If you thought building wealth was about how much you make then you would be wrong: it's about how much you keep.
The single biggest expense standing between your earnings and savings is (drum roll, please)... taxes.
Nothing else comes close.
When you add together all taxes on items like income and consumption, factor in the pass through of all other taxes like corporate taxes, import duties, etc., you quickly see what an extraordinary burden taxes have become regardless of your income level.
That's why legally controlling this expense is the 5th essential wealth building principle. You must learn how to keep more of what you make.
The key point is how your government (in it's infinite "wisdom") has decided to favor certain financial practices through tax incentives.
How does this all fit together? Well, remember a few emails back when I taught you the 3 Principle of Wealth Building - paper assets, real estate, and business?
At the time, I explained how paper assets were a wealth parking vehicle, but real estate and owning your own business were wealth building vehicles. This critical distinction surprised a lot of readers.
While the stats make this claim indisputable, I wanted to give you two reasons why it's true.
The first reason was contained in the last lesson - leverage. Few leverage opportunities exist in paper assets (and all carry significant risk and cost). However, business ownership and real estate offer maximum leverage opportunities (many without increasing risk or cost - some even lower costs).
Now you're learning a second reason these two asset classes are favored wealth building vehicles - tax advantages. Real estate and business ownership offer tax advantages not available to Salary earners or paper asset investors.
(Yes, I know I'm using India-centric terminology; however, similar laws and principles apply in most common law countries for my readers outside India)
The government has decided to make these two asset classes the most tax-favored wealth building vehicles available.
For example, it's entirely possible to own real estate that puts cash in your pocket every month while providing valuable tax deductions that give you a bigger tax refund at the end of the year as well. You can't do that with earned income from your job or capital gains from stocks and bonds... without going to jail.
Similarly, when you own a business many expenses are paid partially by the government as legal tax deductions. This can put more money in your pocket for any given level of income.
Now, it's beyond this brief email instruction to give detailed analysis of all the deductions available or how they work. There are too many countries, too many rules, and everyone's situation is unique. You'll need to learn the details from one of the many books focused exclusively on this topic or consult with a competent tax professional.
Instead, what is important for this lesson is to understand how real estate and owning your own business are two wealth building vehicles that afford both valuable tax deductions and leverage opportunities.
The leverage and tax advantages can dramatically affect your rate of compound growth which will shorten the amount of time it takes to achieve wealth. In short, these two principles allow you to create more wealth with fewer resources - both time and money. You can't apply these two principles to paper assets.
It's why more people build wealth through real estate and business entrepreneurship than any other asset classes. It's also why paper assets are generally used to park and preserve wealth built elsewhere.
Sure, you can still achieve financial security the traditional way with aFixed Deposits and savings plan invested in paper assets (which we will cover in detail in the next several lessons). This strategy works (without leverage or tax advantages) if you have the time and discipline to make it work.
It is well-proven financial path that is governed by strict mathematical limitations.
However, many people want to turbo charge their results. They want financial security in 10-15 years instead of taking a lifetime. If you're one of those people then there is no getting around the necessity for leverage and tax advantages.
Your homework from this lesson is to develop a working knowledge of the various tax strategies that apply to your chosen path to wealth. Develop this knowledge or find a professional to help you because it will pay you dividends for a lifetime.
I know it has for me. That's why it's your 5th wealth building principle.
I hope you've enjoyed these first 5 principles to wealth Building. Yes, there are many more wealth principles. Course on wealth Building teaches you everything required in carefully structured, step-by-step, learning modules so you walk away with your own personal plan for wealth. You can learn more about it.
In the next blog in I'll share more ideas explaining exactly how the traditional passive investment approach using paper assets can be applied in your wealth plan, and I'll show you the two essential factors required to make it work. This is important material since nearly everyone applies this strategy - for at least a portion of their wealth - me included.
Thanks for your support, and I'll see you in few days...