How many of us understand the real cost of spending money?
Most of us will borrow money at some time in our lives. Some of us will borrow money many times. Some will borrow money and make payments all their lives and leave the balance to their estates. Some pay cash for everything. Hopefully any of these decisions are well thought out.
So what is the cost of borrowing money? The first thing that always comes to mind is interest. Everyone seems to be aware of this cost although not necessarily aware of the amounts involved. Interest on $1,000 at 2% for a year is $20 Interest on $1,000 at 18% is $180 I think we all understand how rates can affect our cost. The numbers will vary with amounts financed, the term and the rate.
But how many of us think of the largest cost of spending money? Taxes! If one is in the 20% tax bracket he/she must earn $1,250 in order to net out $1,000 to spend on anything. That is a cost of $250 to the spender that is often ignored. And it is more than interest. This is not an argument about taxes or interest rates being too high. It is simply a demonstration of the real cost of spending money. Take it for what it is worth!