"It is impossible for ideas to
compete in the marketplace if no forum for
their presentation is provided or available."
Thomas Mann, 1896
The Business Forum
The Money Matrix ~ Understanding How Money Works
by: Gurdayal Singh
Living the Best Life You Can Live
Of all the opportunities that you have discovered in your life, which were the
most important? Of these opportunities, which ones changed your life forever?
Now ask yourself one question: how would the opportunities that you’re not even
aware of, change your life? If you were given one wish, one gift that would
fulfill your life, what would it be? Happiness, wealth, health, love, there are
many ways you could answer that question. In a very simple way, I would wish to
live the best life I could live. Think about that for a second. If given the
opportunity, I would like to maximize the gifts I have been given so I could
enjoy my life and share with others. Your answer to what you want in life may be
different from mine but understand one thing, the gift and opportunities you
have in life are already inside you but you just can’t see them. Discovering
these gifts and opportunities is simple. Look for them and when you find them
learn about them. Your life will change. It’s time to live the best life you can
There is enough stress, worry and concern in your everyday life that you may
think that changing your life will take a lot of time and energy on you. But to
change only takes thought and some knowledge. The real truth is that your
everyday struggles take up all you time and you have been enslaved by them. In
your financial world the answer to many of your problems is understanding how
money works. It isn’t fair that throughout your life you have not been given the
opportunity and the knowledge to improve your financial life.
Your financial health is centered on much more than simply trying to pick a
winning stock or mutual fund. There is no one product that you can purchase that
will solve all your financial problems. The solution comes when you understand
that everything you own has financial value. When you discover that everything
has value, then you can start to understand how you can use your assets as
financial tools. These steps will help you create more options and opportunities
in your life. Many people are mistaken that the only future dollars they have
are their retirement plans and government programs. This is a very narrow
approach to the problems you will be facing. By discovering the Defining Moments
you will develop a thought process that will not only aid you in your everyday
financial life but also that will become the foundation of the major decisions
you will need to make in planning your financial future. Traditional thinking
has put limits on what your thought process can be, and in turn, the outcome
will also be limited. The solution to these challenges, the Defining Moments,
comes when you understand that everything in your life has value. Future value.
When you discover the value of everything you have, then you can start living
the best life you can live, right now, today.
In living the best life you can live, you need to view everything in your life
as a series of banks, pools of money, that you own and control. With each bank
or pool of money, you have the ability to drive the value of your banks higher.
Since you own and control all of these banks, you need to make sure all your
banks are healthy and well maintained. You need to know how each of your banks
work, and also how each bank can work for you. Understanding this will create
balance in your financial future. You will then know how to leverage the least
amount of money to create the most amount of wealth.
Everything in your life has value and future value. Each one of your banks or
pools of money might have different rules than the money in your house.
Each one of your banks could have different tax consequences attached to them.
All of your banks will have different value and different growth potential. Each
one of your banks, or pools of money will have different exit strategies if you
wish to use the money. And you need to know how to use each one of your banks as
financial tools. Most importantly, you need to know how to drive the value of
the banks or money you own, even higher.
If you consider all the value in your life you may start to rethink your
traditional approach. Let’s take a look at some values, banks or pools of money
that may already be in your life. The most obvious pools of money that you may
already have are the ones you hear about all the time. You may be involved in a
qualified plan for your retirement. This type of bank or pool of money could be
called a 401K, an IRA, a SEP or some type of company retirement plan. These
types of plans have rules attached to them. Even though they all are retirement
programs, some of the rules inside these programs may be different. The rule for
these programs that everyone seems to know, is that when you retire, the money
you receive will be taxed upon withdrawal. The obvious question is this: Will
taxes be lower or higher in the future? Another rule of qualified plans is that
if you take the money out before retirement or before age 59½, you could face a
10% penalty on the money you take out, on top of having to pay taxes on it. If
you understand how money works and you are successful, you must know that
retiring to a lower tax bracket is the only way that a qualified retirement plan
will work in your favor.
