People often attack the wrong problem, or maybe it is the right problem from the wrong place.
Daniel Khaneman is a respected psychologist who has a Nobel Prize in Economics. His specialty has been judgement and decision making. Skills that serve us well in life. Consider this somewhat counter-intuitive thought.
How do you understand memory?
You don’t study memory. You study forgetting.
I don’t spend much of my time studying memory, but I do spend time on other things where the lesson in Khaneman’s thought is important.
Tax management for example. It is always wrong to manage the taxes. You want to manage the money that remains after taxes.
It is quite easy to pay no taxes. All that is required is that you have no income. Having no income is a high price to pay for having no taxes due. All tax plans should make you better off. More spendable income now. More capital in the future. Management simplicity. Better transfers to your heirs.
The first place to look is to understand the pretax income required to support a given expenditure. Sometimes a corporation matters.
In Ontario the tax rate on corporate business income is about 15% on income under $500,000. A non-deductible expenditure of $8,500 requires $10,000 of pretax income. For a person earning $150,000 now, faced with a non-deductible expenditure of $8,500, new income must be $16,000. Easy choice.
Find a way to have the corporation pay.
There are many kinds of expenditures that can move to the corporation. Life insurance premiums and club fees being the most common. Properly structured debt right behind. The non-deductible part of business promotion meals is useful. The price of operating a boat is non-deductible, but if it has a business purpose, better the corporation pays with its after tax income. Use you imagination. Business purpose and non-deductible favours corporate payment.
Another fruitful area is the issue of saving and investment. Do you study saving or spending to find the opportunity? If you start with saving as a given you will miss a lot. Additional capital need not always come out of reduced lifestyle. Consumption rarely exceeds 40% of before tax income. Addressing taxation, how debt is structured and the purpose of saving can often yield fruitful advantage. Suppose someone paid off their mortgage faster by not saving money for education costs after they put money in a Registered Education Saving Plan. Would the mortgage payments be enough to pay the difference? Same rule for retirement saving. RRSP or debt. Restructuring the easily overlooked parts can make a meaningful difference.
Drug addiction follows the path too. Studying how a person behaved when they were not addicted may yield more insight than studying the addiction after it is full blown. Find the source of the pain that the drug relieves and you are part way to a solution.
Studying the obvious does not always give you the best course. Use the Khaneman idea and look at the “not side” of the question. Both saving and not saving can be analyzed and the not side is actually easier.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772
This is an amazing piece of work. It is not intuitive. With practice it will become more automatic. This simple thought could significantly change your life. I would like to see you work up a list of financial decisions in which this thought could offer the greatest value. You could make the list far quicker than it. How about it Don? An amazing gift to the financial planning community. Better yet, an online course with lessons. Healthy tuition, of course!
After all these years you continue to astound and amaze me!
An old pal.