The Debt Millionaire
Page 9
against you.
* * *
I was not sure how to absorb this information.
The first shock was that the people on the left side of the WealthQ “count” money
differently from the people on the right side. The people on the “Paying” side “count” in
“nominal” dollars, while the affluent on the right side “count” in “real” dollars. That was
so different and also so important to know.
The second shock was that people on the “Paying” side purchased assets to make
them rich, but those assets when looked at in “real” dollars and after taxes, are at best at
break even or losing purchasing power. It’s actually in the DEBT that profit is made, not
the asset.
The third shock to me was that an asset doesn’t even have to keep up with inflation to
“make” money if it has the right debt, structured correctly.
Finally, one statement that Emile made originally threw me off, but was now starting
to make sense. “The people on the “Paying” side of the WealthQ borrow money to buy
assets, or buy these assets with all cash and no debt, but the people on the “Receiving”
side of the WealthQ create the right debt by finding the right assets to encumber them.”
It was a complete switch. The left side buys assets thinking it is the assets that make
them rich. The right side creates debt with the right assets because they know it is the
debt that makes them wealthy.
WOW!
I had finally started to see that it was debt, indeed correctly structured debt that was
the key to wealth. I finally felt everything was starting to make sense.
But there was more to come… lots more!
Chapter Summary
· It’s really important to understand “nominal” dollars versus “real” dollars before trying to understand inflation.
· Real dollars means in TODAY’s dollars. Nominal dollars means FUTURE or PAST dollars
without consideration to inflation.
· Think of “Real dollars” as “Purchasing power” and “Nominal dollars” as “Countable
dollars.” One tells you what you can purchase in today’s money, while the other tells
you how many dollars you have in the future or in the past without consideration to
what you can purchase with it.
· Real dollars are also called inflation-adjusted dollars.
· Inflation makes wealth flow from the left side to the right side of the Wealth Equation.
· People on the left side of the Wealth Equation think in terms of nominal dollars, but
people on the right think in real dollars mainly.
· Well-structured debt is the key to moving to the right side of the Wealth Equation.
· When you buy an asset today using well-structured debt, you are buying it in real
dollars today, but paying for it in nominal dollars in the future!
· Well-structured debt for inflation should be at a fixed interest rate for as long a period as possible. Aim for the lowest loan constant you can get.
Chapter Eight
Lowering Your Taxes
“So let’s talk about the exciting world of taxes” Emile said sarcastically as he smiled.
My body reacted negatively. I disliked dealing with taxes, but I knew I had to “deal
with it.” So I reluctantly leaned over. “You don’t seem to like the topic of taxes” he
chuckled. I shared with him my dislike of dealing with taxes and the overly-complicated
nature of it.
“Well then, I will share with you my simple system to dealing with taxes” he said.
I was expecting Emile to go over a whole bunch of deductions and numbers.
He proceeded to share with me his system for dealing with taxes that was pretty
powerful. I always enjoyed “systems”, and this system was one that I could use for taxes.
He called it his “Tax Management System”.
* * *
In chapter three, we saw how devastating taxes can be on your portfolio.
When we looked at our doubling of a penny problem, we noticed that the results were
pretty outstanding.
Here were the results:
· Tax-Free Compounding Growth: penny turns into $5,368,709.12.
· Tax-Deferred Compounding Growth: penny turns into $3,758,096.38 (assuming
30% bracket).
· Taxable Compounding Growth: penny turns into $48,196.86 (assuming 30%
bracket).
Obviously, we cannot find a place to double our penny every day, but this illustrates
the magnitude taxes can have on our investments.
The affluent on the right side of the Wealth Equation know that and therefore plan for
it.
There are tax benefits offered by the government to business owners, and it’s
important that you find the right experts to help you maximize your tax benefits. Many
people try to figure out their own tax savings in order to save money. I cannot stress the
importance of having the right professionals on your team to help do that instead of you
doing it yourself.
Also, beyond tax savings is what you do with your savings. Most people spend them,
while people on the right side of the WealthQ reinvest them.
A tax savings of $5,000 in one year will result in over $50,000 in 30 years compounded
at 8%, and that’s just a one-time tax savings. Each $5,000 used correctly as described in
this book can result in even a higher amount in the same time frame.
