In this series, we share some of John Sanderson's favorite insights and anecdotes from his book, “Lessons Earned.” Throughout the book, John shares dozens of lessons he has learned, starting as a young boy and culminating with his leadership as founder and chairman of Sanderson Wealth Management.
My Uncle Jim was one of my favorite people. He owned a small manufacturing business, which was a perfect fit since he had always been handy. In fact, when he was still in high school and my mom was pregnant with me, Uncle Jim made my crib in his woodshop class. I can only imagine the teasing he got from his friends.
When Uncle Jim was running his company, each year his accounting firm would do a projection of his taxable income, and tell him how much was needed in expenses to avoid paying taxes. He would follow their advice and load up on supplies, perform repairs, and spend a significant amount of money. As a result, he ended up owing very little in taxes, or even no taxes at all. But he also wasn’t accumulating any wealth.
One day, I was analyzing Uncle Jim’s financial situation, and I explained to him that the winner at the end of the year was the person who ended up with the most worth—not the person who ended up paying the least in taxes. I’m not sure if he had fully realized the concept before, but he certainly did then.
If you want to make a profit and build wealth, you need to pay taxes.
Sure, there are certainly ways to minimize your tax burden. But you shouldn’t start by focusing on taxes.
With that in mind, Uncle Jim followed my advice and, as I expected, he was able to start saving. Instead of spending all of his money just to avoid taxes, he paid his fair share, then used his profits as capital to take advantage of opportunities.
On the last day of 1986, he used his savings to purchase an old steel plant and workshop that was used by one of the region’s largest industrial companies. Uncle Jim redeveloped the property over time, and today it is a small industrial park that continues to be a significant source of wealth for my cousins and my aunt.
A lot of people view paying taxes as offensive, and make unwise decisions in an attempt to mitigate their tax bill. Every year, I talk with people who want to use gifting to reduce their tax burden, but fail to adequately prioritize the long-term investment results and goals.
Avoiding taxes is almost always a secondary goal. The primary goal is building wealth. Remember that.