Tax time is definitely a pain.

The U.S. tax code is a lengthy document (over 50,000 pages at last count) that few people can really understand (including our current Secretary Of The Treasury which is somewhat frightening).

It’s riddled with puzzling (and at times hilarious) questions such as these gems which I encountered over the weekend:

Did you rent a farm and receive part of the crop instead of cash for the rent?

Why yes I did!  I’m sure glad someone at the IRS thought to include this question otherwise I might have missed it.  And this one:

Enter the amount of any gambling losses, but only to the extent of gambling winnings. It is important to keep an accurate diary or similar record of your gambling winnings and losses.

Umm….ok, nice to see the government giving gambling advice.

But I guess I can’t get too upset at the government acting very…well, government like.  They don’t know any better.

But a private company…well that’s another story.  And this is what I always found especially infuriating about Intuit’s TurboTax product.  It’s not just that it’s a bad piece of software – it’s that it’s bad yet so darn successful!

• It gets TONS of negative reviews on Amazon.com, but since there are over 40 different versions listed (they put up new ones each year) their bad reviews keep getting pushed down.
• It has “designed obsolescence” – which means they went out of their way to break it every year so you’d have to buy it again.
• It’s user interface looks like it was designed by programmers and accountants instead of normal people.

This is why I was so excited to see someone finally come along and clean TurboTax’s clock.

The last two years I’ve used TaxACT.com and it is a breath of fresh air.  It is fast, clean, simple, and makes sense out of incomprehensible IRS documents (perhaps their most impressive feat).

By the way, I’m not getting paid to recommend them.  They are just that awesome that I wanted to tell people about it.

Best of all, it is way cheaper than TurboTax.  Filing your federal return is FREE.  If you want to do a state return it’s just $9.95.

Overall, I’m so impressed with these guys – they nailed a great freemium product, probably put up with TONS of hassle getting it to work with the IRS, and have a product that really beats the pants off TurboTax.

Even if you have been using TurboTax for YEARS, it’s time to BREAK the addiction, stop paying your money to Intuit each year for their inferior product, and make the switch to TaxACT.com.

Until next time, keep breaking free!
Brian Armstrong

P.S. Doing your taxes is way easier if you’ve been doing your financial statements each month!

Here is an email he got from a reader…

“I want to earn more (I know, who doesn’t)

I keep reading all these finance books and like any other lazy American, I haven’t done shit. I’m 30 and a little behind on saving for the future, plus my boyfriend is a post-doc and not making a ton, so I’m kinda saving for both of us… yadda yadda) Essentially, I love the automation idea, I am just not sure how to start automating my life…

I have the (Roth) 401K, I also have a Roth IRA, but haven’t set up an automatic deposit into that – I know I should, I’ve just been sending in the lump sum every year… bad Leah, bad! Other than those two, I have no idea what to invest in. I like the idea of keeping a close tab on the 401K but let’s face it, I just put it in a lifecycle fund and haven’t touched it since. What else do I invest in? Basically, I just want out of the rat race.”

If it sounds familiar then check out what his response was.  Financial education is too important to be left to chance.  Speaking of which, have you done your financial statements for October?

Until next time, keep breaking free!
Brian Armstrong

It seems to be when a new piece of technology comes along that is a TOTAL game changer.

In recent memory of course is the internet, and all the things it has enabled. A small example being distribution of media such as music and video, and reducing the cost of publishing content to basically zero.

But this trend is not new and has been going on throughout history.

What about the printing press? It was basically the first internet. Even before that, what about the first civilization to create an alphabet or writing?

What about when everyone was using coal and then oil came along? HUGE amounts of wealth generated.

What about when everyone was running around on horses and then railroads came along? COMPLETE game changer.

What about when everyone was using blocks of ice and then refrigeration was invented?

Steel? Plastic? Agriculture? The wheel? Flight?

Wikipedia actually has a list of the wealthiest people in history (adjusted for inflation) and you can see that aside from Royalty (which doesn’t really count as earning it since you’re born into it) most of them are people who got in early on a complete game changing technology.

The trick is getting in at the right time.

Coming in too early: There are also lots of “next big things” which turn out to never materialize, like the flying car or a battery which lasts a long time. People have been waiting for those for 50 years. So it’s definitely not easy to bet on the next big thing and be right. You have to hedge your bets.