As for the idea of using this pool of money for anything else other than for
retirement income has always been viewed as some kind of financial sin. But you
must remember, if one of the deterrents of using this money before you retire is
that it will be taxed, the truth is that it will be taxed anyway – now or later.
The ten percent penalty is real and is a consideration that should be explored
before using retirement money prior to retirement or age 59½. The 10% penalty
can be avoided in an IRA if this money is taken out over a lifetime period in
equal disbursements according to 72T of the Internal Revenue Code.
The value of your qualified plan will be determined by the results of your
investments. Remember, you are the only one at risk in your investment choices.
I am not condoning simply cashing in your qualified plans, but you need to
understand that this is still your money and if needed, you can get to it.
Breaking the traditional thinking that this pool of money should never be used
before retirement, is a step to opening doors and opportunities you didn’t know
As a financial tool, qualified
plans can play a big role. As a bank or pool of money you must understand the
rules of these programs, understand how
and when your money will be taxes and understand that these programs can be used
before and after retirement.
Another financial tool in the average person’s life is the value that is inside
their home. Traditional thinking has always held that the value of one’s home is
sacred ground. The changing housing market and potential collapse of real estate
values should instill caution in the way anyone purchases and pays for a home.
Most of the problems that occur financially in owning a home are created with
the purchase of a home, when the buyers fail to realize that taxes and insurance
and maintenance costs on this property will continue to increase over the years.
But in most cases, over a period of time, equity will build up in one’s home.
This can occur in a couple of ways: Either the value of the property increases,
and/or; the payments on the house reduces the debt owed, creating equity. Much
of the equity in one’s home is tax-free money. Learning the rules of this equity
is very important. It has value and it is tax-free within the guidelines of the
IRS. Equity in your home could act as a bank for you. If the equity is borrowed,
it is paid back with interest, but in many cases the interest that is paid back
is tax deductible. Now, I am not suggesting to take all the money out of your
home and invest it. You can see how this pool of money is different than your
401K money and other qualified plans you might have. An interesting question
would be: would you rather have $250,000 in your qualified plan, or $250,000 of
equity in your home?
Having $250,000 in your qualified plan means you have to pay taxes in order to
get it. Having $250,000 of equity in your home means you would have to refinance
your house and pay interest in order to get $250,000 of tax-free money. Just
imagine if you could trade your taxable qualified plan money for the tax-free
money that is inside your home.
The once taboo idea of using the money that is in your home to live on, is now
becoming acceptable. Reverse mortgages are back in style. In your retirement
years, you could get a reverse mortgage on your home. You could remain in your
home for the rest of your life and receive a monthly check or even a lump sum.
In exchange, your house belongs to someone else upon your death. Before entering
into any agreement of this kind get a really sharp real estate attorney to
assist you. The reason I am discussing reverse mortgage, is simply to make you
aware that the idea of using the money in your home is not a foreign one.
I have had many discussions with people about families buying the homes of their
parents and the parents using the money to increase the value of the legacy that
they can leave behind for their children and grandchildren. With proper planning
this legacy would transfer tax-free to the next generation of the family. This
would create another pool of money.
The Family Fortune
Many opportunities in life pass you by simply because you weren’t aware of them.
These opportunities are so critical to your financial future. I feel I have an
obligation to share this with you, even if it is to just give you an opportunity
to say no to the idea. The family, your family, may be one of the most powerful
financial tools that you have. Traditional thinking neglects to share with you
the opportunity that could be created if you were to view your family as an
untouched wealth opportunity. You may be surprised to learn that the value of a
legacy can be driven higher, wealth can be created, and taxes can be avoided
when using your family as a financial tool. Earlier, we discussed how rich
people think like rich people, and poor people think like poor people, in
Defining Moment #8. The opportunity of using the family as a tool to create
wealth could change your life forever.
Just as your qualified plan money and the money in your home has value so does
the value of your family. Don’t allow this conversation about the family to be
cast off as uneasy or uncomfortable. Find a qualified professional who is
trained in the family legacy to help guide you through the opportunity. You see,
how can you say yes or no to ideas you don’t even know exist? Just as it is
possible to increase the value in your qualified plans and your home, you can
also increase the value of your family. The difference is that most of the money
from the family can be tax-free. In your qualified plan and the money in your
home you spend and invest a dollar and hope it goes up in value. It is possible
that when investing in the family you can use the least amount of money to
create the most amount of wealth. That is what we call leverage.
