Published September 22, 2005

In order for you to increase your wealth, without changing your lifestyle, wouldn't it make sense for you to first make sure your money is working as hard as it can? Although this may sound elementary, most people spend very little energy searching for ways to handle their money more effectively. While many advisors boast of how they can increase your wealth by helping you achieve better investment results, few spend time showing you how to avoid areas which could erode your wealth. I feel it is important to begin helping my clients avoid unnecessary wealth transfers because doing so will have a dramatic effect on their total wealth. Yes, you can increase your total wealth by reducing your lifestyle expenses, but how much do you want to reduce your present standard of living?

I suggest that working to reduce your wealth transfers is a better approach, as it allows you to not only increase the total wealth available for investment, but also to recapture lost wealth without reducing your standard of living. In fact, there may be more to gain by avoiding the unnecessary wealth transfers than there is in getting a better rate of return on your current investments or by giving up your daily latte.
Wealth transfers exist when we pay for our lifestyles inefficiently or purchase unnecessary products or services.

For instance, wealth transfer occurs as we loan money to the U.S. government without requiring them to pay us interest. Everyone who receives a tax refund has experienced this wealth transfer. When you overpay your taxes you are transferring the use of that money from you to the government. If you receive a tax refund of $2,000 per year, (let’s figure you’re paid monthly representing $167 per month) assuming you could invest that money at 7 percent , your wealth transfer over 20 years is $45,884. That is the cost, to you, for letting the government provide you with a tax refund. This wealth transfer can be eliminated by better estimating your tax liability and increasing your deductions accordingly.

Another wealth transfer directly related to a lifestyle expense might be within your medical insurance. I have found many clients are purchasing far more medical insurance coverage than they use. [See September 8 column.] For the sake of argument, I am assuming that your current medical plan is costing $75 more per month than you require. This may be caused by having an expensive carrier or a plan with benefits you don’t need. Through proper planning, I may be able to trim $75 from your medical premium payments and return that to you for investment.
Avoiding this unnecessary wealth transfer may benefit you more than earning a higher rate of return on your current investment.

Family A employs a higher rate of return strategy for increasing wealth. They have an annual combined income of $100,000. They save $10,000 of their gross income, receive a 10 percent rate of return and spend the rest on lifestyle expenses. Their expenses equal $90,000. Under this scenario the increase in their investment account at year end is $1,000 ($10,000 x 10 percent ). In order to improve their investment returns, they could choose to take on additional market risk within their investment account hoping to earn a 12 percent rate of return. Assuming this strategy is successful they would have earned $1,200 ($10,000 x 12 percent ). A $200 increase.

Family B, on the other hand, chooses to avoid the unnecessary transfer on their medical plan instead of increasing their rate of return. Their income and original expenses are the same as Family A except that now their expenses are 1 percent less ($90,000 x 1 percent = $900 or $75.00 per month). Family B adds those recaptured dollars to their investment account. At the end of the year they would have increased their investment account balance by $1,900 (($10,000 x 10 percent ) + ($90,000 x .01)). A $900 increase!

Family B’s strategy provides 63 percent more dollars with no additional risk by only applying this concept to one area of their expenses.
Think of the possibilities for your own total wealth.

{Rates of return are for illustrative purposes only, and not indicative of any particular investment. Your returns will vary.}

Stephen Bossio is the principal of Magnum Financial and the host of Strategies for Creating Wealth Fridays from 2-3pm on KSVY 91.3. He welcomes your questions and comments. Stephen can be reached by phone at 707-996-9664 or via email at sbossio@sammonsrep.com. Bossio offers securities through Sammons Securities Company, LLC Member NASD and SPIC