While the coronavirus pandemic has created financial strain for a lot of low-income and middle-class Americans, many wealthy people don’t seem to be as affected. The stock market is doing relatively well, and many of the world’s richest people are getting even richer. How is that even possible, you may ask? Here are three main reasons the rich are getting richer.
1. They create their own business. Instead of having a typical job and following the rigid schedules of their bosses with a capped salary, many rich people opt to create their own businesses. By having their own business, the income they make is taxed at a lower rate. They are also able to write off business expenses like their home internet bills, gas in their cars as they travel to and from their business, and fancy dinners with colleagues that most people pay for out of pocket. Another advantage of having their own business is that the ceiling for how much money business owners can make is oftentimes much higher. They are not limited to a certain salary and have the potential to make much more money, depending on the value of their business.
While you and I may not be creative enough (or have the time) to create the next Facebook, as high-income professionals, there are simpler ways we can start a business. People in the medical field can create a business by contracting out their services to the hospital (i.e., be an independent contractor instead of a salaried employee or do locums work). People outside of the medical field can create side hustles in which they complete surveys, start blogs, host a podcast, give consulting advice, invest in real estate, serve as nutritionists, tutor kids, start a daycare, etc. Many of these things create side income that would classify as a “business.” After we come up with an idea, we should complete the paperwork needed to make it official through the IRS (by registering it as an LLC, corporation, or limited partnership). Once we complete this process, we will be better able to lower our tax rate, keep more of our money, and increase our income.
2. They find ways to lower their taxes. While most people complain about paying taxes or suck it up and merely hope for a refund in April, the rich approach taxes in an entirely different manner. They view the tax code as a list of incentives from the government to do certain things, and they follow in line accordingly. Their reward for this “obedience” is lower taxes.
For example, the government wants us to create businesses, since entrepreneurs create jobs for other people and generate revenue that stimulates the economy. Thus, the government provides incentives for business owners by taxing them at lower rates and allowing them to write off many of the expenses the average person has to pay out of pocket. What do the rich do? They create businesses.
The government wants its citizens to have children, since procreating and raising other little humans secures the viability of our nation. Thus, the government provides tax incentives for people who have kids by giving them tax credits and creating tax shelters as they save for their kids’ education. What do the rich do? They have kids, (but not too many especially considering how much kids cost us in time and money).
The government also says it wants its citizens to invest in nonprofit organizations and charities since doing so provide funding, education, housing, etc. for the less-fortunate and lowers the amount of money the government has to use to subsidize programs for these individuals. Thus, the government allows people who donate to charities, churches, and nonprofit organizations to have tax deductions of up to 50 percent of their entire income. What do the rich do? They give to charities and start nonprofit foundations. (Think all the rich people you can think of who have started foundations and scholarship funds. These people may not have started charities to lower their taxes, but decreasing their taxes by hundreds of thousands of dollars each year is a surefire incentive to give.)
3. They invest in assets like real estate and have lots of money in retirement accounts. Unless you’ve been living under a rock, you’ll know that the rich want to keep their wealth. One way they do this is by investing it and purchasing items that increase in value from year to year. Instead of buying depreciating liabilities like new cars, the latest cell phones, or stylish clothes, the rich invest in assets (or things that increase in value).
Thus, they put their money in stocks, purchase commodities like gold, and invest in various real estate forms like land, homes, and apartment buildings. These assets increase in value from year to year and create additional cash flow on the side to supplement their income. Not only does this grow their wealth, but it also virtually ensures that they’ll have enough to pass on to their kids and grandkids. Think generational wealth.
My point? These strategies on how the rich get richer do not only apply to the wealthy. These same opportunities and strategies are open to us as well. If we want to accumulate wealth, or simply keep more of the money we currently have without paying a large portion in taxes, then we should consider following the strategies above. Think about what you are good at or what you like doing and consider a business you could start, product you could create/sell, or service you can render then file it as an LLC (or other business entity). Before you know it, you’ve “started your own business” and can now take advantage of tax rules that allow you to write off many of the expenses you already paid for.
If you feel you pay too much in taxes, then meet with a tax advisor or talk to an experienced professional about ways you can lower your taxes. If you’d like to have your net worth increase in value so you can start living the life you’ve always envisioned, then talk to a financial planner and start investing. If you don’t have a financial planner or don’t think you can afford one, then start by putting money aside in your job’s 401(k) plan and investing the money in that account into a low-cost index mutual fund. (If you’re an advanced investor, then start learning about real estate and other active/passive investments.)
The rich start businesses, find ways to lower their taxes, and invest in things that appreciate in value. You can too.
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