Twice in one day, I had very interesting conversations with high-income, licensed professionals. Both these men (in two different professions) told me very similar stories. They are extremely good at generating almost a million dollars a year in net income, yet when you look at their overall situations, they have little or no real net worth because of taxes, insurances and lifestyle debt. In fact, one of them was actually insolvent by more than $250,000.
Driving an automobile on which you owe nearly $100,000 when you own no income-producing assets is insanity!
Granted, both of these men were in the wrong place at the wrong time with some of their business investment decisions. They, like many others, have been clobbered in a two-way squeeze of falling real estate prices, increasing taxation and cost of doing business.
Many people would look at them with their ultra-high incomes and say they are clearly affluent and wealthy. I look at them with their ultra-high incomes and corresponding tax obligations and ask, “If you didn’t show up for work for thirty days, what would happen to your business?” In both cases, the answer is the same. They would not have a business. Their income is a sole function of their unique professional skills and talents.
My advice and recommendation to both these professionals was the same. Stop the insanity and reconsider everything you are doing with your money.
- Every dollar you earn must have a name tag and a job description. Your money should be working for you!
- Please review the detailed stories of Dr. North and Dr. South as set forth by Tom Stanley and William Danko in the book The Millionaire Next Door.
- Debt service and taxation will cripple you. You must do everything you can to fight those two crippling afflictions.
The guiding principle I extracted from these conversations was an affirmation of what I already knew. When you generate tremendous revenue because you are so good at what you do in a professional skill or business, it is absolutely crucial that you do the following:
- Put in place a tax strategy to mitigate the taxes as much as legally possible.
- Make sure a significant portion of your income goes into a retirement program.
- After funding your retirement account, make sure you have funds to go into an investment program outside of your retirement arrangements. These investment programs should be designed to generate long-term, consistent cash flow that will initially become self-sustaining and then increase more and more so you can replace your active earned income with passive income.
First, supplement your income, and then replace it. Upon replacing your active income with passive investment income, you have achieved “financial freedom.”