Fair to say we've all heard of the International Bestseller Rich Dad Poor Dad, but fairer to say we haven't a clue who the Rich Dad is or how he really made his money. We don't because the rich tend to keep their means to great financial wealth to themselves and that just sickens me to be honest. I was recently in an affluent community in South Florida and one of the wealthiest guys there made his NFL neighbors pale in regards to wealth as he had just closed an international business deal netting him $30 million dollars but I don't have a clue how. Not saying that he owed anyone an explanation and he doesn't but just in general I've been around enough wealthy folk to say they tend to be mysterious when it comes to their wealth and failures sustained along the way. They make it seem as if they've had it great their entire lives. I've tried not to follow that path.

In a recent conversation with a friend, he mentioned to me that he'd fell into a financial slump. When I inquired further, he said that every pay period for the last several months, he's come up short or only had $50 to $60 left. "If I only had about $2000, I'd be straight and could breathe a little bit." I understood his frustrations as we have all been there but then asked him was he taking advantage of his 401K contributions. He said, "Sadly I am not and I know I should." I asked why wasn't he and he responded that he didn't have the $3-400 a month to put in. It was at that very moment, I knew he was ill-informed. Let me give you a quick run-down on how I spent the next five minutes solving his problem.

This individual made 80k a year which is twice the national average for a family of four. His taxable income after deductions and exemptions which we know 401K was not a part of was 80,000 - 20,000 or 25% Federal tax, 3,200 or 4% state tax, 3,360 or 4.2 SSN, 1,160 or 1.45 for Medicare which totals $27,720 or nearly 35% of his salary is gone. That leaves $52,280/12 or $4356 a month. He said after all the current bills there was absolutely no room for a 401K contribution. I said let's try this again.

Since his employer matched contributions 100% for the first 3% of his salary, an advantageous approach would have added $2400 (80k x .03) a year into his 401K. His taxable income now starts at 77,600 since the contributions are tax free. Instead of the former tax equation, this new one follows: 77,600 - 19,400 Federal tax, 3,104 state tax, 3259 SSN and 1125 for Medicare for a total of $26,888. You may notice the 832 (27,720-26,888) difference between the scenarios and say big deal. Well actually it's a huge deal. For starters, the thought that he would have to contribute $3-400 a month is totally off. The 401K contributions equation leaves 4,426 (53,112/12) a month which isn't even a $75 monthly difference.

The $2400 a year he would have put in his 401k would be matched by the company and at the end of two years since he's been on that job, he'd have over $10,000! The stock market generally returns 10-12% but let's just say it's only 5% for the last two years since we're in a recession which still means over $5,040 each year. I can assure you that a person who continues to find themselves with $50 at the end of the pay period is a person who probably does a lot of debit card swiping and little to no check book balancing and probably gets occasional overdraft fees. That means stronger balancing will ensure that they have more money at the end of the month because it will highlight inefficiencies like too many $4 trips to the frappolattay-mochachi-sweet hot drink hangout. I'm not suggesting that this person could have borrowed the $2000 they needed from their 401K but at the very least they could have seen it in an account whereas today it was nowhere to be found. 

In addition, this person had federal student loans which I suggested that they may want to defer for one year to make a temporary adjustment which gives them an immediate $200 a month. I've stated many times that most people don't earn a dime until June and people look at me like a deer in the headlights. Look back briefly at the $27,000 amount of taxes he is paying. Is that not 6 months of take home pay eaten up by taxes? Oh and incidentally, if he does his plan for the next 30 years he will have $0 in his retirement account, if he does my plan for the next 30 years he'll have over $500,000.  The old adage says "If you want what you have do what you do, if you want what I have, do what I do."  It's perfectly fine to be a millionaire but being worth half a million ain't bad either.  I know too many numbers in one message can rack a person's brain so we'll stop there but for further info, don't forget great sources such as Accountable$  with Thomas Harrelson.

With the middle class being squeezed, people will be forced to make a choice. Either fall to the bottom and be amongst the poor or claw to the top and be amongst the rich. Financial literacy says you can squeeze blood from a turnip when you know what to do. It took me five minutes to give this person that solution but once he nails these principles he'll begin generational wealth and that to me is payback for a lifetime.  Years ago, I used to give workshops on rocket science literally, but this stuff is hardly jet propulsion. I know the rich tend to pay less in taxes but until you get there, you have to control the things you can control. Take emotions out of your wallet and you can make reaching the moon a reality but I will be the first to admit that it's not easy if you're influenced by the Macy's 40% off sale. I could go on and on but some of us need to pull out the ole check book and account for that $50 we swiped at the gas station this morning, ignored the receipt and are unaware that there is only $48 in the account.

We will be hosting the Investing in Education forum with the ARM FOUNDATION on August 6, 2011 at 6 pm on the Coast Guard base in Alexandria, VA and while our interests are getting students prepared for higher education, it never hurts to carve out a side bar for money matters. Should you want to discuss more or come out to a great event or heck, just get out of the house for a minute, come on out and join us.

Anthony "Von" Mickle

The Investment Forum

-A knowledge of wealth, a wealth of knowledge