Save. Spend. Splurge.

Wealthy People Don’t Realize Their Income

Misleading, I know, but it’s not that they don’t know how much they make, it’s more that when they make the money, they don’t spend it (also known as “realizing their income”).

What is the difference between realized income versus unrealized income?

Realized income is for instance your salary, or any money you have to pay tax on.

You make $40,000 a year, and you get paid the full $40,000 which means you have to pay taxes on it as well, you can think of it as any time you earn money (even on your investments), and want the cold had cash in your pocket at the end of the day.

Unrealized income is money that you “earn” like when your investments go up in value, but you don’t sell them to get the profit or the cash into your bank account, which would turn it into “realized” income.


A home is another perfect example of unrealized income.

You bought the home for $200,000 (let’s say you bought it outright or you’ve paid the mortgage off), and it is now worth $400,000.

Your net worth has now gone up $200,000 but you haven’t realized the income, because you haven’t sold the home for $400,000.

Millionaires maximize their unrealized income

A typical millionaire next door has a realized income that is equivalent to only 8.2% of his wealth.


This means that they only take 8.2% out of their investments, their companies, their salaries or what have you.

Net worth of $50,000

So let’s say you have a net worth of about $50,000:

$50,000 x 8.2% = $4100

This means that if you had $50,000 as your net worth, you’d only spend about $4100 a year on your expenses like rent, and food.

That’s near impossible!!!


Net worth of $1 million

But if you have a net worth of let’s say $1,000,000:

$1,000,000 x 8.2% = $82,000

A person with a million as their net worth, to be in the millionaire mindset, spends about $82,000 a year.

Of course, there are certainly millionaires who spend a lot less than that, but that’s the median.

My personal situation: ~$540,000 in net worth

$540,000 x 8.2% = $44,800


That means I’d have to spend about $44,800 a year to have a millionaire mindset or $3735 to have a millionaire mindset.

I could do that.

It’s surely something I’m thinking about now.

How can I start thinking and managing my money like a millionaire?

The biggest thing that ordinary folk like us can do, is to put the MAXIMUM into tax-deferred and tax-sheltered retirement plans.



Tax-deferred plans like the 401K for Americans and RRSP for Canadians are the easiest way to not realize any income until you go to retire (then you’ll get taxed when you withdraw the money, but you’ll need the money anyway!).

This means if you invested $5500 in your RRSP this year, you would not be paying income taxes on it (it’d lower your taxable income), and in 40 years it’s $38,719 at 5% interest, and you will be taxed on that $38,719 when you go to realize that income at retirement.


  • No income tax paid on the year you contributed the money (lower taxes)
  • Money grows tax-free for the whole period it’s in your tax-deferred plan


  • You’re taxed on the money when you go to withdraw it (presumably) at retirement age
  • It’s locked-in, and you can only withdraw it for a home or education, but you have to pay it back


For things like a Roth IRA for Americans or the TFSA for Canadians are tax-sheltered plans, so don’t write them off either! You should also max them out if you can.

Tax-sheltered means that even though you pay taxes on the income first before putting it into a Roth IRA or a TFSA, you can invest that money which will then grow tax free until you retire.

So imagine if you invested that $5500 in a TFSA this year, and you’d pay income taxes on that $5500 this year. In 40 years it turned into $38,719 at 5% interest over the long-term, if you went to take out that $38,719 from your TFSA, you won’t be taxed on it.


  • Money grows tax-free for as long as you leave it in there
  • It’s not locked-in, you can take it out any time you want and have the room available later on
  • You won’t be taxed on the money if you take it out (at any time you want)


  • You’ll be income taxed on that money in the year you contributed it (full income taxes)

Contributing and maxing out the above accounts basically lets you not “realize” the income, because you will not be taxed on anything you contribute, and it lowers your taxable income as a result.



As a freelancer, the best thing to do is to have a company, make money with that company, and take out as little as possible as your salary.

Leave all the money in your company, invest your retained earnings, let it grow and be taxed under the company, and slowly siphon off money from your company when you go to retire.

The reason why this is awesome, is because you get taxed at company rates (much lower than individual rates), it’s still all your money (assuming you’re the owner and sole shareholder), and you get a built-in nest egg when you go to retire.

In doing so, the main downside is that if you don’t take a salary (you take dividends from the company instead) and contribute to Social Security or CPP, you won’t get much from the government when you go to retire.

You are REALLY on your own for your retirement with this kind of strategy.


  1. Know and calculate what your net worth is (how much you have minus how much you owe)
  2. Know how much you spend yearly by budgeting and tracking your expenses
  3. Calculate how much you spend yearly versus your net worth (see above)
  4. Pay down your consumer debts so that you aren’t wasting your money on high interest rates
  5. Save and invest as much as you can but don’t realize that income
  6. If you decide to buy a home, pay for it in full and keep it for as long as you can

Saving your money outside of your retirement accounts, buying a home and keeping it, and investing it on the stock market, and leaving it there (that is, don’t take out the money as “cash” in your bank account), is another way you can make money without realizing it.