The New and Old Invest-a-Testament
Another pool of money that many people have, are investments in stocks, bonds
and mutual funds. While we are at it, let’s include your bank savings also.
These investments are different from your qualified plans (IRAs, 401Ks, etc)
when it comes to the rules and taxes. In many cases, your investments, such as
stocks and mutual funds have something in common with your qualified plan: You
are the only one at risk. By investing outside of a qualified plan, you shed
some of the rules that qualified plans have. Currently, and I mean currently,
the tax issues are different in qualified plans, from taxes and capital gains
taxes that are paid on most investment gains that you might experience.
Qualified plans are taxed at an income tax rate while capital gains tax rates
could be a lot lower (check with your tax advisers).
Traditional thinking is of the belief, almost religiously, that investments
always go up in value over a period of time. Well, that is true, but not for the
reason they want to believe. You see, the stock market must go up because it too
reflects inflationary trends. As an example, two thousand years ago, a one ounce
gold coin would buy the average Roman a nice toga, a very nice pair of leather
sandals, and a nice leather sash. Today, for the value of one ounce of gold, you
can purchase a very nice suit, a nice pair of leather shoes, and a nice leather
belt. The value of gold really has not changed over two thousand years, but the
value of manmade currency has. The inflationary aspects of our currency appear
to drive the value of what we have skyward. So far, everything that we have
talked about in this chapter can be viewed as pools of money that can contribute
to future income in your life. As you can see, everything has value and can be
used by you to create your best life now.
Bet On Your Life
Another source of money in your life could be your life insurance policy.
Professionals of all sorts have opinions, and in most cases they are only
opinions, about life insurance and the type of policies people should have. It
always cracks me up when I hear someone ranting and raving about the
types of policies people should have without knowing anything about the person
they are talking to. Just like everything else in life, cheapest may not
necessarily be the best. Although the “cheapest” sounds frugal and wise, you
wouldn’t want to apply that theory to, let’s say, your kid’s education or to
your heart surgeon. There is a time and place where value is important. There
are different types of policies that you can purchase and they all have
different rules, values and results. The most important lesson about life
insurance that you should know is this: That life insurance policy you own
allows you to spend more of your money now, while you are alive. What I mean by
that statement is this: Instead of paying all your debts off as fast as you can
so you can be debt-free, why not buy a policy that will pay off all your debts
when you die? If you do this you can pay off a lifetime of debt for pennies on
the dollar and enjoy the life you deserve while you’re alive. Think about it, if
you could magically create a document that would pay off all your debt at the
end of your life, what kind of life would you live now? Many people look at life
insurance as a conversation of avoidance but really when put in the proper light
it becomes a conversation of opportunity.
The different types of policies out there today have different types of rules,
benefits, values and costs. Term insurance sounds cheap, and if you die your
beneficiary receives tax-free proceeds from that policy. Rule number one here
is: You have to die for there to be a benefit for anyone. If you’re on
a tight budget and can’t afford anything else, buy term insurance. The other
really important thing you should know, is that by definition, term insurance
lasts for only a specific term of time, such as 10, 20 or 30 years, then it
expires. If the term policy expires before you do, then there is no benefit and
the policy no longer exists. Buying term insurance at older ages can get very
pricey and cost prohibitive.
There is a different set of rules, values and benefits for cash value life
insurance. The first thing you will notice is that it is more expensive and this
is what term insurance sales people emphasize most. But there is more to cash
value life insurance than simply the cost. In these policies, cash value
accumulates and grows over a period of time. These values grow tax deferred.
When it comes to the values in these policies, the premiums that you have paid
becomes what is called the basis for the values inside them.Let’s say you paid
over a number of years, $20,000 in premium and now the cash value in the policy
is $20,000. All of that money is basis and are tax-free values. These policies,
if designed right, would have death benefits that increase over the years. Also,
if ever needed, these policies can provide tax-free loans to its owner. Cash
value policies can also be used as collateral for personal and business loans.
