Earn Smarter, Not Harder

by MB on January 18, 2008

We’ve all heard the old adage “Work smarter, not harder”. This means that if you plan and think about the best way to do a job, you will save huge amounts of time and effort.

I would like to propose that you should also apply similar thinking to your income. You should “Earn smarter, not harder”.

I recently read a post on My Money Blog, titled: Save More vs. Earn More: A Dollar Saved Is Two Dollars Earned. In it, the author points out that due to regular income taxes, a person in the 25% tax bracket can expect to keep around $0.58 for every dollar earned. This means that for every dollar this person spends, they would need to earn two dollars. The message here is saving is a good thing, and I agree.

That being said, earning more money is also good thing. Unless the tax rate is 100%, the more income you take in, the more money you have to save and invest.

To earn smarter you should, over time, focus on earning an increasing percentage of your income from sources that offer the lowest tax rates. Here are some ways to earn smarter:

Roth IRA – Contributions to a Roth IRA are made with after tax dollars, and the earnings grow tax free. After tax dollar value of income earned in a Roth IRA:

$1 Earned = $1 Retained

Dividend Income: The current qualified dividend tax rate (set to expire in 2011), on all but the lowest tax brackets, is 15%. After tax dollar value of dividend income:

$1 Earned = $0.85 Retained

Long Term Capital Gains – A capital gain, is the profit you make, when you sell an asset, such as real estate, or a stock, for more than its purchase price. If you held this asset for longer than one year, the gain is taxed at the long term capital gain rate. That rate is currently 15% (which is also set to expire in 2011). After tax dollar value of long term capital gain income:

$1 Earned = $0.85 Retained

As you can see, earning income from these three methods is more preferable than earnings provided by regular income.

As with all things tax related, exceptions always apply. Please speak with your tax advisor before embarking on any investment plan.

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