Coming in too late: The market for oil and automobiles is very mature today. It would be very difficult to build the next great oil company today, or shoe manufacturing company, or any other mature industry where there are strong incumbents. So it pays to be looking for the NEXT big one, not ones that have already passed. If you can be the only expert around when it does hit then you’re positioned well to capitalize. This requires you to toil away in a particular industry when a lot of people probably think you’re wasting your time.

I feel like the internet still has lots of untapped potential, and it’s probably one of your best opportunities for generating wealth today. But it’s starting to feel a bit mature at times.

So that begs the question: what do you think is going to be the next big thing?

For me I see some of these being complete game changers where people will build huge amounts of wealth. See if you agree with my predictions. Maybe you can get in early on one of these…

• genetic engineering (crops, bacteria for various purposes, and most importantly humans to prevent various diseases)
• robotics (the military will increasingly become unmanned – casualties are more acceptable if they’re robots)
• artificial intelligence (I think Jeff Hawkins and his company Numenta have a good chance of solving this in the next 5-10 years, btw it will not be like terminator, the part of our brain which accounts for desires and motives is very old and easy to replicate or leave out of a robot, the hard part is the neo-cortex which other mammals don’t have and is good at learning to make good predictions – this would definitely be a game changer – for more check out his excellent book On Intelligence)
• Renewable energy, in particular solar and electric vehicles

What do you think will be the next big thing?

Now that UniversityTutor.com has the billing/invoice system setup and running (more and more people are starting to use it) I’ve had a few days to work on a project I’ve been pondering for a long time.

I don’t want to give away too many details yet, but here’s what I can tell you:

• It’s a web app
• Whereas UniversityTutor.com focuses on a specific niche (tutoring) this new app will have a MUCH broader appeal and potential if it takes off – something on the order of Twitter, Wikipedia, etc.
• In the pay vs. ad-supported debate this one will be completely free for right now. To be honest I don’t have the business model really figured out yet for this, but it’s something that would be REALLY awesome whether it makes money or not and deserves to be free for the world.
• I’ve been thinking about it for probably at least two years, but I’ve just recently seen some developments which really made it come together in my mind.
• I worked till 3 or 4 am the last few days on this, and even after trying to go to sleep last night I couldn’t because it was racing through my mind! I had to pace on the balcony at 5am and watch the cars to calm myself down.
• This is a website that I’ve found myself wanting a number of times over the past year. This is really the best kind of business in some ways because you are creating it for yourself and understand the target market. Some people refer to this as dogfooding.
• I will be asking YOU to help me test it out and try it later this week when I announce it. As always, I would love to get your feedback.
• I am following my own advice on this project and launching the whole thing QUICKLY and INEXPENSIVELY to test out the idea. As you may remember, I launched UniversityTutor.com in one month for less than $100 (to be fair I did the programming myself which I know isn’t an option for everyone, but there are alternatives to that if you’re interested). This project will be even better by those measures: I’ll have it done in ONE WEEK and for only 7 DOLLARS AND 95 CENTS. Literally my only expense so far has been the domain name and I don’t plan on spending a single cent more to launch this website (not even for web hosting). I’ll show you how I did that later this week.

And to top it all off I’m leaving for Argentina in about 2 and half weeks! Today I sold my car, and I’m wrapping up various loose ends on that front as well (insurance, selling furniture, putting gym/phone/etc on hold).

I was really reminded today of my post from a few weeks back about how time is your most precious resource. UniversityTutor.com is turning into a great “water wheel” for me. It is running almost entirely on auto-pilot now with new tutors and students signing up daily. It’s making money and growing every day while I’m busy already working on the next water wheel!

These are exciting times to say the least. Stay tuned for the announcement later this week…I think you’ll really like it!

Brian

Here is the video as promised of the new billing features on UniversityTutor.com.

For those just joining us, this represented a big change in the business model. Previously I was charging tutors $10/month to keep their profiles on the site.

With the new business model, tutors can now have a free account, but the client pays a 15% fee on any money they earn. For tutors who use the site a lot and don’t want their clients to have the 15% fee, they can still pay $10/month (for a Pro Account) and then the markup is only 5%. This is similar to the Guru.com business model which I think balances nicely between the free and pro account.

