In Taxes 101 we talked about the three types of income. Now it is time to put ourselves in an even better financial situation. I want to briefly speak on the differences between an average individual and a business.
Indeed, only people with the utmost financial education can leverage a business to the fullest extent. Have you ever seen a story about how a president pays zero dollars in taxes? This is how they do it.
Individual. Gets Paid—->Pays Taxes—->Handles Expenses
Business. Gets Paid—->Handles Expenses—->Pays Taxes
Did you see the difference? Well, let’s break it down further.
Keep the Job, Quit the Mindset
1) Getting paid. The individual and the business started in the same place. We get paid. The individual gets paid from a paycheck. The business gets paid from customers and clients.
2) Pays taxes or handles expenses. The individual now has taxes withdrawn from their paycheck. Refer to Taxes 101 on how this works. Based on certain situations, the individual may be paying 30-50% in taxes.
This is where the magic happens. The business pays its expenses before it pays taxes on the profits. I repeat, for effect, that the business pays its expenses before it pays taxes. Why is this so important?
Because the more expenses, the better. Think about if you wanted a luxury car. You started a limited liability corporation (LLC) and bought a Corvette. The debt, gas, cleanings, maintenance, and other expenses would come out first. Then what is left over is profit and taxed.
The Magic of the Infinite Return
Do you see the value in this? It may take some time to see what this actually means. Rich people don’t want to own anything in their name. They want their businesses to own everything. Not only for liability purposes but for tax purposes. Their cars, boats, vacation homes are owned by their businesses.
This is how an individual person doesn’t pay much in (or anything) in taxes. This is the major point of the article, where the rubber meets the road. We keep saying that the rich are getting richer, but these are reasons why. They are taking the time to understand these principles.
3) Handles expenses or pays taxes. Now, when this is combined with the three types of income, you have a truly different way of life. Let’s go back to our luxury vehicle example. An $80,000 corvette.
Why Banks want Your Money and Why You Should become the Bank
Middle-Class person. The middle-class person, Josh, works twenty years to be able to afford his Corvette. Josh is making $100,000 a year. At a 40% total tax rate, Josh brings in $60,000, after taxes. This is a total of $5,000 a month.
Josh decides to get his bright yellow 2020 Corvette. It costs $80,000. Josh, being “good with money”, chooses to drop $20,000 down on his dream car. This equals a $1,100 a month payment, at 3.1%. Now with gas, maintenance, insurance, etc… Josh pays a total of $2,000 a month.
$2,000 out of $5,000 goes towards his bright yellow Corvette. He doesn’t even drive it most of the time, he has a daily driver car fit that.
Rich person. Our rich person, Kris, also wants a bright yellow Corvette. She also makes $100,000 a year from passive real estate investments. Her tax rate is 16%, so she brings in $84,000 a year or $7,000 monthly.
Instead of buying the car directly from her income, she exercises her financial education. She starts a business called Yellow Car Rentals LLC. The business buys the car for $80,000, with no money down. The payment is roughly $1,500. The expenses of the car are also another $1,500. The total debt service for the car is $3,000 a month.
Are You Living Life on Auto-Pilot or Driving Toward Abundance
Kris puts her bright yellow car on Turo (car rental service) for $500 a day. She is able to rent the car out 15 days out of the month for a total of $6,000 a month. She subtracts her expenses ($6000-$3000) and pays a 20% tax rate on the profits.
In the end, she is earning $2,400 to drive her Yellow Corvette. Again, she is making $2,400 a month to drive her car. She drives her bright yellow Corvette for half the month and gets paid $2,400.
How to Create “Luck” with Money
Whom would you want to be?
Josh- Working full-time, driving his Corvette, and has $3,000 take home after his car.
Kris- Not working, living off passive income, and has $9,400 take home after her car.
I think the decision is pretty easy. Financial education is a must to have the life that we want. Kris can go and buy multiple cars to add to her collection. Her financial education of business allows her the choice to do what she wants to do, how and when she wants to do it. It just makes smart business sense to buy even more cars.
Take the time to review this Taxes 101 series. It is meant as tax guidance, not hardcore tax advice. Please go see a legal consultant for that. But if you understand the principles, you will be guided to making the smart financial decision. Life isn’t about having all the right answers, it is about asking all the right questions. I highly recommend “Unfair Advantage” by my favorite author, Robert Kiyosaki.
Check out our Merchandise Shop on Redbubble: (here)
Follow us on our Facebook Page (here)
Join our Facebook group (here)
Follow us on Pinterest at:
Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Leave a Reply