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.
Tomorrow we will talk about the value of your time.
You have a choice, and the choice is yours. – Coach Bryan
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- TurboTax – What Are Tax Calculators? (turbotax.intuit.com)
- Guidelines That every Property Buyer Must Stick to (boldstate.com)
- Coupon Tip: Why You Should Always Shop With a Calculator (urbanmoocher.com)