November 20, 2021 | Business Minded

How to Answer Your Strengths Question

What are your greatest strengths?

We’ve all heard that interview question at one point in our professional lives. The predictable strengths and weaknesses question, where we have the opportunity to highlight both achievements and character traits. The typical response to this question is to either grab from the top of the list of “traits every employer wants in their employees”. These overused and unsupported answers do little to further our cause. While the interviewer usually nods their head as their eyes glaze over with boredom, without some story that backs up the claim, these assertions come out as empty as an upside-down coffee mug.

The other response is slightly better, we scramble through our list of professional achievements haphazardly, hoping we have done something that proves our value. Unfortunately, our memories are only effective at reaching some accomplishment in the last few days or weeks, and if we’re really lucky, a month or two. These accomplishments, while noteworthy, may not best represent the true value we can bring to the organization.

Knowing this, we need a better approach to answering this question. We do this by routinely, systematically keeping track of the accomplishments we make on the job. By recording our successes and wins along the way, when that strengths question comes up, we have an answer ready.

Just as you wouldn’t hire a photographer to capture moments with your children or at your wedding without first seeing some of their work, you also need a portfolio that showcases the fruits of your labor. This career portfolio helps remind you of your value, so when you sit down at your next meeting with your boss, or at that next interview, you can prove your worth.

So how do you create a career portfolio?

I recommend each month writing down your biggest accomplishment of the previous month. You’ll need to record what the challenge was, how you reacted to it, and the result. This will provide you the flesh to your story that illustrates how you were able to create a positive impact. Any proof that you can show also goes a long way to building credibility. This could simply be an email of thanks from your boss, or an email you send to others that explains what the situation was, and how you resolved it.

To get you started with your portfolio, you can also go back and write down accomplishments from the past. Even though you might not be able to find “proof” of your impact, you will still be able to showcase a pattern of value that you bring. Once your portfolio has some successes recorded, you are able to fall into the routine of adding to it monthly.

Maintaining your portfolio monthly serves two purposes; recording achievements before you forget them, and focused on contributing some measure of success to your organization. Trying to have a positive impact monthly, even if it’s only because you want something else for your portfolio, will help you stand out among your peers. And because of this focus on achieving more, you will eventually be handsomely rewarded for your efforts, leading you to even higher levels of success.

So next time someone asks you to “tell me a time when…” or “what are your strengths”, you’ll be prepared. Your career portfolio will help you ace those questions, with concrete examples of the challenges you overcame, and the successes you wrought. As you continue to seek new accomplishments to add to your career portfolio, you will stand out among your peers. Your pursuit of success will become a self-fulfilling prophecy, and your career portfolio will continue to grow, paying dividends with each new deposit.

Action Item:

Start your career portfolio today. Write down at least 3 examples of challenges you have overcome professionally.

What was the challenge?

What did you do?

What was the result?

And for bonus points, what were the attributes you displayed in this example? (These are your strengths!)

Are you feeling Lucky?

Have you ever met someone who is financially well off, and thought "Oh, they're just lucky"?

The truth is, they probably are lucky. Luck plays an important role in everyone's quest for financial freedom. And for such an important factor, we had best uncover what makes some people lucky, and some people not so lucky.

So what makes people unlucky with money?

These are the people who search for financial well-being without putting in enough effort in first. We can see this all the time with lottery players and gamblers. Many people play such games of chance, and when relying on chance, the effort requirement for good luck to show up isn't fulfilled. As such, statistically speaking, nobody ever "wins" in these games. That's not to say they don't have merit, but if your reasons for playing are purely financial motivation, you will leave disappointed. But the horse races and gaming tables aren't the only places we look to luck to provide us a financial windfall. We also make investment decisions based on limited information, and hence rely a degree on luck to help us out. This could be as risky as investing in an unproven startup without first performing sufficient due-diligence on the business and owners. An investment like this is fraught with risk, but quite alluring especially for the ambitious young professionals looking to make a start in this world.

I know about this relying on luck from first hand experience. Many years ago I had the opportunity to invest in a startup company, and the silver-tongued promises of untold riches had me dreaming of how my life would be much improved. These dreams swayed me into making a risky investment, relying on a combination of hope and luck to turn those dimes into dollars. And therein I learned one of the hard lessons that Lady Luck teaches. Luck never comes to those who aren't deserving of it.

