Mortgage Law, Mortgage Modification, and Foreclosure: How Money Works Part II
So why am I trying to explain the money game? We are a law firm doing Mortgage Modification, Debt Settlements, Bankruptcy, and general consumer advocacy, right? I'm trying to stress the importance of getting out of debt and making your money work for you. I am going to give you an example of how devastating taxes can be on your investment earnings. This is going to be a simple example to show you the importance of getting out of debt at any cost and putting any amount of money you can into a tax free investment vehicle. For simplicity's sake let's say that you take a Dollar and double it every year for 20 years. How much do you think you will have in 20 years? Let's see...
Dollars--------Year
1-----------------2
2-----------------4
3-----------------8
4-----------------16
5-----------------32
6-----------------64
7-----------------128
8-----------------256
9-----------------512
10---------------1,024
11---------------2,048
12---------------4,096
13---------------8,192
14---------------16,384
15---------------32,726
16---------------65,536
17---------------131,072
18---------------262,144
19---------------524,288
20---------------1,048,576
Now who guessed you would have over a million dollars? Let me show you what happens when your money gets taxed every year after it doubles. I am going to use a 28% tax rate. So you start with a dollar. You double that dollar in year one. That means you earned a dollar. The government is going to tax the dollar you earned at 28%. That reduces your earnings by 28 cents in year one ($1.00 * 28% = .28 cents.....$1 - .28 cents = .72 cents). That plus your original dollar gives you $1.72. So in year two you are going to double your money and earn another $1.72 for a total of $3.44; but the government taxes your $1.72 at 28% leaving you to only add $1.24 and you have $2.96. Repeat this process for twenty years and guess right now how much money you think will be there in 20 years...
Dollar--------Year
1-----------------1.72
2-----------------2.96
3-----------------5.09
4-----------------8.75
5-----------------15.05
6-----------------25.89
7-----------------44.53
8-----------------76.60
9-----------------131.75
10---------------226.61
11---------------389.77
12---------------670.41
13---------------1,153.11
14---------------1,983.34
15---------------3,411.35
16---------------5,867.53
17---------------10,092.15
18---------------17,358.49
19---------------29,856.61
20---------------51,353.37
Now, all that money you are paying towards your credit cards and other debt is post tax dollars!! That means again, your money is working against you. See why it is so important to get out of debt by any means necessary? Debt Settlement, Bankruptcy, whatever. You can't depend on Social Security or the government to take care of your retirement. You must get out of debt and start saving in the highest interest rate accounts you can that are tax free! Next time I'll go over inflation and how that affects how much money you will need to plan on having in the future. Stay Tuned for part three.
