Are You Richer Than You Think?
Posted by John Draper | Filed under Debt Traps
While is may suit some to convince you that are, I’m going to bet dogs to donuts that you aren’t. And if you’re living your life, spending your money, as if you have more than you actually do, you may end up a lot poorer than you want to be.
People who quote me their gross income are playing the richer-than-you-think game. You hear it all the time. “I make $60K and the little woman pulls in another $45,000.” People, you don’t make your gross income. You and the government make your gross income. You only put your net income into the bank, and thinking in gross dollars means you’re probably grossly overspending… think 30% right off the bat.
Then there are all the people who are willing to mortgage their future incomes for the sake of whatever has taken their fancy today. These are the folks who believe their incomes will continue to rise at an unprecedented clip, so they can afford to buy now and pay later. Hardly anyone ends up paying up on time – which the guys who convinced you to buy are banking on – and so with a retroactive 30% interest rates and significant fees, you end up paying almost double what you thought you would for that big screen TV, new leather couch, or very comfy bed. Statistically, between 2001 and 2005, while our average debt jumped by almost a third, our average family income increased only about 10%. Oops. Not so much with the richer, eh?
Of course, if you’re comparing your income of $150,000 with the $50,000 your parents earned when they were raising you, you might be tempted to think you’re richer than they were. But maybe not. According to the Canadian Consumer Tax Index, 2007, in 1961, the average Canadian family earned an income of $5,000 and paid $1,675 in total taxes, so taxes were at 33.5% of our income. In 2006, while our income had gone up to $63,001, we paid total taxes of $28,311 – almost 45% of our income.
Total taxes includes everything from income taxes, to sales taxes, Employment Insurance and Canadian Pension Plan contributions, import duties, excise taxes on tobacco and alcohol, amusement taxes, and gas taxes. In fact, personal income tax accounts for only about 32% of the total taxes we pay.
The average family income for a fam of four with two working parents is about $78,000. Add up the total taxes of all kinds this fam must pay, and you’ll have to deduct about $35K from that income, leaving $43,000. Since the average after-tax cost of regulated childcare is about $9,000, we’ll deduct that too, leaving a whopping $34,000. Now comes housing, clothing, and food, which costs about $22,000 for the average fam, and that leaves $12,000. So, how much for that car payment? Got two cars, you say? And your insurance? And gas! How about your cell phone, cable and entertainment? Not too much money left for things like couches and TVs, is there, which explains why we love our credit soooo much.
Perhaps the most successful ploy brought to you by the people who would have you believe you are richer than you think is the Minimum Payment Ploy. Yup. If you figure that $2,500 trip is only going to cost you $64 a month, how can that be beat? Who can’t afford $64 dollars for a fabulous vacation? And thus it has been for the past 30 years, ever since the credit card was invented (followed 15 years later by the personal line of credit), fueling unprecedented growth in consumer spending, which could only have been achieved with borrowed money because it has outpaced the growth in our incomes. All that credit gives us the ability to live well beyond our means, creating the illusion that we are rich… until the payments come due.
The recent housing boom was just one more justification the richer-than-you-think camp had for getting you to spend money you havn’t yet earned. Our homes, once the anchors in our wealth-accumulation plans, have become cash cows. Growth in equity is synonymous with richer-than-you-think as we use our home appreciation to finance everything from vacations to vehicles, eroding our true wealth and leaving us vulnerable to the inevitable downward fluctuation in the value of our homes.
I meet people every day who are definitely NOT richer than they think. If you owe a dime outside of your mortgage and car payments (and, perhaps, student loans), you’re one of the suckers who has bought the b.s. about being richer than you think. You can keep your head firmly planted in the sand, leaving your behind well exposed, or you can smell the winds of change and do some back-filling to get your financial house in order.
The only way to be rich is to have the life you want, while owing nobody nothin’.
