Don't just dream about paradise, live it with Fiji Airways. Escape the ordinary with Fiji Airways Global Beat the Rush Sale. Immerse yourself in white sandy beaches or dive deep into coral reefs. Fiji Airways has flights to Nadi starting at just $748 for light and just $798 for value. Discover your tropical dreams at FijiAirways.com.

That's FijiAirways.com. From here to happy. Flying direct with Fiji Airways. Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.

My name is Josh Ruchites. I am your host. And today we're going to talk about the unbelievable impact of just a little bit of tax. This is a redo of a show that I released earlier this week where I made a serious math mistake in that show. If you haven't already listened to that show, go ahead and listen to this one.

You'll hear me correct the math mistake in just a moment. But in the United States, we're just getting into what we usually consider to be tax season, right? April 15th, the well-known day that your taxes are due. And as we come into this last month here before taxes are due, I want to share with you a series kind of a mini series of tax planning shows where we'll go over some specific ideas to help you save on tax.

And some of these ideas are going to be new ideas that I haven't really talked about in the history of Radical Personal Finance. Throughout the annals of Radical Personal Finance, you'll find lots and lots of shows on tax planning. We've done year-end tax planning. We've done big picture tax planning.

We've talked about tax advantage accounts. We've talked about businesses and business deductions. But I want to present to you a couple of ideas that I haven't really discussed in detail throughout the history of Radical Personal Finance in this series. But today we begin not with a specific tax saving idea.

Today I want to simply share with you the incredible importance of actually saving money on taxes. Because a lot of people I think are too ambivalent when it comes to saving money on taxes. Too many people look around and say, "Well, it's just a little bit of tax. It's only 15%.

It's only 20%. It's not that big of a deal. After all, taxes are the price we pay for living in a civilized society. And I want to live in a civilized society, so I'm going to continue and pay my taxes." But I want to demonstrate to you the importance of tax savings and show you why I think that if you care about wealth, you should be very interested in or even semi-obsessed with the topic of tax savings.

I want to show you why this is so important so that you will go ahead and be interested in making good tax planning decisions. I want to begin today by talking about the story of the magic penny. You remember the story of the magic penny. A friend comes to you and says, "Hey, listen, I'll give you two offers.

Offer number one is I'll give you a million dollars of cash today. Offer number two is I'll give you a magic penny that will double in value every single day for a month. Which one do you want?" Now, of course, those who understand the power of compound interest on their investments know that although we might not know the exact figure, we know we should choose the magic penny because we know that with compounding, the magic penny will increase substantially in value.

So let's go over the numbers here and remind you of how much it increases. On day one, the magic penny is worth one cent. And then of course on day two, it doubles from one cent to be two cents. Day three, it doubles from two cents to four cents, then to eight cents, 16 cents, 32 cents, and 64 cents.

So after one week, your magic penny has doubled to be worth 64 cents. Well, it continues though, and then it starts to get more fun. After two weeks, it's $81.92, but it's still doubling every day. Three weeks in, you're at $10,485. Four weeks in, you cross over that magic million dollar number, and you're at $1,342,000.

Then it gets really fun because in those last four days, it goes from 1.3 million to 2.6 million, from 2.6 million to 5.3 million. And on day 31, you wind up with $10,737,418.24 in your account. So if you choose the magic penny, you wind up being far better off than your friend who chose the million dollars because of the power of compound interest.

Now we know that. We know that that's powerful. And obviously the magic penny is a far better investment than we're going to find anywhere else in the world. I have no idea what you could possibly invest in that could double every single day for a month. But what I want to show you is the impact of just a little bit of tax on your long-term investment values, even if you have such a stunningly amazing investment, such as the magic penny.

It's really, really substantial. Now let's talk for a moment about the actual amount of taxes that most of us pay. The reality is that I think most people probably pay in excess of 50% of their income in taxes. Now that's a number. I can't prove that to you. And the number actually changes depending on what level someone's earnings are.

So for example, if you're a very high income earner, if you earn millions of dollars of wages per year in the United States, your overall tax rate will probably be something like 40 or up to 50 and possibly in excess of 50%, depending on what state you live in.

You have a maximum marginal tax bracket of currently 37%. You have some employment taxes, although when you have a high income, your employment taxes are not a big factor in your overall taxation. You have a little bit of miscellaneous Medicare tax. You might have some state and local taxes, and then you have all the other taxes as well.

So you might be at 40 or 50% of your income in total income tax burden. If you have a lower income, if you're lower on the income scale, then you're not going to pay as high of a rate of federal income taxes or state income taxes. But I still think there's a good chance that perhaps even 40 or 50% of your income is going to taxes.

