The Smiths make $80k a year between husband and wife. Mr. Smith makes $50k per year as a computer technician. Mrs. Smith makes $30k per year as a florist. They have two kids in daycare.
The Smiths are doing very well... or are they?
Average Income per month: $6666
Housing costs (mortgage payment and insurance)- $1500
Charitable Giving- $300
Utilities, Phone & Internet- $140
Income Tax- $1667
Total Average Spending per month: $7453
Did that last item surprise you? Taxes aren't what you normally see on the budget, but Uncle Sam shouldn't be ignored. It's a real eye-opener to see how taxes, as an expense, compare to other items in your budget. The Smiths are in a 25% income tax bracket*.
The Smiths realize that they can't afford to keep going on like this. They are continually running short on money; $787 short each month, in fact. Even with modest housing and other costs, $80k per year isn't enough for this family of four.
In a surprising turn of events, Mother lost her job at the flower shop. This set the Smith family back $30k per year- a drastic cut, especially because they were so short on cash already.
Interestingly, the Smith family's income tax went down by 66%, even though their income only went down 37%. When Mrs. Smith lost her job, there was less income to tax, but it also brought the family into a 15% tax bracket.
Because they have two kids and a newly-lowered income, the Smiths are now eligible for more discounts, benefits and programs from the government. Although the Smiths are $30k poorer, the tax savings of $13,500 plus daycare savings of $15,600 leaves them only $900 per year poorer than when Mother had a job. If Mother clips some coupons and saves $100 a month (14%) on groceries, this difference is easily made up and the Smith family is richer making $50k than when they made $80k.
Don't Forget Sales Tax
For every new shirt or disposable diaper or restaurant meal you buy, there's a 6% sales tax. It doesn't sound like much, but if the Smith family goes through $7000 worth of taxable purchases per year, they are spending another $420 in sales tax. When Mother makes her own goods, shops second-hand at garage sales or utilizes scavenging, she's massively saving money on the product itself. But don't forget the extra $420.
A Better Way to Earn
Instead of Mother going back to work, the Smiths have decided to save money with gazelle intensity. Their savings will be put into mutual funds and other investments. These investments will allow the Smiths to slowly increase their yearly income without paying half of it back to the government, because investment income is taxed differently than job-earned income.
If you're making way more money than you need, paying taxes is no big deal. But if you're spending more than you make, like the fictional Smith family, it may be time to re-evaluate your earning situation.
*Though the Smith family has standard and child deductions, they also pay Social Security (6.2%) and Medicare (1.45%) taxes on top of 25% regular income tax. This pretty much cancels out their deductions.