Why do some people go through contortions to avoid paying taxes, yet spend money on expensive financial advice, high-interest loans, etc?
"One is a choice the other is not. While they are both liabilities on the balance sheet, in the real world they are quite different.   We do not feel as much ownership over our money that goes to interest payments as we do over our tax payments.  Taxes pay for our government and the services it provides.  Interest, on the other hand, is what we pay in order to have a bank loan us money.  Similar to paying for a good or service obtained from some other business, we do not feel we have a say in what the bank does with that money.  If we disapprove of a business' practices, we stop doing business with them; assuming there are other choices.  We can not practically avoid dealing with our government.   We certainly feel that we should have a say in what is done with our tax money.  I doubt there is anyone in the world that completely approves of their government's spending.  It is very easy to feel marginalized with regard to our tax payments.  For example, some people feel resentment because their taxes fund the welfare rolls. All that said, I believe there is little overlap between the two groups.  It seems to me that you are referring to those with large amounts of high interest (e.g. credit card) debt.  I doubt that a large percentage of them are scouring the tax laws, looking for deductions and loopholes.  If they had that mindset, they would also be working hard to get out of the hole they are in.   In summary, we choose to pay a financial adviser, to take out a loan or to obtain a credit card.  We do not choose to pay taxes.  Since taxes are supposed to pay for our government and things which should benefit everyone, we want a say in what is done with it.  This is also the case because it is forced on us.  (""Fine son, I'll lend you some money, but I don't want you buying cigarettes with it."")  Since our say is limited and we likely will not approve of everything our government does, we want to exert what control we do have: reduce our payments as best we can." I think sometimes this is simply ignorance. If my marginal tax rate is 25%, then I can either pay tax deductible interest of $10K or pay income tax of $2.5K.    I think most americans don't realize that paying $10K of tax deductible interest (think mortgage) only saves them $2.5K in taxes.  In other words, I'd be $7.5K ahead if I didn't have the debt, but did pay higher taxes. "To some extent, I suppose, most people are okay with paying Some taxes. But, as they teach in Intro to Economics, ""Decisions are made on the margin"". Few are honestly expecting to get away with paying no taxes at all. They are instead concerned about how much they spend on taxes, and how effectively. The classic defense of taxes says ""Roads and national defense and education and fire safety are all important."" This is not really the problem that people have with taxes. People have problems with gigantic ongoing infrastructure boondoggles that cost many times what they were projected to cost (a la Boston's Big Dig) while the city streets aren't properly paved. People don't have big problems with a city-run garbage service; they have problems with the garbagemen who get six-figure salaries plus a guaranteed union-protected job for life and a defined-benefit pension plan which they don't contribute a penny to (and likewise for their health plans). People don't have a big problem with paying for schools; they have a big problem with paying more than twice the national average for schools and still ending up with miserable schools (New Jersey). People have a problem when the government issues bonds, invests the money in the stock market for the public employee pension plan, projects a 10% annual return, contractually guarantees it to the employees, and then puts the taxpayers on the hook when the Dow ends up at 11,000 instead of ~25,000 (California). And people have a problem with the attitude that when they don't pay taxes they're basically stealing that money, or that tax cuts are morally equivalent to a handout, and the insinuation that they're terrible people for trying to keep some of their money from the government." "The bank provides a service that the customer voluntarily agreed to - the bank will provide funds to the customer now and the customer will pay back those funds plus interest in the future.  The arragement wasn't forced onto the customer. The government, on the other hand, takes money (the exchange is not volutary) from people to provide a ""service"".  This frustrates a lot of people - myself included - since people do not have a choice.  They must pay the taxes or go to jail (or have their house confisicated, wages garnished, etc.).  It gets even more frustrating when the government takes money from the people and gives it to the banks, auto companies, insurance companies, etc.." An example, where I live. When you buy a house, the seller wants 'black' money. This is because that way the seller pays less taxes. However, it's not smart for the buyer to pay in black, as the tax reductions are lower. Eventually, when the buyer tries to sell the house, he has to declare the difference, so a higher buy price should not have affected... apart from the notary minutes.
