Man: This is Cashflow Ninja, Episode 24, another Wisdom Wednesday.
Announcer: Welcome to the Cashflow Ninja, the podcast empowering and inspiring people to discover how to generate their own income, and manage, grow, and protect their own wealth in the new economy. Now, here is your host M.C Laubscher.
Laubscher: Hello, everyone, M.C Laubscher here, and welcome to another Wisdom Wednesday. The topic of our show today is the biggest wealth destroyers. Now, this is an extremely important topic for anyone that wants to build true and lasting wealth. You'll never really be able to build true and lasting wealth if you're not aware of the biggest wealth destroyers out there, and know of strategies to implement to reduce and limit the impact of these wealth destroyers in your financial life.
In the average family, money goes usually to the following areas: debt, savings, taxes, investments, and lifestyle. So, usually if you do not have a plan, a wealth plan set up and a wealth capture strategy, which I talk about in previous podcasts as well, where you capture your wealth systematically, the money will not go into savings and will be spent usually on lifestyle. So that's the first wealth destroyer. I would say not having that plan that is strategically and systematically done every day is a very big wealth destroyer. We've spoken in past episodes too of how to combat Parkinson's Law through establishing a wealth infrastructure and wealth capture strategies again. So I'm not going to stay on that for too long.
So let's look at the big kahuna of wealth destroyers, yep, taxes. I just want to state before we even get into the discussion of taxes that I am not a tax advisor. I'm not a tax strategist or a tax professional. Please talk to your own tax professional about your own personal situation, since everybody's situation is different. Now that we have that out of the way, Benjamin Franklin said, “The only thing certain in life are death and taxes.” I mean, taxes is really the biggest wealth destroyer out there. The average person in the United States, for instance, pays a federal personal income tax averaging around 17%. Then there's social security, Medicare taxes, which takes another 7.65 is around the average for an employee. And 15.3% for self-employed person.
Then there's state and local income taxes which varies but the national average is around 10.1%. That's a total of 34.75% for an employee and 42.4% for a self-employed person. Most of the Western World, or most of the world has a very heavy and progressive tax system as well. So the more that you earn, the bigger your tax liability will be.
Then off your take-home, what's left of your money, you're not taxed for everything else that you spend your money on. There was this article on zero hedge where he listed over 97 taxes that the average person pays every single year. And this was back in 2015 that he published this so there might be even more added to this list. You could think just of sales taxes. The average in the United States is around 9.7% across all the states. Then you have property taxes and more, and more, and more. And when you eventually die, your estate will pay taxes.
The first area I think that we can look at to combat this monster is the way that we earn income because not all income is created equal. There are three types of ways that money comes into our personal economy. The first one is earned income through a paycheck. The second one is portfolio income, income that we derive from paper assets. And then the third one is passive income. Earned income is taxed the highest and passive income the least. One way of combating these wealth destroying taxes is to try and turn that earned income into passive and portfolio income. Especially passive income. That's what the part cost is all about is trying to build and create assets to generate income streams.
A second way to combat this wealth destroyer is to control when we pay taxes and reduce and limit our tax liability. Now, usually there's three buckets that people save in. The first bucket is the tax bucket. It's the one that you pay your tax as you earn it. You get a 1099 in the United States. Examples are something like a CD, a money market, stocks that you sell at a profit. The second bucket is a tax-deferred bucket. Like qualified retirement plans. In the United States, 401(k)s, IRAs, and wherever you live in the world there's probably a government sponsored or endorsed plan which is similar to what we have in the United States, the 401(k)s and the IRAs. Earned income is put into these plans, not taxed, and it's deferred to pay the taxes later. So there's a couple of problems that I see with this.
The first thing is you don't have any control over your tax liability deferring your taxes. We don't know what taxes will be in the future. Nobody knows. We can all guess. We can look at the trends. None of us can predict with certainty what's going to happen in the future. There are trends that you look at. Yes, if you live in Western countries, most of the Western governments are practically insolvent. So you can think about it that, when say, well, you know, are the Western governments or are these governments that are insolvent going to say, “Hey, we made a mistake. We mismanaged the country's money. We're going to clean this up. All of you guys are okay.” If we have to predict future behavior, right, we look at past behavior. Chances are they're going to come to their citizens and raise taxes.
And then the baby boomer generation, one of the largest generations, I think, that's ever been alive on this planet, are all aging and getting, over the next 15 years just in the United States, I think it's a way over 70 million, is going to retire in the next 15 years, and they're all going on to social programs, etc. So where's the money going to come from, because most of these programs are severely underfunded? So where's the money going to come from?
