May 31

How much are you REALLY taxed throughout the year?

If I had asked you, what percent of your annual income do you pay in total taxes, what would your answer be?

10%? 15%? 20%?

Don’t be surprised if you’re totally off by the time you finish reading this.

This topic came about as I once purchased a brand new luxury car that was equivalent in purchase price to my gross salary at the time. I was (and still am) such a car fanatic that I figured spending my entire year’s compensation on a vehicle I would love was worth it. What I didn’t consider, however, is that consumer goods are purchased using my net income, not gross income.

What I mean exactly is that my $45k gross income was not an apples-to-apples comparison to my $45k vehicle, as the vehicle would be purchased with my net income (closer to $35K or so after taxes), and so it turned out my justification to be able to afford it with a year’s pay was a mere illusion.

This sparked a new question in my head.

How much do we pay in taxes?

The truth is, we pay taxes throughout the year without even realizing it in some cases. Here are a few examples:

Income Tax

Your annual income is likely taxed at a federal, state and local level in most cases. This is typically deducted from your gross income, per pay period, and adjusted when you do your annual taxes. Additional types of taxes under this bucket would be Capital gains taxes and Estate taxes (i.e. stock and real estate profit realization, inheritance, gifts, etc).

Property Tax

If you own a home, you likely pay a recurring tax on a monthly, quarterly or annual basis to your local government. The taxes due are based on a set percentage of the value of your home. These taxes may also be applicable to automobiles and recreational vehicles such as boats and airplanes.

Goods and Services Tax

At the retail level, sales taxes are almost always imposed by state and local governments to grow revenue. You will find yourself paying sales taxes for gas, groceries, misc. consumer goods, dining, entertainment, services and installations, etc. In most cases, these taxes are imposed based on the value of the good or service, while in some cases, such as purchasing gasoline, it is based on the number of gallons rather than the dollar value of gallons.

Sin and Luxury Goods Tax

Purchase of items such as alcohol, cigarettes, jewelry and exotic vehicles are subject to their own taxation guidelines.

Usage Charges & Fees

Without even realizing it, many of you may now acknowledge that the use of many services are subject to a tax/fee/service-charge as well, such as those for financial transactions, utilities (i.e. cell phones), licensing, hotel rooms, airline tickets, rental vehicles, toll roads etc. Take a good look at your prior or next bill for any of these services and you will quickly find these additional forms of taxes that are billed to you.

After compiling all these forms of taxes, and tallying-up your income taxes against your consumer spending taxes, you’ll quickly find yourself having paid a significantly higher percentage of your gross income in taxes than you thought. Not to mention, you will have to adjust/convert the spent taxes to account for pre-tax funds. In other words, if you paid $7 (or 7%) in taxes for a $100 good/service, be mindful of the fact that the $7 you paid was from your net income, and is likely closer to $9 (pre-tax or gross income) if you are comparing it to gross income.

I am hopeful that this write-up encourages you to train yourself to understand all the taxes imposed when it comes to incoming cashflows or when making purchases.

Hopefully you’ve found reading this write-up more valuable rather than…taxing.

Category: General | LEAVE A COMMENT
April 29

Buying Good Deals: My two cents

Have you ever witnessed an amazing deal online, or in the store and immediately jumped on it to save a lot of money? You might think you saved a lot of money on that seemingly rare and once in a lifetime opportunity – but chances are, you actually lost money.

Let Me Explain…

As humans, we are emotional beings and often make impulse decisions. Even as a responsible, financially literate person, you may believe you are making the right move and saving tons of money by purchasing that new Elite-book with an i7 processor, $500 off retail price – or making a killing by cashing in on that Buy-One Get-One (BOGO) pizza deal.

This, however, is usually an illusion. It is an illusion because your impulse emotions get the best of you, and you fail to isolate your needs from your wants. These so called deals only save you money if they are needs – that is, if you were planning on purchasing the same product and quantity ANYWAY. If not, then you are forcing an unwarranted event and purchasing something you otherwise wouldn’t be – just because it makes you feel that you’re getting a good deal.

For example, back to our BOGO pizza deal. You’re hungry and want to purchase a large pie of cheese pizza from your local Mom & Pop Italian restaurant. A large pie here typically costs $10. But, you notice it’s Wednesday and on Wednesdays, there’s a buy 2, get 1 free deal. This would mean you can purchase 2 large pies, for $20 and get a 3rd pie for free, effectively costing around $6.66 per pie. What a killer deal! Right?

Not exactly

Though the economies of scale look attractive, the economies of…needs…is not! You were hungry, and spending $10 would have satisfied the need. But now, you’ve spent $20, which is double what you actually needed to spend. Yes, you have 2 extra pies now; but those were not needs. In fact, they’re left overs now and you’ll find yourself forcing yourself to eat them later on, or giving them away unless you leave them to spoil. The bottom line here is, you spent twice as much as you needed to and thus, you didn’t save money – rather, you SPENT money.