Again, the key is to have the right team work on your taxes. Unfortunately, most
people think that just means having an accountant. Most accountants look through your
existing taxes to find tax deductions. However, the right tax attorney or tax professional
(which I will refer to as “tax strategist” later) for example can restructure things and
create new entities to create new tax deductions and therefore generate bigger tax
benefits. So don’t just go to your accountant and assume you are done, rather, find the
right tax professional, typically a tax attorney. The cost might be higher for the latter, but they more than pay for themselves with their tax planning and savings knowledge.
The key is to have as much of your investment growing in a tax-deferred or tax-free
environment.
Furthermore the use of debt strategically has tax benefits. This includes mortgages,
business debt, HELOCs used for certain things, and loans for investments. Not all loan
interest qualifies as a tax deduction, but it is always prudent to see if a new loan will
qualify as one. Consult with your tax professional as to deductibility of interest before
using debt for an investment.
The strategic use of debt may have tax benefits. Work with your tax
professional.
I could show you lots of charts on how tax-deferred and tax-free environments can
save you a lot of money, but I will not do that. Also, I will not talk about how you should
not do your own taxes or actual benefits, but rather I will share with you the basics of the
system the affluent have in place to address taxes. The system is called the “Tax
Management System.”
So let’s jump in.
The Four Components of the Tax Management System
Figure 29: The four components of the Tax Management System
Here are the four components for your Tax Management System:
Team: This is your TEAM that should be involved in all aspects of your Tax
Management System and responsible for helping increase yo
ur net-worth and save you
money. The team should work together for and with you. The team should work off of
your “Big Picture” plan for your taxes! You need to lead this team by following a plan that
one of your team members (the Tax Strategist) develops for you in writing. We will
discuss who should be on your team later in this chapter.
Plan: The PLAN is customized for you by your Tax Strategist. It should include the
entities to use and instructions on how to use them. It should also be straight forward
and clearly written so that anyone in the future can follow it. It should have measurable,
defined benefits (savings), and it should be written to be useful for many years to come.
Vehicles: Your VEHICLES can/should include whatever your Tax Strategist thinks
would be best for you, such as trusts, qualified retirement plans, banking systems,
entities etc.
Processes: Your PROCESSES are all the processes that you will need to have in place
for running a very efficient system. These include systems for filing, tracking expenses,
documentation, verification, bookkeeping process etc.
The Three Team Members of Your Tax Management System
Figure 30: The three main team members in the Tax Management System
Here are the 3 team members of your Tax Management System:
· Tax Strategist
· Accountant
· Bookkeeper
This is the team that would be involved in all aspects of your Tax Management System
and responsible for helping increase your net-worth and save you money. All team
members should work together for you. All three should review and work off of your “Big
Picture” plan for your taxes! You need to lead this team by instructing your Tax Strategist
to first develop your “Big Picture” plan for you in writing, then getting your accountant on
board and have them discuss your plan, and finally your bookkeeper. A payroll service is
sometimes added to this to handle just that, your payroll.
Here’s a brief description of each of these functions:
Tax Strategist: There is not a specific “Tax Strategist” designation. A Tax Strategist is a CPA or Tax Attorney who has studied how to predict the tax consequences of
business and investment decisions. The primary difference between a good CPA and a
Tax Strategist is time. A CPA/Tax Strategist can lay out a course of tax loopholes that
steer you clear of tax situations, legally. A good tax CPA catches you after you’ve run
into the problems and then helps you get out of them. A Tax Strategist helps build
your “Big Picture” plan (sometimes called your “Tax Strategy Plan”) that your
Accountant and Bookkeeper can use to save you taxes. You should meet with them at
least once a year, and more often as they recommend which will depend on your
business.
Accountant: Accountants’ work varies depending on if they work in a company as an
employee or on their own where they may focus on assisting small businesses.
Some accountants are directly involved in preparing an organization’s financial
statements. Other accountants work with a corporation’s management in analyzing
costs of operations, and products. This can also involve budgeting and preparing
reports. Some accountants and CPAs choose to work on their own and focus on
assisting small businesses with their accounting systems, financial statements, income
tax returns, tax planning, etc. The important thing here is to make sure that your
accountant works within the scope of the plan developed by your Tax Strategist.
Bookkeeper: Performs work, including but not limited to performing work of a diverse
nature; serving as a bookkeeper; purchasing materials and equipment; conducting
invoice activities; paying vendors for delivered materials; providing inventory support;
and performing clerical/administrative functions. Bookkeepers work closely with
accountants.
