Let’s take a quick look at how money works when you spend it as opposed to save it. The math here is estimated and rounded but the facts surrounding how the math works are dead on accurate.
You walk into a store on a nice day and see some shiny new thing you JUST HAVE TO HAVE! and it only costs $20. That’s no big deal, $20! You worked hard last week and deserve a little reward for your efforts right!
Let’s break down that $20 cash in your pocket: This is money you received from your paycheck AFTER PAYING TAXES! The amount of money you earned was 20% more that that (assuming a %20 tax rate from Uncle Sam). You need to EARN $25 before taxes to pocket $20 cash. The actual cost of the item you are buying was $25 worth of time you invested (and this does not account for other deductions based on your income).
Now let’s consider sales tax: %7 tax on $20 is $1.40. You need to hand over $21.40 for that shiny thing.
You traded $25 of work plus $1.40 tax for that $20 item. $26.40 It sucks, I know!
Lets look at that $20 (plus $1.40 tax) if you put it on a credit card and don’t pay the balance for 12 months and your credit card charges %10 interest ($2.15). You now have the balance plus $2.15 interest. Grand total of $23.50
That shiny thing cost you $23.50 after taxes! you had to earn $28.20 before taxes and you missed out on any potential future earning from the money you spent. Remember the price tag on that shiny thing was only $20!
Now let’s consider you put that $28.20 into a modest pre-tax investment (the money came out of your check before taxes). $28.20 compounded once every year at %10 for 20 years is $189.72 Will that $20 shiny object go up in value at that rate?
NOPE! probably not.
You now see that not taking charge of you money costs you money! Money is a tool to be put to work. It can serve you now to acquire shiny things and satisfy your urges and needs for instant gratification or it can be put to use to build wealth and financial strength.
People get beat down and frustrated when they dont understand where all of their money went at the end of each month. Miscellaneous $20 here, $30 there…….it all adds up!
“Are you telling me to not spend any money? It costs money to live!” My intent is simply to show you how money works. If pocket $$ is in your budget (YOU NEED A BUDGET) then spend the money allotted as you see fit! You earned it, you accounted for the spending in your budget. Its yours to spend.
Knowledge is power! You now know what it really costs to buy something!!