The money or values in these types of policies can also be used as a tool for
generating additional income in a lump sum or withdrawn on a yearly basis.
Remember, these values have some tax friendly advantages.
It will be up to you when deciding what type of policies you should own. It
might be in your best interest to find a highly recommended professional who
represents not only term, but also cash value types of policies. Your policy can
become a very valuable tool for you in the future. Rich people know how to use
these tools. Rich people think like rich people and the “cheapest” is not always
There is No Business Like Your Business
If you own your own business, you need to understand that your business is a
unique opportunity. Not only does your business provide an income for you, but
also the opportunity is there to grow and drive forward the value of your
business. The secret of owning a business is developing an exit strategy for
your business when you decide to retire. Many small businesses simply close
their doors when the owner is ready to retire, and with it goes thirty years of
experience, good will that was built up in that business, and a possible client
base. All of these aspects of a business have value. Many business owners fail
to see these values and simply shut their business down. Develop a continuation
plan for your business after you leave. Your business could be a great
investment for someone else, and create more future dollars for you. Like
everything else in life, more time and energy should be spent on exploring the
exit strategies for our lives.
The Money Matrix
To understand how money works you need to apply a litmus test to measure the
effectiveness and usefulness of your money. It is important to remember that way
too much emphasis is put on the “rate of return” mentality and too little on how
money can work for you. The litmus test for money contains a series of questions
that will define the most effective types of money that you currently have, and
guide you towards other types of money that you might want to have.
There are a number of categories that the money you have right now may fall
into. You can have IRAs, 401Ks, Roth IRAs, defined benefit programs,
SEPs, mutual funds, bank savings programs, CDs, stocks, your home, real estate,
your business, possible inheritances and life insurance. You may be able to
think of more but these are the most general categories of money that you might
have. If you take each one of these categories and list them in a column, and
ask the following questions of each one of your money categories, you will
discover the efficiency, effectiveness and safety of the money you have.
RISK: DOES THIS CATEGORY OR TYPE OF MONEY INVOLVE RISK?
Can you lose your money? As an example, can your 401K lose money? Can your home
lose value? Are mutual funds and stocks subject to losses? Can your bank saving
program lose money? There are different degrees of risk. Some things may
be more risky than others, so when it comes to each of your categories, mark
each one “H” for high risk, “M” for medium risk, or “L” for low risk. If this
category or type of money has no risk, write “NONE.” Ask the risk question of
all the types of money you have.
GUARANTEES: DOES THIS CATEGORY OR TYPE OF MONEY OFFER GUARANTEES?
Is this category or type of money assuring you of a controlled positive result
in the future? Some guarantees may have a stipulation attached to them like
keeping your money in an account for a certain number of years. Does an IRA have
guarantees? Does the money or equity in your home have guarantees? Does that
mutual fund you own have guarantees? For every type of money that you have,
simply answer: yes or no.
PENALTIES: DOES THIS CATEGORY OR TYPE OF MONEY HAVE PENALTIES ASSOCIATED WITH
This question is an important one that you must understand. Many types of your
money might have penalties attached to them. An example may be: Are there
penalties for early withdrawal of an IRA? Are there penalties for not taking
enough money out of your IRA during retirement? Are there early withdrawal
penalties for a bank CD? How about a penalty for paying your house off too soon?
Are there any penalties in annuities or back-loaded mutual funds? For each
category or type of money simply write yes or no if penalties exist.
LIQUIDITY, USE AND CONTROL: DOES THIS CATEGORY OR TYPE OF MONEY GIVE YOU THE
OPPORTUNITY TO GET TO YOUR MONEY IF YOU NEED IT?
Do you have access to your money? Can you
get it when you need it? Answering simply yes or no will give you a clearer view
of whether you control this type or category of money. Do you have an equity
line of credit on your business or your home? Can you sell off your stocks and
mutual funds? If money is quickly needed, what type or category of money would
you turn to? So you have liquidity, use and control of this type of money, yes
PROTECTED: IS THIS CATEGORY OR TYPE OF MONEY PROTECTED FROM CREDITORS?
