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Pretend you work for $20 an hour and wanted to buy a new iPod Touch for $200. You would need to work for 10 hours to make $200, right?
What we forgot in the calculation – income taxes
Don’t forget that income taxes come out of your paycheck. Pretend your effective tax rate (how much taxes you pay) is 20% of your earnings. In this scenario you would bring home $16 after taxes. How much would you need to work in order to buy that iPod? 12.5 hours.
Wait, there’s more – Sales Tax
But you forgot about sales tax. If sales tax is 8% then you would pay $216 for a $200 item, which would mean you would have to work for 13.5 hours.
Credit Card debt makes it worse
What if you don’t pay cash (or debit/check) for the iPod and charged it to a credit card instead? If interest on your card is 12% annually (about 1% a month) then the debt of this gadget will now cost you 13.64 hours of work, AN ADDITIONAL 8 MINUTES JUST FOR THE INTEREST.
A “good” interest rate
The normal American finances their car. If they finance a $20,000 car with an 8% sales tax at 2.99%, what many would say is a good interest rate, they would have a balance of $21,600. This is the equivalent of 3.36 hours of work for the interest charges of the loan. It will take more than 5 work weeks to cover the interest on a $20,000 car loan.
Work for yourself, not for Visa
Paying interest costs you future income and valuable, precious time! Making purchases with debt products is a promise to your family that you will be leaving them in order to pay taxes to the government and interest to the banks.
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Steve I really this show’s topic. When I was in college and making $8 an hour I would always ask myself “how many hours do I need to work to make this purchase.” This was before I was budgeting and it made me think before I made a purchase on how much time I would have to put in to buy something. I can definitely say that by asking myself that question I saved myself from making some bad purchases!
Thanks Jon. Hey, I see you signed up for the, uhhhhh (what should I call it…?) – newsletter? It won’t be a newsletter but it will include some content you don’t get in the podcast (or you will get it before it’s ever discussed in a podcast).