Reasons why taxes and savings are considered leakage factors


If you’re looking to increase your financial well being, taxes and savings are two things you should probably get started on. But while the benefits of saving money might be self-explanatory, taxes may not be such a no-brainer.

In this post we’ll look at the strange world of tax laws and how exactly it’s possible for them to dilute your bank account. If you’ve never understood taxes before, this should change that.

Here is the answer for, which best describes why taxes and savings are considered leakage factors?

The thing about saving and taxes is that they don’t just take money out of your life: saving and taxes will also give you things in return for your payment. 

Cash flow, Retirement funds, Investment Opportunities, Education for yourself or your kids the list goes on.

Here are some points:-

1.You pay tax on cash flow. 

If you’re getting paid by your company, you’re paying tax. It doesn’t matter if its not enough to live on or if it’s transferred through your bank account. 

The moment you get your salary, the government gets its share of it.

2.You get money back in return for saving. 

This is where things get interesting. If you save money in any way possible, the government will give you back an extra percentage in the form of a tax rebate known as a tax credit.

For example, if you deposit N10,000 into a bank account for a whole year and you don’t withdraw it, at the end of the year you’ll be given back your N10,000 as well as an additional 20% of that deposit. 

This means that you will take out N10,200 from the bank account. Your savings thereby turn into a cash flow for you.

Why is this important? Because it means that money in your pocket now works harder than the same amount in your bank account. 

That’s what we call tax efficiency: using tax laws to increase savings and take advantage of loopholes to earn more money legally.

3.You get education benefits from saving and taxes. 

If you save money in a bank account that is a Nigerian domiciled account, you will be given tax rebates on your deposit if you’re a student. This means that while you’re at school, the government will help pay for your education through tax rebates

4.You get retirement benefits from your taxes and savings. 

If you save money or invest in shares, the government will give you tax rebates so that when the time comes for you to retire.

They’ll have ensured that there is enough money within the system to help pay for your pension and give you a good quality of life after retirement.

The bottom line: taxes and savings are just a way of helping each other out.

5.You get tax rebates for keeping your money in Nigeria.

This is the most important point in this post.

One of the biggest factors that keeps Nigerians out of saving money is the fact that they believe that it’s pointless to save when one can simply take out money from an ATM or bank at any time. 

This is why many people prefer to keep their money in accounts outside Nigeria for convenience when they need it. The thing with this, however, is that it costs you in the long term to maintain this arrangement.

For starters, taxes make it impossible to simply withdraw all your money in one go (unless you’re a very large corporation).

6. You get corporate tax rebates.

Secondly, banks charge higher withdrawal fees for transferring money out of Nigeria than they do for deposits. This means that if you deposit N10,000 into a Nigerian bank account and withdraw it after a year, you’ll probably end up with N9,500. 

This is what we call banking leakage: the unfortunate fact that Nigerian banks lose your money to foreign banks who can take advantage of their lower taxes and transfer fees.

7. You get international tax leakage for storing money abroad.

Then there’s the fact that foreign countries’ banking systems usually don’t support tax rebates like Nigeria’s does (in the form of tax credits). 

The result is that if you deposit money into a foreign bank account, not only do you lose out on banking leakage charges, but the government will also take a large chunk of your money as tax.

8. You can earn more from saving and taxes.

Finally, if you have a lot of cash sitting in foreign accounts, all it takes is one or two civil wars or another political crisis for everything to go up in smoke. 

Money locked up abroad can definitely be lost due to political instability within the country itself (just like the United States recently experienced).


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