Should I claim and invest cash that I make off the books?

Investing
#1

If I’m making some cash on the side, is it smarter for me to stash it and not pay any taxes on it. Or claim it, pay taxes on it, and then invest it (into an index fund)?

My spouses family is very “cash is king” & “no one makes money in the market except the brokers.” They have built up a substantial amount of wealth on their own (low 8 figures), through their business and real estate income, but no one believes in the stock market (which is a shame because they could be raking in gains just buying the index). And their business makes a lot of cash and they would rather cut off their arm than claim it and pay taxes on it.

Our business makes a small amount of cash, but my spouse still has the mindset of “never claim or deposit cash.” The government will flag you and you will have to pay taxes on it.

Since starting my investing education about a year ago, I have been trying to put more money into investments than just sitting around doing nothing. I would think, even with having that cash taxed, after putting it into a fund and getting ~5-10% return, that would be better than having it sit under a mattress and earn zero interest.

What do you guys think?

#2

Hey @LBIrigoyen!

I think you’re kind of conflating two things here. Option 1 is “don’t report the income, not invest” and Option 2 is “report the income, and invest”. So you’re really choosing two things. Should you report the income, and should you invest.

That said, on the first issue: I would report the income. If you don’t report the income, that’s stealing. It’s not stealing from the government, it’s stealing from me and every other honest person who doesn’t decide to cheat on their taxes. One of PFC’s principles is to do the right thing. Congrats to your in-laws on their success, but I believe people who do the right thing are more successful in life. And probably sleep better and are happier along the way.

On the second issue, yes, of course invest it.

And given your question, for sure paying tax and investing will put you way ahead over time than not reporting and leaving the cash under the mattress.

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