There were a couple important points I wanted to reinforce to the tutors:

• The *client* pays the 15% markup and not you. I stole this idea from odesk.com by the way, and it’s slightly different than how elance.com or guru.com does it, where they charge the tutor.
• Clients can only leave you a positive review if you complete the transaction online.
• Similarly, your number of hours of tutoring (aka your tutoring experience) will only get updated if you complete the transaction online.
• You don’t have to pay up front for “contacts” from potential students anymore. Now, we only make money if you make money – which seems more fair.

Here it the video on Veoh (which has slightly better resolution). Click here if you don’t see it below.

Or if you are international here is the same video on YouTube.

As you can see, it ended up remarkably close to my drawings from a few weeks ago:

I launched the feature this weekend, and sent emails out to about 5,000 tutors explaining the change and how it would (hopefully) benefit them. A handful of the tutors wrote back and were pretty upset about the change (which was to be expected when sending to this many people). But I wrote them back right away thanking them for the feedback and telling them it was still a work in progress and that really using the invoicing was optional for right now. They could still get paid with cash/checks if they wanted – clients just wouldn’t be able to leave them a review after.

Here is an example of one of the emails I got:

Subject: Silly

While I feel that it is justifiable for the website to make money and operating costs, the website should find another way to make these costs. Advertising to both the potential tutees and tutors could be a much better option. It could include specially directed advertisements based on
-info given about potential tutees
-Area
-Major and area of tutoring (of college students)

Additionally, I am concerned about the method of payment. Would it be through pay pall? That would be bad for me. My students have been very reliable with their checks.

Sincerely,
A disgruntled student

And my response:

Hi[NAME REMOVED],

Thanks for the feedback you make some very valid points! It is still a work in progress and nothing is set in stone yet so we’re definitely taking everyones feedback seriously.

To answer your question, the student can pay via credit card which is more common online, so no, Paypal is not required. In addition, you are not required to use our online payment method at all. If you prefer to keep using checks or cash that is ok with us, and you wouldn’t pay us any markup in that case.

For your current clients it may be easier to just continue doing this. Just keep in mind that to build a reputation on the site (reviews and hours) it might be better long term to transition over, but it is still totally optional, and to be honest right now it won’t make much of a difference since nobody has any hours recorded yet anyway.

But hope this helps and we’ll continue working on it. Thanks again!

Thank you,
Brian Armstrong
–
www.UniversityTutor.com

Her mood changed instantly when she wrote back:

Thank you for answering my questions.
I am actually quite excited about using the online system now!

Success! I’m really excited about it and hopefully it helps make the site much more profitable over the new few months as people start using it.

What do you think? Feel free to send me your feedback in the comments…

So the question becomes, what is the most effective way to spend your time and mental energy?

Think for a minute about a person carrying buckets of water for their crops. There is a direct correlation between how much they work and how much water they get. If they want more water, they have to carry more buckets.

Now compare this to someone who uses their time and energy to build a machine instead. This machine is “passive” in that it works whether it’s owner is there or not.

Obviously there is great leverage in having a machine such as this. It can work day and night while your time is preserved to build new machines or relax.

In the modern day of the knowledge worker, we no longer need to carry buckets of water with manual labor. But there is certainly the mental manual labor of a 9-to-5 job, copying and pasting in Excel, or whatever it is that you do. It really is no different in the sense that there is a direct correlation between your time and how much your earn. If you want to earn more, you need to put in more hours and continue working each week.

Now, if you are surrounded by people who carry mental buckets for a living, the idea of building a machine might sound pretty silly to them. I’m sure the first person who built a water wheel felt the same way. It is more difficult to build, costs money for wood and nails, and might not even work.

While you are messing around trying to get your machine working, your bucket carrying counterparts will probably get a lot more water carried in the short term. They might think you are pretty silly spending all your time and money on a machine that might not even work while they are getting consistent progress each and every day carrying buckets.

But at some point you’ll get your machine working, and it will start to match the output you were able to accomplish manually. Even if your machine is only producing the equivalent of what you could do manually, you still have a very significant advantage: your time and mental energy are still available.