November 26, 2008 at 6:52 am
My consumer debt is running @ about 20,000 right now. Its slowly being paid down but in 3 years I should be free of that debt! I love your advice and an slowly incorporating into my life. I’m not good with credit cards or line of credit, so once they’re paid I’ll cancel them. My student loan stands @ 9430.00 and will be finish within 1 year!. That light at the end of the tunnel is getting brighter! As a FORMER ostrich ( hence the name) every day I’m making different choices. As far as the life planner goes, i really, really want one, but its not in my budget and will make do with the one i already have! ( I won’t be getting one for Christmas either as we’re not buying gifts for the adults, just the kids this year.) Thanks for all you do!
November 26, 2008 at 8:55 am
Thanks for letting us know why there was no blog post yesterday. I’m so used to my daily Gail that I was a little concerned when there was no post. Also, I’m slightly addicted…this being the first site I visit in the morning…
November 26, 2008 at 10:37 am
Dinah, I only visit three websites regularly and consistently: Hotmail, Facebook, and Gail’s Blog! Congrats Gail…I consider you one of the big players! lol
Another scary blog posting Gail. Just goes to show how much the government is screwing us over. In between the government taking more money from us than our parents, corporations providing less benefits, less money (i.e. real time salary – salary minus inflation – increases have actually been flat for decades – sorry I can’t quote a source other than my Economics 101 textbook) and providing more part-time work rather than full time, it just goes to show how F**KED we are (pardon the language). And credit is being used to offset the fact that we are actually have less disposable income than our parents. So we, as in the North American society, are actually poorer than we think! In my opinion, these facts actually produces a less hopeful future than I would have liked. But this economic situation is good to purge out some of the bad debt out there. It may just force people to smarten up about money which is so badly needed.
Thanks for focusing us on staying on the game plan Gail and having realistic expectations for our lives.
November 26, 2008 at 11:49 am
Hi,
I too visit your blog every morning, it help sets my day in motion (kinda like coffee).
Gail I want to thankyou for thar you do!! I have been watching your show for the last 3 months. For the last 2 months I’ve been living on a cash budget and haven’t been over budget once. My debt is being paid down, and we haven’t touched the one credit card that I have left, I’ve destroyed the others. I would love to buy your planner, but at the moment it’s out of the question, no money. I have one son in University, and one going next year. Needless to say anything we have extra goes to them. For some reason we didn’t think to save for school …I guess I thought we had more time to save or something. Now we’ve slashed our variable expenses down to necessaties only.
Please keep writing and doing your show!!
Catherine42
November 26, 2008 at 12:04 pm
@ Sam – be careful about cancelling your credit cards, it kills your credit history as well. Cut them up instead but know you will never be able to rent a car or hotel room without one.
Also why would you be in a hurry to pay off student loans (if they’re government you can deduct the interest you pay) if you have credit card debt you can pay down first? Is the student loan interest higher than the card debt?
November 26, 2008 at 12:30 pm
I am definitely not richer than I think, haha. I am becoming well aware of the fact that I don’t have as much money than I thought I did when I was racking up thousands of dollars of line of credit/credit card debt. And now I have to worry about job security, as the company I work for is supposed to be cutting 53,000 jobs. I only wish I had taken all this good advice earlier, and started my emergency fund. If I lost my job tomorrow I would have $25 saved up…not quite the back-up I was hoping for!
I’m with Sam, I really really want a life planner, but with two pay periods before Christmas, I don’t think I can budget it in for myself. Make sure you have lots of stock so I can buy one once the holidays are over!!
November 26, 2008 at 12:52 pm
Erran – Just a friendly rebuttle. In my opinion the government isn`t screwing us by taxing our incomes, it uses that money to provided much needed social programs, provide assistance to small business owners, keeps our cities running, our education system in place as well as our health care programs.
While our government is not perfect it isn`t bad either, take a look at your life and really see where your tax money goes and what your life would be like if those resources weren`t there for you.
