How Debt and Taxes Can Make Smart Entrepreneurs Rich
Why taking on 'good' debt and tax code savviness are crucial for financial success.
My wife Kim and I have hundreds of millions of dollars of debt. We pay little to nothing in taxes. We are very rich, members of the 1 percent that gets crowds screaming about economic inequality. And we sleep very well at night.
Debt and taxes: Those two words make most Americans feel anxious and keep many up at night. That's because most Americans -- even highly-educated people with six-figure salaries -- lack basic financial knowledge about how to use debt to make money and how to avoid paying taxes, legally and ethically.
Love him or hate him, President Donald Trump knows a lot about debt and taxes. He knows how to use debt as a tool for building businesses and real estate. He also knows the real purpose of the U.S. tax law: to provide incentives to business owners and investors. When Trump's 2005 federal tax return showed that he paid $38 million in taxes on an income of some $150 million, I'll admit I was surprised. Dig deeper and I am certain that year's return, leaked or not, was an anomaly. Most years, it's likely Trump paid little to nothing in taxes. Yes, that makes him smart.
How can debt and taxes make some people rich and other people poor? Why does this paradox exist? The culprit isn't the gap in earning potential, career opportunities or social advantages between the rich and the poor. It's our nationwide gap in financial education. In school, we don't teach kids about money. Instead, we tell them to get good grades so they can get a job and make money. When they grow up and get a job, we tell them to save money. We tell them to save for the future by putting their money in 401(k) plans. No wonder so many people work hard all their lives and can't afford to retire without government support like Social Security.
I was born into a middle class family in Hawaii, but I always felt poor. My father had a PhD and a top-level job in education but struggled financially. Fortunately, I had a second dad who was financially smart and a great teacher. At 9 years old, I chose to be rich. I asked a lot of questions about money and then questioned the answers. I learned how to use debt to acquire assets playing Monopoly. Buy four green houses. Exchange them for one red hotel. Today, I own 6,000 properties that have made me a multi-millionaire -- my real-life "red hotels."
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Our financial education gap leads to a cash flow divide. On one side, there are employees and small entrepreneurs, which include specialists like doctors and lawyers, as well as owners of startup ventures and local burger stands. The people on that side of the divide work for money and pay between 40 and 60 percent of their income back to the government in taxes. On the other side, there are big business entrepreneurs and the ultimate entrepreneurs: investors. The people on this side -- people like Ray Kroc and Oprah Winfrey, George Soros and Donald Trump -- work to make money work for them. They typically pay between 20 and zero percent of their earnings in taxes.
Debt is the new money. But, there's good debt and bad debt. The rich work for good debt, investor debt. The poor pile up bad debt, consumer debt. If you're a small entrepreneur, understanding the different types of debt is critical. Make smart, informed decisions that help you use money to grow your business and make money. Stop thinking of debt as a four-letter word.
Related: 4 Keys to a Stable Business
Hardworking employees and small entrepreneurs often complain that the rich don't pay their fair share in taxes. They're ignorant about how the tax code works to keep the country running. When you partner with the government to create jobs, provide housing, drill for oil or supply food -- things that the government, in a democracy and free market economy, can't do alone -- the government gives you tax benefits. For big business entrepreneurs and professional investors, minimizing taxes is a powerful incentive.
To be a rich entrepreneur, learn how to use debt and reduce taxes. It's that simple. I'll leave you with some valuable free advice:
Accept the fact of risk. All markets have risk. Whether you invest in real estate, energy, agriculture or making your business bigger, there's a risk of losing money. The more you learn about your market and trends -- and the more control you have over your investments -- the better you'll be able to manage risk. A financial education gives you control.
Conquer your audit phobia. Big business entrepreneurs often let fear of an audit hold them back from taking advantage of every possible tax benefit. Embrace being audited as an opportunity to learn about and improve the health of your business. Think of an audit as an annual checkup, like a physical exam. If you've chosen your CPA or accountant well, he or she will take the lead should you face an audit.
Look at both sides. If you're an employee with dreams of being your own boss or a small business owner, you might be focused on working for money and avoiding debt. You might think that the 1 percent should bear more of the tax burden. Try to see the other side's perspective. Imagine standing on the edge of a coin. From that vantage point, you can look at both sides and make smart decisions. One of my favorite quotes is from F. Scott Fitzgerald: "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function." Challenge yourself to do that.
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