If you have somebody who makes say $100,000 a year, you'll have your 7.65% employee contribution of your employment taxes. If you're self-employed, it'll be 15.3% of your income. Then you'll have your federal income taxes on $100,000 income for a single individual that might be 7, 10, $15,000, depending on deductions, retirement plan contributions, et cetera.

So then you have your state and local taxes if applicable. But then now your other taxes are a higher percentage of your income. Things like property taxes, sales taxes, miscellaneous use taxes, gas taxes, sin taxes, the taxes on alcohol, tobacco, et cetera. All of these taxes factor in. And so when you look at the totality of the taxes that you pay, it's a very high expense.

It's a very high percentage of our income. Now today, I just want to look at the impact of income taxes on this magic doubling penny because it shows you how important it is for you to save on income taxes on your wages and also on your investments. So let's look at the numbers.

Let's assume that we start with a very modest tax rate of 20%. In the United States currently, you have capital gains tax rates, long-term capital gains tax rates that are usually 15%. They might be zero if your income is low, or they might be as high as 20% if your income is high, but 15%.

So I'm using a 20% number for a good round number. Now before we go through the numbers, I want you to predict to yourself. Let's assume that every day as this magic penny doubles, you pay a 20% tax rate on the increase. How much would you have at the end of 31 days?

Well, let's do the math. After seven days, of course, we wind up with not 64 cents, but we have 35 cents. After 14 days, we wind up not with $81, but $23. If we continue on after three weeks, we don't have $10,485, we have $1,571. Now remember day 28 was the exciting day previously where we had $1.3 million.

Now we're down to $103,000. Then on day 30, we wind up with $188,000. On day 30, we have $343,000, and on day 31, we wind up with a grand total of $625,000 instead of the $10.7 million that we had previously. We're down to $625,000, which is obviously a massive, massive change from what we had previously.

You've lost due to simply a 20% tax rate. You've gone from $10.7 million to only $625,000 by having your magic penny taxed only 20%. Now let me tell you about the mistake that I made previously. In the previous version of this show, I foolishly sat down about 15 minutes before I had friends coming over to my house, and I said, "I'm going to get this show done.

It's just going to be a 10-minute show. I know exactly what I want to say." I sat down and I did it really fast, but I messed up the math. What I did in that show was instead of taxing only the gain, I taxed the entire portfolio value, which is obviously not the way that taxes work currently.

Why do I say currently? What I did would in some ways be analogous to a wealth tax. What I basically modeled in that previous error-filled show was what would you do if you had an investment that doubled, and then at the end of the year, or in our case, at the end of the day, the entire portfolio value was taxed at 10% or 20% or 35%.

That was obviously devastating. When I went back and corrected the math, and thank you to the many listeners who pointed out my error to me, it was just a dumb error, but they pointed out and showed me what I had done wrong. When I went back and updated the spreadsheet and corrected the math, what's remarkable is although the numbers are significantly higher than they were previously, the impact is still overwhelming.

I mean, just look at that. With a 20% tax rate, you go from $10,737,000 to only $625,000. Now what if we play with these numbers a little bit? What if instead of a 20% tax rate, we just increase that to a 35% tax rate? What if you do something like is being proposed in many countries around the world where instead of capital gains taxes being taxed at preferential rates, what if capital gains taxes and income taxes are unified and now you're paying 35% of your income on the gain?

Well now instead of $10,737,000, you wind up with a grand total of $94,000. Your portfolio is completely and utterly devastated at 35% rates. Now perhaps you say, "Well, Joshua, I don't live in a high tax country. I live in a place where they have a fair flat tax, a measly 10%.

What does a 10% tax do on your daily doubling?" Well remember previously, you had $10.7 million. If you pay a 10% tax on that daily gain at the end of 31 days, you wind up with only $2,487,054.68. Now here's what I want you to pay attention to. I want you to recognize how big the differences are with very slight changes in the rate.

The difference from 10% to 20% was millions of dollars. The difference between 20% to 35% was virtually all of your gains. So just a little bit of tax savings is a big, big deal. Now let me be quick to point out obviously where this example may be falling short.

It may be falling short by simply demonstrating the fact that you're being taxed every year, or in our case, every day. Your taxes would be much less if your magic penny was not taxed until you sold it. And clearly that's how capital gains taxes work currently, at least in the United States.

You could have this magic penny. You could leave it alone and it could double every single day until day 31. And if at day 31, then you wanted to go out and sell the magic penny and go spend all the money, that's when you would pay your taxes. So you can do the numbers.

