Eric is one of my regular climbing partners whom I boulder with in the middle of the week. He recently switched to working nights and even though we were advancing together on par, his gains have halted.
We climb the same schedule as before. We run the same drills and we are pushing each other just as hard. But Eric now works nights and has less recuperation time and is less focused. He often feels pressed for time and the added stress is resulting in him having decreased gains from the same training investment.
Take 2 physicians, both are invested in the same index funds with low expense ratios. One is able to profit more from the same investment because the other gives up more of their investment performance over to taxes.
Progressive Capital Gains Taxes
In 2018, a single physician who earns up to $38,700 in long-term capital gains gets to pay 0% in taxes on that money federally.
If your household expenses are past this amount, let’s say you need $60,000/year to live off of, then you’ll lose extra profits to taxes. Your investment choices weren’t any worse than your peers but you don’t get to keep as much as your lower spending colleague.
Any long-term capital gains amount over $38,700 will be taxed at 15%. It’s great having the extra income but the returns of that portfolio are decreased.
Since our earned income taxes are progressive in the US, we also benefit from earning less as employees.
Again, if you can live on less then you need less earned income to run your household.
Living on Less
Those percentages are based on total household income. Even if you decide to get a part-time gig, any income you earn from that would be added to your long-term capital gains returns and increase your taxable position.
One solution is to live on less. I advocate for this on this blog because it’s possible. In fact, it’s far more enjoyable than living a luxurious physician lifestyle, speaking from experience.
We need to ignore what media refers to as a low-income household or even a households in poverty. I realize it’s a touchy subject but you don’t have to suffer just because you are spending $20k/year.
Intentional poverty can be a pleasant poverty.
When you work a lot, endure the stress of a full-time job, the last thing you want to do is deny yourself the freedom to spend freely. Unless you’re inherently frugal you will spend more the harder you work.
Eventually a time will come when you’ll have less pressure to work full-time – you guys write me telling me that you are finally in financial situations where you can cut back on full-time work.
Unlearning our spendy habits is the next step, however. The longer you’ve spent working full-time, the more effort it will require to develop a sustainable spending routine.
The good news is that this new skill comes with incredible perks – you get to keep a lot more of your passive income.
You’ll have less stress than your peers during your retirement. You’ll have more options with your income. And a poor performing economy will likely not affect you the same as others.
Investment Performance & Profits
Low-risk securities investments don’t have a lot of room for profits. By the time fund expense ratios and inflation take their bite out of it we’re left with small profits.
Maybe we can get some wiggle room by controlling our personal rate of inflation. Beyond that we would have to increase our risk in order to potentially profit more.
In this post I’m proposing to take advantage of the tax code to increase our profits. The only way I can think of doing it with our particular tax code is by lower our expenses.
High spenders and high earners are penalized with our current tax code. My goal is to use this to my advantage and maximize my profits from my investment performance.