The following tips are from the book, “Richest Man in Babylon” by George Clason.  I recommend this book not only because of the many practical advices it offer but also because it’s concise and fun to read. Set in ancient Babylon, the author uses stories of rich and poor men to share his knowledge and experience on how to become successful and wealthy.

Live with only 90% of your income

How much is left in your income after paying the bills, dining out, and visiting the mall? If it’s at least 10%, congratulations! You have taken a big step on your way to success. But before you go out and celebrate, remember that the 10% you are saving is not for the new 50-inch HDTV or for a Caribbean cruise with your family.  You set aside 10% of your income because you will use it for other money-making activities.  Remember, you need money to make money.

Control your expenses

I know it’s not easy to live with 90% of your income when 100% is not even enough. Before you throw in the towel, question your expenses whether they are absolutely necessary. I know watching football games on a 50-inch LCD HDTV complete with a surround sound system is an awesome experience but is that really necessary? The game doesn’t change if you’re watching it on a 21-inch, right?  The difficult part in identifying what is necessary is that “necessary expenses” tend to grow to equal our incomes unless we put a stop sign to all our desires. Spending for some luxury is not bad. Just remember that when you budget, you budget for necessities and enjoyment without spending more than 90% of your income.

Grow your money

Setting aside 10% of your income is a start. It’s a big start actually considering that many employed individuals not only have less (or none at all), but are also incurring a lot of credit card debts. But as I’ve said, it is just a start. The next goal is to grow that savings.  Nope, putting your money in a bank account even with an interest won’t make you rich. Ultimately, your goal is to have a source of income whether you work, travel, or attend your kid’s soccer game. This is often achieve by owning a business but if you’re not yet comfortable as a businessman, you can start with simple money-making ideas like buy-and-sell.

The key thing is you now have the resources to grow your money. A word of caution though. At this point, it becomes difficult to take action because of fear of losing our money, which is normal. The best way to overcome that fear is to start with safe bets like lending money to your friends and neighbors. Remember, money in your pocket earns nothing.

Guard your treasures

I used to make fun of banks who require a proof of income before they give you a loan because I thought the reason you are asking for a loan is because you don’t have money in the first place. Now, I understand why and if I were in their shoes, I would do the same thing. If you are going to part with your money and give it to a friend, make sure he has the ability to repay. Of course there are risks involved but if you are careful, there is no need to worry.

You also need to resist the temptation of making large investments in exchange of growing wealth rapidly. A few years ago, my wife and I joined an “investment” company after an invitation from a friend. The company promises an interest of 30% every month which is very large indeed.  I doubt it is real but my wife kept insisting that many of her friends have already joined. Eventually, I gave in but we both agreed that we’ll only do it for 3 months. After 3 months, our initial investment doubled and we quit. For the next 3 months, we talk with envy about our friends who are making lots of money. On the 4th month, all their investments and earned interest were gone.

Own a nice house for your family

This tip is more motivational rather than a direct multiplier of your wealth. Having your own house makes you proud and confident, and encourages you more to strive for success. However, owning a house can become a liability rather than an asset. Many commit the common mistake of considering only the difference between their monthly mortgage and rental. They don’t consider the cost of maintenance, government taxes, and other fees. Many sellers also would like you to think that owning a house is an investment which is not always true.  It becomes a good investment only when it’s market value is higher than what you paid for but with the recent housing crisis, we now know that properties can turn into bad investments.

Insure a future income

Unless you’re a member of the Culllen clan, eventually you will grow old and/or die. There’s nothing we can do about it so you might as well prepare so when that day arrives your family can still have the support they need. Getting a life and/or accident insurance is definitely one of the smartest thing you can do for your family. You can also look into buying lands or other properties whose sale value may increase in the future.

Increase your ability to earn

Learning doesn’t stop after college. If you got this far, congratulations!  As long as you have the desire, you can learn what is needed to become wealthy and successful. It’s OK if you failed accounting in college. The cumulative wealth of successful people who didn’t have a college degree greatly outnumber those who have one. Start with a small money and scheme that pays a low rate. Don’t invest $10,000 yet in stocks if you don’t even know what compounded interest means. As you become more capable, you can increase your stake. Remember, the more we know, the more we may earn.

Wherever your journey may take you, just don’t forget that money isn’t everything. I don’t think you will ever hear a successful man say in his deathbed “I wish I spent more time with my business.” It is always “I wish I spent more time with my family”.

There are still a lot of things to learn from the book “Riches Man in Babylon” (I am not yet done reading). If you want to receive updates via email, you can find the signup box at the upper-right side of this page.

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Photo courtesy of devil fang.

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A long time ago a friend told me that if you get married and have kids, my taxes would be lower.  I thought it was silly but after I got married and had kids, I realized he was right.  There are lot of benefits in having family and reduced taxes is one of them.

One way to reduce taxes is based on the income-splitting strategy.  To understand income-splitting (and using the example in the book as  basis), let’s assume Angelina Jolie earned $60,000 last 2008 and Brad Pitt had no job and just stays at home taking care of the 6 kids. The Bradgelina’s tax would be $11,070. But, if Angelina earned $30,000 and Brad earned $30,000, their tax would drop to $8,700. Interesting!

Here are some ways to reduce taxes based on the income-splitting strategy. This is just a list and I suggest you read Tim’s book for a thorough explanation. As always, before you start tinkering with your taxes, please consult a professional.

1. Lend money to the family member you are splitting income with.
2. Lend money, then take repayment.
3. Lend or give money to a family members for use in business.
4. Transfer money to cover interest on investment loans.
5. Swap assets with another family member. Yes, you can even sell your investments to your child.
6. Generate capital gains in the hands of your kids.
7. Transfer any investment income to your adult child (i.e. 18 years or older).
8. Give funds to your adult child, then charge room and board. You can also charge for the Wii, I think.
9. Make a corporate loan to a related student.
10. Pay an allowance to your working child.
11. Pay an adult child to babysit the younger kids. Just like childcare expenses, babysitting fee is tax deductible.
12. Pay an adult child to help in a move. If you are going to pay someone to do the work for you, it might as well be your son or daughter.
13. Transfer assets before leaving the country. Do this when you have decided to leave Canada to settle in a tropical island.
    
14. Transfer capital losses to your spouse.  This is a bit complicated to do but it can reduce your taxes.
15. Transfer personal tax credits  to the higher-income spouse.
16. Pay household expenses through the higher-income spouse.
17. Invest the inherited money in the name of the lower-income spouse.
18. Invest Child Tax Benefit in the child’s name.
19. Transfer pension income to your spouse.
20. Consider an RESP for a child’s education. Contributions to the  Registered Education Savings Plans  are not tax deductible but the accumulated income  will be taxed to the student.
21. Split the tax bill on your Canadian Pension Plan benefits. This applies if you and you’re spouse are both over 60.
22. Report your spouse’s dividends on your tax return. This can work because reducing your spouse’s income may increase the spousal tax credit you can claim.
23. Pay family members a salary. If you have a business, the salary is deductible and  the family member has to pay the taxes.
24. Become a business partner with family members. The income, thus taxes can be distributed between partners.
25. Own a corporation with family members.  I think this applies to almost anywhere in the world because many big corporations are family-owned.
26. Use two corporations to transfer money if you and your spouse own separate corporations.

I emailed my friend to thank him for giving me an excellent advice. Having a family indeed reduced my taxes.  However, I was mad at him at the same time. Because he didn’t tell me that my expenses would go up.

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Photo courtesy by Joey Harrison and danie.roop.

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