When you get paid from a job, you have to decide what to do with the money. With a job, your first expenses is income taxes such like employment insurance, pension plan by your country, etc. An employee has no choice to pay these taxes. But after that an employee has to make all the choices of what to do with the money next.
What Do You Do Next
The next choice you make with the money determines your future. A poor person will spend it on expenses like groceries, cable, rent or mortgage, restaurants etc. A person with a poor person mindset has all their money goes out the expense column and have nothing left over a the end of month. These people pay everyone else first before they pay themselves first, which is usually nothing as nothing is left at the end.
A middle class person , who makes more money than a poor person, will have more expenses such as mortgage and car. Their money goes out the expense column as their money is used to pay for liabilities and other expenses such as groceries, entertainment etc. The middle class people will get a raise and make choices like the buying a bigger house or a new car. There is nothing wrong with this but delay gratification is needed to get ahead financially by saving and investing in income generating assets.
For an employee that has a rich person mindset, they still have no control over their income taxes from their job. They choose to pay themselves first after the income taxes deducted right off their paycheck. By paying themselves first, they can put this money in their asset column. This has to be done before you pay rent or mortgage, bills, groceries etc. These dollars placed in their asset column are "their employees". Every time you get paid, if you continue with this process of paying yourself first, your savings accounts and investing accounts will grow. Eventually you buy an asset which can generate income for you such as dividend stocks, rental real estate, mutual funds, bonds, businesses in your local community done. These dollars in your asset column are "your employees" that work for you 24/7 and never call in sick. Repeating this process over and over, you income generated by the asset column will become greater than your expenses and you are financially free. Currently right now, this is my approach to reaching financial freedom.
Is there Another Way?
If a person starts their own company by the legal entity corporation, they can use their business setup to buy their investments through a pay yourself first directly though the business structure. This allows them to grow their wealth really fast because it is more tax efficient.
A corporation can be used to lower your taxes and to protect your assets if structured properly. As I am not a lawyer or tax accountant I will not talk about the corporate structure in more detail here.
The income generated my the assets in your asset column, will be taxed more efficiently than employee income. Also the different types of assets will have different taxes. Income though dividend paying stocks is more tax efficient than interest from a bond or savings account as interest is taxed as ordinary income, or marginal rate in Canada. The tax on interest will be the tax rate of your tax bracket, but you will not pay the employment insurance tax or pension plan though your own government. These tax advantages of income other than a job and tax benefits of corporations is why Warren Buffett pays less percentage of taxes than his secretaries.
An easy read about paying yourself first concept is The Richest Man in Babylon by George Clason.
I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.