What if I told you that on April 15, the day that Americans file annual income taxes, you were required to write a check to the tax man for $5581? According to the U.S. Census Bureau $5581 is the average amount a single taxpayer with no children paid in 2004 for federal income taxes. Sadly, for many families just writing a check for $5581 would be a difficult chore. Now let’s suppose the federal government allowed you to split up that large debt over twenty-four or twenty-six payments (read: paychecks). That is exactly what happened when lawmakers approved the creation of the withholding tax in 1943 essentially making employers the tax collectors. Think about it. Employers don’t take your taxes out of your paycheck as a benefit for you. They do it because they are required to do it. $5581 split over 26 paychecks (for employees paid every two weeks) is about $214. For most people $214 from each paycheck is far less painful than one big payment of $5581.
Further evidence of this argument is supported by that fact the U.S. Treasury’s coffers increased sixfold from $7 billion collected in 1941 before the withholding tax was introduced to over $43 billion by 1945. Of course WWII played a large part in expanding the U.S. economy, but the withholding tax hid the true burden shouldered by working Americans. For those who believe a congress with a lot more money to spend is a good thing then the withholding tax was the greatest source of spending money for politicians ever created. For those believe the more money congress has the more money will be wasted the withholding tax was the worst invention ever created. What is the point of this discussion? The point is that your spending habits will have a much bigger impact on your mind if you view them annually rather than monthly, weekly or daily. Some examples:
- A $425 coffee bill.
- $2860 spent on meals eaten out.
- $250 spent on DVD rentals at the local video store.
- $936 spent on extra “knick knacks” for the house or apartment purchased at Wal-mart or Target.
Now, if your local Starbucks required you to pay your coffee bill in advance each year $425 would seem like one heck of a hefty bill to pay up front. Bills like these would have been thought to be preposterous in the 1940s when the withholding tax was introduced. In the 1950s Bloomingdale’s department store caught on to the same financial scheme the U.S. government used for collecting taxes. They would put your large bill from the department store onto this new concept called a credit card. For a mere $3 annual fee for cardholders, the Diner’s Club (created by Bloomingdale’s) would let you split up the bill over several payments into smaller chunks. Over the next couple decades this completely changed the culture of consumer spending to view costs in a monthly amount instead of an annual amount. Other changes that negatively affected consumer spending habits are below:
- Christmas savings clubs have become nearly extinct. Today’s younger generation have not even heard the term. The clubs were set up by banks to let you deposit cash on a regular basis so when Christmas came you already had the cash set aside for all of your spending. Christmas spending has done such a 180-degree turn now that we are to the point where credit card companies let you miss a payment (for a hefty fee, of course) in January to avoid sticker shock when you see how much you spent during the holidays.
- Consumer purchasing a car used to look at the total sticker price. Now many buyers only look at the monthly payment and don’t scrutinize the interest rate of the loan or total car cost like they should.
- Car leasing is the same concept only worst for the consumer. The monthly payments are lower than a purchased car, but the consumer has nothing at the end of the lease.
The examples above are just a few of the consequences of living in a monthly-payment-driven culture. True costs are often hidden or misleading because they are divided equally over many months or years. So how can you as a consumer more closely monitor your spending habits so that you spend less? Try the following ideas:
- Record all of your spending for one month. Keep all receipts and record cash expenditures. A rough estimate of your annual spending would be to multiply these figures times twelve. Once you see the larger annual numbers you’ll be able to make minor adjustments to your daily spending that will have major effects on your finances.
- Track common household spending categories such as groceries, eating out, clothing and entertainment. For most consumers those four categories alone amount to $10,000 per year or more. A minor tweak to these categories could yield thousands saved annually.
- Don’t be car poor. Personal finances expert Dave Ramsey recommends that the value of your car(s) should not be more than 50% of your household annual income. This may sound obvious for some, but I have heard callers on his radio show driving $40,000 pickup trucks who earn $47,000 annually.
Using the knowledge from the examples above can help you free up thousands of dollars from spending to be directed to more productive long-term investing goals.