Concept
Earn, Spend, Pay Taxes
Earn, spend, pay taxes is Robert Kiyosaki's name for the order in which a business handles money: it earns, pays the legitimate costs of earning, and is taxed only on the profit that remains, while an employee is taxed first and spends what is left.
In Rich Dad Poor Dad, Kiyosaki draws a simple contrast. On a salary, tax comes out first, often before the money reaches your account. You then pay for everything you need to keep earning out of what is left: the commute, the course, the laptop. A business reverses the order. It records its revenue, deducts the costs of producing that revenue, and is taxed on the remainder. The same money comes in, the events happen in a different order, and a different amount is kept. This idea has limits. Rules differ by country, and a cost counts only if it is genuinely business-related and documented. Running a family holiday through a company is tax fraud, not strategy. Owning a business also brings admin, risk and often other levies. Spending $100 to save $25 in tax still costs you $75. The order only helps when the spending builds the business.
A real-life example
Maya earns $60,000 a year as a salaried graphic designer. Tax is withheld first, and the $3,000 laptop and software she needs come out of what's left. A year later she freelances for the same clients at the same $60,000. The laptop, software and a co-working desk are now documented business costs deducted before tax. She also handles quarterly filings, pays an accountant and goes through months without work.
How to use it
- 1List each income source and note whether tax is taken before or after the costs of earning it.
- 2Write down what you already spend in order to earn (tools, training, workspace), and ask an accountant which of these would count as legitimate business expenses where you live.
- 3Before changing structure, run the full numbers: admin, contributions and lost employee benefits. Switch only if the business makes sense even without the tax difference.