The same principal applies to any other impulse buys. Next time you see a new laptop or the latest sneakers on sale, please try to really ask yourself – were you going to purchase it ANYWAY in the very near future? If not, you’re becoming victim to the big marketing ploy that is slowing down your pace to financial freedom by tricking you into buying wants. Just my two cents.

Category: General | LEAVE A COMMENT
March 31

Spend less or Make more?

Does achieving financial independence come from significantly limiting one’s expenses? Or, does it come from significantly increasing income? Does one method outweigh the other? As with everything else in life, the answer is: it depends. Although – for the most part, it is a healthy mix of both.

I’ll try to break it down.

reducing Expenses

When it comes to saving money, there are two overarching expense segments to consider: Fixed Spending, and Discretionary Spending. Fixed spending is your set of essential expenses that you need to live, such as housing, eating, transportation, etc. Discretionary spending is your set of non-essential expenses such as entertainment, travel, restaurant dining, hobbies, etc.

Now that we have that covered – let’s think about reducing expenses. While it is wise and doable to reduce expenses, you can only reduce expenses so much. Yes, you can mostly get rid of or reduce a lot of that discretionary spending, because those aren’t entirely necessities. But your fixed spending cannot be reduced beyond a reasonable level. You’ll always need housing, food and a means to get to work (if you have an on-site job). While you can relocate, shave utilities a bit, and opt for cheaper groceries to cook at home, you’ll reach a point where you just can’t cut costs down any further.

Increasing income

This is when increasing your income starts to look more appealing. By increasing your income, you won’t have to cut those discretionary costs as much. You’ll no longer be “just getting by”. In fact, you may have more to spend on that discretionary spending bucket and opt to buy flashier and more luxurious products. The problem with this, however, is that just like you have an imaginary “floor” for expenses that you cannot dig below, in most cases, your income potential also has a “ceiling” that you may not be able to break out of.

But let’s assume the sky is the limit. Let’s say you’ve landed your dream job and have a bunch of investments or started a great business and things are just looking up in the future. How do you achieve financial independence, if you wanted to?

Well, you’d still need to control and shave those discretionary expenses as much as possible. And here is why: Financial Independence is not achieved solely by reducing expenses or increasing income. It is a byproduct of your effort to do both. If you don’t do both, you’re setting up a recipe for disaster.

Rant

This may be a generalization, but if you look around, it’s usually not the people with the six-figure jobs and big houses and Porsche Caymans that achieve financial independence under their 50’s. It’s typically those, who may or may not have a six-figure income but certainly do not have to flashy houses and cars and Gucci bags. Why?

Because those who are truly serious about financial independence do not increase their expenses relative to their income.

This is the problem with conventional society. We go through high-school, then university, and then we land our first job. With that first job, we blow all our money on the things we’ve always wanted: Moving out of the parents’ house, buying that nice german car, eating out with friends, and traveling the world. By the way, there is nothing wrong with any of this. But, a few years later, we land another job with a nice bump in salary. Then another one, and another one. And all along with these income boosts, we’ve also continuously upgraded our lifestyles. We went from the cheap rental apartment to a luxury condo, or a big house. We went from that entry level Audi A4 to a much more expensive Audi S5. We bought a bunch of designer apparel we didn’t need. So what’s wrong with this picture? We have no damn savings! Every incremental dollar earned, we spent on things we didn’t need. The problem with this picture is that this lifestyle is not sustainable. If we lose our job – our only source of income, all those bills still need to be paid and we have no strategy to carry forward this lifestyle.

best of both worlds

To prevent these unanticipated challenges, my best advice to you would be to gradually increase your income, all while keeping those discretionary costs low and stagnant. Getting a raise, or bonus, or any form of added income should not be looked at as a ticket to buy more nice-to-have things. Instead, look at it as your ticket to achieving financial independence even SOONER, by means of saving and investing that residual income, and having it work for you in a compounded fashion!

Thus – as obvious as it may already be – in order to achieve financial independence, it is advisable to minimize discretionary spending and increase income simultaneously.

Category: General | LEAVE A COMMENT
February 29

Why I use Ally Bank

I don’t always preach the importance of choosing the right bank for a savings account, but when I do, it’s Ally Bank.

Take that with a grain of salt, because everyone’s financial situation and preference is different. You should always have an emergency fund to live off of for several months seamlessly.

Below are some of the primary decision factors that helped me decide which bank was right for me.

Interest Rate

I needed a bank where I didn’t feel like my wealth was depreciating. For those of you that aren’t aware, the annual rate of inflation is usually 1.5-2.5%. This means each year, every dollar in your name loses purchasing power by this percentage. Most savings accounts I’ve owned prior to Ally Bank generally didn’t have an interest yield beyond 0.1%. This meant keeping money in a savings account would actually devalue my wealth each year (0.1% profit but ~2.0% devuation is no bueno!).

