Interesting article on wealth

[SWC Bonfire]

http://finance.yahoo.com/columnist/article/richricher/1095?p=1

Why the Rich Get Richer
by Robert Kiyosaki
Finance Home > Why the Rich Get Richer > Work Hard, Earn Less?

Work Hard, Earn Less?
by Robert KiyosakiUtility Links

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Monday, October 3, 2005
American workers have been getting the short end of the stick since 1943.

That's when the United States Congress, in response to the costs of World War II, passed the Current Tax Payment Act. The act requires employers to withhold taxes from their employees' paychecks, overturning the previous system in which workers were paid first and settled their tab with the government later.

The Current Tax Payment Act is why so many people look at their paychecks and wonder where all their money has gone.

My poor dad -- who also happened to be my real dad -- often said to me, "Go to school, get good grades, so you can find a good, secure job with benefits." My rich dad, on the other hand, had a different point of view.

Instead of advising me to work hard for money, my rich dad said, "If you want to earn more and pay less in taxes, you need to have people and your money work hard for you." In other words, my rich dad encouraged me to be an entrepreneur and investor.

Today, workers who save money and invest in a 401(k) plan are the highest taxed people in America. Now, I can hear some of you asking, "Isn't saving money and investing in a 401(k) having your money work for you?"

No -- at least not according to the IRS. A worker's pay is taxed at the highest tax rate possible. So are your savings and income from your 401(k). In most cases, money goes into a 401(k) tax-deferred but comes out as highly taxed ordinary income.

One of the reasons the rich are getting richer is because they have more control over our number one expense: Taxes.

For example, my passive income from real estate can be the lowest taxed income of all. On one of our commercial properties, my wife and I receive approximately $30,000 a month in income -- almost tax-free. When we sell the property, we can legally take the capital gains without paying capital gains tax, which in our state would be 20 percent. Try doing that with stocks, bonds, mutual funds, or real estate investment trusts (REITS). In fact, mutual funds can be a tax trap if you do not understand the rules.

Another example, when we invest in oil and gas projects, we receive approximately a 70% tax deduction and a depletion allowance -- another tax break -- for income from oil and gas revenues. That means if I invest $10,000 in oil and gas, I can deduct approximately $7,000 from my income as well as receive a tax break for income from the sale of the oil and gas.

Obviously, I'm not a tax professional and you should not make any tax or investment decisions based on this brief article. My point is this: If I had followed my poor dad's advice and got a job with a 401(k), there would be almost nothing an accountant could do to protect me from higher taxes. The 1943 Current Tax Payment Act saw to that. Today, employees with a 401(k) work hard and earn less.


The federal government provides the biggest tax breaks for business owners and investors in oil and gas and real estate. Why? Business owners provide jobs and jobs mean employees who pay higher taxes. The economy needs oil and gas so anyone who explores for oil and gas are given big tax breaks. And people who invest in real estate are given big tax breaks because the government needs investors to provide housing. If investors didn't provide housing, the government would have to.

After 1943, people who worked for money lost most of their tax breaks. Now, entrepreneurs and investors get the big tax breaks -- and that's another reason the rich get richer.

[Sportcamper]

One day a florist goes to a barber for a haircut. After the cut he asked about his bill and the barber replies: "I'm sorry, I cannot accept money from you; I'm doing community service this week"

The florist is pleased and leaves the shop. Next morning when the barber goes to open there is a thank you card and a dozen roses waiting for him at his door.

Later, a cop comes in for a haircut, and when he goes to pay his bill the barber again replies: "I'm sorry, I cannot accept money from you; I'm doing community service this week."

The cop is happy and leaves the shop. Next morning when the barber goes to open up there is a thank you card and a dozen donuts waiting for him at his door.

Later a Republican comes in for a haircut, and when he goes to pay his bill the barber again replies: "I'm sorry, I cannot accept money from you; I'm doing community service this week."

The Republican is very happy and leaves the shop. Next morning when the barber goes to open, there is a thank you card and a dozen different books such as "How to Improve Your Business," and "Becoming More Successful."

Then a Democrat comes in for a haircut, and when he goes to pay his bill the barber again replies: "I'm sorry, I cannot accept money from you; I'm doing community service this week." The Democrat is very happy and leaves the shop.

Next morning when the barber goes to open up, there are a dozen Democrats lined up waiting for a free haircut

[SWC Bonfire]

:lol

But, it is strange that you don't actually see/read many articles on wealth, only on debt. Perhaps it is because so few actually take the steps to build true wealth.

[Marcus Bryant]

oh?

:)

[SWC Bonfire]

oh?

:)

Ask an informal poll of people under the age of 35 what their net worth is. Most don't know, and a lot will probably be around $0.

[Marklar MM]

My net worth is roughly...uh...300 dollars. :). I am getting up there with the likes of Bill Gates and the GOOGLE guys.

[Marcus Bryant]

Ask an informal poll of people under the age of 35 what their net worth is. Most don't know, and a lot will probably be around $0.


True.

[SpursWoman]

Ask an informal poll of people under the age of 35 what their net worth is. Most don't know, and a lot will probably be around $0.


