To grow your net worth, which is the better option, increase your income or reduce your spending? This is an often debated topic in the personal finance world. However, the answer is crystal clear. You don’t have to choose one over the other. You can and should increase income and reduce spending to maximize your financial results.
 

When people are looking for ways to increase income or reduce spending, their solutions often focused on either the increased income or reduce spending side individually. For this post, I will show you how I grew my net worth to $1.43M by increasing my income and reducing my spending at the same time with just one awesome trick.
 

So what’s my secret weapon? It’s the personal income tax code. Don’t close your browser just yet, give me a few sentences to explain. I know that most people think of the tax code as a super complicated and terrifying beast. They hate filing their taxes and avoid talking about the tax code like it’s a plague (unless they’re a tax accountant). They also think that they’re being taxed to death on every dollar they earned.
 

Don’t worry, I won’t be regurgitating the tax code from the government’s website and bore you to death with it. I’ll show you something better. All you have to know is the basic mechanics of the tax system and how to use it to your advantage. This way, you can keep the taxman out of your pocket and retain more of every extra dollar that you’ve earned.

The Basic Income Tax Knowledge

Everyone knows that the more incomes you earn, the more taxes you pay. However, not all types of incomes are being taxed equally. In general, the most tax efficient types of income (forms of income that allow you to pay less income tax) are as follow: capital gain, dividend, business, interest, and employment.
 

Depending on the province that you live in and your income level, the tax efficiency of capital gain and dividend may be switched. Check out Taxtips.ca’s marginal tax rate table for your province and income range to find your most efficient form of income.
 

The holy grail of the tax code is the allowable deductions that you can legally use to lower your income as you earn more. Except for employment income, most of the other forms of income have some allowable deductions that you can claim to lower your tax bill. Let’s take a look at some of these deductions examples and pay less taxes.

Home-Based Business Deductions

Let’s say that you suddenly got a brilliant online business idea (personal finance blogging anyone?) and use the extra room in your home as an office for your business. If the extra room is about 10% (in my case) of your home’s square footage, you can legally deduct 10% of your housing expenses to lower your business income. Here’s a list of common home office expenses:

• Computer Equipment and Assessories
• Home Insurance
• Home maintenance and repairs
• Interest paid on your mortgate
• Internet bills
• Office Furniture (depreciation)
• Phone bills
• Property tax
• Software (Antivirus, Microsoft Office, Tax)
• Utilities such as electricity, gas and heating

As you can see, out of the ten items on the deduction list, the only extra cost to you is the electricity. For the rest of the other costs, you’ll have to pay for it anyway regardless if you own a home business or not. These common housing expenses can amount to thousands of dollars every year. With your home-based business, you can achieve your goal to increase income and reduce spending at the same time.
 

Just a note, you don’t have to own your home to use those deductions to lower your income tax, a rental would also suffice. However, you just don’t have as many deductions available if you are renting compared to owning.

Business Vehicle Deductions

If a home-based business is not for you, maybe a service-based business may be more suitable, like driving for Lift or delivering for Uber eats. Let’s say that the mileage driven on your vehicle for business is about 60% of your total annual mileage driven. You are now able to legally deduct 60% of all your vehicle expenses against any income that you’ve earned using your vehicle. Here’s a list of common vehicle related expenses:

• Gas
• Depreciation
• Insurance
• License Fees
• Maintenance (Oil change, tire change, parts replacement, etc.)
• Parking Fees
• Winter Tire and Rims

Once again, out of the seven items on the common deduction list, the only extra cost to you is gas. The rest of the vehicle expenses will be incurred by you regardless if you use your vehicle for business or not. If you want to drive a shiny new car, this is the best way to do it at a lower cost.

Investment Expense Deductions

Using a business to increase income and reduce spending is a great way to use the existing resources that you already paid for. However, if you don’t have the time to operate a business, there is a less time-consuming option that you can take. Using money to make more money. It can either be your money or other people’s money.
 

For example, if you have $20,000 sitting in a chequing account collecting dust and have a sizeable mortgage balance, what should you do? Should you just pay down your mortgage and have your $20,000 earn at least an interest rate that’s equivalent to your mortgage rate or invest the money? You don’t have to choose, you can and should do both – with no change to your financial situation of course.
 

If you just choose to pay down your mortgage, you’ll just save on the interest cost and have no additional assets to help you build wealth. On the other hand, if you don’t pay down your mortgage and just invest the money, you’ll be fully taxed on the income that your investment generated and the capital gains when you sell.
 

To do both, first, you need to set up a Home Equity Line Of Credit (HELOC) where your mortgage is being held. Pay down your mortgage with the $20,000 in your chequing account so you’ll have $20,000 available to borrow from your HELOC account. Borrow the $20,000 from your HELOC to invest. Here’s a popular post of mine that goes further into detail on how you can borrow money to invest.
 

By borrowing money to invest, you have the best of both worlds. You’ve paid down your mortgage and save on the interest expenses. Furthermore, you also have an additional $20,000 in asset (and debt) to work for you to increase your wealth. Since you borrowed the $20,000 for the purpose of generating extra income, the interest that you paid on the HELOC is 100% tax deductible.
 

The beauty of this borrowing money to invest method is the correlation with your taxable income. The higher your taxable income is, the harder the interest expense will work for you. The deduction reduces your income tax from the highest income tax rate. This is what I suspect that some of the 6000+ Canadians earning more than $100K/year and paid no income taxes did.
 

Borrowing from your HELOC is just one of the methods of borrowing. You can use any other borrowing method you want as long as you can clearly demonstrate and justify that the borrowed money is used for the purpose of earning an income.

My Increase Income And Reduce Spending Results

I personally took advantage of all the deductions documented in this post by operating a home-based business, owning rental properties and borrowing money to invest. Except for my interest and gas expenses, most of my daily expenses were reduced by at least 10%, which resulted in a reduction of thousands of dollars off my income tax.
 

I don’t want to brag, but to demonstrate the phenomenal results of my increase income and reduce spending trick, here are a few highlights:

• I saved an extra $200,000 because I borrowed money to invest.
• Leveraging my investment portfolio, I earned over $30,000 by selling covered call options and naked put options this year.
• Increased my net worth by more than $109K for the latest quarter.
• I was able to reduce my 2017 overall income tax rate to 12% from my highest marginal tax rate of 43%. I documented this in a post on how I earned more income and pay less income taxes than my spouse.
• Got a five figure tax refund for the last two years.

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My Two Cents

To increase their income, many people may take on an extra job or two and ended up paying a huge amount of income taxes on the extra income. On the contrary, to reduce spending, some people may make many sacrifices and cut their budget to the bone. Both of these options can be successful, but they’re not the most efficient.
 

The most efficient ways to increase your wealth is to find opportunities and synergies to increase income and reduce spending at the same time. The tax code can be your friend. Don’t dread this beast. Harness its power and have it working you.
 

So readers, what do you think of this trick to increase income and reduce spending at the same time? Would you consider incorporating this trick into your financial toolbox? Do you have any tricks that worked really well for you that you can share with this community?