The Way to Wealth - 05 (Working from Home)

Greetings Friends

Today we will learn why it is important to make the difference between keeping your daytime job and taking care of your own business…

When talking with friends, family, and clients, I always try to explain the difference between a job and business. See, most people I talk to think that having a job and saving in their RRSP (Equivalent to 401K in the US) is the solution to a comfortable retirement. I tell them that it is not for a simple reason. When working for someone, you pay everyone first (Government, Bank, Etc...) and pay yourself last. When working for yourself, you pay yourself FIRST and everyone, including the government LAST

Let us take an average well paid 30 year old professional … sayyyy … hmmm … $120,000 per year, who owns a car and a $400,000 house. The counter part is the same professional working for himself from home.

I am taking this example only to prove that simply by saving in your RRSP will not generate enough money for a comfortable retirement. I will use Canadian figures, but trust me they apply as well to the US and Europe with simple small variations Sales Tax in Quebec is %12.875 (Federal and Provincial). Business Expenses are Tax Deductible, in other words, all expenses related to the business are tax free

Okay… Well let is start let us use the Budgeting information (The Way to Wealth - 04) and use the Accounting Principles (The Way to Wealth - 02) (The Way to Wealth - 03):

Income:	Professional	Business Man
Gross pay:	$120,000
Business Revenue		$120,000
Total	$120,000	$120,000

Business Expenses
Car – payment (tax incl) Car – Insurance Car Repairs (tax incl) Gas (tax incl) Cell Phone (tax incl) 10% Mortgage: 10% House Taxes: 10% House Insurance: 10% Heating (tax incl) 10% Electricity (tax incl) 10% House Phone (tax incl)		$4,252 $1,000 $1,328 $2,657 $1,063 $2,800 $400 $100 $88.59 $177.19 $53.16
Total		$13,919
Real Taxable Income	$120,000	$106,081

Personal Expenses:
Tax Deduction: (45%) Mortgage: House Taxes: House Insurance: Car – payment (tax incl) Car – Insurance (tax incl) Car Repairs (tax incl) Gas (tax incl) Cell Phone (tax incl) Groceries (tax incl) Clothing (tax incl) Heating (tax incl) Electricity (tax incl) House Phone (tax incl) Cable TV Vacation	$54,000 $28,000 $4,000 $1000 $4,800 $1,000 $1,500 $3,000 $1200 $5,200 $3,000 $1,000 $2,000 $600 $600 $2,000	$47,736 $25,200 $3,600 $900 $5,200 $3,000 $900 $1,800 $540 $600 $2,000
Total	$112,900	$91,476

Real Income

$7,100

$14,605

As you can see in this example, our professional working at home, is making more than twice the net income of the working professional.

Now with regards to the RRSP (401K), if we invest the net income over 35 years at the same profit rate of 8% per year, we will see a very different result for both professionals. As we all know, the inflation rate in North America is about 2.5% per year. Which means, every year, your dollars can buy you 2.5% less than the year before. In 35 years, to purchase something that costs today $1.00, you will need $2.37. So your real revenue in 35% will be worth 58% less

	Amount in RRSP	Revenue 8%	Real revenue (Value in 35 years)
Professional (Job):	$1,216,349	$97,308	$41,144
Professional (own business)	$2,502,082	$200,167	$84,635

In the above example, you can clearly see that the ONLY WAY you will be able to retire is to have your own business…

Good Luck