[T]he taxes are indeed very heavy, and if those laid on by the government were the only ones we had to pay, we might more easily discharge them; but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly; and from these taxes the commissioners cannot ease or deliver us by allowing an abatement.
– Benjamin Franklin, The Way to Wealth
There are some topics I don’t often delve into on Money360, and taxes are one of them.
Yes, almost all of us pay a lot in taxes. We pay income tax each year to the federal government, sometimes to state governments, and occasionally to local governments. We pay property taxes. We pay sales taxes. We’re sometimes hit with other taxes as well, like usage taxes.
When you add up all of those taxes, it seems like a big financial burden. At the same time, there are strategies you can use to cut into that burden.
So, why aren’t taxes a frequent topic on Money360?
The reason is this: there are really only a handful of tax strategies that consistently work for people who aren’t exorbitantly wealthy and already have tax specialists working for them on issues that don’t matter to most Americans. I do talk about those strategies, and often. If you’re saving for your kid’s education, use a 529 college savings plan. If you’re saving for retirement, use a 401(k) or 403(b) (or similar plan) through your workplace and/or a Roth IRA. If you have a mortgage, you might be able to deduct the interest and pay less income tax (assuming it’s a big mortgage), which does reduce taxes but means that a lot of money is leaving your life in the form of mortgage interest, which may not actually be a win in the first place. Use a tax preparation package, as it will find a lot of other little deductions and credits for you. Those are good strategies to use, and they will help your tax bill, either today or in the future.
Once you get past a lot of that low hanging fruit, though, you start chasing things that are either only really useful for a few people, or only produce a very small savings for a lot of effort, or only apply to people with a big income.
For some, tax avoidance is a bit of a political issue as well. For political reasons, they want to give as little of their money as possible to the government. That’s not my approach. For me, tax strategies are only interesting as a way to keep money in your pocket in a time-efficient way. I’m not interested in lots of effort to save a few bucks on taxes, or chasing down a tax benefit that ends up not really helping you.
When I look at those things and compare them to the multitude of other low hanging fruit in people’s lives, I turn away from chasing a few bucks in tax savings.
Here, Ben Franklin offers some great guidance in that opening quote. “We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.”
We spend money on many, many needless things.
We constantly buy things that give us little bursts of pleasure, pleasure that very quickly fades. Our minds inherently focus on that burst of pleasure without thinking of the downsides – the cost and the fact that it fades extremely quickly – and convinces us to buy. Simply understanding this is a huge financial game changer; working toward mastering that impulse is a lifelong journey. There is a ton value for the average person in moving along this path, understanding their impulses, and trimming out a lot of them.
We buy things that we believe will save us time, save us effort, make us more attractive, make us look cooler, make us smarter, make us appear to be smarter, and on and on and on. Advertising preys on every bit of our own self-consciousness, nudging us to fix some flaw we perceive in ourselves by buying this product that will just magically fix it – but it won’t. Fixing our own self-image has a ton of financial value. Avoiding advertising does as well. Understanding the spotlight effect leads to realizing that spending money to impress other people is a losing battle unless you’re aiming for a bit of short term glamour to sell something.
We make purchasing decisions based on all kinds of bad and inappropriate information. We rely on brand familiarity. We rely on our internal sense of what we need and want without really parsing it out. We’re easily distracted by store arrangements and flashy advertising and clever displays. Simply being able to stay on task when spending money saves a ton of money, and there are many ways to do that.
We put our attention in the wrong place all the time. This allows businesses to put extra charges on our monthly bills. This allows us to keep subscribing to things out of inertia, even though we don’t use them any more.
We fall prey to countless cognitive biases. (Reading through that original article, some of the individual items barely touched upon on that list deserve full articles of their own.) Our mind often works in ways that led to survival on the ancestral savannah, but utterly fails us in the modern world in terms of saving money and conserving resources.
Those things – and many others – are our true taxes. When we make bad spending decisions, we pay a tax for that. When we fall prey to a fleeting desire that doesn’t bring anything lasting or valuable, we pay a tax. When we don’t see a hidden charge, we pay a tax.
Those are taxes we all pay, all the time, simply by living in the modern world. To me, there’s no wonder that 80% of Americans live paycheck to paycheck – I’m frankly surprised it’s not even higher than that.
My goal is to help everyone get themselves in a better financial position in life, because the rewards for doing so go far beyond dollars and cents. You feel less stressed about everything. The number of professional opportunities in your life expands rapidly. Unfortunate events are now easily handled rather than devastating catastrophes. This is a life I have worked hard to achieve for myself, and the last thing on earth I want to do is lose this for the sake of fleeting pleasures, cognitive biases, hidden costs, and questionable choices.
If we’re foolish with our money, all the tax strategies in the world won’t help. What saved my financial life did involve a good tax strategy or two, but more than that, it involved cutting all of the other “taxes” in my life. The vanity tax. The fleeting pleasure tax. The “what will others think” tax. The name brand tax. It goes on and on and on.
Cutting your taxes is a good financial strategy, but the government is just one of many, many entities to whom we pay “taxes” of some kind. Cut your true taxes and you’ll find the financial success you seek, just as Benjamin Franklin suggests.