Because they have been preserved, you can now go on to build a second machine, and another, and another. When you have 15 machines running simultaneously your output will be far greater than any one person could produce (or earn in a job).

This is the real key: preserve your most precious resource (your time and mental energy). Build systems and machines that work when you aren’t there. Avoid mental manual labor that require your time for output.

What are the best modern examples of these machines? Owning and investing in businesses, income generating real estate, some web businesses, etc. With these machines in place you can produce far more than any one individual could with manual labor, and get rich in the process.

By the way, in case you’re thinking “$2,000 doesn’t sound like very much income per month”, keep in mind that this is PASSIVE income – income that comes in whether I work or not. In other words, this income cannot come from any hourly or regular “job” type work. It comes from things like real estate rental income, businesses you’ve setup that are running on autopilot, investment income like dividends, royalties from books or products being sold, etc. I was also earning other income during this time from my existing business and consulting which DID require my time and wasn’t passive.

If you are curious why passive income is such a big goal of mine you can read this and this for some background, but essentially it boils down to this: if you no longer have to trade your time for money you have truly broken free and can start to accomplish great things in life.

People in Times Square new years eve reminiscing on their 2008 goals? Photo by amelungc

Real Estate

To be clear, my goal as originally written on this blog December 16th, 2007 was to get to $2,000 per month in passive income VIA REAL ESTATE specifically. At that time I was convinced this was going to be my best path.

The year started out with a bang and in January I closed on 2 rental properties (the process to buy them had been in the works before this). Things seemed to be going along fine – I had actually purchased 5 properties total in the last year and while some of them didn’t turn out so well, others did.

After a court battle with an unscrupulous contractor and dealing with an incompetent/immoral mortgage broker, real estate was beginning to take it’s toll on me stress wise. By this time it was already mid-year and I was not on track to get enough property to accomplish my goal by years end. I was ready to keep pushing on, but at this time the mortgage market dried up (especially for self employed people like myself) which meant the deals kept getting better but I could not get financing to buy any of them.

It was time to re-evaluate my goal. I had 3 properties rented out and cash flowing (with only about $250 per month in passive income after all expenses – I had hoped it would be more) but I was unable to buy more and I wasn’t close to accomplishing my goal. It was time to “adjust” my goal to find another way. Remember, if you want something bad enough there is always another way.

The Blog

Around this time I noticed that this blog had started to pull in some decent money. it wasn’t much yet but it had potential. This got me excited enough to try some other monetization efforts, continue writing, and eventually break the 2,000 subscriber mark.

As I’ve often said about blogging, pick something you love writing about because for the first year it will feel like nobody is reading it. But if you can get through The Dip, then you can wake up with a nice passive income business in a few years.

By the way, blogging isn’t as passive as some other forms, but I still consider it to be quite passive for two reasons: (1) I’d probably do it whether I got money from it or not and (2) when your blog becomes successful your compensation is not tied to the number of hours you put in like a traditional job.

Anyway, the blog began to contribute to my passive income slowly and steadily at this time until it was generating about $400 per month. I was firing on two cylinders now – real estate and blogging – but I felt like I needed to add one more to accomplish my goal in time. The year was running out!

Launching The Tutoring Site

Luckily, earlier in the year I had launched a passive income business as a test. This site matched tutors with students who needed help.

I had experimented with all sorts of business models and finally got one with some potential. It was starting to generate about $300 dollars per month, but at this point it was getting quite late in the year.

So how close did I get?

Well, I just finished putting together my financial statements for December 2008. By the way, if you aren’t looking at your personal and business financial statements monthly you probably should be. This is one of the best things I ever did to start accomplishing financial goals – a very wealthy mentor got me to start doing it and it’s really helped. After all, how can you know if you’re accomplishing something unless you measure it? Here’s an easy way to do it yourself if you don’t have an accountant (I do them myself too).

Anyway, here is how it broke down:

• $250.00 – Real Estate Rental Income (after taking out principal, interest, taxes, insurance, HOA dues, etc – this is true cash flow)
• $1,260.40 – this blog, StartBreakingFree.com from book sales, ads, affiliate commissions, etc
• $129.20 – the tutoring site (after large advertising expenses for the month and a software glitch)

TOTAL: $1,649.60

The real estate income was predictable.