If you were to get sued, what types of
money would be protected against law suits? Money you have in the bank? The
equity in your home? Your investments? Your 401K? This is important to know.
Many people are at great risk and don’t even know it. Simply answer yes or no to
all of the types of your money that may be exposed to law suits.
LEVERAGE: DOES THIS CATEGORY OR TYPE OF
MONEY USE LEVERAGE?
Does this type of money create the most
amount of money for the least amount you invest? When someone invests a dollar,
the hope is that dollar will grow over a period of time. It doesn’t create
increased value or increased net worth the next day. Simply compounding the
value of a dollar may also increase or compound the taxes due on it. The thought
of leverage is not typically centered on rates of return but more on controlling
and creating wealth or value. As an example, if you had $200,000 in the bank
today that would be good. The next day you bought a $500,000 home and put the
$200,000 down as a down payment. So in a day, you went from doing well with
$200,000 in the bank, to being $300,000 in debt. Did this person leverage the
least amount of money to purchase this home, or leverage the most amount of
money? What’s the rate of return on the $200,000 of equity in this new home?
Why, its zero. You might be thinking your monthly payment will be lower and it
would be, but you also lost the time value of the $200,000, as well as what it
could grow to in value. Once again, Donald Trump would not put the most amount
of money down on a piece of property, he would leverage the least amount of
money to gain control of the property. Another example of leverage would be
someone whose net worth is one million dollars today and the next day they
bought a million dollar life insurance policy for one hundred dollars a month.
Their life value doubled in one day for $100 per month. Leverage. . . it can
create wealth. Are you using the least amount of money to create the most amount
TAX DEFERRED: DOES THIS TYPE OR CATEGORY
OF MONEY GROW TAX-DEFERRED?
Very few things in our lives escape
taxation. Many types of money are taxed on their growth on an annual basis. A
typical CD at a bank is taxed on its growth on an annual basis. Is this true of
an IRA or 401K? No, these are tax-deferred. These are taxed when you take
distributions from them. So the tax on them is deferred to a later date and
possibly a higher tax table. Ask yourself, does your money or a particular type
of money grow tax-deferred?
TAX-FREE: DOES THIS TYPE OF MONEY GET
DISTRIBUTED TO YOU TAX-FREE?
Better yet does the type of money you
have get distributed to you or your heirs, your family, in the event of
something happening to you, tax-free? Is an IRA tax-free? How about a bank
savings program? Are mutual funds tax-free? On your chart or list of types of
money you can have, how many of them are tax-free at distribution? Yes or no.
COLLATERAL: CAN THIS TYPE OR CATEGORY OF
MONEY BE USED AS COLLATERAL FOR LOANS?
Sometimes lending institutions will grant
loans if there is some type of collateral or hard asset involved. A home could
be used as collateral for a loan but how about an IRA or a 401K? Can mutual
funds be used as collateral? Collateral typically has value that is relatively
safe and assures a lending institution of controlling value while lending your
money. If money was needed by you or your family, what assets do you control
that could be used for collateral? What assets or types of money could be used
to get a loan which could increase the value of let’s say, your business? Do the
types of money you have, have value to anyone else? Think about it. . . yes or
TAX DEDUCTIBLE PAYMENTS: ARE THE PAYMENTS
FOR THIS TYPE OF MONEY TAX DEDUCTIBLE ON YOUR INCOME TAXES?
Some types of money are tax deductible
from your income. Within the guidelines of the IRS payment to 401K and IRAs are
tax deductible. How about a typical mutual fund investment, is that tax
deductible? How about an annuity or a bank CD? Interest payments on some types
of money are also tax deductible. A principle payment on your home is not tax
deductible but the interest portion of that payment is. Try to think if any
other types of your money that have tax deductible payments. Yes or no?
DISABILITY BENEFIT: IN THE EVENT OF AN ILLNESS OR ACCIDENT IN YOUR LIFE WILL
THIS TYPE OR CATEGORY OF MONEY CONTINUE TO MAKE DEPOSIT OR PAYMENTS FOR YOU
WHILE YOU’RE DISABLED?
