Effective estate planning requires development of a strategy to accumulate capital.
Financial security cannot be achieved through income from our work alone. We only obtain financial security when we are able to quit working and still have sufficient income to live the lives we want to live. Obviously, only if we have obtained capital that throws off income to us can we survive without continued work. The caital could be stocks, bonds, a business, etc.
Income is essential of course, but it is a relatively weak means of achieving financial security and independence. The reason is that income is attacked from all sides. The more you make of it, the higher the tax rate is that you pay, draining off an ever higher percentage of the income.
Even more damaging to income is what we do with it when we get it. We find ways to spend it. And, again, the more we make of it, the more we spend it. Finally, over time, inflation eats away at the real value of income. The money you make is actually worth less and less because things are more and more expensive.
So, as discussed at Estate Planning 101, building up capital is the key to achieving financial independence. Capital will tend to grow along with inflation. It normally will only be taxed when sold (if at all); so it's value can grow and grow without being taxed each year. And, we are much less likely to spend capital since it is not liquid.
For all of these reasons, effective estate planning requires that we focus like a laser beam on obtaining and building capital assets.
The difficulty, of course, with accumulating capital is that it requires us to defer immediate gratification in the pursuit of future goals. An easy example is choosing a regular, old fashioned, TV; rather than the latest plasma screen in order to divert the money saved into your IRA.
But, that’s an easy example. Many of you (me included) are saying, “no, it’s not.” But, compared to other choices we have to make – that one is easy.
Most people truly want to do the right thing. They truly want to make good decisions with their money. They want to invest. They don't want to waste their money. The problem is there seems to be no money left over after meeting their current needs. This seems true for people of all income levels -- low, medium and high.
The reason is that the more money we make, the more things we feel we need to spend money on.
In the modern culture we live in, our self-worth is defined by the things we own. The car we drive; the house we live in; the vacations we take; the concerts we go to.... This is how success is defined. So, we face an incidious pressure to spend all that we have -- and often more than we have.
This has resulted in most Americans (in particular) accumulating enormous debts. Of course, our government does the same thing. Not only are most governments huge debtors, but in the U.S. we recently saw the government borrow more money to give Americans tax rebates. And what did the government tell the people to do with the borrowed money? "Go spend it" of course -- to "stimulate" the economy.
I don't mean to stray into politics, but it is relevant to demonstrate how saturated our culture is with the idea of borrowing and spending all we can for immediate gratification.
Our standard of living is higher than ever, yet our savings are lower than ever.
Effective estate planning requires that we act differently than most people and make the tough choices required to defer immediate gratification in order to invest for our future.
We need to be more like Sam Walton and Warren Buffett and less like ... well, you know....
OK, so what now?
Never fear. We won't leave you hanging. The key to achieving your financial goals, and developing a great estate plan, is establishing your objectives and acquiring the determination to carry out your plan. You can read about that at Help With Estate Planning.
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