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”.
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:
- Reduce your expenses
- Get out of consumer debt (credit cards, car loans, student loans, etc.)
- Create an emergency fund
- Invest in income-producing assets (and increase your income)
- 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.
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!
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)?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.