Financial Independence (Getting to Point X)

A Comprehensive Tax-Smart Wealth Management Guide

John J. Vento

• Publisher: Wiley
• Year: 2018
• Print ISBN: 9781119510345
• eBook ISBN: 9781119510352
• Edition: 2
• Topic: Business
• Subtopic: Finance
• Index: Business

Discover how the Tax Cuts and Jobs Act of 2017 will change your journey to financial independence and what you need to do now to take advantage of the new law

Financial Independence (Getting to Point X) offers practical, time-tested advice for reaching your financial goals—whatever they may be. Whether you're recovering from debt, putting kids through college, planning for retirement, starting your own business, or just seeking a healthier financial outlook, this book shows you how to get it done. No platitudes or empty advice here—just a clear roadmap to your goals, based on the effective management of the 10 Key Wealth Management Issues that threaten to derail us all.

This new second edition has been updated to reflect President Trump's massive income tax changes. These historic changes will reduce the tax obligation of most Americans, but not all. This is the most significant tax reform in over 30 years, rendering old advice obsolete while opening new opportunities. This edition also includes a new chapter on becoming financially independent by starting your own business. Author John Vento knows exactly what these new laws entail, and this book puts his wisdom of experience to work for you to help you get on track to financial freedom.

Saving, budgeting, managing debt, minimizing taxes, and living within your means—all classic financial advice, but easier said than done, right? In this book, you'll find real, practical advice for actually doing it— to the extent that makes sense for you.

• Understand the enormous changes taking place in the federal income tax code
• Learn which financial strategies have become obsolete, and what new opportunities you should take advantage of
• Negotiate your way through the 10 Key Wealth Management Issues with expert advice
• Find out if you have what it takes to reach financial independence by starting your own business
• Follow a clear roadmap to financial independence, no matter how you define it

The goal is not perfection on all fronts, it's simply tailoring your journey to suit your destination. No unnecessary deprivation, no obsessive adjusting—simply paying attention to key issues may be enough, depending on your goal. Regulatory changes close some doors but open others, and opportunities still exist if you know where to look. Financial Independence (Getting to Point X) provides you with a roadmap to financial freedom, so that you can achieve your life goals and dreams.

CHAPTER 1
Committing to Living Within Your Means

There is no dignity quite so impressive, and no independence quite so important, as living within your means.

—Calvin Coolidge, 30th president of the United States

We all want to live the American Dream. Beginning with the earliest European settlers, Americans have sought the heights of success and prosperity for themselves and their children, and have believed firmly that we can achieve it, no matter our race, religion, nationality, or gender. All it takes is hard work and discipline.

The American Dream Becomes the American Nightmare

Our country was founded on the conviction that it was the land of opportunity and prosperity – that was the definition of the American Dream. In the early years of our country's existence, infinite real estate was available for the taking, a great boon for a basically agrarian society. If you wanted more land, all you had to do was pack up your wagon, travel farther west, and claim it. If you were willing to work hard, you could earn an honest living, rear and educate your children, and save for your family's future. These principles stood firm for almost two centuries.

Nevertheless, perhaps because of the decades of affluence that followed World War II, this land of “equal opportunity” turned into the land of “expected entitlements.” People came to believe that living beyond their means – usually on credit – was acceptable, and “living large” became the norm. Younger people no longer thought they needed to save for a down payment on a house, a new car, or a luxurious vacation. They could just put the costs on a credit card or take out a loan. Even professional financial institutions fed into this false sense of affluence, giving credit cards, large home mortgages, and home‐equity loans to people they knew full well could never pay them off. This distorted definition of the American Dream significantly contributed to the financial crisis of 2008 and turned this dream into a nightmare for many people. Although the road to recovery was a long and painful one since 2008, many people have since dug themselves out of this hole by following the very principles I have outlined in this book.

If my parents were able to come to a foreign land with only an eighth‐grade education, barely able to speak the language, and end up as millionaires, certainly anyone blessed with the education and opportunities available to most Americans today can become financially independent. Anyone can get to point X – the point at which you can support yourself and your family financially with your investments, not a salary. All it takes is knowledge of good financial practices and the discipline to carry them out.

Living Within Your Means: The Essential Step

The single most important step you must take to become financially independent is to commit to living within your means. This sounds obvious; this sounds easy. But believe me, it is not!