At a 35% tax rate, if you have $10.7 million, you would still clear six or $7 million. So I'm not ignorant of that impact. I'm not ignorant of the fact that you can do that with capital gains taxes. In fact, that's going to be one of the shows that we're going to do in this series.

I'm going to show you how to live tax-free with capital gains assets. But what I want you to see is how when you're paying tax on a regular basis, you are devastating your wealth. Now you can avoid taxes on a lot of capital gains assets for a significant amount of time, at least in a place like the United States.

What you can't avoid taxes on every year is your wages. And yet these same numbers are devastating the impact of your wages. You can run your own spreadsheets. Let's say you make $100,000 and you make it tax-free. Or you make $100,000 and you pay 20 or 30% of your income between employment taxes, income taxes, and income taxes on the federal, state, and local level.

And then add your property taxes, etc. Now how much money do you have to save and invest? A lot less. And that dramatically impacts your overall investment returns. So that's the lesson. Think about this lesson whenever you think about tax savings. Think about it. If you're going to build wealth, you need to decrease your expenses so that you can increase the amount of money that you have to save and invest.

Expenses need to go down so that you can have more money to save and invest. Because early on in your wealth building career, the single most important factor that drives how wealthy you become is the amount of money that you invest. That changes when you have a large portfolio.

When you have a big portfolio, then the single most important factor is your rate of return on those investments. But early in your life, the single biggest factor that drives how much wealth you build is how much money you can save and invest every single year. The guy who can save $100,000 a year is going to get far wealthier far faster than the guy that can only save $20,000 per year.

So how do you do that? Well, you increase your income. We talk about that extensively here at Radical Personal Finance. The single best thing that you can do to improve your financial position is increase your income. Because with a higher income, you can spend more money and enjoy the higher lifestyle now while also being able to save more money and build more wealth long term.

So you focus on your income. So as your income gets high, you need to decrease your expenses. When you look at decreasing your expenses, don't be a fool and go to the little daily stuff. It's fine if you want to drink fewer lattes, that's fine. It's fine if you want to cut back on your cable bill, if you want to cut back on your Netflix bill, etc.

That's fine. But $14.95 a month of saving is not going to make that big of a difference if over here you're paying $10,000, $15,000, $30,000, $500,000 a year of taxes. So when you look at cutting your expenses, my advice is always go to the biggest factors. Cut the big things first so that then you can have lots of money left over to save and invest.

And the biggest thing for most of us is taxes. I get really tired of tax planning. I really do. I find it overwhelming, the number of taxes they want to impose. And I find a lot of the planning really overwhelming because there's so many things that you can do and that you have to do.

But I want to encourage you that if you care about building wealth, there is no way to escape this formula. There is simply no way to escape this formula. You need to get your expenses low and you need to get that compound interest curve working on your side. So stay tuned for the rest of this series.

As we close, I want to just simply remind you that the first thing is simply that I'm running a sale right now. That sale is being done on all of my courses up through March 31. If you go to RadicalPersonalFinance.com/store, you can purchase any of my courses, including the course that I have there on how to increase your income substantially in the short term and the long term by building a job or a business that you really love.

It's called the Radical Personal Finance Guide to Career and Income Planning. You can find that at RadicalPersonalFinance.com/store. On March 31, that course will disappear forever. I'm taking it off the market, but if you buy it between now and March 31, I'll save you 50% by using the coupon code "Changing Platforms." So just go to RadicalPersonalFinance.com/store and use the coupon code "Changing Platforms." Now in addition to that, I was previously offering a discount on consulting.

That consulting work has now sold out, so that is no longer available. If you would like to get in contact with me, what I would encourage you to do is to go immediately and purchase one of those courses. Because starting on Monday, I'm going to be doing a series of live Q&A calls, extensive live Q&A calls with my students in those courses.

So you want to get in before Monday. That would be Monday, March 21. So go to RadicalPersonalFinance.com/store. Sign up for any of those three courses there. The coupon code "Changing Platforms" will save you 50% on whichever one appeals to you. And I look forward to seeing you on one of those Q&A calls.

Don't just dream about paradise. Live it with Fiji Airways. Escape the ordinary with Fiji Airways Global Beat the Rush Sale. Immerse yourself in white sandy beaches or dive deep into coral reefs. Fiji Airways has flights to Nadi starting at just $748 for light and just $798 for value. Discover your tropical dreams at FijiAirways.com.

That's FijiAirways.com. From here to happy. Flying direct with Fiji Airways. (upbeat music)