The blog was a big surprise. At the start of 2008 I would not have guessed this would have grown like it did. I should also mention that during December there was higher than normal book sales and affiliate commissions (although lower ad revenue due to decreased traffic during the holidays). December was the blog’s most profitable month ever.

The tutoring site was the greatest disappointment for me. I thought it would completely out-earn the blog, not the other way around. There are two big reasons why the passive income it generated was low for December: (1) I had quite high advertising expenses to drive in new tutors that month, which was an investment in the business but hurt the cash flow and (2) it was suffering from a rather large bug in the software which caused much of the communication on the site to fail. After getting complaints for several months from people using the site, I was FINALLY able to track down what was happening and it is now fixed. (In case you are curious and a geek like me, the reverse DNS on my server was set incorrectly caused a large number of my outgoing emails to be marked as spam).

This was incredibly frustrating because I lost a bunch of paying customers and some people left in frustration. But it is also exciting, because now that the bug is fixed I can see what this baby can really do! I still have big hopes for it – and the number of users plus traffic to the site continue to grow quickly.

Conclusion

Passive income is a funny thing because it requires a disproportionate amount of really hard work up front for very little compensation – and I felt like that was this year for me in some ways. But I’ve laid the foundation for success and now that I’ve gotten the flywheel turning just a little bit, it won’t take much effort to have it REALLY humming in 2009.

The blog and tutoring site will continue to grow at an increasing pace with little additional effort on my part – they are great assets. I’m still fond of real estate as an investment vehicle and will be open to buying more as the lending markets change. I would especially like to invest in a partnership to buy an apartment complex (with the right investor) at some point in the future but financially that is a ways off.

Overall, I’m happy with getting 82% of the way toward my yearly goal ($1,649 out of $2,000). I’ve read before that you’re goals should be ambitious enough that they really push you while at the same time being believable. Put another way, you should have about a 50% chance of achieving it. By that measure I’d say I was spot on.

And since I’m big on PUBLICLY writing my goals, and it worked so well in 2008, here is my goal for 2009: reach $5,000 per month in totally passive income.

I estimate that by the time I reach about $3,000 per month in passive income, I can probably stop doing all other types of earned income and I will effectively be retired at the age of 26 since I will no longer HAVE to work for money. Of course, I still will be working on all sorts of interesting projects – that’s just my nature – but I’ll be able to choose them because I want to not because I need the money. And that’s a very powerful place to be.

Why not state your goals publicly as well? What would you like to accomplish in 2009? Try to make it specific, measurable, and include a deadline if possible – then leave a comment below!

Sure, I understand the idea that “people who make more should contribute more in taxes”, but do you realize this is already accomplished with a simple percentage? Let’s say everyone paid 20% of their income to the government and this was the only tax bracket. Well, 20% of $50,000 is half as much as 20% of $100,000. It’s simple, it’s fair – someone who earned twice as much would contribute twice as much in taxes.

Photo by Bird Eye

But instead, we have tax brackets. We are in effect telling people that if you work hard, start businesses, own real estate, break free, create jobs, stimulate the economy, and start to earn a lot of money – we (the government) will punish you by taking an even greater percentage of your money. Similarly, if aren’t doing anything currently which people are willing to highly compensate you for – you will be rewarded by the government taking less of your money! How is this any different than punishing success and rewarding failure?

The dirty little secret about tax brackets

Here’s a more subtle point that many people don’t realize. Due to tax brackets and inflation, the government will continually get more of your money even without raising taxes. Allow me to explain…

Inflation occurs each year and makes your money worth a little bit less. Many companies give a standard raise each year of about 3% to each of their employees if they haven’t done anything particularly spectacular or terrible because it is expected. This raise doesn’t actually make them any richer in term of purchasing power – they can still buy about the same amount of stuff they bought last year because everything is a little more expensive.

BUT, while salaries are continually creeping up due to inflation (without anyone getting richer), tax brackets don’t creep up with inflation. They stay set. That means there are millions of Americans each year who get bumped into a higher tax bracket (without being any richer) just due to inflation – and the government gets a bigger percentage of their money.

This means politicians can literally say “I will not raise taxes!” yet still get more of your money even after adjusting for inflation. Tricky!

