ELFS: 3 Types of Money

DonaldJLester.com

The Three Types of Money

One of the most powerful discoveries you can make is that understanding how money works can change your life. What is more important than where your money is, and its rate of return, is knowing how it works. You may think that learning how money works would be a massive undertaking on your part, but it does not have to be that difficult. You must first learn how to categorize your money. This should simplify your thought process and enable you to improve your life. You have been marketed to death by companies telling you that all you have to do is to have the right products and higher rates of return to make your life better. Now, while that is important, the main focus of this marketing is for you to buy something. It sounds easy, and there is very little thinking involved. That type of marketing is aimed at the person whose life is so busy that he has very little time to pay attention. Remember, the product they sell is not the source for your knowledge; it should be the result of your knowledge. Owning more products does not make you smarter. With that being said, both you and I are going to need some products in the future. The point is that the products we have are not the center point of our knowledge. They are tools we use. Products alone will not teach you how money works.
Your thought process should begin with understanding the types of money you have. If you categorize your money into three types, then controlling your money should become easier. The three types of money can help you identify mistakes, problems, and solutions that surround your everyday life.

Power

The greatest financial tool you possess is your ability to earn money and generate an income stream. This continuous flow of new money is the heart of your financial life. This income can come from various sources. You can receive compensation from your career or occupation. Unless you work until you die, this source of money may end at retirement or, heaven forbid, you lose your job. Or even worse yet, you become disabled, unable to work again for the rest of your life. For many, working until you die is not an option it is a necessity. For others, an income flow can come from retirement plans and/or investments. This source of income is secured as the result of some planning in the past. Another source of income flow can come from government programs and benefits. These benefits, and the income stream they produce, are becoming less and less certain to be there in the future.

The demographic shifts, a decreasing work force, and an aging population are ingredients that may reduce or eliminate these benefits in the future. No matter what the source of your income is, it remains one of your most valuable assets. It is important to remember this
Defining Moment: Your money may never be worth more than it is today. Let’s now divide your money into three specific groups.

Show Me the Money

Your money is going to end up in one of three categories: lifestyle money, accumulated money, and money you transfer away, sometimes unknowingly and unnecessarily. Every dollar you have will filter through one or more of these categories.
Your thought process can be simplified by being able to identify how money passes through your life. Being able to track how your money enters and exits your life will uncover lessons you need to learn in understanding how money works.

Lifestyle Money

Your standard of living, the way you live, has taken a lifetime to achieve. Maintaining and increasing your lifestyle for the remainder of your life should be everyone’s goal. Your lifestyle money is the amount of money you need to maintain your current standard of living. The house you live in, the cars you drive, your vacations, the country clubs, all the comforts you are accustomed to they all fall into the category of lifestyle money. You have worked very hard, and you deserve an affordable quality of life. You are certainly aware of your lifestyle money more than the other types of money because you live and spend money on your lifestyle almost every day. Many of the financial decisions that you make are centered on your standard of living. Unfortunately, the cost of your standard of living continues to increase every year due to inflation. If you attempt to live above the standard of living that you can afford, you can run the risk of being buried in personal debt.
The challenge of maintaining your standard of living after your working years can get complicated. You may find yourself on somewhat of a fixed income at retirement. If you followed traditional thinking and achieved the goal of retiring on two thirds of your working income, your lifestyle could suffer dramatic changes. You may discover that everything you buy will probably continue to increase in price along with the taxes you pay on these goods. At 3% inflation, a dollar when you are 65 will have the buying power of fifty five cents 20 years later.

The majority of money you earn will end up in your lifestyle. It may consume an increasing amount of money in the future. A problem occurs when people start to fund their lifestyle with an increasing amount of debt and credit.

Accumulated Money

Accumulated money is that portion of your earnings that you attempt to save. With our best attempts and intentions, some of our money ends up in investments, saving programs, retirement plans, and banks. The average American is finding it more and more difficult to save and accumulate money. According to the GAO, the Government Accountability Office, we are saving at the lowest rate, per capita, since 1934 during the Great Depression. There are many reasons why this is happening, but the result of this is a great concern. Our inability to fund our future lifestyles could impact everyone. Banks, financial planners, and investment brokers are all competing for the money you are attempting to save. In the financial world, there is an enormous amount of information. You would think with all the financial magazines, news articles, TV and radio shows, and a record number of financial experts out there that it would be almost impossible to lose money. It has turned out to be quite the opposite. All of this information has caused a lot of confusion. Misinformation and the “sleight of hand” make good financial sound bites and headlines. For the average American trying to save, it is becoming more difficult to separate opinions from fact, myth from reality, and the truth from fiction. Greed and ambition motivate individuals, and corporations forgo the truth whenever it is convenient and profitable. You may discover that your accumulated money may be the smallest category or type of money that you have, but the most important. Your future and financial survival depend upon it. Your ability to save more money and increase your lifestyle may depend on understanding and controlling the third type of money in your life.

Transferred Money

The third and last category of money in your life is transferred money. It may surprise you that many people transfer away much of their wealth on an everyday basis, unknowingly and many times unnecessarily. Transfers of your wealth appear in the form of taxes, interest rates, finance fees, finance charges, maintenance and management fees, etc. The beneficiaries of these transfers are the federal, state, and local governments; banks; loan companies; and mortgage and investment companies. While everyone is focusing on their lifestyle and accumulated money, the answers to increasing your wealth lay hidden in the transfers of your wealth. Learning to recognize, understand, and recapture the transfers in your life could allow you to create more wealth without spending one more dime than you are already spending or facing any additional market risks. The more transfers of your wealth that you are involved in, the more your lifestyle and accumulated money decrease. You should learn to categorize all of your money. Your money ends up supporting your lifestyle, being saved and invested for your future, or being transferred away. Unfortunately, any attempt to increase your income, improve your standard of living, and save money for your future also triggers some unintended consequences in your life. As you increase your lifestyle and your savings, you will incur an increase in taxes now and possibly in the future. Even increasing the amount you save for retirement today could create greater amounts of taxation in the future. It seems every time you try to save a dollar, you will have to give a dollar away.