The Fives Phases for Launching Your Tax Management System
Figure 31: The five phases of launching your Tax Management System
Here are the phases of your tax management system:
1. Team Building: This is the first critical part of building your team. Your first team member should be your Tax Strategist and/or Accountant. They will help you with
identifying and recruiting the other team members.
2. Evaluation: Meet with your Tax Strategist and go through your current financials
showing where you are at this point. The reviews performed during the evaluation
phase are critical for laying the groundwork to be able to move to the next phase—
planning.
3. Planning: After the evaluation phase, the Tax Strategist can now help build a plan
with a customized strategy just for you to save you on taxes and help position your
financials in the best light for borrowing from the bank for investing.
4. Strategy: The result of the planning session is a customized strategy just for you
to save you on taxes and help position your financials. This should be shared with
your whole Tax Management System team, i.e. the bookkeeper, accountant and
your attorney.
5. Management: This is your ongoing processes to follow through with your plan.
This includes regular updates with your team, as well as processes in your business
to keep track of documentation and verification, etc.
The team should be able to help you build your processes and checklists. Work closely
with your bookkeeper to help setup your processes and checklists.
As I said this was intended as an overview of the “Tax Management System.” It is
important to remember that you have to focus on developing the system to solve the
specific problem, in this case lowering your taxes. The cost of this system should pay for
itself with the tax savings if you build the right team.
Built in Tax Savings when on the Right Side of the WealthQ
In the previous chapter on inflation, there was a very interesting implied strategy that
is built into the discussed strategy. Investors on the left side of the WealthQ focus on
increasing their net worth by looking at nominal dollars. “Buy something today and sell it
in the future for a larger amount.” As mentioned, that is the left side of WealthQ thinking.
It is in nominal dollars. And as shown, they pay taxes on nominal dollars even though the
purchasing power went down or stayed the same! Think about it: They are paying taxes
on “gains” that don’t exist in terms of real dollars!
Investors on the right side of the WealthQ look at real dollars, and focus on the debt
and not “appreciation” only. In fact, because the asset doesn’t have to appreciate as
much, the amount of taxes paid on the nominal dollars is less than otherwise paid but the
true gain is made in the real dollars from the debt, and they do NOT pay taxes on that!
So as a result, the investors on the right side of the WealthQ end up paying less taxes
overall and have bigger gains than the people on the left side!
To wrap up this chapter, do what the people on the right side of the WealthQ do:
· Build the right team
· Have a plan developed by your team
· Create a system to manage your taxes
· Reinvest your tax savings.
· Educate yourself. There are many books out there on this subject, it’s a great idea
to read a fe
w.
· Use debt strategically.
· Place your investments in tax-advantaged environments.
* * *
“I love this system Emile!” I exclaimed. “This helps investors feel empowered.”
“Emile has everything systemized. This is one of many systems” my mentor chuckled.
Weeks later, I was surprised to receive a box of Emile’s documented systems. This box
included his “Tax Management System”, “Debt Management System”, “Credit
Management System”, “Inflation Management System”, and “Family Bank System” among
many others.
These documents really shed light on how this man thinks.
Chapter Summary
· Taxes can have a devastating impact on our wealth
· The affluent on the right side of the Wealth Equation know that and therefore plan for it. They do so by doing the following:
o Build the right team
o Use a system to manage their taxes
o Use debt strategically
o Place their investments in tax-advantaged environments
o Educate themselves
o They know that it is important to reinvest their tax savings and not just spend
them carelessly.
Section Three
Putting it All Together
Chapter Nine
Debt Revisited
As I sat there contemplating what I had learned, I realized the power of moving over
to the “Receiving” side of the Wealth Equation. You position everything to work for you,
and by everything I mean people, systems, money, monetary systems and the economy.
That was just amazing.
“The WealthQ Method” of investing is indeed very different from traditional investing.
It is a very methodical process and has a lot of thought behind it.
And the secret “weapon” behind The WealthQ Method is well-structured debt, the
same thing many people say to avoid. For many people DEBT is a 4-letter word. It
dawned on me that the middle class and poor people were saying that, yet the wealthy
always said it was part of their “ammunition,” in fact their “secret” weapon.
The words used to describe debt as a “weapon” and “ammunition” started making
sense. Debt is used to fight a lot of things, but also, like any weapon, it can be used for