“Study hard in school, get a good job, work hard at that job so you can retire comfortably”.
Does this advice ring a bell?
I am pretty sure it does.
This is because we have, in one form or another, heard our parents or relatives mention this to us, in an all-too-helpful manner.
Now, before I get flamed for criticizing this time-tested advice for success, I would like to point something out.
I am not against education or going to school at all.
In fact, I have a Bachelors of Financial (Hons) from York University and an MBA in Finance from DeGroote School of Business, which happens to be in the top 5 schools in Canada.
So yes, I have pursued my higher education to a great extent, primarily because I myself wanted to do so, but also because it was my parents’ dream as well.
However, the same advice of studying hard & landing a good job is a recipe for leading a financially-mediocre life.
Yes, it stinks and it is sad, but it also happens to be true.
- The government taxes employees at a much higher rate than it taxes businesses and investors. Assuming you are earning $120,000 per year in Toronto, Canada, you will be taxed around $34,807, leaving you with $85,193 in net income (assuming you didn’t contribute to your retirement plan). That huge tax chunk might not feel huge right now, but in a couple of years it adds up. Business owners & investors use tax loopholes which allows them to pay a fraction of the tax employees pay, even if they earn 10-50 times more than the employees. Technically real estate investors can earn millions and get taxed nothing. So being an employee definitely works against you.
- You earn only through your labor & there’s only so much you can earn. Business owners & investors use economies of scale and other peoples’ money in order to get affluent, which means that their income is not related to their labor. It is related to their productivity.
- The more you earn, the happier the government is with you. This is because the more you earn, the more money you send to them. Let’s use an extreme example of a neurosurgeon in Ontario, Canada whose annual salary is $380,000. That’s a lot of money, right? Nope, not really since the government takes around $160,999, leaving him with only $219,000. That is how much taxation will affect you even if you reach the top tiers in your job.
- Chances are, if you are an employee, you will end up making the same mistakes more employees make, which is why they find it difficult to retire even by the age of 65. Business owners and investors play by a different set of rules and successful ones come out way ahead.
So why does the government penalize the employees?
Aren’t employees being productive members of the society?
Well, yes they are.
And the government isn’t really penalizing them.
The government just doesn’t give them the same “rewards” it provides to business owners and investors.
The tax code is written in a manner so as to reward these 2 classes because:
- Business owners increase the economy’s GDP and productivity and also hire people
- Investors help the economy grow further by pooling resources together
I hope you understand the point I am trying to make.
It isn’t that an academic education and getting a job is wrong.
It is just that most people who are employees get taxed heavily so they can’t build up their net worth.
Also, they don’t have the same financial IQ as business owners and investors, further hampering their net worth goals.
Think about this:
- How many people do you personally know who are over 60 and still working? Would they ever care to go to their job if they were financially free?
- How many people who work a job have said: “I am now financially free. I can afford to not go to the office from now on”.
- How many people actually LIKE and enjoy their job?
To put things into perspective, here are some of my own experiences:
- I know a dentist who makes over $180,000 per year but is always broke. He says if he loses his job or is forced to quick work, he will be in deep trouble in 3-4 months. He is 58 years old.
- My friend’s dad is a Civil Engineer and never seems to earn enough to make his ends meet. He is over 60 and wants to retire but is not able to.
- My uncle is a heart surgeon in the UK and gets paid really, really well. His only complaint is that he gets taxed at 50% so he is left will “almost nothing”. He is in his 60s and even though he has decent wealth, he still can’t afford to retire.
So yes, generally speaking, academic education will not make you wealthy if you do a job unless you have decent financial IQ as well.