The Secret to Creating Lifetime Wealth (Part 3)
Image sourced by Joshua Mayo @joshuamayoo
Welcome back!
This blog post covers one of the most important and fundamental financial concepts and money concepts about building lifetime wealth; what wealth is; and what wealth can do for you.
Let’s continue thinking wealth, prosperity and abundance. Let’s get to it!
If you’re just joining this blog post series, click here to see Part 1, Part 2, Part 4 and Part 5.
In this segment, we’re diving into Dad’s asset allocation in his investment income.
To build lifetime wealth, we need to estimate our earnings, income and investment income and how much we can spend.
Ideally, our income exceeds our spending.
Here we go!
Picking up from Part 2, let’s suppose that:
Note – this is intended to be a general example and investment strategy. This example is Not intended to be a specific asset allocation recommendation for you. In addition, for simplicity we’re Ignoring income taxes, which in practice is usually Not a good idea.
Dad’s actual net worth and asset allocation are different, but $1,000,000 is a round number that helps simplify the math for our discussion. Suppose:
Dad’s investment portfolio equals $1,000,000 on the day he retires.
His $1,000,000 investment portfolio includes:
Rental real estate property that has a fair market value equal to $250,000; and
Cash and marketable securities equal to $750,000 ($1,000,000 total investment portfolio minus the real estate of $250,000).
The cash yield (rate of return) on the $250,000 in real estate is 8%. So Dad receives $20,000 in interest income per year ($250,000 multiplied by 8%).
He’s invested the remaining $750,000 ($1,000,000 total investment portfolio minus the real estate of $250,000) in a combination of Certificates of Deposit (CDs) with banks and other financial institutions that are FDIC insured; highly rated municipal bonds; and some blue chip common stocks.
The non-real estate or securities portion of his investment portfolio throws off income (generates income) at a rate of 5% (rate of return).
The non-real estate portion of his investment portfolio (asset allocation) equals $750,000.
His expected annual income equals $37,500 ($750,000 multiplied by 5%).
Therefore, excluding Social Security Income, Dad expects to receive income equal to $57,500 ($20,000 plus $37,500).
And take note that the $57,500 is income Before taxes, or pre-tax income. Except in a few cases, we can’t spend pre-tax income. It’s after-tax income (Cash) that matters.
Now let’s look at Dad’s financial situation again and throw a kink into the mix:
Suppose that years ago, Dad had invested $130,000 to acquire the real estate that now has the current fair market value of $250,000.
Tax basis means the amount of money (value of your investments) that you subtract from the selling price of an asset to calculate your gain or loss.
Tax basis of real estate typically changes over time given a number of factors. So calculating the tax basis can be complex.
But for purposes of this example, let’s assume that Dad’s tax basis is $130,000.
In general, unrealized gain means the increase in the value of an asset (investment) over the cost – how much you paid for the asset.
‘Unrealized’ means that you have not sold the asset or investment, so you probably would not have to pay any taxes (until you sell the asset or investment).
When you sell an asset, any unrealized gain (or unrealized loss) becomes a realized gain (or realized loss). Then taxes come into play.
The selling price minus the tax basis equals the taxable gain (or loss).
Assuming that the selling price exceeds your tax basis, that’s the amount of money or amount of capital on which you have to pay income taxes – more specifically, capital gains taxes.
This means that the ‘unrealized gain’ on Dad’s real estate equals $120,000 ($250,000 fair market value minus the tax basis of $130,000).
In the next segment in this special Budget and Grow Rich® wealth-building series, we’ll explore realized gains and capital gains taxes.
Let’s really start thinking about wealth, prosperity and abundance and design a plan to help us create lifetime wealth. Right now!
See you next week.
Arthur V.
P.S. To Create More Free Cash, Save More Money on Groceries Every Day – click here.
To grab the other blog posts in this special Budget and Grow Rich® series, click here to see Part 1, Part 2, Part 4 and Part 5.
Disclaimer: OH and Please Remember, we are Not attorneys or financial advisors and are Not providing any specific financial, tax or legal advice here. Be sure to consult your own professional advisors to get sound professional advice that’s specific to your financial and personal circumstances!
How to Succeed and Achieve Your Dreams!
Tired of the rat race?
To Succeed even bigger, greater and stronger, 10X your success – click here.
Budget and Grow Rich® is the original e-book guide to easy budgeting and wealth-building. Gain financial freedom and pour money into your pockets today and for years to come.
Finally, the proven roadmap to building wealth – how to make a personal budget that really works. Explained in plain English – easy to follow, practical steps. Since 1974, personal finance expert and author Arthur VanDam has used this system to organize his finances, manage his money and amass wealth. Now you can too. This straightforward guide tells all! Handy spending plan worksheet includes 14 categories that does it all. Practical tips and ways on how to create a financial plan and put your financial plan on auto pilot. Budgeting At Your Finger Tips will help You save more money, build more wealth, gain peace of mind and enjoy financial freedom.
Take your Business, Career & Life to a New Level with this Experiential, Immersive Live Event FREE!
How to Make Money in your Spare Time Writing Letters.