Balancing life priorities and financial goals

From: alexhormozi

The pursuit of wealth often leads individuals to focus heavily on financial strategies like tax savings. However, a deeper look reveals that true financial success and a fulfilling life require a more nuanced approach, prioritizing the building of wealth through appreciation rather than incremental savings, and ensuring that financial goals do not compromise core life priorities like relationships, time, and well-being [00:00:00].

The Cost of Obsession with Tax Savings

Initially, the speaker was “obsessed” with tax savings, spending approximately $1.6 million on legal and accounting fees to establish a structure for tax efficiency [01:13:00]. Through this experience, he developed four core beliefs about tax shelters:

• Tax shelters cost more than they save [01:42:00].
• Tax shelters decrease your net worth [01:48:00].
• Tax shelters diminish your life [01:54:00].
• Tax shelters don’t make you a better person [02:01:00].

Hidden Costs of Tax Shelters

The perceived savings from tax shelters often overlook significant hidden costs, including [02:21:00]:

1. Cost of Discovery and Conversion: Identifying legitimate tax solutions is challenging, as 95% of them are “swampland” [02:42:00]. Sifting through options, vetting structures, creating new entities, transferring assets, and establishing new banking relationships consumes a significant amount of time and attention [03:06:00].
2. Cost of Upkeep: Maintaining these structures requires ongoing attention, trading valuable time for less valuable monetary savings [04:07:00]. Examples include a friend traveling 104 days a year to avoid US taxes, potentially missing opportunities to make more money if that time was reinvested [04:14:00], or another friend missing their baby’s birth to meet residency requirements [05:04:00]. Even complex structures like captive insurance require constant attention for fund allocation to remain legitimate, diverting focus from value-generating business activities [05:32:00].
3. Cost of Unwinding and Fines: Many tax “tips and tricks” are eventually unwound by the IRS, which operates 3-5 years behind [06:11:00]. This can result in back taxes, fines, and interest, along with legal and accounting fees to unwind the structure. This often happens because people used clauses for tax saving purposes, not their intended use [06:45:00]. The IRS views the tax code as an incentive system, encouraging specific economic behaviors (e.g., real estate investment) [07:18:00].

Fortunes Built on Appreciation, Not Income

Wealth is primarily generated from the appreciation of equities, not just income [09:04:00]. The wealthiest people in the world, many residing in high-tax areas like California and New York, demonstrate this [08:39:00]. For example, 94% of Forbes 100 growth came from appreciation, not income [11:12:12].

Consider a business example:

• A business making $10millioninprofit(EBITDA),valuedat5x,isworth$50 million [11:34:00]. After 37% taxes on dividends, the owner receives $6.3 million [12:02:00].
• If the business grows to $12millioninprofitthenextyear(20$60 million [12:20:00]. After tax, dividends are $7.6 million [12:35:00].
• The net worth increase is $10million(fromappreciation)plus$7.6 million (after-tax income), totaling $17.6 million. This indicates an effective tax rate of only 21% on the overall increase, because 56% of the net worth increase was tax-free appreciation [13:11:00].

The key takeaway is that increasing the value of a business (equity) is far more impactful for building wealth than obsessing over tax savings on income [13:38:00]. The focus should be on building a valuable business and allowing its value to compound, even if living in a high-tax state [14:04:00].

Inverted Priorities: Sacrificing Life for Money

Obsessing over tax savings often leads to “inverted priorities,” where the means to achieve a goal (money) become more important than the goal itself (freedom, desired lifestyle, relationships) [15:03:00].