I'm 33 ... and mine is pretty substantial--for a 33 year old anyway. :lol

[SWC Bonfire]

I'm 33 ... and mine is pretty substantial--for a 33 year old anyway. :lol

Good for you! :tu

Appreciation in home values has a lot of people's net worth on the rise as well. I haven't really gotten a whole lot of help in that department, but I think I got a relatively good value on my house. I was more interested in the land, anyway.

[boutons]

"don't actually see/read many articles on wealth, only on debt"

Only a tiny %age of people have net worth (assets exceeding debt), a wealth to worry about, and they don't read magazine articles to manage it. They hire tax lawyers/accountants to avoid/evade taxes.

OTOH, PLENTY of people have debt, so the articles on debt have huge readership.

[SpursWoman]

I acquired it from just being born, though ... I inherited a 2400sqft house on a 25,000sqft lot in Alamo Heights with very little debt attached.

I'd have been only a little bit ahead had that not happened, not an awful lot. :fro

[SWC Bonfire]

They hire tax lawyers/accountants to avoid/evade taxes.


It's not evading taxes if you have legitimate tax breaks. Basically, the system rewards certain behavior. Why wouldn't you wish to emulate this behavior to increase your net worth?

[Marklar MM]

Well, if I go garbage picking for cans, will my net worth increase? :) Hey, that sounds like a good idea. Make a good amount of cash. Maybe start up a fake bottle drive.

[SpursWoman]

"don't actually see/read many articles on wealth, only on debt"

Only a tiny %age of people have net worth (assets exceeding debt), a wealth to worry about, and they don't read magazine articles to manage it. They hire tax lawyers/accountants to avoid/evade taxes.

OTOH, PLENTY of people have debt, so the articles on debt have huge readership.


Having a positive net worth doesn't automatically put you in Bill Gates territory. A significant number of people have a positive net worth...especially older people that have already paid off their homes.

Why are you assuming everyone is irresponsible? Because you are? Having a pretty decent net worth doesn't automatically put you in Bill Gates territory...and learning how to take care of your money and get the most out of it takes a little self-education--which would include reading related articles.

[ElMuerto]

Most people are worth more dead than alive.

[boutons]

"Why are you assuming everyone is irresponsible?"

why do you think you know what I'm assuming?

[SWC Bonfire]

Boutons, do yourself a favor and pick up a used copy of The Millionaire Next Door or The Millionaire Mind.

[Marcus Bryant]

boutons has to ask because he sure as hell doesn't know.

[SpursWoman]

"Why are you assuming everyone is irresponsible?"

why do you think you know what I'm assuming?


Because you are assuming only a very tiny percentage of people are responsible enough with their money to not bite off more than they can chew. (ie. have postive net worth).

Either they over-extend themselves with credit or they throw away their money on rent instead investing it in a home. Neither situation would be considered responsible financial planning.

I'd think people in those situations would benefit THE MOST from literature on how to manage their finances. :spin

[Marcus Bryant]

boutons is right about one thing. There are a class of people who can afford to hire expert advice to minimize their tax burden over their lifetimes and through the lifetime of their children's children. This is why it's almost inevitable that attempts to make "the rich" pay a larger burden ends up costing the middle class more.

There's also distinction to be made between 'income rich' and 'wealth rich'.

[Spam]

Poorest 40% own less than 1% of the wealth Wealthiest 5% of population own 70% of the wealth ...

[boutons]

SW, go look up "usa household debt", current and historical trends, to see how the vast majority of households have been going in record numbers into record levels of debt, a negative net worth, not "wealth". Scold them, not me.

[jochhejaam]

I went from single to married with a family of 6 in eighteen months, so much for wealth. :lol


(wife had 2 children when we married and we had twins 18 months later)

[clubalien]

actual debt is good, it is called leveraging in fact the idea of rich dad poor dad is to have money work for you and not to work for money....
using somoneelese money, captial insted of risking yours and investing it for a higher return. isn't a bad thing.

[scott]

actual debt is good, it is called leveraging in fact the idea of rich dad poor dad is to have money work for you and not to work for money....
using somoneelese money, captial insted of risking yours and investing it for a higher return. isn't a bad thing.

"Having debt" can be good... being "in debt" usually can't.

[Cant_Be_Faded]

Boys, one thing you have to rememba, is that step one to bein wealthy is wearin' clothes that are in proportion to your physique.

[mookie2001]

having a good business card too

[Cant_Be_Faded]

Preferebly, with a watermark.

Or at least that's what I'd want!

[smeagol]

I'm proud of the fact I have a decent NW. Both me and my wife have good paying jobs, so that certainly helps. On the other hand, I have three kids and live in NYC, so expenses run high.

Damn it!

PS: I wish my NW was close to my VBookie cash :depressed

[spurster]

Today, workers who save money and invest in a 401(k) plan are the highest taxed people in America. Now, I can hear some of you asking, "Isn't saving money and investing in a 401(k) having your money work for you?"

No -- at least not according to the IRS. A worker's pay is taxed at the highest tax rate possible. So are your savings and income from your 401(k). In most cases, money goes into a 401(k) tax-deferred but comes out as highly taxed ordinary income.

