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| Joined: 27 Jun 2013 |
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100 Pair of Shoes Really Costs You,[link widoczny dla zalogowanych]
When I'm lecturing to students I like to ask them how much a $100 pair of shoes costs. The most common answer is $100 plus tax. Would you believe me if told you it could be as much as $1,376.46?
A basic truth in finance is that when you give your money to someone else they get to use it, not you.
As a 20-year-old, if you convinced yourself not to buy the shoes,[link widoczny dla zalogowanych], and invested it instead -- with an assumed rate of return of 6 per cent -- you'd have $1,376.46 by the time you were 65 years old.
Now,[link widoczny dla zalogowanych], some of you are going to start thinking about taxes and inflation and those are valid considerations but there are ways around that. The important thing here is that every decision you make with money has a current effect and a future effect.
No one has a limitless amount of money. The money you earn either works for you, or it works for someone else.
If you earn $60,000 per year, your net income after taxes, CPP EI contributions is about $48,000. Your effective tax rate is 20 per cent so that $100 you're spending on shoes required you to earn $125 ($125 - 20 per cent = $100). If you live in Ontario you would also need to pay HST of 13 per cent and since that tax is paid with after tax dollars,[link widoczny dla zalogowanych], that means it actually costs you another $17.50. So now those shoes have cost you $142.50 of earnings.
If you took the $142.50 of earnings,[link widoczny dla zalogowanych], and put it into an RRSP for 45 years at 6 per cent you're now at $1,961.46!
Albert Einstein said, "Compound interest is the eighth wonder of the world. If you're paying $25 per month in bank fees,[link widoczny dla zalogowanych], assuming 6 per cent growth over 45 years,[link widoczny dla zalogowanych], that's equivalent to $73,678. Using our very conservative 20 per cent tax rate,[link widoczny dla zalogowanych], that means that you have to earn over $90,000 just to pay your bank fees.
I wonder if those shoes ever go on sale,[link widoczny dla zalogowanych]?
Click here to leave a comment,[link widoczny dla zalogowanych].
HuffPost High School welcomes a lively, thoughtful debate in the comment section. So much math.
I show kids who are 20 how much actual money they would have at 65 if they were to put $2000 per year for 10 years into a 8% fund, and how much they would have if they put $100/month in for the rest of their adult lives,
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