Sample Chapter #2

Big Bucks and Big Buckets

If someone told me that I was going to make a million dollars during my career, my first thought would be, "You're nuts!" Then I would ask the obvious question, "How in the world am I going to do that?" That's a fair question and one worth addressing whether you are 12, 15, or 20 years old. In fact, the earlier you start thinking about it, the better off you will be.

This book is all about dealing with money, but before you can deal with money, you have to earn that money. How you earn it will be one of the most important decisions you will ever make. It's not a decision that someone else should make for you, and it's not a decision you should take lightly. Earning money takes up a lot of your time - like eight to ten hours per day for 35-40 years of your life. Believe it or not, the average career for most of you will last 86,000 hours.

My only advice to you about earning money is this: make sure you find yourself a job that you enjoy. People who love their jobs tend to be much happier than people who hate their jobs, no matter how much money they make. 86,000 hours is a long time to be miserable!

As soon as you start working, either part-time or full-time, the money will start rolling in. At that point, you will have to begin making lots of decisions about what to do with the money you have left. That might sound a little weird - talking about the money you will have left even before you have spent a single dime of your hard-earned money, but that's the way it works.

Uncle Who?

You are about to be introduced to one of your relatives who will be taking money away from you for the rest of your life. In fact, this relative will usually take some of your money before you ever get your hands on it.

That's right. You will work your tail off to make money, and before you can put it into your pocket or your checking account, one of your relatives - an uncle of all people - is going to snatch some of it away right from under your nose! Not exactly what you'd like to think an uncle would be doing. I mean, when I think of uncle, I'm thinking birthday presents and Christmas gifts, not some guy helping himself to my hard-earned money without even asking if it's O.K. with me.

And you know what's even worse? When this uncle takes his share of your money, he gets to use that money for whatever he chooses. And he doesn't even have to check with you before he spends it.

If this sounds like a rotten deal to you, join the crowd. You have just met an uncle you probably never knew you had. His name is Uncle Sam, a nice name for the United States government, which will be taking income taxes out of your paychecks for the rest of your life. Uncle Sam doesn't call it "taking" your money. He calls it "withholding" payroll taxes. That's probably a good description since Uncle Sam gets a hold of some of your money before you even see your paycheck.

I doubt Uncle Sam will ever be your favorite uncle, and I'm sure he won't be invited to your next family reunion. But he does live forever and he never stops doing his thing - carving a little cash out of your hard-earned paycheck.

If you have ever worked part-time after school, on weekends, or during the summer, you probably already know the feeling - that there's not much left of your paycheck after taxes are taken out. Most people call what's left after taxes are taken out for Uncle Sam their "take-home pay." That's the amount of money you actually get to take home. And that's the amount of money you have to figure out what to do with.

Think of your Uncle Sam as a guy who shows up on payday at your place of employment with three buckets: one really big bucket for federal income taxes, one medium-sized bucket for Social Security taxes, and a third smaller bucket for Medicare taxes. To make things even worse, in all but seven states, Uncle Sam brings his brother the state government tax collector with him. That guy has a bucket of his own for state income taxes. These guys fill their buckets up with your money before you even get your paycheck.

How much does Uncle Sam take? Well, that all depends on how much money you make. There is a 5,000-page tax code that you can read if you have about two years of free time and don't mind being bored to death. But simply put, the more money you make, the higher the tax bracket you will fall into, and the more taxes you will pay. Uncle Sam calls this a "graduated" income tax. Basically, the more you make, the more Uncle Sam will take!

Here's how it works. If you work part-time and make $100 each week, Uncle Sam takes a total of only about 18% out of your paycheck. On the other hand, if you work full-time and earn $40,000 per year, Uncle Sam is going to want about 25% from you ($6,810 for income taxes, $2,480 for Social Security and $580 for Medicare). And if you really do well and earn $100,000 per year, dear Uncle Sam is going to take approximately 30% of your income for a total of $29,646.

Even if you win the lottery, don't think that ten million dollars is all for you. When Uncle Sam and his brother get finished filling their buckets, almost half of your ten million dollars will be gone.

Bucket #1 - Freedom is Not Free

I don't know anyone who enjoys paying income taxes, but taxes are a fact of life. Actually, most taxes are very necessary because they pay for many important services.

Taxes pay for highways and interstates, bridges, buses, and subways. Federal and state income taxes also help pay for public schools, community and technical colleges and universities as well as the teachers who teach at those institutions. They also help support less fortunate people who lose their jobs or cannot work because of a disability. Taxes even help pay the salaries of police officers and firefighters who keep us safe.

These are just a few of the many things that Uncle Sam does with the money in his big bucket. But where does the majority of all that federal income tax money go?

We live in one of the greatest countries in the entire world. We are very lucky because we live in a country that believes in freedom - freedom of speech, freedom of religion, freedom to vote, and freedom to watch any television channel you choose. These are all freedoms we enjoy just because we live in the United States. In fact, in the U.S. we have more freedom than anywhere else in the world.

But too many people take their freedom for granted. Freedom comes at a cost, and in some cases it comes at a very high cost. Many young Americans have paid the ultimate price to protect our citizens and to guarantee our freedom. Hundreds of thousands of brave men and women have died in wars as they fought to defend your freedom and mine. These members of the Army, Navy, Air Force, and Marines are all part of the strongest military force in the world, and their job is to protect our nation.

Money from your taxes is used to fund these military forces - to pay for their tanks, planes, guns, bombs, and whatever else they need to protect you and me. Tax dollars are also used to fund the new Department of Homeland Security. Billions and billions of dollars are needed to keep our nation safe and free. Last year alone, Uncle Sam spent $400 billion to pay for our freedom.

Freedom is expensive. Income taxes help pay for freedom.