We look for luck in other places too; there are whole companies built on selling you the latest, hottest stock tips. Making those rushed investment decisions based on a 3 A.M. hot-pick email, or the whispering you overheard from a couple tipsy bankers in a bar. This again doesn't fulfill the requirement of deserving luck, and as such your winnings will be lacking.

If luck doesn't lie in those places, how are some people lucky?

Luck is only a reward given to those who are prepared. Hard work will carry you to places where you might find good luck. I cannot tell you exactly where to look for luck, that is a function of the right time, the right place, the right people. But there are some places that you will have a higher chance of finding that good luck. These are the work opportunities that come about through hard work, impressing others with your knowledge, dedication, and character. I have met numerous people who embody those characteristics and ultimately find that good luck.

One such gentleman worked hard for years in a relatively unrewarding job. But through his perseverance, his dedication to his craft, he was ready when an opportunity came his way. This provided a substantial increase in his financial compensation. Already a financial win in his hand, his work performance continued to excel, and the reward was an ownership investment opportunity into company stock. This story isn't uncommon, but is only repeatable through consistent hard work. And that work is rewarded with opportunities that on the outside look like good luck. As Thomas Edison said, "Opportunity is missed by most people because it is dressed in overalls and looks like work."

Opportunity is missed by most people because it is dressed in overalls and looks like work.

Thomas A. Edison

These opportunities are found in other places too. A chance encounter at a conference could open doors that you never thought possible, opening you up to financial abundance. Or a good idea from a course or book could completely change the way you see life. These experiences that we put ourselves in to grow and become more are the preparation you need to be ready to find good luck.

How do we get lucky?

Looking for luck at the gaming tables or a chance email is as likely to pay out as those Nigerian prince's who ask you to hold their $ 50 million for them. Instead we should be taking advice from Thomas Edison, when we look for luck, we need only look at the opportunities disguised by hard work. Actively developing and growing ourselves will put us in the position to receive the boons of good luck, so when those opportunities come our way we are ready to step up to the plate.

Perhaps we need to rephrase the question, instead of Are you feeling lucky? What we really need to ask ourselves is: Am I willing to do what it takes to be lucky?

The Resume on Your Casket

How do we measure success in our lives?

I talk often about the grand vision, the life-defining projects that shape our entire lives. The continuous pursuit of these lofty goals is a life well lived, a life of success. But there is more to it than that. The dreams we pursue leave a legacy. Our accomplishments are sweetest when they enable others to thrive in their lives. And we are remembered by both the accomplishment, and how we conducted ourselves as we chased those goals.

To bring this idea into some clarity, let me tell you a story.

Earlier this summer, I attended an event celebrating the life of my uncle, Don. For all that knew Don in his younger days, they knew a man of great strength and sharp wit. Those attributes helped him climb the rungs of his career ladder, eventually becoming Vice Principal at his highschool. To achieve these accomplishments, he embodied the qualities that lead each of us to success; a positive attitude, a vision of where he could take his life, and consistent action working towards that goal.

Like any accomplished professional, his resume was strong. Solid performance in academics, being awarded a degree from a reputable university. Excellent job performance, a proven ability to rise to new challenges. Coaching extracurricular events, and strong involvement in the school. But for all the bullet points on a piece of paper, none of these accomplishments were talked about as we remembered Don.

You see, your accomplishments, the ones that really matter, are the ones that you leave written on other people's lives and hearts.

Hundreds of people filled the room, all the seats were taken, and many of us were relegated to standing room only as we crammed in the large auditorium to celebrate Don. Friends and family members alike took turns standing, giving speeches, remembering the man. Story after story, letters dug up from hundreds of young students that had been impacted over the years. Each of these stories touched on similar points; the kind words of encouragement that picked you up on your darkest days, the smiles that always seemed like they were saved just for you. The countless times Don had gone the extra mile for his students to see them succeed. The supportive friendships he developed with fellow teachers and school administrators.