They are using several banks, hedge funds or other financial institutions, in order to diversify the risk inherent to the fact that the firm holding (a fraction of) their cash, can be insolvent which would makes them incur a really big loss. Also, the most available form of cash is very often reinvested everyday in overnight*products and any other highly liquid products, so that it can be available quickly if needed. Since they are aware that they are not likely to need all of their cash in one day, they also use longer terms or less liquid investments (bonds, stocks, etc..). Im pretty sure its a moral application of the forceful basis of taxation.  And most people get rich by providing goods and services, or via investing in goods in services. The rest, the hyperwealthy banksters, international weapons/ death merchants, wall street, fraudsters, the-good-ole-boys-network, etc... that was via government, and its probably not a good idea to give them more.  Pay your taxes, please. I dont want them to ruin your life. There is the underpayment penalty, and of course the general risk of any balloon-style loan. While you think that you have enough self-discipline, you never know what may happen that may prevent you from having enough cash at hands to pay the accumulated tax at the end of the year. If you try to do more risky investments (trying to maximize the opportunity) you may lose some of the money, or have some other kind of emergency that may preempt the tax payment. Credit is very important even if you are wealthy. One thing you may not realize is that rich people typically have comparatively little cash on hand.  If they're smart, most of their assets are not liquid - they're tied up in safe, long-term investments.  They use credit for their day-to-day expenses and pay it off from the dividends on their investments (which might only come in once a quarter). There are also tax advantages to using credit.  If a rich person wanted a new car, he'd be smarter leasing it for his business (immediate write-off of the lease payments on taxes) versus buying it (depreciation over several years plus property tax liability in some states).  There are more elaborate tax dodges but the point is that buying a car outright is the worst option in terms of tax avoidance. Another way the rich (mis) use credit is so that they don't risk their own money on business ventures.  Let's say I have $1,000,000 in my personal bank account, and I want to buy a business that costs $1M.  If I am dumb, I clean out my bank account and put all my money in the business.  I get 100% of the profits, but I also bear 100% of the risk.  If I'm smart, I loan 200K of my own money in the business and put the rest someplace safe, and get a loan from a bank for the other 800K.  If the business succeeds, the bank gets their money back plus interest.  If it fails, the business declares bankruptcy and the bank eats the 800k loss. If I structured the debt right, my personal loan to the failed business gets paid back first when the company is liquidated, and the bank gets whatever is left over (if anything).  The most of my own money I can possibly lose is 200k, and probably it's closer to zero if I have a good accountant. "They're hiding income. The IRS is a likely candidate for who they are hiding it from but not the only option. Another possibility that comes to mind is someone who had a judgment against them--a check made out to ""cash"" could be handled by someone else and thus not ever appear in their bank accounts." Where I am you pay annual taxes on a house, pay state and county transfer taxes when you buy/sell, and then have to pay capital gains the year you sell if it appreciated and you don't meet one of the exemptions. So I think your whole premise may be flawed. "That's just his base salary for last year.  Keep reading in the article: He also received $1.6 million worth of securit[ies]. Plus, he's probably earned plenty in salary, bonuses, and other compensation in previous years to more than keep up his lifestyle.  He can also sell (relatively) small amounts of the stock he already owns to get millions in cash without raising an eyebrow. how are people able to spend more than what they make, without going into debt? Well, people can't spend more than they have without going into debt. Certainly money can be saved, won, inherited, whatever without being ""earned"".  Other than that, debt is the only option. That said, MANY ""wealthy"" people will spend WAY more than they have by going into debt.  This can be done through huge mortgages, personal loans using stock, real estate, or other assets as collateral, etc.  I don't know about Bezos specifically, but it's not uncommon for ""wealthy"" people to live beyond their means - they just have more assets behind them to secure personal loans, or bankers are more willing to lend them unsecured money because of the large interest rates they can charge.  Their assumption is presumably that the interest they'll pay on these loans is less than the earnings they'll get from the asset (e.g. stock, real estate).  While it may be true in some cases, it can also go bad and cause you to lose everything." A major reason that I can think of is financial security. Most people have reoccurring costs such as housing, car, medical expenses. If you were to put all you money into dept, and live from check to check, than you could be increasing risk of financial loss. Think about what would happen if one were to default on their mortgage? Risk management plays a huge role in personal finance, and a way of preventing financial loss is to have enough money in an accessible place to pay reoccurring costs in the event that ones situation changes unexpectedly. People just love becoming more well-off than they currently are, and one of the ways they do it is with leverage. Leverage requires credit. That desire is not exclusive to people who are not already well-off. For a well-off person who wants to become more well-off by expanding their real estate ventures, paying cash for property is a terrible way to go about it. The same goes for other types of business or market investment. Credit benefits the well-off even more greatly than it benefits the poor or the middle-class. In principle, the US taxes both income and gifts. Simply thinking good thoughts is not necessarily sufficient to avoid filing or payment obligations. Giving somebody money with no repayment date, no interest, and no enforceable note looks an awful lot like either income or a gift. A loan normally has interest, money sitting in a savings account is insured, and other investments generally have an expected return.  Why would somebody give a loan with no interest, with only flexible or informal payment expectations, in a way where it has neither deposit insurance nor any expectation of net returns?  That looks a lot like a gift - at the very least, a gift of the time value and the default risk. The IRS definitely polices loan rates. The latest release is Revenue Ruling 2014-13. The AFR is useful for tax concepts such as Original Issue Discount (when issuers sell low-interest or no-interest bonds or loans at less than face value, attempting to recharacterize interest income as return of principal), various grantor trusts (e.g. GRATs), and so forth.  It's a simple way for the IRS to link to market rates of interest. Documentation and sufficient interest, as well as clear payment schedule (and maybe call or demand rights) make it a bona fide loan.  