It just takes a spark! Increasing your personal spending power.
I’m reading an interesting book called “The Myth of American Inequality” by Phil Gramm. It was highly recommended by someone I respect, and it's sparked some interesting conversations at our house.
It's definitely worth a read if you're interested in economics and better understanding the financial dynamics at play with your money.
One of the big issues addressed is the fact that the Census Bureau uses gross income, rather than net income is used as a measure of economic wellbeing.
As I was reading it occurred to me that we all do this- it's both a problem
and an opportunity for everyone, but especially if you're self-employed.
Stick with me.
What I'm about to explain is something you probably already know and understand, but the benefit doesn't lie in “knowing” or “understanding”- like with most things, the value is in the consistent application of the principles. And the application translates to more personal spending power.
Someone who makes $100,000 is not ten times richer and
does not have 10x more spending power than someone who makes $10,000.
Because of taxes. And also, because of other social benefits.
All else being equal, someone who makes $100,000 on w2 pays federal income taxes and someone who makes $10,000 doesn't.
But there are other factors.
Someone who makes $10,000 qualifies for health insurance credits or subsidies and likely a whole slew of other social benefits.
Someone who makes $100,000 doesn't.
Simple. We all understand this and regardless of your political leaning I'm sure no one making $100,000 would really want to trade places with the $10,000 person.
Even with increased taxes and lower benefits, the $100,000 person is likely economically better off.
But what about two different people who make $100,000.
One lives in a state with no income tax, and one lives in a high tax state.
One has access to an excellent health insurance plan through their employer with a generous retirement match and stock options and the other doesn’t.
One owns a home in an excellent school district and has to pay insane property taxes and the other rents in the same district and doesn’t.
One has a Dependent Care Flex Savings Plan through their employer that gives a tax benefit on their kid's daycare expenses and one doesn't.
$100,000 isn't $100,000.
Looking at gross income is virtually meaningless.
But it's not just about taxes. It's about spending power.
It's about all the other benefits someone receives that they don't have to spend their paycheck on- and I'm not talking about welfare.
This is a conversation that isn't had enough.
When you are in the 24% tax bracket and you don't have a Dependent Care FSA offered through your employer, you have to EARN $6,578.94 in order to buy $5,000 worth of daycare.
When you do have a Dependent Care FSA set up you only have to earn $5,000 to buy $5,000 worth of daycare.
As your marginal tax bracket increases, the gap widens, and the value of that pre-tax employer benefit is magnified.
As an employee this statistic matters, because when you understand it.
You are better equipped to make decisions that increase your spending power.
Instead of focusing on increasing your salary alone, you pay more attention to the value of your benefits package. You maybe make different decisions about what state you live in, what town you live in, whether you decide to rent or buy.
This isn't about letting the tail wag the dog and making all of your financial decisions based on taxes and net economic value, but these do have real financial impact and factoring them into your decision making can provide real meaningful value to you in terms of lifestyle.
For entrepreneurs, the impact of focusing on your personal spending.
power rather than your gross revenue or gross salary is magnified.
No matter your tax status, you have an additional layer of taxes. You also have an additional layer of tax benefits available to you. AND, you also have total control over your compensation and benefits so the potential for increased economic value and spending power is huge.
One of the biggest mistakes I see small businesses make is in failing to learn and understand how to keep more of the money they're earning.
It's truly one of my favorite things to teach because the impact is typically huge.
There are both immediate benefits to the bottom line, and also long-term benefits as they put their tax savings to work for them and as they continue to grow their revenue and continue applying the strategies that make sense for their business and personal goals.
At a high level, the solution is to be strategic about your compensation
package as the CEO so that you're going beyond salary and draws.
More specifically it's…
1) Part corporate status planning (not just incorporating your business when it makes sense, but understanding how to maximize the value of being an S Corp)
2) Part maximizing tax deductible expenses on the business that provide personal value
3) Part leveraging income shifting strategies when available to you
4) Part learning how to tax diversify your future income streams so you’re getting and growing money outside of the income tax system so that you can keep more of what you’re earning in the future
(See my ‘you make more than Mark Zuckerberg‘ blog from a few weeks ago)
5) Part learning how to better communicate with and leverage your bookkeeper, accountant, financial planner, and anyone else on your financial team
It doesn’t matter what you bring in, it matters what you take home.
Your take-home is your net income plus the value of all your benefits.
The benefits that you receive that you do not have to use your salary to pay for.
There’s a lot here, obviously. And you might be wondering “why isn’t my bookkeeper or accountant talking to me about these things. ”
My best guess?
They were probably drowning under the weight of thousands of tax returns and Quickbooks reconciliations and you’re possibly not actually paying them to help with this kind of planning.
What I'm talking about can't really be fully delegated to someone who doesn't
fully understand your business operations and your specific financial goals.
YOU need to be involved and engaged and have the bandwidth and headspace to be able to spend a few hours looking at what you want to take home from your business. To figure out what the priority is and how to accomplish it, and to continue to inform the strategy as things change.
That's part of the reason my Profit 2 Wealth program is a hybrid.
It's part virtual course because you’re busy and that allows you to work through the training modules on your own schedule however you can fit them in.
And there are live group coaching calls with me every month so you can actually get my eyes on your situation and get answers quick for faster results.
If you've been bringing more money into your business and feel like it's finally time to focus on keeping more of it, consider booking 20 minutes with me to see if Profit 2 Wealth is a good fit for you.