunity to personally save money. It is ironic that the government has secured its future through your income with no regard to your financial survival in your future. Any attempt you make to save money for your future must be shared with the government.

 

Saving is not just physically putting money somewhere and hoping it will grow. Saving is also NOT spending money you do not have to, unknowingly and unnecessarily. Understanding this type of saving and recapturing transfers of your wealth can help you save the money you are simply giving away. The process, the way you spend your money, is filled with opportunities for others (banks, credit card companies, mortgage companies, the government, etc.) to make money FROM you, not FOR YOU. What they market as a savings for you is really a profit for them. The funny thing is none of these companies have money until you give it to them.

 

So, your personal savings can be a combination of two elements: the actual money you can save and the money you do not have to spend (fees, taxes, interest rates, etc.) in your everyday life.

 

 

 

What many people do not understand is that there is a difference between "savings” and "investments,” and in today’s traditional thinking, it can cause many problems. Savings is money that you have accumulated and you want that money to grow in value but with very little, if any, risk. This should be money that you can count on to be there for retirement or whenever you need it. With the continued onset of government programs such as social security, Medicare, and Medicaid, the average American is lulled into a false sense of security that they do not have to save any money because these government programs provide a safety net for them in the future. The problem is that these programs are not free. The government continues to try to fix their social dream programs of the 1960s. These programs, if left unchanged, may bankrupt America. The average American dependency on the government is now at a crossroad. Does the government do something now to save America and cut back on its spending and cut government benefits by 60% OR simply double the taxes we are currently paying and hope for the best? In a world that is filled with overwhelming challenges, everyone must re-learn how to save money.  

 

The difference between savings and invest¬ments is the word RISK. I will give you an example. Many politicians do not want you to have control to invest some of your social security account into investments because it is A.) too risky, or B.) they think you are too dumb to do it. (Just a side note here: the real reason they do not want you to be able to invest some of your social security payments is that they, the government, would now be accountable for your account and they would not be able to spend this money for other things and that would mess up their lives.) The funny thing is that the government does not think it is too risky to put all your money into 401Ks or IRAs that involve investing. While contemplating on investing, remember one thing, YOU ARE THE ONLY ONE AT RISK. The tradeoff for "trying” or "hoping” for higher rates of returns is the fact that you COULD possibly lose "a little,” or "some,” or "a lot” of your money. For many, social security has become their savings, and 401Ks, IRAs, and other retirement plans have become supplements for retirement income.

 

As it is for savings, finding money from your income to set aside for investments is becoming more difficult. Accumulating money through investments has become the most popular way of attempting to increase one’s wealth, yet it remains the most misunderstood. Remember, it is far more important to understand how money works than what it is invested in. You should begin the practice of separating your savings from your investments.

 

 

 

If you have been fortunate enough to save money, now what do you do with it? Well, the goal may be to let it just ACCUMULATE. Everyone wants their money to grow. You could also FLATTEN your savings and investments. Flattening means that you keep the basis (what you originally invested or saved) intact and take only the money that you have earned from your accounts as income every year. The goal of flattening is to keep the basis or principle of your accounts at the same level while drawing income from them. This would allow you to never run out of income-bearing money in the future.

 

You could also decide to SPEND DOWN an asset or your savings. Spending down an asset is withdrawing money from an account until the balance of the account is gone. As an example, if someone had $100,000 and wanted to SPEND DOWN that entire amount over a ten-year period, and while they were spending it down, they received a 5% rate of return on the balance that was still in the account, they would receive $12,333.17 per year for ten years. At the end of ten years, there would be no money left. If someone were to FLATTEN out this same $100,000 account with a 5% annual rate of return, this person would receive $4,761.90 per year and the account balance would remain at $100,000 at the end of each year. At retirement, you will make decisions on whether to let your money continue to ACCUMULATE or whether to FLATTEN out or SPEND DOWN what you have saved during your life.

 

So far, we have discussed how you spend your money and also the difference between savings and investments. We have also looked at how your savings will be used. Whether you let your savings simply accumulate or use it for income by flattening out or spending down will be determined by you and the economic situation you are in. Your savings can create financial opportunities for you during your entire life, not just your retirement years. Learning to spend down or flatten out an asset could help you achieve goals that you may have now and in the future. By understanding these spending and saving concepts, you can start to see how your money works…for you.

 

 

 

As a nation, we have become very good at spending money and pretty pathetic at saving it. As a nation, the average American has developed some bad habits in the way we buy things and conduct our personal financial lives. The convenience of credit and the perceived nuisance of paying cash create unnecessary fees and charges in our everyday lives. Not only do we pay for the goods on credit but also all the taxes charged for purchasing those goods. That is right, think of all the taxes that can be charged on a credit card. Everyone is constantly being brainwashed that the only way to purchase everything is by using credit. It is important to remember the definition of lost opportunity cost. When you spend a dollar, not only do you lose that dollar but also the ability to earn money from that dollar. When you purchase something, at least you have the goods or services you purchased. Lost opportunity cost also applies to transfers of your wealth. When you spend money for taxes, fees, charges, and interest, not only do you lose those dollars but again the ability to earn money from those dollars. The problem is when you pay for those transfers, you get no goods in exchange for your money. It is not uncommon for the average family to give away $500 or more PER MONTH.

 

It is possible that by examining how you spend, save, and transfer or give away money that you can recapture dollars that are flowing out of your life today. To recapture these dollars, you are not exposed to market risks, taxes, fees, or interest rates. You may be surprised that in recapturing these dollars you will not spend a single penny more than you are spending right now. 

 

Other than the most obvious transfers of your wealth such as income taxes, mortgage interest, and credit card costs, I could probably rattle off another two hundred transfers that you are exposed to either directly or indirectly, in your everyday life. It is important to find an experienced trained professional to uncover and recapture the dollars that you have become accustomed to giving away. Recapturing these dollars can enable you to spend and save more of your money.

 

The average American is under the impression that in order to save money he must give up some of his worldly goods. After all, how much time would you want to spend in reducing your lifestyle to save for the future? Probably not much time at all. But, if you can save money by reducing and recapturing transfers and not spend any additional money, would you do it?  This is the power of understanding how money works.

 

So, what can you do with your money? Well, you can spend it. Go ahead and have a good time and improve your life, but do not spend more than you make. You can save money. This is harder than spending it. Remember, there is a difference between "savings” and "investments”. Savings cannot only be real money you save but also money you do not give away (transfers). Once you save money, you can let it accumulate, "flatten it out” or "spend it down” and use it for income or purchases. Finally, we unfortunately give away a lot of money through transfers of wealth in our everyday lives. Some of these transfers are controllable and can be recaptured. Recapturing these dollars can add up to a lot of money. Controlling this money can increase your ability to save money and improve your financial future. All of this can be accomplished without spending one more dime than you are already spending.