The key is to grow your net worth.



  • Jaymee @ Smart Woman

    Reading this only gets me excited about figuring out my own numbers!! (Hehe yes even though my net worth is negative right now due to student loans.. It’s a temporary situation which I have a plan for!)

    This post helps me realize it’s not that hard to become a millionaire and I like the actions you included I can do today. Great read!

  • Derek@LifeAndMyFinances

    Great points. My wife and I have paid down all of our debt and now realize less and less each day. We put a large percent into our Roth 401k through my work, and we’re now investing in a rental property and plan to use the proceeds to buy another one (and therefore pay no tax on the earnings. 🙂

      • Derek@LifeAndMyFinances

        And now we just bought another rental property!

        This whole unrealized income idea has been awesome. On that first rental property, we bought it for $81,000, put $9,000 into it for repairs, so we’re into it $90k. That same house today, thanks to the hot real estate market, is worth $137,000! We added $47,000 to our net worth and paid nothing in taxes on those profits! Why? Because they’re unrealized!


        We’re now doing the same thing again and fixing up rental house #2! 🙂

        Thanks again for the awesome article.

  • Dd

    Seems like a raw deal if you contribute 5500 for 40 years at 5% and only have $38K to show for it. I’m assuming you mean $380K. Unless that 38K is the 8.2% you can harvest off the amount at the end of 40.

    • save. spend. splurge.

      I am not quite sure what you are referring to but the general idea of the post is that whatever they have saved as their net worth / assets, they generate an income or live off only 8.2% of what they have in total.

      A little more context / help please? 🙂 Thanks!

  • Adam @

    Great advice. The average person should be doing everything they can to maximize those tax deferred accounts and not touch their savings.

  • Michael @ NTPNW

    Were actually lower than 8.2% because as we have grown our income we have kept our living cost about the same and used the money to build our savings and investments. So yes we too have the millionaire mind set but I never knew it until I read this article, thanks

  • Hannah

    I would have a really hard time living on 8.2% of my wealth at least if I were going to keep working and paying for childcare. This post really reminds me of my grandparents and my parents. My parents probably have a net worth around $3-4M (maybe even higher), but most of it is in a business. Their spending of maybe $80-$100K per year might seem like a lot to some folks, but for them it’s just not a big deal.

    • save. spend. splurge.

      Childcare is a real killer for cost. I can’t believe how much it costs and I can completely see how it’s cheaper for someone to stay at home if there are two or more kids.

  • Glenn

    Small business owners need to consider taking out more than just what they need. If you are a small business owner and only take out the bare minimum you could run into problems when you apply for a car loan or mortgage as they do not like to recognizing income left in the company.

    Money invested passively (e.g. stock/mutual funds) within a corporation is taxed at a much higher rate than active business income and if most likely better off in an RRSP. A good compromise is to take out enough to reach the RRSP contribution limit and leave the rest in the company.

    • save. spend. splurge.

      1. That is true. I always take out a little more than I need and save it, just like any other salary.

      2. The article is referring to people who have high net worths and live off 8.2% of their total assets because it generates enough income from 8.2% to live comfortably. It can be in anything not just small businesses but in real estate or other income paying assets.

      3. That is a myth that it is taxed at a much higher rate in a corporation. I have to look back on my notes but I asked my accountant and he said that this is a big misconception. You can certainly invest your money in your corporation in index funds for instance, and it is not taxed any differently than if you were to withdraw the money, pay taxes and then invest it.

      I should go back and ask him for more details so I can write a post on it.

      • Potato

        @save. spend. splurge.:

        That is a myth that it is taxed at a much higher rate in a corporation. I have to look back on my notes but I asked my accountant and he said that this is a big misconception. You can certainly invest your money in your corporation in index funds for instance, and it is not taxed any differently than if you were to withdraw the money, pay taxes and then invest it.

        The first part is not a myth, passive income is taxed at a higher rate in a small business. That is to make the second part true: whether you leave money in your business and invest within your corporation or take the money out and invest it yourself should lead to minimal tax advantage either way. If you have personal RRSP or TFSA room, you could be better off taking more out of the business and using those tax shelters (and generating RRSP room in the first place depends on paying yourself a salary). When those are full, then it gets complicated and I haven’t researched it enough to say.

        Here’s an article I googled up on it:

  • mortod

    That should be 4% rather than 8.2% if you want your investments to last forever. This is the famous “4% rule” If you’re taking out 8% then the value of your investment will go down over time according to the theory.

    • save. spend. splurge.

      The article stated 8.2% for millionaires (click on the Via link just under the quote), but that’s a good point.

      Let’s say conservatively 4% – 8.2%!

      • EdD

        @save. spend. splurge.: The article doesn’t say anything about a retired person generating 8.2% cash flow off of his or her portfolio (assets). What it does say is that the typical millionaire lives on realized income which is about 8.2% of his or her net worth. There is no discussion on how the income was generated. The message of the article is to move as much of your income to unrealized income so that you can build up your net worth.

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