Wealth Transfers

The Family Banking Plan

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What are Wealth Transfers?

Everyday, we unknowingly and unnecessarily transfer potential wealth away from us. These transfers come in many forms and substantially inhibit our ability to reach our maximum wealth building potential.

In order to understand how wealth transfers impact our lives, we must first understand what a wealth transfer is, then learn to identify them in our own lives. Once identified, we can reduce or eliminate their effect on our wealth.

Wealth transfers have an associated cost that actually increases their negative impact on our financial lives. Wealth transfers carry with them something called, “Lost Opportunity Costs” (LOC). An LOC is in addition to the actual wealth transfer itself. It is all the interest or financial growth you could have earned in your lifetime on the money that was involved in the wealth transfer. In the examples to follow you will be shown how this works.

Wealth Transfer #1: Taxes

One of the biggest wealth transfers in our lives is taxes, the largest being income tax. Income tax creates large wealth transfers throughout our lifetime. For example, assume for a moment you pay just $5,000.00 per year in federal income tax. Also, assume the amount you pay in taxes never increases over your lifetime (although that is very unlikely). Let’s also assume you pay that tax every year for the forty years you are in the work force. Just that tax alone will amount to $200,000.00 dollars, but that is just the beginning of this wealth transfer. If you didn’t have to send that money to the federal government, you could retain that money by saving or investing it somewhere, where it could grow for your benefit.

If you had been able to put that $5,000.00 per year into a 5% interest bearing account for the same forty years, the account would have $634,199 dollars in it. The point here is not to talk about tax strategies, but to help you understand just how significant this one wealth transfer is. The reality is, there are over 100 taxes that can affect our lives in one way or another. We may not be able to reduce or avoid all of them, but if we make an effort to identify the ones we can control, we greatly increase our ability to grow wealth.

Wealth Transfer #2: Financing

In this example we will use the purchase of an automobile.

For many people, their primary means of acquiring suitable transportation is to finance a vehicle. Financing makes it easier to fit the payments into our budget, rather than making a large cash outlay.

The thought process that needs to be understood is the same as with taxes. For example, if you were to purchase a vehicle for $30,000 and financed that amount at 6% for 60 months, your monthly payment would be about $577. Over the next 60 months, you would send the bank or finance company $34, 226.

The amount of interest over 6o months was $4,620. That means that not only are you not getting the $34,620 back, you also lose out on all the interest you might have earned on that money over your lifetime! Had you not made monthly payments of $577 towards that loan, and instead were to save that amount every month for the next 5 years at 5% interest, you would have $39,403.

Now, here is the rest of this wealth transfer story.

At the end of 5 years, you could have had $39,403. Continuing to invest those dollars in a 5% account after 10 years (taxes excluded) you would have $64,183. In ten more years, it could have grown to $104,548.

In other words, this wealth transfer could be robbing you of a very substantial amount of money. This example only illustrates the wealth transfer associated with just one car! Most of us purchase multiple cars in our lifetime! It is also important to note that even paying cash carries with it a significant lost opportunity cost.

Wealth Transfer #3: Consumer Debt

The next major wealth transfer is consumer debt. This transfer comes in form of credit cards, home equity lines and all the various ways we finance our lifestyle.

Consumer debt includes items we tend to use our credit cards on, such as: clothing, golf clubs, travel, vacations, furniture, appliances, computers, etc. Items we should be paying cash for instead are financed through debt on a credit card. This debt adds up fast without us knowing how it happened.

Home Equity lines generally start out financing home remodeling or repair, but many times end up being used to consolidate our consumer debt. As with the purchase of a car, this wealth transfer can be very significant and includes the actual purchase price as well as the interest you are being charged.

Once again, the wealth transfer doesn’t stop there; the money that you use to repay consumer debt is lost to you forever! It will never be available to earn interest for you, it will never grow and compound over time for your benefit and enjoyment! This wealth transfer is perhaps the greatest roadblock to us reaching our financial potential if we cannot get it under control.

Wealth Transfer #4: Inflation

Inflation is a very unique wealth transfer. Most of the time, we don’t even realize its impact in our lives. Some people have gone so far as to call inflation the “Stealth Tax”, because it sneaks up on us over time, and is created by our Government’s monetary policies.

Inflation makes our dollar worth less over time, meaning that each year it takes more dollars to buy the same amount of goods we want and need. At an inflation rate of 3.5% over an average working lifetime of 40 years our cost of living will quadruple.

To help you understand just what that means in actual dollars, a 25 year old today that would like to retire in 40 years with a $100,000 per year income would actually need $400,000 to buy what $100,000 would today. While that may seem unbelievable, anyone who has been around for 40 years has experienced it firsthand! 40 years ago gasoline was less than .40 cents per gallon. A brand new Volkswagen beetle was around $2,000.00. The cost of a new home was $28,000.00. A dozen eggs were .50 cents, and a first class stamp was .08 cents!

These are just a few examples, there are many more. If we want to offset the effects of inflation, we will need to understand how to reduce or eliminate as many wealth transfers in our lives as possible so we can accumulate those dollars for our use and enjoyment.

After reading this you can see that a wealth transfer is any transaction or process by which our ability to build or preserve wealth is diminished. Unless we are diligent in identifying and reducing their impact, wealth transfers can permanently damage our financial lives. Wealth transfers come in many forms, some of which are very easy to identify while others are hidden from our direct view.

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