In Career, Discussions, Discussions, Entrepreneurs, Money, Wealth

Reasons why business owners tend to be wealthier

It’s not really because they’re any smarter.

It’s more because if they handle their finances correctly (a crucial subject), they can avoid a lot of headaches and unnecessary taxation.

It all still boils down to the same core principles as with personal finances:

  1. make lots of money
  2. save as much as you can of it
  3. don’t spend it consuming what you don’t need to

EXPENSES CAN BE WRITTEN OFF

Business owners can write off a myriad of expenses, which in turn, lowers their taxable gross income.

Let’s say they need a new computer for their business.

By buying it under the company (and using it for the company), they can get the sales tax reimbursed (cha-ching! 13%), and it lowers their gross income (cha-ching! 20%).

Imagine this, for everything in the business from having to take clients to dinner, to buying a car to get to job sites.

OTHER DAILY EXPENSES CAN BE PARTLY WRITTEN OFF

Use part of your house for your business? Write off the equivalent percentage from your:

  • rent
  • internet bills
  • phone bills
  • utility bills

Cha-ching! 20% saved on business income taxes, and your own personal spending gets a little relief, no matter how small.


LEAVING THE MONEY IN THERE FOR RETIREMENT

The sweetest advice ever given to any new business owner is to NOT REALIZE YOUR INCOME.

What that means, is that if you make $60,000 in a year, and you owe 20% in business taxes, you have a net income of $48,000 a year.

If you take out $30,000 net (or less) to live on, and leave the $18,000 in the business as retained earnings, you will save on paying a bundle for your personal taxes.

That $18,000 left in the business can be put into buying bonds, index funds, or generating income in other ways, without being realized or taxed.

This is a perfect solution if you’re also the only shareholder (100%).

You will just keep amassing those sweet, sweet retained earnings, and when you retire, continue to withdraw out $30,000 each year to live on.

The only downside (if you see it as such), is you get $30,000 a year for your budget, which in my case, would be okay especially if I am able to write off parts of my living expenses used for my business, especially since I give myself a generous $40,000 gross/year budget.

It’s been documented time and time again in studies of millionaires who own their own businesses — they don’t realize their income, which keeps their wealth growing.

Only if you’re someone who consumes a lot (read: spends a lot), do you need to realize a lot of income and pay the Tax Man.

So even for business owners, you should make more money and spend less, it’s just that building wealth can be slightly easier for business owners, assuming their business doesn’t tank in the first year.


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Sherry of Save. Spend. Splurge.

I got out of $60,000 of debt in 18 months using TheBudgetingTool.com. Since then, I have worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K (savings rate = 85%). I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I also post daily on Instagram @saverspender.

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10 Comments

  1. Potato

    “That $18,000 left in the business can be put into buying bonds, index funds, or generating income in other ways, without being realized or taxed.”

    Are you sure about that? I’m pretty sure that passive income in a business is taxed at the highest rate. cf http://www.thebluntbeancounter.com/2011/12/should-your-investment-income-be-earned.html

    Reply
    1. save. spend. splurge.

      Oh THANK YOU!!! I don’t know what the rules are for Quebec though. I wonder what I should do with the cash then.

      Reply
      1. Potato

        @save. spend. splurge.: It can still be useful to smooth your income if you have big year-to-year fluctuations, but otherwise you may as well do the investing in your personal accounts.

        Reply
        1. save. spend. splurge.

          That’s what imma do then 🙂

          Reply
  2. Kassandra

    Very good points. Once I became self-employed my propensity to spend less and invest more really started to take flight. I also earn more now than I did when I was salaried so I can’t complain. Having to manage all aspects of a business including employing all available tax strategies really does help one to become better with their finances.

    Reply
    1. save. spend. splurge.

      And to be efficient and organized.

      Reply
  3. F
    Fig @ Figuring Money Out

    Great reasons business owners are wealthier…and reasons to own a business! I hope to scale and grow my own business next year and hopefully these reasons all still ring true for me!

    Reply
  4. P
    Petrish @ Debt Free Martini

    These points can be also looked upon as good reasons to have your own business. Taxes is a big deal and if done right can really put some change back into your pockets.

    Reply

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