We laughed and cried, as grief mixed with joyous memories of all the good times. And there were so many good times. Through it all though, those same themes held true. The strength, kindness, his smile, a kind word, the little actions that seem so trivial but have the largest impact. These are the true bullet points on Don’s resume. That is the resume he wrote on his casket, that is the legacy left by the man.

___________________________

For a man who did so much good in his life, it would be a lost opportunity to not evaluate how to measure success in our own lives. The career resume, the list of professional accomplishments were essential for Don. Those goals, that vision for a better, brighter future provided him the strength to see him through hard times. And by accomplishing those goals, he was in a better position to have a greater impact on others. By setting goals, and taking action in pursuit of those goals, Don was able to fill an auditorium to overflowing with the people whose lives were brighter thanks to his efforts. And that is why our goals are so important. They provide us the opportunity to impact more people in a positive way.

And the other way we measure success is through the little actions that we do every day. If we can learn anything from Don, it is how you show up every day is important. The little things, like a kind word to a friend or stranger, or a smile to brighten someone’s day. Those little things, done consistently throughout your life, will build you a legacy that fills stadiums of people positively impacted by you being here.

So dream big, accomplish those goals that you have. Achieving those goals multiplies the impact you have on the world. But the impact, the true resume on your casket, will be how you show up every day as you strive for greatness. How can we measure success? We can measure success through the legacy that you leave behind. Let’s make sure that your legacy fills stadiums with joy and cherished memories.

Action Item: What can you do TODAY to build your legacy? A kind word for someone in need? A smile for someone who needs it most?

Do You Need A Budget?

Almost every personal finance book you’ll ever pick up starts with the importance of budgets. This advice seems pretty universal among all financial professionals. So why is it that so few of us actually maintain a budget?

For many of us, we seem to get by without a budget, and while few people are happy to admit they are right where they want to be financially, there isn’t enough pressure to change. Despite this lack of urgency, the best personal finance practices that I can recommend is this: create a budget, and stick to it. But we know that, and many of us still don’t have a budget. So what else can we do?

To answer that question, we need to look at why budgets are so powerful.

The act of budgeting involves planning, and keeping track of our progress towards the plan. Much like the way we pursue achievement in other areas of our lives. If we want to become healthier, we adopt a nutrition and fitness plan, and keep checking in on our progress. How much more can we lift? What is our weight? Our body fat %? These are measurable figures that help us know if we’re on the right track. Budgets work the same way. How much did we spend on dining out? Are our shopping impulses in check?

These metrics are our analysis of performance. But the metrics didn’t just materialize out of thin air. The most powerful aspect of budgeting is not creating the plan, but instead of knowing where you are starting from. And there lies the glimmer of hope for all of us as we tackle our own financial futures. We can all take a look at where we currently stand.

We are all creatures of habit, and because we are creatures of habit, our spending is fairly consistent. As a result, if we follow what we do for a couple of weeks, or even a month, we have a pretty good estimate as to how the next few months will play out. Tracking our spending, even just for a short period, will help us make more educated decisions about the financial resources we will need in the short term. Any surplus can be invested, and any deficiencies will cause us to pause before we become saddled with consumer debts.

This tracking aspect helps shine a light on our spending habits, and that alone will help shape our future actions. If you realize that you are spending more than you want on restaurants, perhaps you’ll be more inclined to make your lunches several days a week. And while you won’t have the measurable insights brought about by a budget, simply knowing where you spend your money will help you make better decisions.

To answer the question, “Do you need a budget?” we can summarize by saying No, you do not need a budget. Budgets are valuable in their own right, but you can start making better financial decisions simply by looking at where you spend your money right now. And those better decisions add up, bringing you closer to the financial freedom we all desire.

What about you? Do you have a budget? If so, how is it working for you?

If you don’t have a budget, look at your spending from last week. What insights can you see? Does it surprise you where and how you are spending your money? Are there better choices you can make in the future?

Batching Your Success

How are you batching tasks in your life? And how can you take that practice further, to take your success further?

We all know about batch cooking, preparing the weeks meals ahead of time so that we save time during the week. This let's us focus on cooking when we're cooking, and the rest of our lives when we aren't. This practice saves us time when implemented well. And that valuable resource, time, can be reallocated towards our other goals.

