Increase Your Income by Decreasing Your Wages

  •  
  •  
  •  
  •  
  •  

Did you catch that? Did you know that the best way to become wealthy is by actually decreasing your wages? That’s right. According to the well-known book, “The Millionaire Next Door“, most millionaires do not earn their wealth by becoming highly paid employees. Nope, 2/3 of them own their own business and invest much of their profits either into their company or toward investments, which will then earn them a larger revenue. So what is the real difference? It’s all earnings right? Wrong. The term “income” in my mind is far different from the word “wages”.

building wealthThe Road Out of Poverty and Into Wealth

If you are a regular here at LifeAndMyFinances.com, you know that I have been harping on the road to wealth for quite some time now. The process is actually quite simple when you put it down in print:

  1. Reduce your expenses
  2. Get out of consumer debt (credit cards, car loans, student loans, etc.)
  3. Create an emergency fund
  4. Invest in income-producing assets (and increase your income)
  5. Use the additional income to reinvest again and again

This process not only creates the ability for you to earn more money. It also will allow you to quit your job (I thought I would throw that out there in case that interests you ;)). This is the final key to becoming incredibly wealthy. And you can survive and thrive on account of it.

Earn More Money and Pay Fewer Taxes, What’s Not to Like?

Do you remember a couple of years ago when Mitt Romney was required to make his tax returns visible to everyone? Over the course of two years, Mr. Romney earned $42 million dollars, but that wasn’t even the amazing part. On this $42 million, he only had to pay in 14% for taxes! While the rest of us hard-working citizens get 35%+ taken out of our paychecks each month, Mitt was only paying in 14%. How is this possible? It’s simple really. He is not paying taxes on money earned from a job. His money is earned through investments and is therefore taxed at the capital gains tax rate of approximately 15%. This is how the rich continue to get richer. Take note and earn your money like the rich do.

20140915 - increase your income

So how are you supposed to get to the point of earning millions and paying very little in taxes? For most of us, this is going to be a slow process, but it is entirely possible just by following the wealth steps above. If you can pay off your debts and begin to invest in wealth-producing assets (like real estate or your own business), then over the course of 5-10 years, you can produce an income that far surpasses your salary at your job, which will then allow you to invest like the wealthy.

Let’s say that you have amassed $1 million dollars (sure, you might think this would take forever, but I have figured that this can be accomplished in as little as 10 years – hmmm, perhaps this should be another article…?). By investing in a variety of CDs, T-bills, and stocks, you could pretty easily earn an average of 6% on this money each year. At 6%, what would your income be each year? Yep, $60,000! If you were to earn $60,000 at your day job, you might be left with about $35,000 after taxes. But, now that you are earning your money through capital gains and only taxed at 15%, you are now left with $51,000!

BOOM.

Do you realize how huge this is? Instead of earning just $35,000 a year, you now have $51,000. Heck, if you are living light like I intend to, you can probably afford to reinvest $10,000 of this money into another business venture or stick it back into the market. And, your wealth will then continue to rise.

Just Don’t Be a Life-Long Sucker Please

There are so many people that I work with that just blindly invest a portion of their earnings into their 401k plan. They work all of their lives at a job they hate, and then attempt to retire on a medium-sized stack of money that is supposed to last them for the next 20-30 years. In my eyes, this plan is ridiculous. Sure, it’s better than the “stick your head in the ground and do nothing plan”, but how does someone expect to retire well on a meager pile of cash that they still have to pay 35% tax on?

Instead of being a sucker, please be wise and pay off those debts, buy income-earning assets, and pay as little tax as possible.

Are you on the path of high tax payments? Or do you plan to become truly wealthy and increase your income (instead of your wages)?

If you enjoyed this article, Get email updates (It’s Free!)