In the United States, too, if you look historically at tax rates, we have low tax rates right now. Just looking at those three things, we can take a look at and see it, there's a probability that taxes will probably increase into the future. Instead of guessing whether taxes are going to go up, stay the same, or down, we'd like to take that variable out of our wealth plan and control when we play taxes. So that's one of the big problems that I have with a tax deferred bucket.
The third bucket is a tax-free bucket. Now that is Roth IRAs in it, high cash value permanent life insurance. I mean, that's a vehicle used by the wealthiest individuals and families, corporations, banking and financial institutions, and political elite. Everybody can use these two vehicles and actually the second part is what I help people do in my own wealth management and coaching firm. If you look at it this way too, at these three buckets, right, would you rather pay taxes on the seed or the harvest? And I'm going to say the seed. You're going to pay taxes. We all have to pay our taxes. And I'm not advising anybody not to pay taxes. But we'd like to control when we pay taxes and reduce and limit the amount of taxes that we pay. So I'd rather try to pay the taxes on the seed.
You can also reduce your tax burden through tax credits. There's hybrid cars, there's green improvements to your house, make charitable contributions. So there are different strategies to limit and reduce your taxes. There's also estate planning and business entity and asset protection strategies to help you legally limit and reduce your tax liability. Again, I am not advising you not to pay your taxes, but you don't have to leave your government a tip.
The next wealth destroyer is fees paid to financial institutions and banking institutions. This is one that I cover in depth in our episode about qualified retirement plans. So I'm not going to spend too much time on that. And then, everyone that's ever used the bank anywhere in the world knows about all the fees and costs associated with just having a bank account. So I'm not going to stay on that one for too long. There are ways to limit and reduce fees with financial institutions. The model that a lot of the financial institutions make their money from is called the Asset Under Management model. The AUM model. That model is when they manage your money they get a percentage of your money no matter what happens in the market. So even if they lose you money, they still get a percentage of your money.
Now there are fee-based options out there. There are upfront commissions and products with lower fees. This is a very, very important area and an area where a lot of people get fleeced. I do cover that in our episode about qualified retirement plans so I'm not going to spend too much time on that. We have an in-depth discussion in that episode about it.
Then there is interest paid to third parties and financing cost. There is good debt and bad debt. Bad debt is a wealth destroyer. Bad debit is like credit card fees and interest, car loans, home loans, student loans, etc. There is good debt that you use in your business or in investing that actually puts money in your pocket. So if you borrow money to create an income stream, good debt. If you borrow money to spend it and you have to pay that debt every month, that's bad debt. Then there's also the cost of financing because you really do finance everything you buy. If you buy something and even if you pay cash for it, you give up the opportunity to earn interest and compound that interest over time. So there is a cost of financing in every aspect even if you pay cash for it.
The next one is market risk. Market risk is an enormous wealth destroyer. There are people that have had their wealth destroyed in the financial crisis in 2008 and 2009. They've never really recovered from that. In episode 22, I explained the wealth pyramid and how to limit and reduce your market risk and build a solid, sound wealth plan with a solid foundation.
The next wealth destroyer is inflation. Now we looked at what inflation is and what causes inflation in episode 25. You know, Ron Paul called inflation the silent tax. If you don't have strategies in place to combat inflation, it will destroy you. I mentioned in episode 25, one of the strategies is investing in or creating assets that produce monthly income streams that will increase with inflation. You can also hedge inflation by saving a portion of your wealth in precious metals like gold and silver. This is really important. You know that the currency, it doesn't matter in which country you're at, it's all fiat currencies right now. And your wealth is under attack every single day from inflation. So if you don't do anything about it, it will destroy you.
So those are just a couple of wealth destroyers that I've identified. If you can think of anything else, please contact me and leave me a message by going to our contact page. You can leave a message on my SpeakPipe voicemail line or just e-mail me at firstname.lastname@example.org. I do appreciate all the people reaching out to me by e-mail. And I respond to all of my e-mails personally.
That's our show for today, guys. Live a life of passion and purpose on your turns.
Announcer: You have been listening to the Cashflow Ninja with your host M.C Laubscher, the podcast empowering and inspiring people to discover how to generate their own income, and manage, grow, and protect their own wealth in the new economy. Today's show notes and resources are available on our website, cashflowninja.com.
This presentation is for educational and informational purposes only. The information being presented and considered does not consider your particular financial objectives or situation, and it does not make personalized recommendations. This material is not intended to replace the advice of a qualified tax and legal adviser or other qualified professionals, and you should not use the information in place of a customized consultation with a licensed professional regarding your specific personal financial objective, situation, and needs. We believe the information provided is reliable, but we do not guarantee its accuracy, timeliness, or completeness.