There is lots of talk about “Tax Reform” in Washington DC. If you can ignore the rhetoric and wade through the proposals, then you would see that tax cuts can help boost growth. However, that boost will be temporary.
In the same process, the tax savings will increase your net after-tax income. The increase in take-home cash can either be temporary like tax cuts or become permanent.
Spending is the crucial element to balancing the budget if you’re the USA or creating net worth for individuals and families.
For the USA, without cutting spending, faster economic growth can’t be sustained, and eventually, politicians will push tax rates back up in an attempt to pay the tab. Tax cuts are never “permanent” unless spending is contained. Over recent decades, the US has never balanced its budget when spending was greater than 19.5% of GDP. Spending under the proposed tax plan is forecast at 20.5% of GDP according to FirstTrust Economics. As a result, unless tax cuts boost the economic growth rate high enough above the growth rate of spending, tax cuts will not have a long-term impact on GDP and living standards
Living Paycheck to Paycheck on $100,000
There’s something about the figure “$100,000” that just has a magical ring to it. Since the 1980s, a $100,000 income has been a benchmark of financial success. It used to buy a nice house in a posh neighborhood, two cars in the driveway, family vacations, college tuition for the kids and a fair level of luxuries.
That was the 1980’s today there is a new financial phenomenon spreading like the flu on a crowded NY Subway in January. There is a growing population of people between the ages of 30 to 50 who make more than $100,000 per year and are literally living paycheck to paycheck. I call it the $100K & Broke Club.
A report from earlier this year found that 43 percent of Americans don’t have enough money saved up to weather a financial emergency. In other words, 127.5 million people are one mishap away from joining the ranks of the 46 million Americans living below the poverty line. (source: huffingtonpost.com)
The common thread with the proposed “Tax Cuts” is that neither the USA nor the “$100K & Broke Club” know how to contain spending.
If you want to grow your net worth, then understanding and implementing the simple formula is required.
How do you calculate net worth?
That is an easy equation.
Total assets less liabilities equal net worth.
How do you grow net worth?
An increase in the difficulty of the formula and the implementation.
Income received minus spending minus increase in debt plus the decrease in debt plus investment gains less investment losses equal the increase in your net worth.
A real example of a couple we work with on taxes and investments from a conversation in February 2017.
Michael: What do you want to set for a Net Worth Goal 12 months from today? Based on your Blueleaf Weekly Net Worth Report, your current net worth is $450,000.
Her: How about $500,000. That’s over 10%
Michael: That’s lower than what I think you are headed towards. Let me explain. Currently, you are taking the following steps:
$18,500 into his 401(k) – plus company match 3%
$12,500 into her SIMPLE IRA plus company match 3%
$2,000 per month on principal mortgage debt reduction – annual $24,000
$500 per month car payment – annual $6,000
$500 per month in 529 College Savings – annual $6,000
$1,000 monthly to investment savings – annual $12,000
That is a total increase in your net worth of $79,000 plus the company match before any investment gains or losses.
Her: You are right, we need to set a higher goal.
After discussion, the December 2017 goal was set at $550,000
Ready to review 2017 and set your December 2018 goals?
Give us a call and we can set up your weekly Blueleaf Net Worth Service and establish a goal that gets you moving forward.
Whether your goal is $1,000,000 or to get out of debt, you need an accountability partner; Tannery & Company and our client service technology – Blueleaf Net Worth Weekly report. Add a goal and you have taken the first step towards growing your net worth. Congratulations!
Now if we could just get Congress to understand this Net Worth concept.
It is going to be a taco soup, cornbread and college football kind of weekend but first a run on the Katy Trail to start Saturday morning at 8:00 am, who wants to join?
Michael Tannery CPA, CDFA® AIF®
Be A Financial Olympian