Organize Based on What’s Left After Taxes

Once you have filed important documents in your home so that they can be easily located, it is important to go one step further by organizing all your financial assets into a system based on the following four criteria:
1. Organizing an investment based on its risks.
2. Organizing based on the liquidity of the asset, that is, how easily can I sell this investment?
3. Organizing based on timing, i.e., when will it be wise to sell this investment?
4. Organizing based on valuation, or in other words, based on a dollar value.
In addition to these criteria, we have found the most successful way to get organized is based on a fifth and most critical criteria:

5. Organize based on the taxation of investments.

While each individual’s situation may vary according to risk, liquidity, timing, and so on, everyone’s situation is universal when it comes to taxation. All people are subject to tax. Unlike the other criteria, taxation does not vary greatly depending on your individual situation. Taxation is definable and absolute.
The taxes we pay are demanded of us before we do anything else. That’s why we teach our clients to organize their finances around what they get to keep after paying taxes. By doing so, it becomes easier to understand what you need to do to plan because you know what’s absolutely going to be left over. If you organize based on risk, for instance, you may never be quite sure what you have to work with because that risk will always vary. But taxes are sure. By organizing based on taxation, you can know either how to keep taxes to a minimum, thus keeping more of your wealth, or know how much money you will have left after paying taxes so you can feel free to work with the balance in order to create additional wealth.
Important documents should be organized in what we call “Tax Drawers.” Because there are only five ways you can be taxed, financial affairs should be organized based on the following five
dimensions of taxation:

• Drawer #1: Taxed—savings accounts, checking accounts, reserve funds, and so on.

• Drawer #2: Tax Free—municipal bonds, Roth IRAs, and so on.

• Drawer #3: Tax Deferred—401(k)s, IRAs, and so on.

• Drawer #4: Life Insurance—life insurance can be taxed in a variety of ways, and most often is not taxed until the benefit is received in cash while you are living. If you die, then the income is tax-free. How you receive the money determines whether it will be taxed or not.
• Drawer #5: Capital Gains—real estate, mutual funds, or stocks that appreciate in value. There will be a loss or gain depending on tax rules at the time.
  

Organizing your financial assets into these five “Tax Drawers” will help you find a lot of extra money you didn’t know you had. How is this possible?
1. It makes it easier for you to visualize your assets and in terms of what you get to keep for retirement.
2. It provides a basis for calculating and projecting the accumulation of your wealth.
3. It helps you understand the impact taxes have on your longterm savings.
The following example illustrates the importance of organizing into “Tax Drawers.”
Suppose you put all your money in a 401(k) program for retirement.
This money will grow because you will be able to defer paying taxes on it all those years you are working. However, when you begin withdrawing this money, 100 percent of it will be subject to income tax. If you organize your assets into five “Tax Drawers” and use a forecasting tool such as the Master Plan software you will be able to play “what if” scenarios with your money. “What if” you put this money into a tax-free municipal bond rather than a 401(k) or capital gains account? “What if” you took your money and put it into a Roth IRA, or “what if” you put it elsewhere? Of all the tools available to get and keep oneself organized financially, being able to project your debt, income, and assets over time is among the most valuable. Staying organized is a function of being able to sweep all financial elements (spending, borrowing, and saving) out to a future date and look at the results. By doing this, it is easy to play “what if” so that you can test how a financial decision made today will impact your future. Using organizational tools such as the Master Plan software can help you determine the best way to accumulate money so that you can maximize your assets. And because there are no future decisions, only decisions made today that affect the future, this knowledge allows you to make much better choices. You can make the necessary changes today and not get down the road and have to look back and say, “Oh, I wish I had known!”