Disclaimer: I am not a tax professional, I only play one on television… but anything that I write about here can be confirmed by your local CPA or tax attorney.
There are 2 financial curses that weigh down folks in the American middle class.
If both earners in a 2 income family work in a typical W-2 job their greatest expense will not be their mortgage, but the wage taxes that are taken out of their weekly paycheck.
This tax rate for W-2 wage earners starts at about 25% and goes up from there based on income. The more you earn in a JOB the higher your tax rate climbs!
A business owner (or sole proprietor) earning a similar gross wage pays an average tax rate of only 13.3%. Middle class folks pay most of the income tax in this country.
Wage taxes are the FIRST CURSE of the middle class.
Most middle class people are aspirational and tend to buy homes rather than rent. The typical $200,000 home, paid for over a 30 year mortgage at a low interest rate will still COST over $400,000 in total payments.
If you own a home take out a calculator and do some simple math based on your mortgage statement. My $157,000 home will cost me $396,000 if I wait until I’m 59 years old to pay it off!
My goal is to pay off my home by next year.
In addition to mortgage interest most middle class families also pay interest on car loans, credit card balances and student loans.
Interest payments are the SECOND CURSE of the middle class!
You can’t escape taxes, and we all need a place to live, right?
Here is my super simple idea, a way to reduce these financial curses.
Do you and your spouse both work in W-2 jobs, and your home is NOT paid off yet?
Start a modest side business, something you can get into for less than $500.
Right away your taxes will decrease because you can claim expenses like mileage, meals and your cell phone bill.
Becoming a business owner this year might save you $5K this year in taxes, or it might save you much more, talk to an accountant about your particular situation.
The tax savings ALONE will probably offset the costs of starting your new venture.
Use the new income from your side business to PAY DOWN your debt.
You’ll still have to pay taxes, but if your business deductions reduce your taxes by $10,000 per year this adds up to $100,000 per decade that you get to keep in your pocket.
If you pay off your home in 10 to 15 years instead of the usual 30 you will save another $100,000 in interest payments.
Start a business with a low cost of entry.
Grow your income in your business to $1,000 per month.
Pay off your cars, your credit cards, then your home.
But what kind of business is low risk for a modest investment?
It can be anything from a lawn service to a consulting business to a home based direct sales business like Mary Kay or Life Leadership.
I started Balloon Distractions while I still held a full time sales job.
There are many ways you can start a small side business and grow it to profitability.
Don’t make the mistake of going into further debt to buy a franchise for $100,000. This is a mistake, especially if you still have a full time job.
It took me a few months to get my Life business up to $1,000 per month in net profit, and I’m glad that I took that leap. Anyone could do what I did, even if they worked 40 hours a week. I built my Life business on nights and weekends.
You don’t have to spend your entire life paying a big chunk of your income to the banks and the IRS, you can avoid the 2 curses of the middle class!
The other side benefit to operating a small business is not just the tax reduction and the additional income, but the skills that you will learn in taking the leap from being an employee to becoming an entrepreneur.
I haven’t been an employee since 2003, and this has given me tremendous freedom and options that I never would have had trading time for money and working for a boss.
I hope that gives you something to think about!
Benjamin T. Alexander
August 30, 2016