Behind The Price Tag
I’m not shy about the fact that I continue to buy non-essentials even though I’m on a journey to be debt free. Today I’d like to share with you some of the random things that I think about when making those purchases. I don’t do these calculations every time I spend money, but I think it’s an interesting perspective.
I recently bought a new backpack, a Matt & Nat Brave in Black if you’re curious. (I was disappointed to read this post on their materials/manufacturing, so I can’t say I wholeheartedly recommend them anymore.)
The initial price was $145.00, and most of the time we don’t think beyond that. Today I want to talk about the hidden costs behind the price tag.
Sales tax is an obvious one. In Canada our sales tax is added to the base price of the item upon checkout.
Adding in the 7% provincial sales tax (PST) for British Columbia and 5% federal goods and services tax (GST), we’re now at $162.40 total.
- $10.15 provincial sales tax
- $7.25 federal goods and services tax
Most of us would stop there, but that’s not the full picture.
Opportunity cost is the loss of potential gain that I could have earned if I used my money in a different way.
My highest interest debt is a student loan at around 6%, so even though I have no credit card debt I’m essentially borrowing at 6% to buy this item. To simplify the calculations, let’s just say I’d only be carrying the debt for one year. That means adding another $9.74 and we’re up to $172.14.
Now, what about all of the taxes that came off before I got paid?
Pre-Tax vs Post-Tax Dollars
Canada has a progressive tax system, which means that the marginal rate of tax increases at various levels of income.
Canada’s federal income tax rates for 2018:
- 15% on the first $46,605 of taxable income, +
- 20.5% on the next $46,603 of taxable income (on the portion of taxable income over 46,605 up to $93,208), +
- 26% on the next $51,281 of taxable income (on the portion of taxable income over $93,208 up to $144,489), +
- 29% on the next $61,353 of taxable income (on the portion of taxable income over 144,489 up to $205,842), +
- 33% of taxable income over $205,842.
Provincial tax rates for 2018 (British Columbia):
- 5.06% on the first $39,676 of taxable income, +
- 7.7% on the next $39,677, +
- 10.5% on the next $11,754, +
- 12.29% on the next $19,523, +
- 14.7% on the next $39,370, +
- 16.8% on the amount over $150,000
I like to think about it like this:
The first $20,000 I earn is for rent and bills, taxed at 20.06%. The next $35,000 I earn is for student loan payments, taxed at 20.06-28.2%. Then food and non-essential items like travel and purchases which would be taxed at 28.2%.
I prefer to imagine that I pay the highest amount of income taxes on non-essential items (even though I completely understand that’s not at all how it works!), because it’s more motivating for me. Apologies to any tax professionals out there! It’s just a mental strategy that helps me prioritize basic living expenses and debt repayment.
Buying this bag with $172.14 of after-tax dollars means I needed to earn $220.68 in gross income.
- $35.29 federal income tax
- $13.25 provincial income tax
If you’re following along so far, that’s $75.68 dollars that were unaccounted for on that initial price tag – more than half of the original $145!
That’s not all. What if I chose to use that money for retirement savings instead?
Tax Advantaged Retirement Savings
If I were to invest the money into a registered retirement savings plan (RRSP) instead, I wouldn’t pay any of the taxes on that $220.68 right now. I would instead defer the taxes and pay them based on my income in retirement, which will very likely be less than I’m making now and so I would pay less in tax.
If I were to invest that money into a tax free savings account (TFSA) instead, I’d pay the federal and provincial income tax and be left with $172.14 in the account. This amount would grow tax free, and I wouldn’t be taxed on withdrawals later.
If I invested the $220.68 and it grew at a rate of 5% annually, in 10 years I’d have $359.46.
Investing a similar amount every year instead of buying an item would give me $3,273.94!
That doesn’t sound like much, but consider how many things we’ve purchased without much thought only to donate or sell them shortly after. Imagine if we cut back on that mindless spending and started investing it instead, for retirement or to pursue other goals.
Storage, Care & Disposal
One of the things that we rarely think about when we purchase a new item is what will happen after those initial moments of unboxing excitement. Of course we’re not thinking about disposing of something before we’ve even purchased it, but we should be!
If you’re paying for an additional room or a storage unit to house your possessions, that adds to the cost of ownership. Same with cleaning or disposal fees, or even just the time it takes to sell or find somewhere to donate an item.
It’s Not All About Money
Obviously, this is just a thought experiment because I’ve already bought the bag! I don’t regret the purchase, nor do I feel bad that I didn’t send every penny to debt or retirement.
Surplus money should be spent on more than just building wealth. It’s important to enjoy ourselves, and it’s valid to find some of that enjoyment in the purchase and use of material items – within reason.
It’s fun to think about these things occasionally, but poring over spreadsheets and optimizing every decision is no way to live your life. With that in mind, just remember this simple rule:
You can’t afford something unless you can buy it twice. – Jay-Z
Is there something on your list that you’ve been putting off buying? Or a recent regret?