While expanding your standard of living, you purchase new homes, cars, televisions, home improvements, furniture, and many other items. Sometimes these goods are bought on credit. This debt has interest rates attached to it, which transfers some of your money to others. Let’s face it: Almost all the purchases in your lifestyle are depreciating assets and get replaced from time to time. When you buy a new car, by the time you drive it out of the dealership, the car value drops about 30% and continue to drop in value every year. Even purchasing a home is surrounded by transfers in the form of interest rates, property taxes, school taxes, water and sewer taxes, maintenance and improvement costs, and insurance costs.  Many banks, mortgage and credit companies, look at your buying habits as “a dollar from you is a dollar for me” opportunity. Unfortunately, with the possible exception of the mortgage interest you pay, almost all your other debt interest is not tax deductible. As you ca n see, these transfers can consume a lot of your money.
If you have the opportunity to recapture many of the dollars you are transferring to others and keep the money for yourself, would you do it? Absolutely! Unfortunately, most people do not know how to do this. There is a reason why no one is teaching you how to recapture transfers. If the banks, credit card companies, mortgage companies, investment companies, and the government taught you how to reduce your payments to them, well, they would get less of your money. These companies understand the lesson of the first defining moment. They know that money will never be worth more than it is today. Their goal is simple: to get as much of “your money” today, where it will have the most buying power for them.  Many Americans find themselves in the position of having to work so hard to pay for all these transfers in their lives that they do not have time to learn how to reduce or eliminate them.

Defining Transfer Labels

It is one thing to be held up by someone wearing a mask and carrying a gun; it is another to willingly give away your money freely, but the result of either one in your personal financial life is the same. Just as you can identify a thief by his mask and gun, you must learn to identify the transfers in your life that also take money from you. Many people have not been trained to recognize these transfers. Quite the opposite, people have been trained and brainwashed to accept that these transfers are just a part of life.
Some transfers in your life are inescapable, but many people create transfers in their life by the decisions they make or do not make. Bad judgment, bad investments, bad timing, indecisiveness, and sometimes doing nothing at can also create transfers and a loss of wealth to you. You must remember your economic situation is a matter of choice, not a matter of chance. The problem is that many of life’s decisions are made by default, without enough knowledge, and these decisions can create unintentional consequences in your future. A transfer of your money is nothing more than profit for someone else. Now pay attention. The government sees you as a taxpayer. The bank sees you as a borrower and interest payer. Investment companies see you as a fee payer, nothing more, and nothing less. These groups are not going to do you any favors. They are not your friends, and in most cases in dealing with them, you are the only one at risk. Here are transfer labels, what they are called and how they are active in your everyday life.

Defining Transfers

TAXES:

Taxes occur dozens of times a day in your daily life. There are federal, state, and local income taxes; sales taxes; telephone taxes; cell phone taxes; water and sewer taxes; gas taxes; business taxes; cable TV taxes; capital gains taxes; service taxes, and utility taxes. The list of taxes you pay goes on and on. Some of these taxes are unavoidable and impact everyone, whether you are still working or retired. Taxes impact your lifestyle, accumulated, and transferred money.

INTEREST RATES:

Debt in America is at an all-time high. The interest on this debt is a great concern. The interest rate on much of this debt is flexible, meaning it can go up. Interest is paid on mortgages, equity lines of credit, credit cards, auto loans and leases, college loans, and various other purchases. Interest rate payments come from your lifestyle money, after taxes. Paying too much money on interest could impact your ability to deposit more money into savings and accumulated money.

BANK FEES:

In my book, Learning To Avoid Unintended Consequences, I list about 100 fees that a bank can charge you. Once again, bank fees are transfers that come from your lifestyle money: check fees, check cashing fees, ATM fees, savings account fees, late fees, early withdrawal fees, etc. Why not just put on a mask, get a gun, and rob us while we are standing in line waiting for all that free service they proclaim to give us.

MAINTENANCE FEES:

You gave them your money, then they want to charge you a fee for giving it to them. These fees once again are typically paid out of your lifestyle money. Many times, a maintenance fee is simply subtracted from the money you gave them. It is not enough that they use your money to make tons of money for themselves; they charge you a fee. Using your money must be some kind of nuisance to them.

MANAGEMENT FEES:

Once again, these types of transfers are hidden from you by simply subtracting them from your accounts. Management fees guarantee the company of getting paid first, whether you gain money in their accounts or they lose it all for you.  Management fees are a transfer to your lifestyle and accumulated types of money.

FINANCE CHARGES:

It is not enough that companies that lend you money charge you interest on the loans, they want to charge you finance charges for processing the paperwork, billing you and sending you a late payment notice as well as a late fee.  These transfers, once again, impact your lifestyle money.

LOST OPPORTUNITY COST (L.O.C.):

If you pay a fee, a charge, an interest rate, or finance charge to some company, not only do you lose the dollar you gave them, but also the ability to earn money from the money you just gave to them. This compounds your financial troubles.

Product Transfers

Almost everything we attempt to do to help our financial situation results in some form of transfer. When following the financial advice of some experts, many times they gloss over or omit some of the transfers that you will have to face when purchasing financial products. I am not telling you not to buy financial products but rather to be aware of not only the positive aspects of your investment but also some of the transfers in your life that can occur from them. First of all, find competent professional help from someone who is versed in all aspects of products AND transfers.

©2012 Wealth & Wisdom Institute.