You’ve heard that all your life, but today a penny isn’t worth much, and besides, it’s no longer the truth.
The truth is more like: “A dollar saved is $1.30 earned – or more.”
If you work for a company that hands you a paycheck at the end of the week, you’ll see a wide gap between the dollars you earned and the dollars you got.
Deductions start with Social Security and Medicare. The last I checked, your share of those came to 7.65%. Then there’s Federal Income tax. Depending upon the tax bracket you’re in, that could be anywhere from 15% on up. The more you make, the more they take. Then, also depending upon where you live, there’s State income tax.
You could pay 1% (if you earn under about $5,000 per year) on up to 11%. In most states, the tax is in the 6-8% range if you earn a living wage. To see the charts for your state, visit the Tax Foundation
If you assume a “middle of the road” State Income tax of 7% and add it to a minimum of 15% Federal tax, plus Social Security and Medicare, you’re now at 29.65% of your earnings being deducted before you see the money. If you happen to pay union dues or other fees based on income or hours, there’s more gone.
Since the percentage you’ll pay in both State and Federal taxes goes up as your income goes up, this gets worse. For instance, In 2010, if you earn more than $68,000, you’ll pay 25% in Federal tax. Over $373,650 you’ll pay 35%.
If you’re self employed, you pay both sides of your Social Security and Medicare, so add another 7% or so to what you need to earn to spend $100.
But going back to the minimums… Since taxes are deducted from your earnings, when you earn $100 you get $70 or less.
So the next time you’re tempted to buy that interesting gadget that costs “only” $70, stop and think about it. You’ll need to earn at least $100 to pay for it. Is it worth the number of hours it takes to earn that amount?
And if you don’t have the cash but decide to add it to a credit card that already has a balance, stop and think even harder.
According to the latest Bankrate survey, average credit card rates are hovering around 14%. And if you have a balance on the credit card, that new purchase could stick around costing you money for a year, or even for 2 or 3 years. On $70, that’s $9.80 per year – and you need to earn at least $14 to pay that $9.80.
Is that $70 gadget worth the $114 you need to earn to pay for it?
Tags: budgeting, saving money