I disagree. Overall, your 401(k) or IRA will be at a lower tax rate, especially compared to investing the money without the tax deferral. Sure, there are other ways to reduce your taxes, no doubt better if you know what you are doing.

And if I'm wrong, isn't Bush's Social Security "reform" based on IRAs in some form? I thought it was going to be good for us.

[SWC Bonfire]

I disagree. Overall, your 401(k) or IRA will be at a lower tax rate, especially compared to investing the money without the tax deferral. Sure, there are other ways to reduce your taxes, no doubt better if you know what you are doing.

And if I'm wrong, isn't Bush's Social Security "reform" based on IRAs in some form? I thought it was going to be good for us.

It certainly can be, especially if you are planning to retire on a significantly lower income level that you are currently earning (i.e., much lower tax bracket).

But your rate of return and tax benefits are actually higher in other things, like real estate or things that you can actually use to make you money (equipment, computers, education) and then write off/depreciate off your taxes. Ideally, I personally thing that you shouldn't put your eggs in one basket and should do some of both.

[mookie2001]

I must to explain to yall the nature of dollar cost averaging

[SWC Bonfire]

I must to explain to yall the nature of dollar cost averaging

No.

But the vIRS called. It seems that you did not declare your winnings as income and you are being audited.

[mookie2001]

LOL

well with the vPatriot Act they could check my vbank statements

[xrayzebra]

LOL

well with the vPatriot Act they could check my vbank statements
:lol
They did!

[RandomGuy]

Ask an informal poll of people under the age of 35 what their net worth is. Most don't know, and a lot will probably be around $0.

RG's net worth is somewhere around -$70,000 at the moment. This is almost no assets and about that much in student loans and credit card debt from a year of unemployment.

This figure is projected to become positive in approximately 4 years, and is actually better than some people with 6 figure salaries who spend beyond their means.

The trick is to live well below your means, save and invest. No big secret.

The only way to really make a 100% certain buck on the stock market is to write a book about making money on the stock market.
;)

[RandomGuy]

Boutons, do yourself a favor and pick up a used copy of The Millionaire Next Door .


Best book I have read yet on money. I recommend it highly. executive summary: live beneath your means and save 15% of your income.

I also read "Rich Dad, poor dad" and thought it waaay tooo preachy and outright wrong in a couple places, but I can see how people who like to think themselves better than others would like it.

As for avoiding taxes:

There are lots of ways to do that within the system.

Take for example maximizing your itemized/standard deductions:
(dates given are for instructional purposes)
Pay 2004 property taxes in Jan 05, then pay your 2005 property taxes in Dec 2005. Save up your charitable giving for a few years, and then give it in 2005 as well.

You take your itemized deductions all at once in one year with a little planning, then take the "standard" (read: minimum) in the next year. This maximizes the effect of those deductions.

BUT

Keep your receipts and good records.

Heh, this is the kind of advice that CPAs charge a lot of money for, and is surprisingly simple. shhhhhh.....

[RandomGuy]

...they throw away their money on rent instead investing it in a home. Neither situation would be considered responsible financial planning.


Actually, to maximize long term wealth, sometimes renting can make more money in the long term than buying.

If you can rent for a couple of hundred dollars less than buying, and take that money and invest it responsibly, you can end up with more net worth than buying a house with a 30 year mortgage.

The calculation is kind of a complex one, because one really has to consider the full opportunity costs of both options.

Keep in mind that for the first 20 years (approx) of your house payments on a 30 year mortgage you are paying more in interest than principle, and that interest is a "dead" to you in terms of net worth as the rent is.

(begin edit)
RG breaks out his MS excel and whips up an amortization table and finds this to support his thesis:

The first 10 years of a 7% mortgage on $100,000 will see you spending $65,648.68 on interest, and only having paid $14,187.62 on principal.

Theoretically, you do get an income tax deduction on that interest that makes that interest a bit "cheaper". You can also deduct the cost of property taxes from income taxes as well.

BUT

On the flip side, let's say you can find an apartment for $200 dollars cheaper than your house payment+property taxes+insurance+(everything else).

And you invest that $200 per month at 7%, a rather conservative rate.

After 10 years you will have $34616.96, and this is clearly more than the $14,187.62 worth of equity you would have had buying the house at 7%.

Fast forward another 20 years and you will have saved up $243,994.30 with the "rent" option. This is compared to the house buyer who has a house with $100,000 equity.

That said, houses do appreciate. Say 2% per year. The house will then be worth $181,136.16. This is STILL less than the "rent" option.

There are LOTS of things I have left out, bear in mind this is a simplified example. Not everyone is better off renting versus buying, and a house is a very legitimate long-term investment, and something I would recommend for anyone.

All that said: I personally will be renting for the next few years while I pay down some debt. If you have any credit card debt at all, you should pay it off before saving a single cent. This of course requires enough discipline not to buy more on credit.

Credit cards should be used ONLY for short term cash crunches, like your car's transmission exploding or something, and shoudl be paid off ASAP.