  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  

16 comments to Increase Your Income by Decreasing Your Wages

  • Robert Kiyosaki says everyone who has started from scratch and has managed to make a fortune has (somewhere along the line) made a bunch of cash from property. I’m nervous about investing in the stock market at these prices, but there are some areas in which you can buy property for less than the rebuild value, and that sounds like a good investment opportunity to me.
    Myles Money recently posted..#SmartMoney Roundup

    • I understand your concern about the market Myles. I am a little concerned myself, but as long as we diversify our assets and only put a portion of our portfolio in the stock market, then we should be fine. I am interested in real estate as well. Keep reading this site into next year and I will teach you all about it from my experience. 🙂

  • That’s one of the beautiful things about self employment. You can incorporate yourself, pay yourself as low a salary as can be considered reasonable, and take the rest of the money as dividend income. The lower my salary the better!
    Kim recently posted..Retiring on Social Security

    • Very true! It’s a good thing I’m not the type of person that needs to gloat about my salary. I wouldn’t mind paying myself less in salaray and earning more in dividends!

  • Rachell

    I can’t wait until you pay off your house and see what is next in your future Derek. This Blog has been very motivating to me. Thank you. My husband and I have 2 kids one 8 and 3, we are in the middle of trying to pay off our house as well, but we will take a few months off due to wanting to take the kids to Disney land while they are still small and love and enjoy Disney characters, they are only little ones right? I would like to see if you can blog about how to get a good deal on Disney land Vacation, I don’t know i thought you will be good at that! Again thank you.

  • It’s funny how my thinking has changed in the past years.

    I was one of those people who was upset that Mitt Romney paid less in taxes than the average person but made millions. Bottomline was I was uneducated.

    Great article because it just illustrates another reason why business ownership and investing is the way to go.
    Ced @ Fuggingdebt recently posted..5 Critical Ways Having Debt Impacts Your Fugging Life

  • Hi Derek,
    I like the overall message of the post, and definitely agree that you have to learn the tax code to get ahead in our system. I do have to disagree on the last paragraph that investing in a 401(k) makes you a “sucker”.

    We use tax deferred investing as a cornerstone of our early retirement plan. We are able to put away significant sums of money ($35k/year) pre-tax allowing all of that money to work for us rather than paying the government first. We benefit from employer matches which is free money with no risk. We then will pay a much lower tax rate when we start to draw our money because we are reasonably high earners (28-33% tax rate on our last dollar depending on the year)but live a frugal lifestyle (our spending could be supported making only enough money to be taxed at a top rate of 15%), which is a huge advantage with the only risk being a drastic change in the tax code. We then plan to further leverage these gains by moving from our current location to a state w/ no income tax, gaining us an extra couple of %.

    My point is that depending on the individual, there is no one right or wrong way to do things and the key is developing and fully understanding a plan that best matches your strengths, wants, needs and individual situation so you don’t become a “sucker”.

    • Haha, sorry for the term sucker. I just hate to hear people talk about their retirement fund and it only consists of money in their company 401k! Is that really the only preparation they’ve done to ensure themselves a quality retirement?! What if much of their money is in mutual funds and index funds and the stock market crashes? What if the government decides to raise the income tax to 50% to cover their enormous debt load? It sounds like you have a decent plan, but please do not invest in only your 401k. Diversify! Purchase some rental property. Develop a business. Become a lender. Let your money earn more money, and be mindful of taxes along the way. Thanks for the comment!

  • Rich

    Hi Derek,

    Thanks for the article and great info.

    With interest rates so low, can you please give more details on how 6% can be easily attained. Thanks

  • Lance

    There is a reason CEO’s ask for $1 salaries and take all their pay in company stock. They appear generous with their salary but do better tax wise in the long run.
    Lance recently posted..I’m Sorry, We Can’t Date, We Are Financially Incompatible

  • Great post! I hated how the media and so many others ripped Mitt for how little he was paying in taxes. Everyone can do the same thing if they focused on saving and investing more. Instead they ignore this path to wealth. Always remember, the IRS taxes income, not wealth!
    Jon @ Money Smart Guides recently posted..How To Retire At 50 And Live Like A King (or Queen)

    • Right?? I have a friend that continually complains about the government taxing the middle class, but yet, he does nothing to try to pay less in taxes – which is exactly why the government is taxing him!

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  

  

  

CommentLuv badge