Thinking After Taxes
March 16th, 2007 by Remon
Many people think before taxes. Ie. a friend is earning € 2000 a month before taxes and he is in the lowest tax bracket here which is 34%. It’s a fulltime, 40 hour week, job. Let’s call my friend Joe for the rest of this post.
The common thought
Joe wants to buy a new iPod, the price is € 400. “Hmm that’s only 4 days of work” Joe thinks and he decides to buy it. “Cash or creditcard?” the clerk says.
Do you know what went wrong here?
First, Joe’s monthly income is not equal to 4 weeks (20 days) of work. 3 Times his monthly income is 13 weeks (65 days) of work. I don’t know if it works that way in the US or Canada as well but that’s how it works here in Holland. So instead of earning € 100 per day, Joe is earning € 92.31 per day.
The second thing that went wrong is, ofcourse, that Joe is thinking before taxes! And Joe is definitely not the only person thinking this way. Many people, worldwide, make this mistake. After taxes Joe is making € 1320 a month or € 60.92 a day. That means that Joe can spend close to € 40 less then he thinks he can spend. Instead of working 4 days for his new iPod, Joe has to work 7 days (6.6) to be able to pay for his new gadget.
Moral of the story
You’re not interested in Joe’s new iPod ofcourse, but what I wanted to show the readers of this blog is how easy it is to make this same mistake. An iPod could be something one really wants or needs, but think about how much you’re paying for stuff you don’t really need. Buy lunch everyday? Buy coffee everyday? Buy a snack everyday? All those little things add up over time, and you’re paying for them with after-tax dollars.
Instead of thinking before-taxes like many people do, start thinking after-taxes. For the fun of it, you could write down everything you bought but didn’t really need for one month just to calculate how many days you had to work to pay for the unneeded stuff. I bet you’ll be amazed!