So why don't many of us batch other tasks?

This is a practice I have been doing for years, and it works wonders for improving my outcomes professionally. I decide the night before exactly what related tasks I will be working on the next day. This helps me be more efficient, effectively getting more done. And because I am focused on one area at a time, the quality of my results improves as I don't need to switch cognitively between different unrelated action items throughout the day.

I do this by spending a couple of minutes preparing at the end of each day. Rather than grinding right until quitting time, I will take 15-20 minutes at the end of the day to get ready for the following day. This process provides some huge benefits in two main areas.

The first benefit, my efficiency. In those last 15 minutes, I can source the data and reports that I will need first thing the next morning. Having those files open on my desktop enables me to jump right into those important tasks without extra mental efforts the next morning. I don’t need to think about the long list of to-do items first thing in the morning, I already know what I’ve selected to do. And that simple process saves some of those important decision-making “juices” for later in the day. Prioritizing this way also helps me group my to-do list into general areas. As an accountant, I will batch tasks such as vendor expense reconciliations and payments, since these are both related to corporate expenses. Another day I will deal with invoicing, analyzing outstanding receivables, and forecasting future revenues. Again, these tasks all have a similarity. Once I know what the day will be spent on, I can forget about the other aspects of the business, knowing that the time for analysis and reporting is scheduled for another day.

Many of the ultra-successful have practices like this. Joel Osteen, the iconic pastor and world-class orator, batches his tasks. Certain days are dedicated exclusively to reading, generating ideas. Other days are spent entirely on writing his weekly speech. And yet other days are dedicated to practicing that speech. By batching his tasks, he is able to produce a brand new key-note speech each and every week. That is the power of batching. That is how you can batch your success.

The second benefit is more subtle, but exceptionally powerful. By spending the last few minutes every day closing down that day’s tasks, and planning for the morrow, I am effectively closing down my work day. This helps me leave work at work.

We’ve all had days where we don’t get what we wanted done. We show up and it seems the whole business went up in flames since we last looked. All our carefully laid plans are thrown out the window. Spending the last few minutes of the day setting plans of attack for the following day helps us stay in control. And knowing you have a plan before you head home helps you leave some of that chaotic stress from the office at the office, and not bringing that frenzy of stress and negative energy into the home.

Batching tasks helps us operate more efficiently, which allows us more time for everything else. Our productivity increases, and our results become of higher quality. This is an exceptionally powerful strategy for achieving career success, as getting more work done, of higher quality is certainly a way to increase our professional value. And once the day is done, we can plan our batched tasks for tomorrow. This helps us leave work at work, and promotes a healthier home-life. Success is sustainable only when we lead a healthy, balanced life. Batching for success can help us achieve that.

Fee’s, The Investment Killers

What is the greatest threat to your investments that you can do something about?

Nighttime news sensationalizes claims of impending economic recessions, trade-wars between economic powerhouses like the US, China, EU. Or failing crop yields this year, or oil pipeline issues, climate change. The impact of all of these sounds terrifying, and will certainly have economic consequences that ripple around the world. If these news anchors are to be believed, the days of doom and gloom are ahead. Religious fanatics also scream of the end of days, with judgement day fast approaching. But before we work ourselves into a panic, let’s look at what we can control in our personal economic lives.

I can’t tell you how to deal with any of the aforementioned scenarios. These issues, although very real, also have very uncertain economic consequences. Speculating about those impacts is a dangerous game, and ill-advised in any financial portfolio. And as such, personal finance advice remains the same, invest in a diversified portfolio, and avoid as many fees as possible. It is these fees that you can avoid; these fees that kill your investment returns.

What is the effect of fees on your investments? Let’s take a look.

For the purpose of these examples, let’s use “typical” investment fees to represent the offerings of most large financial institutions. These would be the big banks, pension companies, etc. Their fees, depending on the investment option you pick, are usually around the 2% mark, but can go much higher. Let’s see what those fees do to your investments. In the following vastly simplified example, we’ll start with a $ 100,000 investment and no further additions. This money will be held for 25 years, a good long-term investing strategy.

