.

 

What is the first rule of building wealth?  It can only be built with “after tax” income. Thus, if you lower your taxable income, it gives you greater ability to create wealth.  If you are reading this article to find out how ‘not’ to pay any taxes, stop and don’t waste your time. You are better served looking at websites that will tickle your ears with schemes that offer you to pay no taxes on income. I would also suggest looking at sites on Federal prisons, because perhaps you can negotiate which one you would like to spend some time in after the Feds catch up with you for tax evasion.  Yes, it hurts to pay a large chunk of your income in taxes and yes it sucks.  But, in the U.S., the privilege to earn a large sum of money also comes with the responsibility of paying taxes. If you made a large amount of money and did not write a big check to the IRS, you either cheated, or you are a large corporation with an army of lobbyists to get you some preferential loopholes. .  Of course, never pay more taxes then you should, but your focus should be on building wealth above savings in taxes

One of the core ways to build wealth is to start a business.

With an established business, here are the keys to building wealth with it:

  • Owner’s Wages – Pay yourself W2 wages out of the business at a market rate for the job you are performing in the business. In other words, how much would you have to pay someone off the street to do your job? Then live off of that wage. Do not fall into the trap of consuming the profits of the business.
  • Get Profitable with the business – After you properly set your wage as an owner, your net income gives you a true picture of the profitability of your business. If you are not profitable, examine all expenses that do not add value to the bottom line. Look at all labor, overhead, travel, auto, meal and entertainment expenditures. Can you cut back? Can you find a different vendor with the same quality but more affordable? (Never sacrifice quality just for the sake of saving a few bucks). You have to get your current business model profitable before you grow.
  • Grow Your Own Capital – When you are profitable, retain after tax business profits until the business is fully capitalized. Usually, being fully capitalized is having 2 months of operating expenses in cash with nothing drawn on a Line of Credit. A business that has 2 months of cash can act on opportunities as they come.
  • Take care of personal finances – Once the business is fully capitalized, you can then take distributions to get your personal finances healthy. Get out of debt first, and then build up your emergency fund.
  • Think Strategically – When your business and personal finances are stable, then you can make strategic decisions about the after tax profits of the business and decide if you want to grow the business larger or just continue to harvest the profitability of the business.
  • Do not fall back to over-consuming. Everything you buy owns a piece of you and creates a financial drag. Live off your wages and leave the profits of the business for wealth creation.