Tax Time“I can give you 1040 good reasons why I hate the government.” – Terri Guillemets

I recently wrote an article appearing in the latest issue of the BLADE, a Southern California GLBT magazine. I wanted to reprint it here…

Every year as April 15th approaches, we are gently reminded that a good portion of our income goes to paying taxes. If you view your income in 12, one-month increments, then most Americans are working from January to May just to pay their taxes. This means that “your” money doesn’t really kick in until around Memorial Day… or the first warm day at West Street Beach if you’re using the gay calendar.

Taxes are everyone’s biggest expense. Robert Kiyosaki in Rich Dad Poor Dad writes, “The government takes its share from your paycheck before you even see it. By working harder, you simply increase the amount of taxes taken by the government.”

This is gloomy news and all the sunshine in Southern California will not improve this forecast. So what can you do to reduce your taxable income? Well, you can make pre-tax contributions to your 401(k) plan at work. Another option is contributing to an IRA (this allows the money to grow tax-deferred until you take it out). This vehicle comes in another model called a Roth IRA where you make after-tax contributions and then never pay taxes again on the earnings provided that you wait and withdraw it in old age (FYI: Uncle Sam doesn’t consider 40 to be old age).

Taxes are not rocket science. Reducing your wages (income) means reducing your tax bill. There are a few other ways to reduce taxable income. One way is to increase your tax deductions. However, if we pursue the “deduction” topic here, then we would veer off in a direction that even finance people find very boring.

There isn’t any legal way out of paying taxes. So it’s best to just succumb to the inevitable and do your patriotic part. However, the law-abiding approach is going to leave you struggling like millions of other middle class Americans. Yes, when it comes to finances… we are pretty similar to the average Joe or Jane in the straight world.

So how do you get ahead? Wealth is the result of two things: 1. Spending less and 2. Making more money. Terry Savage at MSN Money writes, “Certainly, you can affect your personal balance sheet by spending less money dining out or on entertainment. Making a pot of coffee at the office instead of buying a $3 latte will make a slight difference in your cash flow. But the big difference is usually made on the income side of the ledger.”

“Stop looking at your budget as a fixed pie that must be cut up into different size pieces to cover your regular bills for housing, telephone, electricity, car expenses and insurance. Instead, concentrate on thinking about how you could expand the size of the pie. Sure, you could ask your boss for a raise. But that’s a less likely prospect than figuring out how you could earn more money on the side. Take a look at how you’re spending your time, as well as your money.”

How do you make more money? “Earned” income is from a paycheck. And let’s face it, most people are capped on the amount they can earn from employment. Earned income barely keeps up with inflation and you’ll be destined to flounder in the middle class.

On the other hand, “passive” income is what makes people wealthy. Often times, passive income originates from real estate. Specifically, real estate that is income producing such as a single family or multi-unit rental property. The goal is to arrive at a point where your investments are making more money than your wages.

Don’t feel like being a landlord? Then buy other investments such as stocks or bonds that pay dividends. Making money work for you is the only way to get ahead. Otherwise, you’ll be 50 and still wondering how you’re going to pay for last month’s drinks racked up on your credit card at Woody’s. Now that’s a financial hangover and you’re not going to ease its pain by taking two Advil.

So start now. Did you or will you get a tax refund this year? Don’t make the mistake of viewing this as “found money” but treat it as a way to kick start longer term financial goals. Instead of blowing it on a vacation or traveling to circuit parties, use the money to pay down debt or replenish that emergency fund. Once the basics are covered, you can start investing. You have to crawl before you can walk. And before long you’ll be running down the road to financial freedom.