Article written by Advanced Retirement Strategies, LLC
Essential Economic Principles for Keeping More of Your Income and Growth
What drives your financial decisions? Would they stand up to an economics litmus test? Virtually thousands of financial reviews have shown that financial decisions are predominantly based on satisfying a want or need by looking at the “features” of a product or service being offered. Economic principles are largely absent. Yet, when the math is done on performance, “principles” crush “features” while simultaneously putting a gator filled moat of protection around the financial castle. Here are three essentials.
1. Every individual, family, and business has a “personal” economy of its own.
It consists of every financial product or service being used: from debt, to savings and growth, to protection. Some earn money, some cost money, and many affect taxes. The real “bottom line”, how well one is really doing, is determined by the combined net results of all the parts.
Application: The financial pieces in most “personal” economies are thrown together like a junk drawer, with little coordination and no positive interaction -a car loan here, a 401k there, some savings, some life insurance, some credit card balance, some car insurance, etc. The resulting conflict creates unnecessary costs that diminish or wipe out gains. Proper coordination and integration inside the personal economy eliminates or minimizes certain costs, called wealth transfers, which include: interest paid, interest lost (not earned when it could be earned), income and capital gains tax, and certain unnecessary insurance costs. That money can be saved instead of lost. Total financial performance is then exponentially improved with no additional outlay and with reduced risk.
2. Lost Opportunity Cost.
This principle has a powerful impact on wealth. When we spend a dollar we think it cost a dollar.
Not so. Along with the spent dollar, we give up all the growth that dollar could produce for us for the rest of our lives: each dollar times 2, times 4, times 8. More? The multiple only depends on how long we measure and what rate of return we can earn. Multiply every dollar of avoidable wealth transfers by whatever multiple may apply and that is the lost wealth you suffer from lost opportunity cost. For most, it’s more than their realized wealth -whatever was kept and accumulated.
Application: Coordinating and integrating the financial pieces in the “personal” economy will save taxes, reduce or eliminate interest paid, reduce or eliminate the causes of interest lost, and save unnecessary insurance costs. For most, what is freed up is greater than what is being saved. These freed up dollars can then be saved and compounded, turning what would be opportunity cost into opportunity gain -with increased wealth equaling the full spread from the negative to the positive. Since the principle works within present cash flow, there is no added cost to enjoy the benefits of reversing lost opportunity costs into gains.
3. Velocity of Money.
When two or more uses of a dollar -two or more uses of the same dollar at the same time -can be achieved, the value of that dollar is multiplied. That is the “secret” to the profitability of banks. You could do this too within your “personal” economy, but the financial industry will not teach this since two parties cannot enjoy velocity with the same dollars at the same time; and, they won’t voluntarily give away the key to their profits: control over your money.
Application: Attaining velocity potential begins with the concept of “liquidity, use, and control” of your own money. This is a natural result of coordinating and integrating the pieces within your “personal” economy. It is mostly a simple matter of learning to recognize the potential that is there; that has been there all along; but, has been unseen. Conclusion: Economics is like gravity. Defy either, even unknowingly, and, someday, sooner or later, the unavoidable price must be paid. Conversely, knowledgeably applying a few sound economic principles reduces taxes and other financial costs. The freed up cash flow can then be used to increase wealth and overall financial security in an atmosphere of reduced financial fears and stress.
Advanced Retirement Strategies, LLC
1720 Oak Village Blvd. Suite 200-B
Arlington, Texas 76017 817.200.4777 www.forars.com