There is no real way for the IRS to distinguish between an informal arrangement and a post-hoc lie to conceal a gift.  Moreover, an undocumented loan is generally difficult to enforce, so it looks less like a true loan. The lender declares the interest payments as income on his Form 1040, line 8a and if necessary Schedule B. High taxes and tax breaks have done. Tax breaks can only be accessed if you can essentially afford a descent accountant. For that to makes sense you need to earn a large amount of money. So proportionally the middle classes end up paying the most tax and gets the least for it. "Most well-off people have investments which they have held for long periods of time, often of very substantial value such as a large part of a company.  They also have influence on legislators and officials through various social contacts, lobbyists, and contributions.  They managed to convince these law makers to offer a lower tax on income derived from sales of such investments.  The fig leaf covering this arrangement is that it ""contributes to the growth of economy by encouraging long-term investment in new enterprises.""" "'Note that ""to keep an investor from lowering their tax bill"" is not an explanation'. Well, yes it is. In fact  it is the only explanation. The rule plainly exists to prevent someone from realizing a loss when their economic situation remains unchanged before/after a sale. Now, you might say 'but I have suffered a loss, even if it is unrealized!' But, would you want to pay tax on unrealized gains? The tax system still caters to reducing the tax impact of investments, particularly capital investments. Part and parcel with the system of taxing gains only when realized, is that you can recognize losses only when realized. Are there other ways to 'artificially' reduce taxable income? Yes. But the goal of a good tax system should be to reduce those opportunities. Whether you agree that it is fair for the government to prevent this tax-saving opportunity, when others exist, is another question. But that is why the rule exists." "These types of diagrams appear all throughout Kiyosaki's Rich Dad, Poor Dad book.  The arrows in the diagrams represent cash flow. For example, the first two diagrams of this type in the book are:  The idea being presented here is that an asset generates income, and a liability generates expenses.  According to the book, rich people spend their money buying assets, while middle class people buy liabilities. The diagram you posted above does not appear in the edition of the book I have (Warner Books Edition, printed in 2000).  However, the following similar diagram appears in the chapter titled ""The History of Taxes and the Power of Corporations"":  The idea behind this diagram is to demonstrate what the author considers the tax advantages of a personal corporation: using a corporation to pay for certain expenses with pre-tax dollars.  Here is a quote from this chapter: Employees earn and get taxed and they try to live on what is left.  A corporation earns, spends everything it can, and is taxed on anything that is left.  It's one of the biggest legal tax loopholes that the rich use.  They're easy to set up and are not expensive if you own investments that are producing good cash flow.  For example; by owning your own corporation - vacations are board meetings in Hawaii.  Car payments, insurance, repairs are company expenses.  Health club membership is a company expense.  Most restaurant meals are partial expenses.  And on and on - but do it legally with pre-tax dollars. This piece of advice, like so much of the book, may contain a small amount of truth, but is oversimplified and potentially dangerous if taken a face value.  There are many examples, as JoeTaxpayer mentioned, of people who tried to deduct too many expenses and failed to make a business case for them that would satisfy the IRS." "Other people have already demonstrated the effect of compound interest to the question. I'd like to add a totally different perspective.  Note that the article says if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors [...] you'll likely accumulate enough savings to retire comfortably. (the latter point may be the more practical mark than the somewhat arbitrary million (rupees? dollars?) My point here is that the group of people who do put away a substantial fraction of their (lower) early wages and keep them invested for decades show (at least) two traits that will make a very substantial difference to the average (western) person. They may be correlated, though: people who are not tempted or able to resist the temptation to spend (almost) their whole income may be more likely to not touch their savings or investments. (In my country, people like to see themselves as ""world champions in savings"", but if you talk to people you find that many people talk about saving for the next holidays [as opposed to saving for retirement].) Also, if you get going this way long before you are able to retire you reach a relative level of independence that can give you a much better position in wage negotiations as you do not need to take the first badly paid job that comes along in order to survive but can afford to wait and look and negotiate for a better job.  Psychologically, it also seems to be easier to consistently keep the increase in your spending below the increase of your income than to reduce spending once you overspent. There are studies around that find homeowners on average substantially more wealthy than people who keep living in rental appartments (I'm mostly talking Germany, were renting is normal and does not imply poverty - but similar findings have also been described for the US) even though someone who'd take the additional money the homeowner put into their home over the rent and invested in other ways would have yielded more value than the home. The difference is largely attributed to the fact that buying and downpaying a home enforces low spending and saving, and it is found that after some decades of downpayment homeowners often go on to spend less than their socio-economic peers who rent. The group that is described in this question is one that does not even need the mental help of enforcing the savings. In addition, if this is not about the fixed million but about reaching a level of wealth that allows you to retire: people who have practised moderate spending habits as adults for decades are typically also much better able to get along with less in retirement than others who did went with a high consumption lifestyle instead (e.g. the homeowners again).  My estimate is that these effects compound in a way that is much more important than the ""usual"" compounding effect of interest - and even more if you look at interest vs. inflation, i.e. the buying power of your investment for everyday life.  Note that they also cause the group in question to be more resilient in case of a market crash than the average person with about no savings (note that market crashes lead to increased risk of job loss).  Slightly off topic: I do not know enough how difficult saving 50 USD out of 50 USD in Pakistan is - and thus cannot comment whether the savings effort called for in the paper is equivalent/higher/lower than what you achieve. I find that trying to keep to student life (i.e. spending that is within the means of a student) for the first professional years can help kick-starting a nest egg (European experience - again, not sure whether applicable in Pakistan)."