Bucket #2 - Social In-Security

Some of that money that Uncle Sam snags will be put into bucket #2, called Social Security. The amount of money taken out of your check, before you even get your hands on it, will be listed on your hard-earned paycheck as "FICA" (Federal Insurance Contribution Act) or it might be listed as OASDI (Old-Age, Survivors, and Disability Insurance).

Your Social Security taxes are combined with Social Security taxes from millions of other people who work and pay taxes. This money is collected by the government (Uncle Sam) to make sure that when you get too old to work, or if you become disabled and cannot work, you will have enough money to pay for the basic necessities. When someone dies and leaves behind a wife, husband, or children, those family members may also receive Social Security benefits.

The federal government collects all Social Security taxes and is in charge of the whole bucket of Social Security money. The idea is that the federal government will invest all of that money and then give some of it back to us, a little bit at a time, starting when we are 67 or if we get disabled and cannot work. For some people, this Social Security money will be the only money they have to live on when they retire.

Unfortunately, a lot of people don't save and invest their money while they are still working, so when they finally retire, if they ever get to retire, they don't have enough money to support themselves and their families. These people have to depend on Social Security income to pay all of their bills. This is a horrible situation to find yourself in since Social Security income is not that much money.

In fact, the most you can receive in Social Security income as of now is $1,825 per month, no matter how much Social Security taxes you pay over the course of your career. Even if you pay hundreds of thousands of dollars in Social Security taxes while you are working, the maximum you can get back when you retire is $1,825 per month. Because so many people have to share the Social Security bucket of money - almost 47 million people last year - the average Social Security payment today is $922 per month.

As you can probably see, Social Security income is nice to have, but you will be much better off if you don't depend on Social Security to support your retirement lifestyle. That's why a lot of people don't like this idea of the federal government being in charge of their Social Security taxes. Some people don't think Uncle Sam is doing a very good job of looking after their money. Many people believe that the Social Security pot of money will be empty before they get any of their fair share back from the government.

The same folks who decide how much you're going to pay in income taxes are also the people who are in charge of what will be done with your Social Security taxes. These people who make our laws, those elected to the U.S. Senate and House of Representatives, have a lot of control over what happens to your money.

Fortunately, you and I and all of our friends and family get to decide who serves in the Congress. That's why, as soon as you are 18, you need to vote in every election possible. These people are messing with your money, and you should decide who gets to do that.

My advice.don't depend on Uncle Sam to take care of you when you get old.

Bucket #3 - Who Medicares?

When you get old - and I don't mean in your twenties, I mean really old - your body isn't going to work as well as it does today. Lucky for you, this isn't going to happen for quite some time but, eventually, it is going to happen. That, I can assure you! In fact, a friend of mine once told me that the only way to stop getting older is to die right now. I don't recommend that, but I just wanted to make my point.

So the older you get, the more medical problems you will have, the more doctors you will have to see, and the more medicine you will have to take. All of this stuff costs money - lots of money.

Today, as a teenager, you probably go to the doctor that your mom or dad chooses for you. And your doctor bills, as well as the cost of your prescriptions, are probably paid for through your parents' health insurance plan. They might have health insurance through work, buy their own health insurance, or even be on Medicaid.

Eventually, you will be out on your own, making your own money, choosing your own doctors, and even paying your medical bills with your own health insurance. For some of you, this might be sooner rather than later. Whatever you do, don't ever get caught without health insurance. No matter what you have to do, make sure that you always have health insurance. Accidents and illnesses are a fact of life, and they can be the most expensive facts of life you could ever imagine.

One day, when you are about 67, you will stop working and you will lose your health insurance from your job, or you won't have enough health insurance to cover your needs. This is when Uncle Sam steps in to help you out with a discounted health insurance plan.

Medicare is a health insurance program that is funded by some of your income taxes and run by the federal government. You obviously don't need Medicare today, but someday you probably will, and you will be glad it's there when you do. Medicare is mostly for elderly people, but it also covers the medical expenses of people with disabilities who can no longer work.

Medicare is expensive. This year it will cost Uncle Sam almost $250 billion. That's billion with a "b"!

Income taxes help pay for Medicare.

Don't Mess With the I.R.S.

When Uncle Sam shows up on payday and fills his buckets, don't think that your taxes are paid and the party is over. If you make $4,750 or more during the year, you have to file a tax return that explains your income and all the federal and state taxes you have paid. I don't care if you make your money washing cars, mowing yards, or babysitting. If your total income is $4,750 or more, you owe your old Uncle Sam a tax return. I'm not going to kid you. This is a royal pain in the butt, but everybody has to do it. In fact, there are just a few things that you absolutely have to do to survive in this world. One is breathing, and the other is paying taxes!

Tax returns are due on or before April 15th each year. If you want more information, check it out at www.irs.gov. I.R.S. stands for the Internal Revenue Service, and these guys are the income tax police. They aren't bad people, but they aren't the best people to have knocking at your door. Pay your taxes, and you won't have to worry about the I.R.S.

The whole income tax deal is pretty complicated, but the general idea is pretty simple. The more money you earn, the higher your tax bracket will be, and the more income taxes you will pay. This is good to know because when you start considering any job, you need to know more than just what the job pays. The real number you need to know is what's going to be left after Uncle Sam and his friends fill up their buckets.

As I mentioned earlier, some people call this their "take-home pay." Others call it "net pay" or "after-tax earnings." Call it whatever you want to call it, but the bottom line is that it is the money you have left to spend, to save, to invest, and to give away.

Remember, we're talking about your money. And what you do with your money is pretty much up to you. But how you handle your money will determine three things:

1. How many years you will have to work before you retire
2. What kind of lifestyle you will have until you retire
3. How much money you will have to live on after you retire

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