Your income is costing you a fortune. How to fix it!
You want to know what the most expensive type of money is?
Ordinary income. It’s easily costing you $20,000+ a year. The culprit: taxes. Ordinary income is the most taxed type of income. First, the the federal government taxes it, then the state wants a piece. Let’s not forget about the ever-increasing social security tax, and, of course, the Medicare tax. And last, but not least, the good old fun payroll taxes!
A person earning $70,000 a year living in New York pays 31%, or $21,857 to taxes.
(You can see how much your total tax bill comes to here: https://smartasset.com/taxes/income-taxes#kOjmW4mQVi )
Of course, we have to pay taxes, but no one said you had to leave a tip. There are a zillion ways you can legally minimize your taxes through taking advantage of your 401(k), HSA, commuter beanies, just to name a few. However, the biggest opportunity comes from managing your expenses. Don’t fall asleep on me. What I’m about to say is big money. It’s bigger than big money, it’s the on ramp to your fortune.
Let me tell you a story about my client Claire.* During our monthly meetings I noticed a repetitive trend in her thinking. She would say stuff like, “It was only $15 more so I went for it. Or, “It’s wasn’t that much money.”
It was through this repetitive thinking that I realized she was the discounting the power of her money, but those small charges can have a tremendous effect. (Because you are spending after-tax dollars!)
So, I asked Claire to suspend judgment while I showed her some magic. She was getting an average of $42 a month in bank fees. Nothing crazy. Every once in a blue moon she would overdraft her account and incur a $34 fee. Her account had a $10 account maintenance fee and she got a couple ATM fees every month. On the surface $42 doesn’t seem like that much. Especially in this case, because it wasn’t one $42 charge. It was a combination of lots of little charges.
I asked her to imagine that we got rid of these fees, I go into detail of “how” in the footnotes,** and to apply the $42 savings to her monthly credit card payment. In doing so she would earn over $2,000.
Claire’s earns $70,000 a year. After taxes that comes to about $25 per hour. To earn the same $2,002 that she saved in fees would take her 80 hours of work. Let that sink in. 80 hours of WORK. So you can’t earn yourself rich.*** The taxes and time it takes to earn the money make sure of that. But you can manage yourself rich.
The take-home: Your income is very expensive, and it doesn’t come quickly. Don’t waste it! It is the source of your future fortune!
* Names have been changed
**I recommended that she ditched her savings account because she was overdrawing her account, not because she didn’t have the money, but because the money was in her savings account. This wasn’t easy for her! She was afraid she would stop saving money. Or, worse, spend all her savings. To which I replied, “It’s not staying saved now.” The money often got transferred back to her checking account. Getting rid of her savings account allowed her to meet the minimum requirement on her checking account, waiving the $10 fee. I recommended she take more out of the ATM, so she would have to take less trips. (It’s important to note: She was spending money anyway.) She didn’t want to do this for the same reason we all don’t want to do it. We don’t like feeling like we are spending a lot of money.
*** Yes. There are exceptions to every rule. If you earn $300K+ you are the exception.