# Calculating the REAL cost of every purchase you make.

### How much?

One thing I have found to be consistent over the past 20 years when working with folks is that they do not understand the real cost of the purchases they make. I always ask the question “How much does a \$1,000 couch cost?” When I ask this I normally hear “Am I paying cash or am I charging it?” For the following example the assumption is cash.

### Only a \$1,000, Right?

You are looking to buy a \$1000 couch, and you say, “It is only \$1,000.” Right? Wrong. Let’s look at what it really costs to make that purchase.

### Taxes and More Taxes…

First, let’s assume you need to pay sales tax of 7%. So now you need to come up with \$1070. But you actually need to earn more money because where I come from there are taxes to pay such as federal tax, city tax, state tax, and FICA. Let’s assume you are in a 15% federal tax bracket, 6% state, 2% city, and your portion of FICA. That means you will need to earn at least \$1,533.00 before taxes to make that \$1000 purchase.

In other words, the \$1000 couch will cost you \$1533 or 153% of the sale price. So when considering a purchase, make sure you evaluate the real cost.

### So another way of saying this is…

• You need to earn \$1533 to buy a \$1000 item
• You need to earn \$15.3 to buy a \$10.00 item
• You need to earn \$1.53 to buy a \$1.00 item

### It impacts other areas…

Let’s shift from couches to vehicles. You know that vehicle sitting in the driveway that you paid \$30,000 for? You had to earn \$46,000, pay the taxes, in order to bring home enough money to buy it. OUCH!

### Can’t seem to get ahead?

Have you ever wondered why it feels that your money doesn’t go very far? Here is why. If I ask you how much you make, what will you tell me? 9 out of 10 times you will tell me the gross amount that you make because we normally think in gross. So if your gross income is \$70,000, you are walking around thinking you make \$70,000 a year, and you are beating yourself up because you are wondering why you can’t make it on \$70,000 a year. The reality is if you are grossing \$70,000, you are bringing home (net) somewhere in the \$46,000 range. That is a long way from \$70,000. Once you start thinking in net, you will find yourself less frustrated and more understanding as to why you don’t have the purchasing power you thought you had.