This defeats the purpose of a savings account. Yes, your $1,000 savings balance doesn’t go down with time and is virtually 0 risk compared to alternative investment options. But guess what, that $1,000 is worth about $980 next year in real value.

This is where Ally Bank really shined. When I first signed up for my first savings account at Ally, the interest rate was 2.0% and higher, with no minimum balance requirements and no fees. That’s INSANE! Ally was a clear winner with this attribute, so I went with it.

Budgeting

I’m big on budgeting. I like to estimate and set, in advance, what my budgets will be for various buckets (especially discretionary ones) such as Food, Travel, Cars, Emergency Fund, Gifts, etc. On an excel sheet, this is easy. In the real world, not so much – unless you own a business and use one of those fancy budgeting services.

In the real world, wouldn’t it be nice to just set aside money for each of those buckets separately, so you can quickly glance at what each of those numbers are without having to open a spreadsheet? The problem is, many banks gave me a hard time if I wanted to open more than 1 or 2 savings accounts. They wanted a good reason and it was a lengthy, annoying process.

Ally bank, on the other hand, lets you open multiple accounts seamlessly. Not only that, but you can give them nicknames so one can quickly get an idea of what each dollar amount is allocated to.

As of early 2020, they actually just launched a new feature for creating actual buckets. So let’s say I had an account for each of the categories listed above – Food, Travel, Cars, Emergency Fund, Gifts. With the new buckets feature, I can actually create buckets within “Cars”, to further distinguish various allocations under Cars. For example, I can create a bucket for Insurance, Maintenance, Modifications, etc!

Accessibility

As an investor and a millennial, I need a quick and painless means of accessing my money when I need it. Transferring money in and out of Ally Bank is seamless, and can take 3-5 business days as with most other banks. This is not problematic. Moreover, their app is very seamless and with fingerprint login set up, I am just a tap away from seeing a breakdown of all of my savings accounts instantly.

Recommendation

For me, Ally bank was a clear winner. Again, it depends on your specific situation for you to determine which bank(s) are best aligned with your scenario.

Overall, I would highly recommend anyone who is either budget-savy or is seeking a reasonable interest rate to at least try Ally Bank. What have you got to lose? It’s a win-win!

Category: General | LEAVE A COMMENT
January 31

The Importance of Personal Finance

Personal finance is a critical component to achieving any monetary goal. The primary reason being that your monetary goal, such as accumulating a certain milestone of net-worth, is the byproduct of a two-part equation.

{Income – Expenses = Savings}

{Savings^Time = Net worth}

It’s about Your Expenses

We all appear to be obsessed with building our income for a higher net-worth, but more often than not, place less emphasis on the expense aspect of it. You can have a house-hold income of $50,000, or that of $150,000; but what you actually get to save depends entirely upon your personal finance spending habits. The average household’s 3 largest expense categories, accounting for 40-50% of total expenses, are housing, transportation and food, respectively. Choosing to live in a 5 Bedroom, 4 Bathroom house (that you may not utilize fully) versus a 2 Bedroom 2 Bathroom house (that may fit your needs) would make a significant difference in your finances, before even accounting for the perpetual and proportional increased costs associated with the ongoing maintenance costs and upkeep of the larger home. The same goes for transportation, when deciding between purchasing a brand new german luxury vehicle versus a lightly used japanese vehicle. Sometimes, one may be able to justify this seemingly financially irresponsible behavior if it’s something they value or are passionate about. I have to admit, I am a performance car enthusiast myself and would hate to downgrade to a more economical vehicle. However, it’s decisions like this that can ultimately make or break financial goals. The earlier on in your career you make these decisions, the stronger they will compound throughout your life.

It’s about your Lifestyle Choices

Personal finance goes beyond the scope of just minimizing your biggest expenses. It is a lifestyle choice that develops and compounds overtime and ultimately influences your saving and spending habits across all areas of your lifestyle. Choosing to regularly eat at restaurants versus cooking at home, or buying groceries at their regular price versus on sale may not immediately yield a large chunk of change, but believe me when I say this; IT ADDS UP.

It’s about YOU

Ultimately, your personal finance is a reflection of you. It is a reflection of your priorities, your planning, your goals. You can better understand yourself once you assess and analyze your finances. At that point, you can differentiate and rebalance your wants, needs and long-term goals accordingly.

Category: General | LEAVE A COMMENT
April 21

My First Blog!

Welcome to my first blog. I am STOKED to have finally decided to start one to write my thoughts in the Personal Finance and Financial Independence space. I have a busy schedule so bare with me but please sit back, relax and enjoy the upcoming posts as I work to refine everything and structure my content. Please read the ABOUT and DISCLAIMER pages in the mean time to get an overview.

Category: General | 1 Comment on My First Blog!