There are some rules in the game of money you need to know about to play like a pro. The rules are about tax strategies and structuring income and investments in corporations and trusts. Knowing these rules can save you hundreds of thousands of dollars on your path to wealth and financial freedom.
The wealthy know these rules. They know that structuring income and investments in the right tax and legal vehicles is how the rich get rich and stay rich.
Let’s just take tax as an example. Tax is your biggest single cost as an individual income earner. The average American will pay half a million dollars in taxes over their lifetime.
Why not use the same methods the wealthy use, to build your own wealth?
Smart structuring keeps the tax man at bay
Smart structuring is a complex area and is tailored to your individual financial circumstances.
It’s about taking advantage of tax and investment efficient instruments to make sure you keep more of the money you make. We’re talking the kind of instruments used routinely by the wealthy 1%.
Smart structuring can start with knowing your way around banking personal finance products and taking advantage of these. As your finances grow it might evolve to getting some savvy advice from a top accountant as well as the right kind of legal advice about how to structure your income and investments.
To get structure right, you need to be clear what investment you’re planning and what your objectives are from that investment. Having this conversation with your accountant and legal advisors is a great acid test for your financial freedom plan – so get on it peeps!
We’ve paid for this kind of advice in the past and that money has been returned to us more than 10-fold. Just make sure you get the right experts in the field. You pay peanuts, you get monkeys if you know what I’m saying..
Let’s talk about a few smart structuring ideas that can help you with your financial freedom goals.
Examples of smart structuring
How to play the money game your bank’s way
Bank loan products are intentionally complex and designed so that you’re never comparing apples with apples when you look across different types of loans. The upshot is, you never really know whether you have the best deal. Good for banks, not good for your financial freedom.
Home loans, offset accounts, credit cards and rewards
If you have a mortgage on your own home then it may pay to think about making clever use of the following bank products in tandem:
- Low interest home loan +
- Offset account against that home loan, or multiple offset accounts +
- Zero fee credit card with and interest free period of at least 4 weeks AND a good financial rewards scheme.
These products can be used together to get great benefits – always pull together a spreadsheet to work out if this strategy is right for you. You may find that the zero-fee rewards credit card is only available as part of bank mortgage bundles.
If you have a home loan and an investment property loan, you can usually get access to these bundled packages when your loans are both with the same bank (but please be careful not to cross collateralise your loan products if you are banking with the one lender).
Use the bank to make money
This is how you might structure your finances around these products:
- Have all income (including wage and investment property rent for example) paid into an offset account. The result will be 100% of that income offsetting a home loan for the WHOLE month. We put our offset transaction card in our sock draw so we don’t use this account.
- Have all of expenses, including personal and investment property expenses, paid from your credit card each month. This will mean some extra book-keeping for you at tax time, but for us it was worth it.
- Set up an autosweep of our credit card at the end of each interest free period that pays it off IN FULL automatically, so that we pay zero interest for using the card. You can do this in most banking apps or ring up the bank.
- Look for a credit card with a reward scheme that offers cash back from the bank or rewards with merchants we ALREADY USE for day-to day-expenses.
The benefits? Here’s how it all works out:
- We max out the bank offset feature across all of your income streams. This means 100% of everything you earn is offsetting your mortgage at all times.
- We end up paying off our home earlier. This is good because there are no tax deductions on bank interest for home loans, at least in Australia.
- We earn rewards on all of your expenses, personal and other. This adds up. We found ourselves with $2000 worth of free groceries at the end of the year just by being smart about how we use bank products to play the money game. We ate for free for 4 months. Huzzah!
It’s really doable folks.
It takes some time setting it up and some extra bookkeeping but it was literally worth multiple thousands of dollars to our bottom line over the course of a single year.
Be a business badass
Anybody read Robert Kiyosaki’s Rich Dad Poor Dad? This is #1 on our curated listed of financial freedom books.
Rich Dad Poor Dad explains how the rich make money. The ‘how’ is important and it’s all got to do with keeping as much of your money as possible from the government.
Not tax avoidance, tax efficient structuring.
The concepts are simple. Once you read Rich Dad Poor Dad, you’ll understand how important it is to properly structure your income and investments. If you don’t, you may as well be playing the game of money blindfolded with one arm tied behind your back.
Not all income is equal
One of the fundamental rules of money to fully grasp and that Rich Dad Poor Dad talks about is that Governments get paid in taxes.
This bit is critical to wrap your head around if you want to keep the money you make – governments earn most of their revenue from income taxes. Wage earners!
Check out this graph of Australian Government tax revenue sources… Personal income tax makes up 40% of consolidated revenue. Company tax is way lower at 19%.
Now to make sure they get paid well, governments structure the tax system to incentivize companies to create wage-earning jobs. They do this by offering loads of tax breaks and deductions to those companies.
Here’s how the system is set up to reward companies over individuals…
Once you’ve got your head around that, let’s consider how tax rates reflect this. In Australia the company tax rate is 27.5% of earnings AFTER expenses. In comparison, the top personal income tax rate is 45% of earnings BEFORE expenses.
If you’re earning your money as personal income – i.e. as a wage earner – you’re a tax mule.
Warren Buffet and Donald Trump pay less tax than the minions that work for them because they’re know the rules of money (I can’t believe I wrote that about good ol’ Trumplethinskin). They also pay for good advice from people who run the money game. Enough said.
Be a company director
So what does this all mean for you?
Earning your income in a company can help you make use of tax breaks and deductions – like the rich do.
the LLP
There are costs to earning in a company structure. These include set up costs, annual company fees and accounting fees. But the tax system is designed to reward companies with tax breaks and deductions that can far outweigh these costs in the long term.
This is just one rule in the game of money that most of us are not taught in school and that the rich take full advantage off.
If you want to learn more about how the money game keeps wage earners poor, kick-off your reading with Rich Dad Poor Dad and then move on to Cashflow Quadrant. Both by Robert Kiyosaki. You might just have your money mind blown.
Protect your wealth with Trust tax strategies
Another tax efficient instrument that the wealthy use and you should consider are trusts. Trusts can help protect assets from legal liability and contribute to estate planning. They can also help distribute income among beneficiaries so that everyone involved pays less tax.
Here’s a run-down on different types of trusts for US citizens.
Stay tuned to our Ms Mogul blog to find out how we’ve used both company income and trusts to get ahead in the game of money.