Typical Investment Fees
Investment	100,000
Rate of Return	6.50%
Annual Fee %	2.20%
25 Year Return	$286,488.84

This simple example shows the growth a long-term investing strategy can have, more than doubling our money over that 25 year period. But there’s more to it than that. A low cost investing option, like those now offered by many e-banks, will knock those annual fees lower, and the impact is dramatic. Let’s take a look:

Low Cost Investment Fees
Investment	100,000
Rate of Return	6.50%
Annual Fee %	0.50%
25 Year Return	$429,187.07

Here we can see the same investment, the same rate of return on the portfolio, and yet the annual management fee is 1.7% lower. The results? A whopping $142,187.07 over the course of 25-years. That means those fees that are charged by typical investments are stealing 33.25% of our overall returns!

This example, although overly simplified, shows the impact that fees can have on your investment portfolio. And that impact is huge. So large that you would be able to retire earlier on more money if you simply moved your portfolio to one of many low-cost investment funds.

So what’s the take-away here?

Fees are often displayed in complex ways on your statements, which makes it hard to determine how much you are actually being charged. But those fees do add up, so it is essential for reaching financial freedom that you look into all the fees that are out there, and minimize the cost of those fees. By doing this one easy step, you could end up with an extra 30% (or more) in your investments!

Action Item

Look into your investments, including (and especially) any work-provided retirement plan. What are the fees? If you aren’t paying less than 1%, you should look at similar portfolios in terms of risk tolerance from other institutions, as the fees alone could save you thousands.

Note: if you do have an employer created retirement account, often these funds are locked in while you are an employee. If the time comes where you are advancing your career elsewhere though, you should definitely look into transferring those investments into a low-cost provider to see significant savings on fees!

Is the Sacrifice too Great?

Success comes as a result of sacrifices. Giving certain things up to grow allows us to achieve more in our lives. But sometimes the sacrifices that are required are too great a price to pay.

As we decide what parts of our lives we want to change to experience more; more health, more love, more wealth, more peace, we also need to put boundaries on what we will sacrifice to achieve that. One of our Success Coaching clients recognized his boundaries and enjoys the extra accountability keeping him focused on his priorities. We joined his story as he steps into a new Director level role for a rapidly growing company, providing the promise of substantial career growth, and compensation to go with it. The allure of riches distracts many from the other pillars of their lives.

And this focus on career success and the pursuit of financial riches has cost many a man and woman their relationships; both family and friendships. But the cost is often higher than that. Many times we can witness those excelling to the top of their field with shaky foundations; poor exercise regimes, unhealthy eating habits, controlling stress with alcohol or tobacco. As we define success for ourselves, these crumbling pillars of success are hardly the inspiring vision we have. So where do we go wrong? Simply put, we sacrifice too much.

Understanding what is important to you, and making those areas non-negotiable means you won’t risk building your success on shaky foundations. What does that look like? As we rejoin our coaching client, his success looks like; devoted time to his family each week, a non-negotiable dedication to his fitness, and healthy stress-management practices. These areas of his life are most important to him, and anything that would require him to sacrifice them is asking too high a price, regardless of the promised reward.

This is why our Success Coaching program was designed to keep you accountable not only to your goals, but also to your boundaries. Knowing what you are sacrificing to enable growth will help you determine if the trade is worth making. We all need balance and boundaries; what is worth sacrificing to achieve more, and what is not. You can't walk the path of success if your health and relationships are crumbling all around you. That is why it is essential to keep track of all that you are doing, and all that you need to do to keep the boat the right way up. That chest of gold does no good in a shipwreck at the bottom of the ocean!

As we strive for greater success, we need to make sacrifices, trade-offs that help us become more than we currently are. But before we get caught up in the pursuit of success, we also need to establish our boundaries. What are you willing to trade in, to sacrifice for more success? And what aren’t you?

Action Item:

Take some time this week to decide what your boundaries are. What are your non-negotiables? What are you not willing to give up, no matter what the promised reward is? Write these down. Commit to them, and as you achieve success, you’ll find yourself living that vision of your ideal future.

Paralysis of Information

You miss 100% of the shots you don’t take.

How do you make financial investment decisions? For many of us, the process of making a financial decision involves researching the available options. But can we fall into the trap of having too much information? We can. And this is the paralysis of information.

