Independent Income: Precious Liquid
“Mama may have, Papa may have
But God bless the child that’s got his own.”
All life needs water, some need an ocean, others make do with remnant desert moisture. All members of human society need income. For some of the few remaining untouched indigenous people, income may be the rain that falls from the sky and the fruit that falls from the trees. For everyone else, it is a number printed on paper, projected on a screen, or committed to memory. That number often changes; the flow may be a flood, and then turn into a trickle.
According to the Bureau of Labor Statistics, late baby-boomers (born 1957-64) changed jobs twelve times by age 50. That’s a new job every 2½ years. Workers in the gig economy are now estimated to be over a third of the workforce. Income for some is as steady as a major river running to the ocean. For others, the rain only comes in seasonal monsoons that must be enough for an entire year.
“The Lord’ll wait ‘til Pickin’ Time.”
Income is the precious liquid that sustains our financial survival, health and wealth. Whether income is as steady as the Mississippi or dependent upon a seasonal monsoon, it must be protected and collected for times when access to the river is cut off or when the storms do not come.
An income tax refund is a return of a taxpayer’s money. The U. S. Treasury pays back no-interest loans every spring via income tax refunds. Automatic income tax withholding reduces the amount of income available for savings and expenses. Savings pay interest. Debt payments make significant improvements to personal finances. Why lend money to the government for no financial benefit? The Internal Revenue Service (IRS) recommends a “paycheck checkup” in order “to have less tax withheld up front and receive more in your paychecks.”
Certain deductions from salaries or wages cannot be reduced or eliminated. Some earnings must be withheld for income tax, Federal Insurance Contributions Act (FICA) tax, and employer-sponsored health insurance payments. But take a look at each deduction in terms of the benefits of continuing versus consequences of reduction or elimination.
Any employee, whose employer is willing to match contributions to an employer-sponsored retirement plan, should contribute at least the percentage of the match. That is a 100% return on investment and, if at all possible, should not be passed up.
Earned income can be electronically deposited into a savings account and then transferred to checking as needed. Instead of money being withheld from income, the process can be reversed, and money can be withheld from expenses. Banks and lending institutions make money on the float: the deposits they hold and use and on which they pay no interest. The IRS does the same. Reverse the float, withhold payment and control more income as savings for a longer time.
Like water carried from the river or rain channeled into storage, all income collected should first be safely stored, then dispersed only as needed. Time is money. Money held over time earns. Savings and investments allow for longer-term expense reductions. Owning appreciating assets is financially productive, renting or leasing is not. Paying bills in advance is only appropriate if that advance payment allows for a reduction of total expense over time. When and where cash flows out of savings and to expenses determines how much is left over.
Often the most effective way to save is to pay down debt because debt charges higher interest rates than savings or fixed income earn. It is important to have liquid savings for emergencies. But for most efficient financial results, the choice should be easy between a deposit to a low single-digit savings account, and a payment to revolving debt charging an interest rate in the high teens. Overpayments to revolving, unsecured debt like credit cards can be too easily corrected with another swipe of the card. Debt payments are future savings of interest expense. They build the left side, the asset side of a personal balance sheet, reduce the liabilities of the right side and result in an increased net worth.
“I get my hands on a dollar again,
I’m gonna hang on to it till that eagle grins.”
But sometimes the most important things to know about finance are what not to do. Don’t carry a bucket with a hole in it, don’t dirty the stored water, don’t spill. An aged, sage and financially prudent writer recently listed 16 money wasters for everyone to avoid.
Credit card balances are bucket holes that leak interest faster than savings or investments can earn them. Paying off credit card debt most effectively and efficiently reduces outflow to future interest expense and slows the compounding effect of charged interest rates. Paying off credit card debt reduces cash outflow. The bucket fills faster and holds more for longer.
Apart from physical or emotional comfort, a particular purchase might generate, and in a strictly financial sense, expenses can be prioritized by financial benefits versus consequences of reduction or elimination of that expense. While wearing a green eyeshade and wielding a very sharp pencil, savings, investments and expenses can be ranked by percentage rates of interest charges forgone versus interest earned.
“God helps those who help themselves.”
All money earned is control of the earner until it isn’t. Some deductions from cash inflow can be reduced to make the money bucket fill faster. Some current payments may reduce future outflows. Carry home now, as much money as possible, and hold onto it as long as possible. Save it and use it to increase future income or reduce future expenses. All life needs water; all humans need income. Protect and preserve the precious liquid.
Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC
This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any strategy or investment product, or as investing advice of any kind.