Divide by Two

28 04 2014

That’s how much money you make for usage when comparing against a purchase. Assuming you’re not in a very low tax bracket, earning your income with a job, and contribute to a 401k.

Dividing by two is a simple trick to put the cost of something versus how much you make in perspective.  If you make 50k and think 25k is a good amount to pay for a car, at first glance it seems reasonable.  But divide by two and to account for federal taxes, state taxes, social security, medicare, 401k contribution, medical, and dental, you’re really only taking home about 25k per year.  So that 25k car is going to cost you all the money you earn in a year, assuming you don’t spend any money on  food, water, a place to live, gas/insurance for said car, some kind of entertainment, or anything else.

Assuming you live very cheaply on 12.5k per year (and I doubt you do, that’s 1041 a month, less than rent for many people), that means you’d have to work for 2 years just to feed yourself and buy the car, with no savings except your minimal 401k contribution. So really it should be divide by four, because after all the taxes and living expenses, that’s what you’re left with.

Oh and so far we haven’t accounted for the tax you pay on the car, or the interest accruing on the loan taken out on it.  Add another 6 months of work to account for those factors.  Now ask yourself, is it worth two and a half years of my life to buy this car?

So, when you want to compare your income to the cost of something remember, divide your income by two. Or better yet, four.



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