Most everyone would like to put away some money for themselves on a monthly basis, but generally, they really don’t know where to put it: where it’s secure, where they can get a reasonable rate of return, and also avoid taxes. This is exactly what we show people how to do. It doesn’t matter how much you make, it matters what you keep, and taxes will eat you alive if you’re not careful. There are two major financial battles you have to win, in order to maximize efficiency.
The first is the rate of return battle, and the second is the tax battle. You have to win both battles in order to maximize efficiency. I’d like to show you how to win the rate of return battle first, then we’ll talk about taxation...OK? I be asking you a few questions about your current situation? Is there a 401k, or other type of savings plan at work? Are you currently setting any money aside? What percent of your income do you think you should set aside or pay yourself?
OK, first off let’s talk about rate of return. Have you ever heard of the rule of 72?... It states that whatever interest rate you’re getting can be divided into the number 72, and it will tell you how many years it takes for your money to double,.. for example, if your interest rate is 6%, 6 goes into 72, 12 times,.. so if you had a hundred dollars in a savings account getting 6%, 12 years later it would be two hundred dollars,.. another twelve, 4 hundred, etc., your money is doubling every twelve years! Look at this though,.. at 12% your money doubles every 6 years, so it is very critical to get a good interest rate. In fact one percent could mean the difference of hundreds of thousands of dollars in the future.
Albert Einstein once said, 'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.'
Historically one of the areas where people have received a high rate of return is with professionally managed money accounts, or mutual funds, you know what mutual funds are? Virtually every 401K employee retirement plan in this country has gone to mutual funds.
Basically, a mutual fund is a pool of professionally managed money. They take the money you are putting aside on a monthly basis and pool it with a lot of other people’s money where they diversify and manage it carefully. Typically they put it into 3 general areas. A portion of it could be invested in government bonds. Many cautious investors use government bonds.
Another place they would invest a portion of the money in the stocks of various companies like Xerox, Coca-Cola, Nike, McDonalds, Wal-Mart, etc. The third place they may put a portion of the money is in fixed accounts, these accounts are usually not managed because they are guaranteed to have a certain interest rate for a specific period of time.
You’ve heard the old adage, ‘don’t put all your eggs in one basket’... That’s why they diversify within the mutual funds; if one stock doesn’t do well, it can be offset by better earnings from other companies. That’s one of the biggest advantages of putting money in a mutual fund. You get to diversify all the money going in. That’s something we couldn’t do on our own because we don’t have their huge volume of money or their knowledge of timing and expertise to do it.
To take this a step further many of these mutual fund companies have introduced indexed funds that use many different indices, for example the S&P 500 or the Dow Industrial Average allowing for an even more diversified cross section of an economy or a sector of it.
To take this even one more step further, in the last few decades insurance carriers have used these indices in designing the latest type of interest crediting for tax advantaged saving with no market risk, guaranteed not to go below zero in interest crediting when those in the market would typically lose ground...
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