Do you ever wonder where all of your money goes? Or why your employer stated when you got your job that you would be making “$60,000 per year” (awesome!) but instead of your monthly paycheck being $60,000 divided by 12 months = $5000 per month, it is much, much less, sometimes only HALF of that: $2500 per month? WTF? What is THAT about, anyway? WHAT HAPPENED TO YOUR MONEY???

Let’s see if we can answer that with a multiple choice question:

What happened to your money?

a. The United States Government Stole It!

b. You have absolutely no idea

c. All of the above

Well, just like in school, if you answered “c” you are correct!  (Remember on those standardized tests, when in doubt, the answer is always “c”! Or a., c., d., c…..Rock ‘n Roll, as they used to say!)

Anyway, today we are going to discuss answer “a”, and learn how the United States Government is legally “stealing” your money.

Taxes

If you are anything but the absolute poorest of poor people (which unfortunately today in America is almost 50% of the population, but that is the subject for another post :() you pay taxes. A LOT of taxes. Here is just a brief sampling:

  • Federal, State, and Local Income Tax (on any money YOU earn)
  • Social Security Tax
  • Medicare Tax
  • Sales Tax (on anything you BUY)
  • Property Tax
  • Estate Tax (yes, you are even taxed WHEN YOU DIE)
  • Gift Tax (heaven forbid Uncle Sam doesn’t get a piece of that generous gift)
  • Customs Tax (when you buy something from another country)
  • Various “Sin” Taxes (Alcohol, Tobacco, etc., in some states)
  • And many, many, MANY more!

Sadly, this list goes on and on! And the government not only taxes individuals as listed above, but say you as an individual also want to start a business (you know, provide something of value to the world, possibly create some economy-growing jobs while you’re at it, etc.), well yep, you guessed it, that ENTITY is ALSO taxed with its own list:

  • Payroll Tax
  • Unemployment Tax
  • And many, many, MANY more!

Now, please take note: I am NOT saying that you shouldn’t pay your taxes– on the contrary, you definitely SHOULD pay your taxes! And promptly! (Otherwise you have to pay penalties, too!) But it is important to become AWARE of this ginormous (<– bigger than “enormous”!) expense! If you are aware, you can then choose to minimize the burden and the impact that taxes have upon your life.

When studying Kung Fu or any type of self-defense, one of the most important skills to cultivate is awareness. You must always be aware of your environment, your attacker, your own condition, and more, in order to be the most effective in battle. It is no different in Kung Fu Finance, and therefore we are going to discuss the power of awareness quite a bit.

Zen MeditationDid you know that there are actually three levels of awareness?[1]

  1. Non-Awareness (you might be here now, but most people are at least somewhat aware of taxes)
  2. Awareness After the Fact (you are most probably here now: you are aware that taxes are “huge” and that they “suck” and that you pay “too much in taxes” but you are only aware of your specific tax impact and situation AFTER you have already been taxed, e.g. once per year when you painfully file your taxes)
  3. Awareness BEFORE the Fact (the most-aware level and what we are working towards in our study of Kung Fu Finance– you are aware of the impact of each financial choice you make and this awareness helps you to make better decisions BEFORE you actually make them)

By changing “awareness AFTER the fact” into “awareness BEFORE the fact”, you TAKE BACK YOUR POWER and make better, more informed decisions. This is a subtle, but POWERFUL distinction.

Are you still with me? Then it’s time for some action!

Kung Fu Finance Action Step:

  1. Get out your most recent paycheck stub– we’re going to decipher this puppy!
  2. Find the amount marked “Gross Pay”– that is what you are actually “making”
  3. Now find the amount marked “After Tax Pay”…. (MUCH smaller number, isn’t it?)
  4. Now some very basic math– take your Gross Pay and subtract your “After Tax Pay” from it and you have the amount of taxes that are taken out of your paycheck BEFORE you even “see” this money!

THAT is what we are talking about… MUCH of your money is taken from you via taxes before YOU EVER EVEN SEE IT!

Now there are a million and one other deductions from your paycheck in addition to taxes that are subtracted before you actually get your “take home” or “Net” pay, such as health insurance deductions, 401(k) deductions, ESPP deductions, etc., but for now we are just focusing on the incredible effect of TAXES on your life (baby steps, grasshopper!).

Congratulations for making it this far! I hope this has opened your eyes as to the single largest expense you have as an American citizen. As you slowly expand your awareness of taxes, you will be able to reap many financial benefits, including:

  • Solicit tax advice from professionals before you make an investment,
  • Form various entities (trusts, estates, corporations, LLC’s, etc.) to reduce your tax burden,
  • Explore tax-advantaged investments (benefits of real estate, tax-deferred and tax-free accounts, municipal bonds, etc.), and
  • Many more… you get the idea!

As you progress from unawareness to being aware of things before the fact (before it’s too late!), you will see your money really begin to grow. And THAT is fun!

Let me know what you think about taxes in the comments below!

To your investing success,

— Kung Fu Girl

[1]“There are three levels of skill in ‘pushing hands’: non-awareness, awareness after the fact, and awareness before the fact.” — Wu Gongzao, second son of Wu Jianquan, quoted in T’ai Chi The International Magazine of T’ai Chi Ch’uan Vol.19 No.2, April 1995.http://www.bookrags.com/quotes/Tai_chi_chuan