Death , Debt and Taxes
These are three of the greatest obstacles to creating, accumulating, preserving and transferring wealth. They are all inter-related and so it is very important that tax efficient earning and investing be a top priority
Death is inevitable and can be a very emotional event. It is also a taxable event. When a taxpayer dies, his or her estate is taxable. However with proper planning in place, many of your hard earned wealth can be passed on to your beneficiaries on a tax free basis. Furthermore your assets can be preserved and your wealth can continue to grow long after death.
Since we never know when we are going to die, the time we have to create wealth is finite and uncertain. It also means that the earlier we start to create and preserve wealth the better off we will be. The power of compounding works best when we start early even if the initial investment is small.
The single most important component in creating wealth is time leverage.
Two ways to leverage our time is to:
- Put our money to work for us, while we continue to earn. This means that as we earn we should be investing a part of our earnings in income producing assets, in a tax efficient manner. This may also involve setting up risk management programs, like insurance, to protect our investments.
- To employ the services of others in order to increase our earnings. There are only 24 hours in a day and physically we can do only so much. When we employ the services of others we can produce more by leveraging their time. As a society we, already, routinely leverage the time of others. When we go to the doctor we leverage the doctor's time, expertise and experience to help us to get better more quickly than if we attempted to heal ourselves. employers leverage our time to produce more income for their business. As employees we leverage our time by seeking employment at higher rates
Debt is a killer of wealth creation, primarily because of the costs incurred to carry the debt. It reduces important cash flow as well as net worth and restricts the ability to receive financing for growth. From a tax standpoint ,however it can be very advantageous to carry some debt.
Whereas the interest on personal loans is not tax deductible, the interest on your debt is tax deductible if the loan is invested in income producing assets. This includes most financial instruments e.g. stocks, mutual funds, GIC's etc, It could also be in rental properties or a business of your own).
One of the key components in wealth creation is to reduce your personal debts (bad debt) to a minimum while increasing your income producing investments with tax deductible debts. This is often referred to as OPM, or Other Peoples'Money.
***Borrowing money is a very serious decision and should always be entered into advisedly. If the debt load restricts cash flow or the business does not produce income to offset the costs of the financing, then borrowing may be counter productive.
There are several programs on the market today designed to help individuals to accelerate their debts reduction.
One such program is the Money Merge Account Program which uses sophisticated software to reduce your debt in the quickest way, based on the information provided. This program has helped hundreds of individuals to reduce their personal debts including mortgages, credit cards car loans and other personal debts, in record times.
The founders of the program, United First Financial were awarded the prestigious Ernst & Young Entrepreneur of the Year in 2008 in the Utah region. Many mortgage planners, real estate agents, financial and tax planners are bringing extra value to their clientele through this program.
Tax strategies like the Smith Maneuver, helps individuals to convert their mortgage interest to tax deductible investment interest, while building an investment portfolio. This is a more sophisticated strategy and you should seek advise as to how to implement it properly.
To learn more about how you can save money while reducing debt fill in the box below
Taxes is perhaps the largest income and wealth eroder other than death, because we are taxed when we earn and taxed when we spend. It has driven many individuals into debt; some have lost their freedom and hence their ability to earn an income. Assets and capital have been lost to taxes as have inheritances.If you were to ask most canadians, they would tell you that they feel taxed to death.
For most people who have a job, taxes are deducted at source. What this means is that the average tax payer has only a fraction of their income to spend. For example if you live in Ontario and are in the lowest income bracket where the lowest tax rate is 21% you will only have 79% of your income as disposable income. If you are in the top tax bracket, you only have 54% of your income to spend.
Depending on their lifestyles, tax payers may be forced to find other sources of income , or may incur short term loans to survive. Since loans are generally based on gross income, it is easy to see how people get into debt.
The first place to start if you have a job is at source, i.e with your paycheque. By reducing the taxes taken at source you can increase your disposable income. A tax refund at the end of the year represents a tax free loan to the government. The average tax refund for Canadians over the last 3 years is about $1200.00 or about $100.00 each month. $100 invested each month with a modest return of only 5% will grow to over $60,000 after 20 years
Owning a business or being self-employed is the most effective way of paying yourself first on a tax efficient basis.