The speaker highlights several ways this plays out:

• Sacrificing Time with Loved Ones: People might avoid living where they want or spending time with family to save on taxes, undermining the very reason they want more net worth [15:15:00]. This directly impacts balancing family responsibilities with self-improvement and balancing marriage and career goals.
• The Moving Goalpost of “Enough”: The idea of temporarily living in a tax-friendly area to “stack enough cash” is often flawed because the definition of “enough” constantly changes [17:31:00]. As wealth increases, exposure to higher levels of wealth can lead to a continuous pursuit of more, making satisfaction elusive [18:19:00].
• Trading Irreplaceable Resources for Replaceable Ones: Sacrificing finite resources like time and youth for more money, which can be generated at will and has diminishing marginal utility, is an illogical trade [16:12:00].
• Unnecessary Complexity and Stress: Opting for complex tax structures, like an intentionally defective grantor trust, might save taxes but introduces needless worry, stipulations, and the risk of audits, creating headaches that outweigh marginal gains [19:04:00].

Reputation and the 85-Year-Old Self Test

Beyond financial calculations, personal values and long-term perspective are crucial for setting priorities.

• Reputational Risk: The speaker prefers to be known as someone who “paid his dues and still killed it,” rather than someone who “escaped taxes” [21:34:00]. This highlights the importance of aligning financial decisions with personal brand and legacy.
• The 85-Year-Old Self Test: This powerful decision-making framework involves imagining one’s 85-year-old self looking back at current decisions. The speaker believes his older self would laugh at the idea of sacrificing youth and living in desired places for marginal tax savings on money he won’t need [23:03:00]. This perspective encourages prioritizing experiences and relationships in the present.

Practical Rules and Core Beliefs

For those who still wish to consider tax savings, the speaker provides practical rules of thumb:

• Real tax savings typically come from:
  1. Giving up ownership or control (e.g., charitable giving, trusts) [25:02:00].
  2. Depreciation (e.g., real estate investments where the government incentivizes development) [25:33:00].
  3. Deferral over elimination (e.g., deferring taxes until death) [26:19:00].
• Due Diligence is Key:
  • Always identify the “hair” (downsides) in any tax structure, factoring in discovery, conversion, upkeep, and fee costs [26:48:00].
  • Be wary of sales pitches claiming “the wealthy have been doing this forever” [27:00:00].
  • Don’t pretend to know what you don’t; ask simple questions [27:21:00]. If an expert cannot explain it simply, they might be trying to confuse you or don’t fully understand it themselves [27:46:00].
  • Ask for references of people who have used the strategy for over a decade to ensure it has survived IRS cycles [28:20:00].
  • Always do background checks on the people and entities involved; avoid those with a history of tax evasion, even if acquitted, due to reputational risk [29:06:00].
  • Never spend money on something you wouldn’t otherwise buy just to expense it [30:23:00]. Focus on expensing assets that build business value [30:57:00].

Guiding Beliefs for Life and Wealth

The speaker’s mindset changes and core beliefs for optimal life and financial success include:

• Attention as the Most Valuable Asset: Never engage in activities that consume attention without a disproportionate return [31:36:00].
• Focus on Making, Not Saving: Pay zero attention to tax-saving schemes and instead focus on generating more income [31:41:00].
• Think in Orders of Magnitude: Replace incremental saving with thinking about how to 10x your earnings, which will render tax concerns trivial [31:50:00].
• Don’t Regret Past Decisions: Once a decision is made (e.g., where to live), don’t dwell on hypothetical past savings, as it destroys spirit and distracts from the future [32:01:00].
• Accept 100% Taxation Upon Death: No matter how much wealth is accumulated, everyone is “taxed at 100%” upon death, as chips (wealth) remain at the table for others to play [32:38:00]. This “casino analogy” suggests that optimizing for marginal gains at the expense of life quality is illogical, as all wealth is ultimately left behind [32:47:00]. This perspective contributes to long-term planning.
• Money Buys Options; Don’t Trade Optionality for It: The purpose of money is to provide choices and freedom. Sacrificing that optionality in the present for future monetary gains is counterproductive [34:30:00].

By adopting these perspectives, individuals can move from chasing incremental tax savings to a broader focus on building substantial wealth through business value and prioritizing a fulfilling life, which are crucial steps to achieve financial independence and overall well-being.