Will your company continue to make your 401K deposits for you even if you’re not
working? Will your investment broker continue to make monthly payments or
deposits into your account for you while you were injured or sick? Would the
bank make your mortgage payment? What types of money do you own that would make
the payment for you if you were disabled? Will the company you’re dealing with
deposit or make the payment for this type of money? Yes or no.
WEALTH TRANSFERS: WILL THIS TYPE OR
CATEGORY OF MONEY TRANSFER TO YOUR HEIRS TAX-FREE?
In the event of your death how will the
type of money you have be taxed or transferred to the next generation or family
members or heirs? Will someone else have to pay the tax on your IRA if you die?
How about your mutual funds or bank CDs? Does the government forgive the taxes
on the investment you left behind? Does this type of money you have create real
tax-free wealth for your family kids or heirs? Apply this question to all the
types of your money. Simply answer yes or no.
Your answers to these questions could be very eye opening when it comes
to how your money works. If you had the ability to create the perfect investment
for yourself, how would these questions be answered? Would here be a lot of risk
involved? Would there be some guarantees? Would you create an investment where
there would be penalties? Would you like liquidity, use and control of your
money? Would you protect it from creditors?
Would your perfect investment create leverage? Would it grow tax
deferred? Would you make it tax-free when you decided to use the money? Would
you design it so that it can be used as collateral to secure loans? Would the
money you put into it be tax deductible? Would there be a disability benefit on
the payments? Finally, would the money you have transfer tax-free to your heirs?
You will discover when creating the most perfect investment, that the answers
you gave are far different than the money and investments you have
right now. The types of money that you have are far from perfect.
Remember there are only three types of categories that your money falls into,
lifestyle, accumulated and transferred money. One final question you should ask
yourself is: if given a choice, would you want your money to be fully taxed,
partially taxed, or tax-free? While this question really answers itself, why is
it that we ignore what is logical and expose most of our saving and investing
efforts to full or partial taxation?
By listing the types of money that you have and asking the important questions
that we just discussed you will get a clearer view of the money that is in your
life and how it works. The money matrix measures each type of money that you may
LIQUIDITY, USE AND CONTROL
Of the twelve measurements, a typical mutual fund might have only three or four
favorable outcomes for an individual. Today, mutual funds remain one of the
largest sectors for investing. Remember your answers, if you could design the
perfect investment, and now compare them with mutual funds. You may discover
mutual funds missed your criteria as a favorable investment eight or nine out of
twelve times. This is not to say that mutual funds are bad but to shine some
light on what we have, compared to what we want.
Everything you do in life and the results of your actions will depend upon how
you prepare. If you wanted to become a doctor, you wouldn’t prepare for this
career by studying all the art courses you could in college, unless of course
you were interested in having the fanciest waiting room in the world. To be a
doctor you would study all the appropriate courses and then enter into medical
Your money is no different. You need to apply a thought process to where you
want to be in your financial future. Heading into that future without a clue of
how your money will support you, will expose you to too many unintended.
This educational material contains the
opinions and ideas of the author and is designed to provide useful
information in regard to its subject matter. The author, publisher and
presenter specifically disclaim any responsibility for liability, loss
or risk, personal or otherwise, that is incurred as a consequence,
directly or indirectly, of the use and application of any of the
contents of this information. No specific company or product will be
discussed. Promoting specific products, or applying any sales
recommendation with this information is prohibited. If legal advice or
other expert assistance is required, the services of a competent person
should be sought.
Singh is a Fellow of The Business Forum Institute.
Currently he is
the principal of Jyot Financial
and Insurance Services, an independent firm specializing in
comprehensive financial planning. Gurdayal specializes in
financial planning for small businesses, individuals and families.
He graduated from Delhi University in India with a masters degree in
Business Administration. He is fully licensed and accredited by the
State of California to provide both financial and insurance
services. He participates in continuing education programs in this field
to remain up to date on all applicable laws and regulations. Gurdayal is an active member of
the Sikh community in Southern California and an active supporter of The
American Heart Association.
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