Debt Free

All too often we don’t take into account everything when we’re costing the products we buy. Absolutely, positively have to have that new pair of Loeffler Randalls? What about that new Harley VSRCX? Yeah, we’d all like to run right out and pick up one of those. How much does it really cost, though. If your goal is to get debt free and stay that way, a little cost analysis is in order.

In addition to the price on the tag, you got to take into account how much you actually must earn in order to make the purchase. After all, it’s going to go up at least 7-10% if you’re shopping somewhere with sales tax. On top of that, you need to account for the deductions you’ll be paying for taxes, union dues, and anything else that comes off the top of your paycheck before you ever get the opportunity to spend it. If you’re losing 40% to the federal, state and possible local government to pay your tax bill, you need to account for this when you are determining the real cost for a purchase.

For example, that Harley lists for $19,995. You can’t just earn 20Gs in order to take it home. First, there’ll be sales tax in many states or municipalities. So you’ll really pay closer to $22,000. Then, if you’re financing, you can’t forget the interest. If you get the 11.99% interest through Harley Davidson Credit, you’ll have the privilege of handing over $8,959 in interest over the life of a 72 month loan. Ouch! That averages out to $124.43 per month over the term of the loan, just for interest.

Remember, you’ve got to earn substantially more than the $30,959 total of payments. You’ll need to gross something on the order of $52,000 to make all the payments, if you are in location with state and possibly local income tax. If you make $35/hr, you’ll need to work 1,485 hours to pay for that bike. You probably won’t even ride it that many hours. If, for example, you put 7,500 miles a year on it and averaged 30mph (include stopping and sitting in traffic), that would be only 250 hours a year in the saddle.

Doing an in depth analysis of larger purchases can help you decide weather you really want to spend the money or not. If nothing else, the sheer boredom associated with the calculation may put you to sleep, and cause you to miss the big sale that had you thinking of spending the money in the first place.

Don’t forget the little things, either. That Starbucks you frequent every morning before work may be a mainstay of your social calendar, but consider this. If you put $4,000 a year into your retirement savings annually, ($40,000 x 10%) passing on that morning caramel macchiato could potentially add a 25% to your retirement savings ($4.00 x 5 days x 50 weeks) every year. Needless to say, that amounts to foregoing over $93,000 in the course of 30 years. This is assuming you were to get a 7% annual return on your Starbucks spending.