The 1 Crucial Personal Finance Tip Every Business Owner Should Know
You’ve been lied to about the price of everything you buy.
Here’s the thing, personal items are always more expensive than you think when you add your tax rate to it. And your personal finances could be slowing down your business’ growth.
What do I mean by that?
Well, when you make a dollar, the government takes it takes. What’s left is the money you have to spend on things.
That suit you just spent two grand on — you had to earn over $3,000 to buy it.
That $500 dinner plus drinks at NYC’s most trendy place — you had to earn $750+ for that.
And, admittedly, the $25,000 Rolex I bought a few years back really cost me $35,000 – $40,000 when I incorporate my tax rate into the equation.
See what I mean?
Knowledge of personal finance as a business owner/CEO starts with understanding your pre-tax and post-tax income. Your pretax income – the earnings you make after deducting all of your operating expenses (insurance, depreciation, employees, etc.) – really needs to be $550 to pay for that $500 Gucci belt you loved.
There are ways to lower your pre-tax income, such as but that doesn’t help when you’re taxed afterward. Everything is 1.4x to 1.7x (depending on the state you live in) more expensive than you think.
Yup, it sucks.
Recognizing the expense of your overall tax rate is the first step toward making smarter spending decisions and reducing your living expenses. Fight off immediate gratification.
Now, it’s not all doom and gloom.
If you understand the system, you’ll realize you can use it to your advantage:
Reinvesting in the Business vs. Personal Spending
We’ve talked before about keeping and reinvesting your profits back into the business. It speeds up your growth, it provides a safety net for when the shit hits the fan… But you are also now starting to get why it just makes logical sense:
The government is (indirectly and unknowingly) incentivizing you to spend money in your business.
If I spend $1000 on a personal item, it’s actually costing me $1,700 because of my tax rate. You know that by now, so I won’t repeat myself.
But, if I reinvest the same $1000 into my business, I can expense the entire thing so my money goes much further. You end up making more money in the long run when reinvesting in your company – and you don’t have to pay taxes until you take profits out!
Instead of going to the government or to Gucci, wouldn’t you rather have your hard-earned dollars go towards hiring new talented people, funding projects, scaling, or investing in new business opportunities? I surely would.
Note: I am obviously not promoting tax evasion. There’s a BIG difference between that and being smart about how you spend your money and business expenses. Always (and I mean always) be legal and compliant.
It really just doesn’t make financial sense to me to spend post-tax dollars on things that don’t provide me an ROI. You could spend that money tax-free by investing in your business (e.g. spending on marketing that will bring you, new customers).
Personal Finances and Business Owners
Educating myself on personal finances (trust me, it’s taken some rewiring) has proven to be a huge competitive advantage.
At the same time, I sometimes hear from business owners that tell me things like:
“Anthony, dude, I made that money –I deserve the Porsche!” Or “you can’t take dollar bills with ya when you are 6 feet deep.”
They’re not wrong, and neither am I. Both options are viable, and I am no one to tell you how to live your life or how to spend your cash.
And listen, I get it. I bought myself a $25,000 Rolex because I also thought I deserved it –and I probably did. I also knew that its real cost was much, much higher.
But if you’re like me, you already LOVE spending money in your business. It’s not a sacrifice. You want to see your company grow, and you also realize that you don’t need to buy shit to impress other people.
The added benefit is that doing that also makes financial sense. I limit the amount of money spent on personal items as much as possible and throw the rest into my business. I get the most bang for my dollar, and my business expenses become tax-free. It’s a Win-Win.
Crucial Personal Finance Tips:
Next time you’re about to buy something, ask yourself: “do I want to invest $1,000 on a business expense and have the government incentivize me for doing so, or actually spend $1,700 on something personal?”
If the answer is the $1,700, go ‘head and buy it. Just know that you have options. So, three things to remember and apply right away:
- Know that everything you buy with post-tax money is much more expensive than what the price tag says. Multiply it by 1.4x to 1.7x depending on your tax rate.
- Leverage the power of pre-tax money by reinvesting in your business. Take advantage of tax-free spending to stretch your dollars.
- Educate yourself on personal finances for business owners and CEOs. It will help your business and your day-to-day lifestyle.
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