A problem of marketing

Getting widespread adoption of an idea like this strikes me as primarily a marketing problem. This concept of no tax brackets is currently known as a “flat tax”. They need to come up with a better name for it because the name suggests “no matter how much you earn you will pay the same amount in taxes”. This sounds totally unfair – and of course is not at all how it works (as I mentioned above, under a flat tax someone who makes twice as much would pay twice as much in taxes). But that’s certainly how it sounded to me when I first heard it.

You’d have to make the distinction between the percentage being the same while the actual dollar amount of taxes you pay changes drastically. Unfortunately, I’d venture to guess that a relatively small percentage of the population TRULY understands this concept to the point where it wouldn’t bias them.

Just like the “estate tax” never had widespread opposition until they started calling it the “death tax”, I think the “flat tax” needs a name change. I’m not sure what it would be (the “fair tax”? the “let’s not discourage success and be idiots tax”?). Who knows, all I know is that I can’t think of any real justification for having tax brackets and it seems totally unethical.

I should also mention that I am currently in a pretty low tax bracket and have nothing to gain from a flat tax – in fact I’d probably end up paying more. I do however work like crazy and hope to some day be filthy rich by contributing massive amounts of value to the world (isn’t this incentive the very basis of all innovation and progress for mankind?) and it bothers me that this incentive is being undermined.

So what do you think? Is there any justification for having tax brackets? Are we just rewarding failure and punishing success?

Until next time, keep breaking free!
Brian Armstrong

You can’t see your hair and fingernails grow, but each month they require your attention for some trimming.

To you it’s just a home, but due to appreciation it could magically be worth $100,000 more when you wake up five years later.

      Photo by brtsergio

What’s the point? There is great power in things which “just happen” whether you focus on them or not – even if they happen very slowly.

This is true because we have a limited amount of time and mental energy to use each day. It is our most precious resource.

Most people use that time and mental energy in exchange for money. The problem is that they must continue to trade their time and energy every time they want to earn more money. Why don’t more people focus it on building something that will generate passive income – income that happens whether they focus on it or not?

The answer is simple, they don’t do it because the initial results are pitiful! You could spend a TON of time finding/buying/fixing/leasing the right piece of investment real estate or getting a passive income business going, and in the first month be left with a measly $50 in cash flow. It hardly seems to make sense. Meanwhile someone else working a job that month could have brought home $5,000 for the same amount of hours and made you look like a fool!

But they would have missed the power in what you did, and that’s why most people will never be rich. Sure, it’s only $50. But you’ve now created something that will happen passively. It will happen whether you pay attention to it or not. You have created that leaky pipe – except now instead of ruining the floor it is filling up a bath tub (your bank account). You’ll come back some time later and that drip will have been working for you the whole time.

Here’s the best part: your time has been preserved. Since you still have all your time and mental energy at your disposal, you can go off and create another drip. With two drips working for you, you can go off and create a third, etc.

One day you’ll wake up with an army of drips working for you generating all the cash you’ll ever need, and your unfortunate counterpart will still be spending his time and mental energy to get a paycheck that month. Meanwhile, your time and energy will still be preserved to focus on whatever you’d like (more drips, charity, culinary school, curing cancer, writing your auto-biography etc).

You might look like a fool up front, but preserving your most precious resource (time and mental energy) by building passive income streams is the besy way to get rich.

The Fed needs to focus on it’s job of controlling the money supply and inflation and stop using OUR money to bail out failed companies.

$700 billion is a lot of money. Do you realize there are only about 300 million people in the U.S.? I’m just guessing but maybe 200 million of those are 18 years or older and pay taxes.

700 billion divided by 200 million = $3,500 per tax payer.

You can Google it if your calculator doesn’t have enough digits.

I’ve never had anything to do with Lehman Brothers, personally I’d rather keep my $3,500. It’s not like their customers will be left out in the cold. Someone will come along and buy them up on the cheap. It will be too good of a deal not too. Lehman will be screwed (and they deserve it, they took the risks) but the economy as a whole will end up fine. After all, people still needing banking services, and someone will be there to provide it.

What do you think, do you mind the government using $3,500 of your money to bail out some executives who made bad decisions?