When you are starting out anything new, you always want to do research to find out a bit about your new endeavor. Investing is no different. But with investing, the options are nearly endless, and in that ever expanding universe of stocks, bonds, mutual funds, ETFs, derivatives, options, dividends, interest rates, etc we can find ourselves quickly overwhelmed. In this state, rather than follow through with our original good intentions, we hesitate, we become paralyzed by information.

To illustrate this point, we can look at the steps we need to take to learn a new skill. As we learn something, such as driving, the list of steps and elements we need to remember is overwhelming. Turn the ignition, put the car in reverse, release the parking brake, ease off the pedal brake, slowly apply gas, turn the wheel, brakes, change gear, check mirrors, signal, check mirrors again, ease off the brakes again, apply pressure to the gas pedal, turn off indicators, check mirrors again.

When we look at a list of what we need to do, the process seems alarmingly complicated. And that’s if we already have an automatic-transmission car. But for many of us, driving is second nature now, so much so we have the confidence to talk and eat while driving too. How did we get to that stage of knowledge and familiarity that we can approach any vehicle? By actually driving. We overcame the paralysis of information by taking action. And our decisions and choices got better over time.

The same applies for financial decisions, especially investing. As we begin our research, we will undoubtedly come across talks of management fees, market swings, dividend yield, historic growth, and many other elements that help us evaluate different investment options. These are all incredibly important to know when making a decision. Charting these elements for the available options is an effective way at determining what investment will be right for you. But the most important part is taking action. As you make more investment decisions, you become more familiar with the elements that are important to you. And as a result, you make better decisions.

Application Steps:

How do we overcome this paralysis of information?

Set a deadline for when you will have research conducted by.
Perform research up to that deadline.
Make the best decision you can with the information gathered in your research. You won’t have all the information right now, and you never will. The most important aspect is that you make a decision.
Take action! Now, today, right this minute!

What decisions have you been putting off because you don’t have all the information? Set up a deadline for how long you’ll allow yourself to research. Then research until that deadline. Finally, on that deadline, a decision must be made based on the currently available information.

Remember, not making a decision is still a decision. And that inaction costs far more than any investment fee or poor market timing.

Giving Up to Grow Up

“We can achieve more than what we have because we can become more than what we are.” Jim Rohn

Have you ever thought about what you would give up to achieve more success? What you would be willing to not have in your life to be able to live out your dreams?

It is often said that success comes as a result of sacrifice. That when we give up certain elements of our current life, we are able to fill those gaps with things that mean more to us. These sacrifices are present in all areas of our life. We give up on being single in order to pursue a relationship with people we love. We give up on watching TV in order to read books and learn new skills. Or the sacrifice of late nights socializing so we can get some much needed sleep and exercise. The sacrifices we are willing to make help determine how far we will be able to go.

My girlfriend Marianne recently made a sacrifice with the vision of a better career. In her sacrifice, there are lessons we can all learn from. You see, Marianne had grown over many years to become an exemplary performer in her job. Ultimately she found herself in a place where she had earned the respect and friendship of those around her professionally. Many of us will find ourselves in similar positions in our careers, where the right now is comfortable and profitable. But right now is just that, a good place to be right now. If we want to reach our potential, we need to continually look for the next opportunity.

One such opportunity presented itself to Marianne, in the form of a career change into management consulting. Embracing this opportunity would mean giving up on her current successes, in order to achieve more in the future. Giving up the close working relationships she had with colleagues (who she could also consider friends), giving up the comfort of familiar where she knew she excelled. This “give-up” list was extensive, and that is frightening. To replace all that she would be giving up was an equally extensive list of new challenges, knowledge she didn’t possess yet, new professional relationships to be cultivated.

So how do you move forward when what you have to give up, or sacrifice, seems so daunting? Turn that fear into excitement.

By re-framing the opportunities, not by what you are losing, but by what you are gaining helps put into perspective the sacrifices that are required. You are not giving up that TV show, but you are gaining strength and vitality from the combined time in the gym. You aren’t giving up freedom as you gain the close companionship of a relationship. And for Marianne, the sacrifice was re-framed into excitement. Excitement for the chance to learn and grow, excitement for future opportunities, excitement to achieve more for her career and herself.

