Investing in Philippines: Why rich people grow richer and poor people become more poorer?


Wednesday, May 12, 2010

Why rich people grow richer and poor people become more poorer?

Okay such topic is a long discussion but my aim here is to connect that topic to investing in the Philippines.

One key thing that makes such happen is the word we all know especially when you are an employee. Yes you got it right the word is TAX.

If you notice it especially if you are an employee, before your paycheck lands to your wife's hand(so that she can start paying bills and buying the household needs) or before even you see it yourself your paycheck will surely have a line called tax withheld or tax withholding. You will also notice that this amount is different from your co-worker who is either single, married, or with dependents. If you are single the government will tax you more thus your jaw always drop especially if you are on commission based. If you made a big sale and in your check you will see that line with a whopping amount deducted to that sale you made.

Remember that as an employee you are taxed based on your earned income which we usually called active income. Active income is the earnings you get by doing something like working, doing business and the like. The opposite of active income is passive income. To simple define it, it is the income you earn by doing nothing; which in reality is passage of time.

Passive income are taxed differently. They are taxed with the same rate without regards to the amount. 

Now connecting this to stock investing, in the Philippines capital gains through stock trading is taxed at 1/2 of 1% which is 0.5% which when converted to decimal is 0.005. Remember this figure 0.005. Why because this is the figure you will multiply to get tax that will be deducted to your gain when you completed a trade. Imagine that, if you earn Php1,000.00 in a single day you will pay the government Php5.00 and what you keep is Php995.00 less other small charges and broker's commission. What if you gain Php20,000.00(let say this is your monthly salary), you will just pay tax of Php100.00. 

Now capital gain in stock are passive income because you never do any work. You just waited for the value of your stock to rise up to the level that you will be able to exceed your breakeven. One can compute its earnings thus all we we have to do is wait. That is why rich people seem to grow richer without them really exerting effort because they have well invested there hard earned money before. They have learned the investing game and they have learned the tax rules thus they chose where the tax is lesser.

I am not implying that rich people don't work to earn money, most of them do work. One thing more why they grow rich is that while working they keep on re-investing whatever they earned thus making lesser tax payment because there tax on there earnings from work are compensated by passive earnings in investments. And also earnings from stock trading are not taxed in your income tax because such was already subjected to final tax which means that is the total tax to be paid for that income source.

So now you know why rich are growing richer. Lets all learn, lets be wise in how we handle our money and taxes.


Breathe and Clay said...

kiyosaki and bo sanchez books are really good read on financial stewardship. what is difficult also for many poor people is the lack of knowledge on the opportunities to earn and be financially free. paradigm shapes our world so much. so with a very limited know-how of opportunities and perhaps, a differently shaped perception on money and confidnce on getting rich, may gt stuck with the homing instinct of being poor...

Louis said...

Thanks for your additional wisdom on the topic...yes financial stewardship is something that most people tend to forget. For them it is easy to spend when money comes but always grumble when no money seems to be in their grasp...