Amazingly, many people do not understand what “living within your means” actually implies! I believe that the definition of “living within your means” is living on less than your take‐home salary and any other resources you receive, such as income from an annuity or a trust. Living within your means does not mean existing from paycheck to paycheck. Living within your means does not mean living on credit or on loans. Living within your means does not mean turning to parents or friends to pay the tab when you cannot quite meet the rent or need to buy a new computer. It means not only figuring out how to pay for your needs and wants, but budgeting your income so that you still have a little money left over.

Paying Yourself First

In addition to living within your means, if you are ever going to get to point X, you must also save money. (You will ultimately need to invest this money productively, but I'll cover that in Chapter 9, “Managing Your Investments.”) I call this exercise paying yourself first. Therefore, “living within your means” includes not only such necessities as shelter, food, utilities, and clothing, but also payment into your personal savings. Ideally, that payment should be 10% or more of your gross pay. You may think that this is impossible, but once you get started, you will realize how easy it can be. And, of course, if you can afford more, by all means, put those funds in savings or invested assets.

The following is an example of how this could work and how this will help you achieve financial independence. If you are earning $52,000 a year, that is $1,000 a week gross income, and you are probably bringing home about $700 of that after taxes. If you pay yourself first by funding your 401(k) plan with 10% of your gross income, that is $100 per week (or $5,200 a year), which may earn a rate of return with compounding over the time invested. If you start saving that at age 21 and retire at age 65, you will have saved $228,800 over those 44 years. Also, that $100 you save affects your take‐home pay by only $70 (assuming a 30% tax rate), so you will be taxed on $900 instead of $1,000 per week, which means you will bring home $630 instead of $700 per week. Yes, that is $70 less money you have to spend on your needs and wants, but you get the full benefit of $100 saved. Assuming you can earn 7% per year on your 401(k) investments over the 44‐year period,¹ you may be able to accumulate $1,383,829 by the age of 65. I believe that saving now is a small price to pay for financial independence in the future. I do not know any easier way to achieve financial independence. By the way, this does not even factor in employer matching dollars, which can significantly increase your savings.

“Paying yourself first” must be as much a necessity to you as the roof over your head, the food on your table, and the clothes on your back. It is not a luxury; it is not something you will start doing next week or next month or next year, but it is an essential expense that you must pay now.

Know the Difference Between What You Need and What You Want

If you asked most people to define the necessities (or essentials) of life, they would probably say: shelter, food, and clothing. I have just added another essential to that list: saving money on a regular basis, or paying yourself first. However, defining what is essential (and not essential) in terms of shelter, food, clothing, and savings requires some additional attention:

• Shelter should not be the biggest house in the best neighborhood decorated with the most expensive furniture (not essential); instead, shelter means a house or apartment that gives comfort and safety to your family, which you can pay for and maintain with the money you have available (essential).
• Providing food for yourself and your family does not mean eating out every night at the fanciest restaurants or even ordering in from the local pizzeria or Chinese restaurant (not essential), but it means preparing healthy meals from foods paid for within a food budget you have established (essential).
• Clothing does not mean buying the latest $200 jeans or other overpriced designer apparel (not essential), but it means planning for your family's clothing needs based on a well‐thought‐out budget (essential).
• In terms of saving money, you need not try to sock away 25% of your salary, especially if money is tight (not essential); you simply need to get in the habit of saving 10% or more of your gross pay (essential).

In other words, you need to begin to discriminate between the nonessentials and the essentials, your wants and your needs.

In working with the finances of thousands of people over the past 30 years, I have noticed one common trait in everyone who ultimately achieves financial independence: They experience anxiety every time they are faced with the decision to make a purchase that is not essential. Whet...

Table of contents

• Cover
• Table of Contents
• Foreword by Todd Mackay
• Preface: Living the American Dream
• Acknowledgments
• Introduction: Getting to Point X
• Chapter 1: Committing to Living Within Your Means
• Chapter 2: Understanding Taxes
• Chapter 3: Determining Your Financial Position
• Chapter 4: Managing Debt
• Chapter 5: Insuring Your Health and Life
• Chapter 6: Protecting Your Property with Insurance
• Chapter 7: Paying for College
• Chapter 8: Planning for Retirement
• Chapter 9: Managing Your Investments
• Chapter 10: Preserving Your Estate
• Chapter 11: Starting Your Own Business
• Chapter 12: The Time Value of Money
• Appendix A: Selecting a Trusted Advisor
• Appendix B: 101 Ways to Save $20 or More per Week
• Appendix C: Basic Concepts and Definitions of Various Types of Taxes
• About the Author
• Index
• End User License Agreement