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There are three things that eat into your wage more than anything else. However these three things sometimes are not easy to see even though they are right in front of us.
Let's use the example of Mrs Smith. Mrs Smith is single and earns $ 50,000 a year before tax.
She has a home loan worth $ 200,000 @ 6% over 20 years. She has no credit cards or personal debt.
Asking Mrs Smith about her expenses, she might say that food or petrol is one of her biggest expenses. However she would be wrong. Let's look more closely and see how she can reduce these expenses.
Yes tax does take a big slice of your wages. Mrs Smith earns $ 50,000 a year before tax. In 2010 she will pay $ 8,850 in tax or 17.7%. Right out of her pay check. This is before she pays any other taxes that spring up in our day to day lives like GST.
Now we all need to pay taxes. So there is little we can do about the first thing eating away at your wage. However in most jobs there are some deductions you can claim at the end of each year. Have a good accountant and keep your records correctly. If you can claim some of this money back at the end of the financial year, its better in your pocket than the government. Or in this case Mrs Smith's pocket than the government.
2 Interest on debt
As talked about before each Australian owes $ 56,000 per every man, woman and child. This is on credit cards, home loans and personal loans. And guess what, 99% of this debt is getting charged interest every month.
And sooner or later you will need to pay back that interest. Make minimum payments today; pay more in interest payments tomorrow. What percentage of your wage goes to paying interest?
Let's take the first example of Mrs Smith earning $ 50,000 a year. Now Mrs Smith has a $ 200,000 home loan @ 6% interest over 20 years. She is paying minimum payments over 20 years. In 2010 alone, she will pay $ 11,500 in interest alone. This is 23% of her wage.
Combine this with the 17.7% tax loss, now Mrs Smith has only used 40.7% from her gross wage.
Inflation is the silent enemy. Each year we have inflation in this country. Prices going up and up. Normally inflation moves up around 3% to 4% a year. This put simply means that prices will go up on average by this amount over a one year period.
Due to Mrs Smith's earning power being FIXED at $ 50,000 her $ 50,000 has less purchasing power on Dec 31st 2010 compared to Jan 1st 2010.
To figure out how much it is costing her can be difficult. However as each month rolls on things get slightly tougher. Let's say that she loses 1% of her total purchasing power from her total wage.
This brings the total of these three things combined to 41.7% of her $ 50,000. This leaves Mrs Smith with $ 29,150 left in her pay packet.
So what's the answer?
Answer on Tax
The world's 2nd richest man (Warren Buffet) has a saying, "Shut up and pay your taxes." He like me believes that paying a fair amount of tax is one's duty.
Unfortunately there's not much you as an individual can do about taxes. Again the only real way is to keep good records and have a good accountant to make all legal deductions. Don't get sucked into vast unlawful tax schemes to get out of paying your taxes.
Death and taxes are two things you can count on.
Answer on Interest on Debt
Reduce your debt. In Mrs Smith's case she had no credit cards or personal loans. So she avoided paying interest on these things.
However if she could afford to pay more than the minimum payment each month on her home loan she would not only reduce her interest payments this month but for every month following.
By paying more off the home loan she reduces the principle thus reducing the interest on the principle.
She could also look into seeing if there is a cheaper home loan rate to refinance to. She may be able to keep the same payments, however she would save money each month by having a lower interest rate.
Answer on Inflation
Each year Mrs Smith must get a pay rise at least the rate of inflation just to keep up. If inflation over 2010 moves up 3% and Mrs Smith only gets a 2% pay rise then she is behind the 8 ball.
This is a silent cost that most people do not take into account. At the end of each year you need to check with the RBA website to see what inflation has done.
When talking to your boss / work about a pay rise understand the facts. If you have had a very good year and they reward you with a 4% pay rise, this might add nothing to your purchasing power if inflation has gone up by the same amount. You need to be prepared to ask for more than this. Tell them the facts about inflation.
Fight higher than inflation costs on products. Let's pretend you get a bill for your yearly home insurance. Last year you paid $ 500 for the whole year. This year your bill comes in at $ 540 for the year. This is an 8% increase in one year.
Question this rise. If inflation only went up 3% for the year and some products are going up more than this they are increasing more than inflation. See if you can get a better discount or lower price. If not, move companies to save money. This is one way to fight inflation.