It’s so easy to spend a dollar. A single dollar is such a miniscule part of the amount we earn that we don’t feel guilty spending it. I’m not immune to spending a few extra dollars here or there and blowing it off as an inconsequential amount of money. This bit of mathematics may help us all understand that every dollar does count, it’s actually worth $2 – $5!
For the majority of us, every dollar we earn is taxed by the federal government. The average income tax rate ** is around 23%. If your earnings are considered wages (some forms of income aren’t wages) then you also pay 7% to social security and medicaid. If you are a tithing family you likely give 10% to your church. 23+7+10 = 40. Did you see that? 40% of your money is gone before you see a penny! If you’re buying something that has sales tax on it, you have to factor that in as well. So to purchase a $1 toy for your child at the dollar store or checkout line, you need to have approximately $1.08 in your pocket.
If you earn $1 and only get to see 60% of that, you’re left with 60 cents to spend. ($1 x 60% = $.60) Earning $1.80 would mean you’re left with $1.08 to spend at the dollar store to get just 1 dollar item. It’s costs nearly $2 of your salary to buy that $1 item and pay the sales tax on it. Ouch! Unfortunately it gets worse.
By now, you guys all know I’m a mathematical nerd. I wanted to know just how much money we’d be losing if we spent that $1.80 to buy a $1 store item instead of putting that single dollar onto our mortgage principal. Interest on debt is after all, money we can’t spend just like the tax money.
On our home back in Arkansas we have about 10 years left on the mortgage. Putting $1 extra on to the principal now would save $.43 in interest charges. On our current home we have nearly 29 years left to pay. Putting $1 extra on to the principal would save $3.04 in interest charges! We have average interest rates on both mortgages. Most credit card rates are 3 times as high – imagine how much interest would be charged on that single dollar at 14 or 15% interest!
While everyone’s tax situations, amount of debt and interest rates are different, I hope this will help you see that whether you have debt or not, every dollar is worth much more.
**Your average tax rate may be higher or lower than 23%, but you
also may have state income tax to consider. It’s important to know
both rates so you know how much money you truly have to spend from your
earnings. If you haven’t filed your taxes yet this year-or didn’t take
note of your effective tax rate, you can run your figures pretty quickly
with one of these 2 free tax programs.
*If you are self employed then you are required to pay the entire 14% for social security and medicaid..
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