Yesterday I talked a bit about harnessing and taking control of the money you earn or have. Today I want to take it a step further and explain how money works.
You’ve no doubt heard the saying, “a penny saved is a penny earned.” Ol Ben had it right but, being a tax guy, I’d like to toss in a variation, “a hundred dollars saved is a hundred forty three dollars earned.” Or, “if I have $100 and decide to blow it, I’ll need to go back to work and earn an extra $143 to get that $100 back.”
Now you’re wondering if I should be doing taxes with math like that. Well Mr. Franklin said that saving a penny, that is, not blowing it, is the same as earning a penny. Makes sense until we realize we have to pay taxes, and to have a penny, you need to earn more than a penny before taxes.
You see to get $100 net pay, you need to earn $143. That, less taxes, equals about $100. This is assuming that you are in the 15% federal bracket and 6% state. Also deducted is the Social Security, Medicare, and state disability taxes. In this scenario, this equals about 29.65% of your earnings going to taxes. So if I spend $100, I would need to work and earn $143 to replace it. Your tax rate may be higher or lower, but this scenario covers a whole lot of people in the U.S.
This adds a new twist to yesterdays article about watching little things as well as big things when it comes to spending your hard earned cash. Most people probably do their homework when buying a car, or big screen tv, or a two week vacation, but most of us go out almost mindlessly and buy, say a soda or coffee every day. We don’t think too much since it’s only a couple of bucks, what’s the harm.
Well, check this out. Spending $2 on a soda or coffee every day is $60 a month, and $730 a year. Now that we know $730 does not equal $730, but more like $1,045, we realize that $2 soda or coffee really costs close to $3. That’s about 2% of a $50,000 income. Maybe doesn’t sound like much but remember, the little things add up. And remember that the soda or coffee is just one area of expenditure.
If you took economics you most likely remember the term ‘opportunity cost.’ That’s the cost of choosing one action over another. If I spend my $730 on a soda every day, that’s $730 I can’t use to invest, or to pay down my debt, or buy new needed clothes.
Besides money, in the case of a soda, it’s really a bunch of sugar or artificial sweeteners, and other chemicals that are probably not really good for the body. I think most of us could agree with that. So let’s look at this. I’m spending almost $3 for a soda that cost $1.79 plus sales tax, which is in reality maybe fifty cents worth of value, for stuff that is most likely harmful to my well being. And I have to earn $1,040 a year for the priviledge.
Lets look at this another way. If you check around online or with agents and save $50 per month on your insurance policies, you save $600 cash. You’ve in effect just given yourself an equivalent raise of $875 this year.
Again, these are just a couple of examples. Look for ways to save on; groceries and household supplies, clothing, home furnishings, insurance policies, entertainment, gifting for birthdays and holidays, cable, utilities, etc.
One almost surefire way to save is, don’t carry your credit cards with you. It’s so easy to overspend on things you need and spend on things that you don’t even need. Lock em up if you have to.
We also need to talk about interest on credit cards if you carry a balance. Interest rates could be anywhere up to over 30% in extreme cases. So if you’re paying 15% remember the rate is really higher since you must pay with after tax dollars. $100 paid in interest required you to earn $143 to pay it.
I hope this makes sense. I am not advocating living like a monk or anything. Life is meant to be lived to the fullest. And money, being nothing more than a medium of exchange, is meant to be spent, just not recklessly. It is also meant to be employed in investing to earn more money through the investment, so your money is working for you.
It’s great to have all these things available for purchase for basic security, comfort and enjoyment. But do not confuse having stuff with freedom. By overspending, you don’t own what you buy, it owns you. Freedom is not having a ‘financial noose’ around your neck.
Simple questions can be: Do I really want this (at this cost)? Do I really need this? If I buy this will I respect myself in the morning (or when the credit card bill comes due)?
This is a long post so I’ll stop here. Be sure to check back tomorrow.
Robert W. Craig, E.A.