Today’s show is brought to you from Jon White, my pal and comrade from JW’s Financial Coaching. He is all about giving you a new perspective on your money by encouraging you to focus on improving YOUR economy, which is the only economy you can control. Today he gives us…
Four new perspectives on money
When it comes to making changes in how we handle our money, quite often all we need is a new perspective or different way to look at how to do things. That’s because we take a lot of our advice or beliefs on how to handle money from the commercials we watch on TV or the credit card offers we get daily in our mailbox. But once we get a new perspective on how money really does work, it opens up a whole new avenue of ideas, beliefs, and actions.
The Mortgage Interest Deduction
One of the biggest ways that mortgages are sold to consumers today is that you can deduct the mortgage interest you pay from your income taxes. While that is true, often the tax savings from having a mortgage are overstated and it’s definitely NOT a reason to take out a mortgage in the first place or to keep your mortgage.
A tax deduction is not the same as a credit. A deduction allows you to subtract that amount from your income so you don’t pay taxes on it. So for example, if you paid $5,000 in interest and you made $105,000, you will pay taxes on $100,000 ($105,000 less $5,000 in mortgage interest.) So if you are in a 25% tax bracket you will save $1,250 in taxes, not $5,000.
In addition, you can deduct your mortgage interest only if you itemize your taxes. Everyone gets to take what the IRS calls a standard deduction ($6,100 for singles and $12,200 for married couples in 2013). But the IRS also allows you to deduct things such as mortgage interest, property taxes, charitable contributions, and state and local taxes, among other things. If all those add up to be greater than the standard deduction you can deduct that. But only 30% of income tax forms itemize, so for most of us the mortgage deduction saves us nothing on taxes!
If you do have a mortgage and are paying interest, take the deduction if you qualify, but don’t stay in debt just for the tax break. It’s a really bad idea, and it actually might not be any benefit to you at all.
There is a myth out there that car payments are a way of life and that only the upper class can live without them. We believe this myth because that is what we are taught and told so believe it to be fact. For example, how many times have you heard yourself or someone else rationalize a car payment by saying they were “forced” to take one out due to a car breaking down or other emergency. The truth is that we are never forced to take out debt; we choose to do it. A lot of times we choose a car payment for the convenience of not having to drive around town or drive a car that might raise a few eyebrows when you stop at the light.
But living without a car payment is possible; Jon and his wife do it and thousands of other families in our situation do it as well. It is isn’t always fun driving around in an older car with a lot of miles on it, but it is worth it.
Why is that you might ask? It is because a car payment costs us a lot more than just the monthly payment. It would cost Jon’s family the ability for his wife to stay home with their son. It would cost them their ability to save for retirement. It would also cost them the ability to save for their child’s college because instead of funding his 529 plan they would be making a payment to Toyota, Honda, or whoever they borrowed the money from. It would also add a lot of risk to their lives as it would add another monthly obligation in their budget.
I know a lot of us can’t imagine not having a car payment and paying for our next car in cash, especially if you have a car payment right now. The hardest one to do is your first one, but once you accomplish that you’ll be on your way as instead of paying a car payment to the manufacturer you’ll instead be paying one to yourself!
Money is amoral
So often we get caught up in the good things and bad things you can do with money that we forget that money in and of itself is amoral. It is what you do with it that makes it either good or bad.
This is important to remember because if you believe that having money is wrong or that those who have money somehow cheated it from others, you will never reach your full potential with money. If you believe that having money is wrong, you won’t invest in yourself and instead just live in the moment and at best tread water with your finances.
On the other side, if you believe money is the way to get power or measure success, no one will want to be around you because you will be considered shallow. In addition, other areas of your life will suffer because if you put money #1 in your life you will put your faith, family, and career behind it. As a financial coach I want you to succeed with money, but I do realize that there are more important things than just living on a budget and building your wealth.
So don’t judge a person by how much or how little money he/she has. Instead view money as a tool and ask yourself if you are going to use money and maximize it to do your best and impact others’ lives or if it is going to be a source of stress and frustration and hold you back from living the life you want to.
You can be in control of your finances
So often we feel like money has control over us. We work and work and work and as soon as payday comes our money is out the door and we don’t think that we’ll ever manage it well. But you do have the ability to change your financial situation.
Yes, we can’t go back and undo the mistakes that we have made in the past. But we can go forward and fix those mistakes and put ourselves into position to avoid them in the future.
So often, though, we hear that winning with money is about luck. That we can’t control our finances and that the “evil rich” have all the wealth and that you will never be able to break through and that you will always struggle with money. That belief is so hopeless and leads you to believe that your finances are already pre-determined. But when people say you can’t win with money, what they are really saying is that they themselves haven’t figured out how to win. That says nothing about your ability to go out and change the way you handle and view money.
I work with and hear stories all the time from people who have done it and changed their finances 180 degrees. It isn’t always fun or easy and it might actually get a little worse before it gets easy, but it is doable and worth the effort!