Here are a few options to pay for a new auto over a 5 year period. Assume a $50,000 purchase price, $0 down payment and a finance charge of 2.9%. Payments will be about $896 per month, ($10, 752 per year), or a total pay back over 5 years of $53,760.
1. Traditional “pay as you go”. Most people when they pay off the “old car” simply take that monthly payment and spend it, rather than setting those payments aside for a down payment on the new vehicle. Therefore, they will have to take a monthly amount from their paycheck of $896 per month or $10, 752 per year ($53,760 over 5 years) to make the purchase. If they lose their job . . . well . . . good luck.
Total “Cost” using this route will be $53,760
2. Another approach is if people have $50,000 in liquid assets they take often all the money and pay cash for the auto. Thus, they are using all of their cash to purchase a depreciating asset. Total “cost” this way is $50,000.
3. A third route. Even if they have the $50,000 in cash in a “bank account” (at a ½ of 1% interest rate) they would rather preserve their cash and pay the monthly payment of $896 (see #1). After 5 years they will have earnings from the bank account of about $1,275. Thus their “cost” will be $53,760 in payments less the $1,275 interest earned or a net cost of $52,485.
Before I share with you an “outside the box” approach, please answer the following question, “If you owned a business and could hire a person for $29,000 per year, and, that person earned for you in your business $70,000 per year . . . how many people would you hire?” As many as possible, right? Move the decimal points in example #4 to under the question I just asked you. It is known as arbitrage.
4. Outside the box approach. What am I referring to? Say you have the $50,000. As stated, it cost you 2.9% to finance the care. You could place your cash monies into a program that produces a 7% effective yield. This program will make payments to you on a monthly basis and is structured over 5 year period. All you would need to do is place $45,700 into this program. It would payout $896 per month each month for 5 years. Set up a special holding account where these monies are electronically deposited and have the finance company electronically draft the $896 out monthly. Thus, the “cost” to you will only be the $45,700 you placed in this program. So, let’s look at the cost options in summary.
The #4 option will reduce your cost of ownership by almost 10%
Obama in his latest budget again has presented a requirement that your 401(k)/IRA monies be invested only into Government T-Bills and Bonds. Remember his “Executive Action” pen has been very hot as of late with no reason to cool it down. Since Congress is now a Republican Controlled House and Senate, and his inability to compromise on anything, watch out.
To people that I have spoken to about this their whole reaction is, “Well, if he does this I will just pull all of my money out and do something else.” Be careful! Included in his plan is a 100%, yes, 100% early withdrawal penalty. So the “king” will get hold of your money one way or the other.
I am baffled as there have been countless articles and links to my webinars about far better alternatives to 401(k)/IRA plans yet people continue to “follow the crowd” into destructive retirement behavior. You need to be educated now. Do not wait. Remember procrastination is the number one reason for financial failure! Contact us immediately at (713) 871-5919 and we will begin to enlighten you on a better approach to retirement that is away from the clutches of Government. Do not be guilty of closing the barn door after the horse leaves.
For those that think they are going to beat the 100% penalty tax by withdrawing now – be careful. All recent legislation has been effective back to the date it was proposed and NOT the day it was signed. Yikes!
Now for those that choose doing the “same old – same old” and parade up to the executioner’s platform here are the retirement plan limits for 2015:
Contributions for 401(k), 403(b) & 457 plans . . . . . . . . . . . . up to $18,000 per year
Those 50 years & older can catch up contributions . . . . . . . $6,000 per year
Phase out deductions for those contributing
to IRAs and already covered by work place
retirement plans are tax payers with MAGI of . . . . . . . . . . . .$61,000-$71,000
Why waste time with these programs when there are better alternatives with no limits on contributions and deductibility.
The media has been excited reporting that the Nasdaq has now surpassed the old record high 5,000 level as last seen in the year 2000.
But, investors are not even whole. Using a modest inflation rate over the past 15 years of only 2.2%, then, the Nasdaq has to be at 7,000 for investors to be even. Just think, having to hold a position for 15 years just to be even.
Let’s now look at the danger signs of the present market highs. Nobel laureate Robert Shiller commented on the CAPE ratio (which measures current S&P 500 prices against the index’s average inflation adjusted earnings over previous 10 years) extreme reading. The current reading is at about 27.5 which compares with just 15 at the market bottom in 2009. The only other times the CAPE has been higher, since the 19th century, was on the eve of the 1929 crash and in 2000 at the peak of the tech stock mania. Look out below.
Most people do not connect the dots in life especially when it comes to economics. A politician with a “gift for gab” can convince people that the benefits of a new program can be helpful to them today. Few people actually think through the ramifications. Liberal “progressive” socialistic thinking has decimated every country in the world that communism ever touched. In the U.S. we have had over 50 years of liberal progressive policies slowly pushed into our lives which has created countless problems. The majority of people that view today’s problems just think that these problems were created out of thin air.
Martin Conrad wrote an insightful piece in the March 23, 2015 issue of Barron’s, 50 Years of “Progress”. I urge you to read this and reflect on what these policies have done in your life. The next time a “progressive” politician proposes a new “no cost to you but a life time benefit for you”, well you may vote differently. My favorite line is: “Be careful of the person who vows to take care of you, for soon your care taker will be your jailer”.
Proactive tax planning consists of taking steps now to potentially reduce taxes in the future. Reactive tax planning consists of evaluating past actions and calculating the amount of tax due.
For people approaching retirement or who are in their early retirement years, proactive tax-planning opportunities abound. One strategy sometimes used is to take advantage of the provision of the income tax law which provides that long-term capital gains are taxed at 0 percent if the taxpayer is in the 15 percent or lower income tax bracket. For a married couple filing jointly, the 15 percent tax bracket in 2015 ends at $74,901. Moreover, personal exemptions in the amount of $7,800 are available, as is a standard deduction of $12,600 plus an additional $1,250 for non-itemizers who are over the age of 65.
Why is all of the foregoing important? Because a married couple, both of whom are over the age of 65, having no other income, can generate long-term capital gains of $97, 801 without paying a single penny of federal income tax! This strategy is sometimes used by people who have engaged in tax diversification planning during their working years to generate tax-free retirement cash flow prior to commencement of Social Security benefits at age 70 and required minimum distributions from IRAs and 401k plans at age 70.5.