The first and biggest “leak of wealth” is taxes.
Our tax system is designed to penalize hourly and paid workers, while rewarding entrepreneurs and business owners. Wage workers pay taxes based on their gross profit, while business owners pay taxes based on what they net. To that end, most people think that Fortune 500 companies are attracted to little boys. Keep in mind that you don’t have to be a big business to get big tax benefits. Even start-ups receive huge tax breaks. So instead of complaining, you may need to run a business from your kitchen table.
To qualify for tax relief in this business, the IRS says you must intend to make a profit. When this standard is met, you automatically qualify for dozens of tax breaks that you do not receive as an individual. Most losses and start-up costs can be written off against other income from your work (restrictions apply, so get a good business CPA to work with you). Realize that no one else (not even your CPA or taxpayer) cares how much you pay in taxes, so it’s your job to understand how the system works and how to use it effectively.
Loss of chance for complex growth
Another set of huge wealth outflows are the market losses of investment capital that you control. When a stock or piece of real estate drops significantly, it can take years for you to return to a steady level. And, of course, there is no guarantee that it will return during your investment life. The less capital you invest, the less you can take advantage of the power of blending growth.
If the money supply curve is broken by market losses or premature withdrawals, this has a huge effect on your final wealth fund. For example, if you were offered a job that lasted only 36 days and you had two options in the pay plan, which would you choose? (A) At the end of each day, you may be paid $ 5,000 per day, for a total of $ 180,000. (2) Your second option is to be paid one cent starting on the first day, but your pay will double each day – will be multiplied by 100 percent – and will be payable at the end of these 36 days.
If you jump to $ 180,000, you miss the power of real money mixing. If your colleague, who does the same job, chooses a penny, he would not be a millionaire. In 36 days … he would be a dirty rich multimillionaire with a last check of $ 343,597,384. Obviously, your investment will not undergo such rapid (or constant) growth of the compound, but do the math – the strength of the composition curve is strong over time – if you do not break it with large losses (which are not always control) or withdrawals (which you can ).
Money lost in fees and interest for banks and financial companies
The next huge wealth drain we face is interest and fees paid to banks or financial companies. Borrowing money has been around for thousands of years, and every business model that has lasted that long is a winner – for business. But when you’re on the loan side of a deal, it’s an outflow of wealth, especially if most of your borrowed money is spent on depreciating assets.
Now people will tell you that if you can take money cheaply and invest it in something that has a higher return than the interest rate you pay, then use the lever correctly. This may be true, but those trying to make such a move should be aware of the warnings. Try this simple exercise: Collect all the money you’ve paid in your life with monthly payments. Then compare that amount with the amount you saved for retirement and see which is higher. (If you wish, we’d love to hear about your results in the comments section below.) Then think about how to be a lender, not a borrower.
Depreciation of vehicles and other large assets
Another huge loss of wealth comes from the depreciation of cars, boats, equipment, appliances and most other large assets that we buy. Most people will lose more money on cars in their lifetime than they will ever save on retirement, let alone all the other depreciating assets they will buy. But there is a way to make money from these items.
Think of your financial life as a big pie. Don’t fall for the old magic trick and focus only on what happens to one of your pie pieces (ie your investment gains or losses). Instead, pay attention to the whole pie and put an end to your huge sources of wealth.