We all have to make trade-offs in our lives to become better, what do you need to give up to become better? What's holding you back? Sometimes growth is held back by our comfort and familiarity with our current situation. Turn fear of failure into excitement to achieve more and you'll see the benefits of making these trade-offs. That excitement will help you through the often difficult immediate transition, and keep you focused on your path to success.

Understanding Income Taxes

You know, taxes are unavoidable. And if you have to encounter those taxes (free tip: you can't escape taxes), you might as well understand what the implications are for your financial well-being.

Income taxes are one of the most common taxes we all encounter. And unfortunately, there are some serious misconceptions about how taxes are levied against us. This is brought about by the marginal tax rate system, as well as some payroll practices that feed our misconceptions. Let's take them in turn.

Marginal Tax Rates

Much of the world uses marginal tax rates, and while the percentages may vary from country to country, and even province to province (state to state), the system is the same. Governments provide us a tax break for a certain income amount, and slowly increase rates the more we make. The increases in tax rates fall into "tax brackets". The marginal element means that the tax rates only affect income in that tax bracket. To understand how this works, let's look at the 2019 Canadian Federal tax rates. (Note: if you are reading this from another country, the process is the same but the percentages are likely different.)

Taking a look at the Federal Marginal Income Tax rates we can see that if we make more than $ 47,631 in income in the 2019 calendar year, we only pay 20.5% on any earnings above the $ 47,631 mark. For the first $ 47,631 in income, we are only paying 15%. This scales as we earn more and more. Let's look at how this tax system works for someone making $ 100,000.

In this example, we work through the tiers and end up with a total amount of tax paid to the Federal government of $ 18,140.90. There is a common misconception that earning more money means the government takes a higher percentage of every dollar. In the above example, the misconception is that making $ 100,000 the combined tax rate is 26%, meaning $ 26,000 in tax paid. The difference from this misconception is an extra $ 7,859.10!

Taxation Myth: The more I make, the more taxes the government takes on all my money.

We can see that this taxation myth is dispelled! But we need to pass the word out. I have heard people working for hourly pay actually giving up shifts to not reach the next income bracket, thinking they are saving money in taxes! Let me simply sum up the math by saying, earning more money is never worse for you financially.

But these myths did start somewhere, so let's look at why that is!

Income Taxes and Payroll

Income Tax is usually automatically calculated each pay period by payroll software. The software makes an important assumption: that current earnings are the level of earnings you will earn all year long. Now let's say you receive a mid-year raise on July 1st, with your salary increasing from 70,000 to 85,000. Your income for the year will be $ 77,500. Unfortunately, the payroll system will be taxing the last half the year as if you are making $ 85,000 in annual income. This means for 6 months you will be paying too much in income tax.

This same situation can have an even more skewed result for certain types of compensation as well. This can be seen in bonuses, commissions, and overtime. These additional one-time compensation line items can inflate your earnings for the current pay period substantially, which puts you into a much higher marginal tax bracket for that pay. Explained another way, most payroll software calculates your one-time earnings as being received each pay. If you earned an extra 25% in overtime this pay, your income tax paid will be as if you make an extra 25% each pay (wouldn't that be nice?).

The good news is, this will be refunded as soon as you file your taxes the following year. Unfortunately, the fluctuating tax payments and clear as mud explanations lead many people to jump to the wrong conclusion about how income tax works.

Key Take-Away

Income Taxes are levied against all of us as we earn income. These taxes are based on a tiered system, called marginal tax rate system, where any income in that given tier is taxed at the same rate. If you go up an income tier, the tax rates levied against those additional dollars earned changes, but only against the extra dollars above the tier minimum! Pro tip: Knowing these tiers is vital for planning your investments!

When calculating income taxes, most payroll software calculations annualize the earnings from the current period. That means if you make more money on one pay cheque, you will pay tax as if you make that amount each pay cheque. These extra taxes paid will be refunded to you when you file your taxes the following year. Earning more income will never be worse for you financially.

Note: Personal tax credits also have an impact on the amount of Income Taxes you owe. For simplicity, tax credits have been left out of this discussion, as not everyone is applicable for the same tax credits.