November 26, 2008 at 1:00 pm
I have to take issue with the comment about the government is screwing us over with taxes. Given the pattern outlined in Gail’s post, if we paid fewer taxes most Canadians would simply spend that additional percentage on stuff (on credit). Those taxes pay for a bunch of things we all need to have in our society but can’t afford to pay for as individuals. How much student loan debt would people have if tuition wasn’t significantly subsidised by government? Although they have increased significantly over the past 15 years, tuition fees don’t cover a quarter of what it costs to sit in a post-secondary classroom. And it’s worth it to us all to subsidise education so that people who might be great doctors, teachers, accountants, plumbers aren’t excluded from studying for those professions. The health system isn’t perfect, but most Canadians won’t lose their homes to hospital bills if they have a major accident or illness (they might lose them due to other debts they can’t cover while they’re recovering but that’s a separate issue). Taxes aren’t the problem outlined in Gail’s post; that prize goes to our growing inability to plan and save for the big-ticket items (education, home) and the terrible ‘what-ifs’ (accident, illness) because we collectively buy champagne on our beer budgets.
November 26, 2008 at 1:02 pm
Sorry..gotta disagree with budgetcruncher here! Don’t make the governemt out like the all-(American)Canadian hero. Think of the governent politician’s salaries and then yours and what you can really do with your salary. Are you on social programs? I’m not, so no I’m not getting use out of that..not a small business owner..gee..they tax as this is the way life goes but not everyone who’s having their pockets emptied is actually getting a good deal or even complete use of why they’re being taxed.
Agreeing with Erran here.
November 26, 2008 at 1:18 pm
Sorry, I have to comment about high taxes. As young parents, we had a very, very ill child. If we’d had to pay her medical bills, we would certainly have lost our house, and so would both sets of pretty well-off grandparents. Canadian taxpayers came through for us in a very, very big way! Our daughter is now a healthy and happy child.
Our family has gradually made progress with our incomes, so of course we pay a lot of tax. We are glad to be in a position to help other families with our publicly-funded Canadian social programs.
November 26, 2008 at 1:26 pm
I’m on the side of those who say we aren’t getting our money’s worth for our tax dollars. Our education system stinks; my high school in the US was MUCH better than my brother’s high school in Canada, contrary to popular belief. I’ve had enough horrific encounters with our health care system that I’m filled with rage at the idea that it is a “benefit”. I agree that education and health care are necessary services, but they are executed so poorly that I can’t say “thanks” just because they’re better than nothing.
November 26, 2008 at 1:30 pm
HI all – to jump in on the taxes piece. We have family friends in the States who’s child developed a very serious illness – they had been paying into medical insurance – but found that it did not cover some of the hospital and doctors fees. We currently have a family friend with a seriously ill child and the family can focus on the child and not on filling in millions of forms to cover the insurance needs.
TAXES are not the problem, as Gail has pointed out – thinking our salary is our whole salary without budgeting in taxes is the problem.
Politicians are paid a decent salary. But, many of our politicians could make significantly more money working in private industry. If we want quality people running our country and making decisions that impact us, I believe we need to pay a quality wage. If you think you can do a better job – run for office.
We choose to live in Canada because of the quality of life that is available for EVERYONE. Our taxes help pay for that. Before we complain about our taxes – lets think about our health care system (do you think twice about taking your child to the doctor because you can’t afford it?), our public education system, our infastructure ect. . .
November 26, 2008 at 2:16 pm
Geoff, the CC is held jointly with my mother, it does not show up on my credit rating. The line of credit is on 1 year old so no big loss towards my credit. My sears card I’ll keep, as it being switched to a master card and I’ve had it for 15 years. As far as my student loan is I’ve been paying on it off and on for 10 years, and i want it done! It was 472/month, I switched to 250/biweekly payments over 2 years ago.
November 26, 2008 at 2:47 pm
Ostrich,
I’m with you on paying off that student loan. The interest you pay is not fully tax deductible, you only get a credit of 15% of the interest you’ve paid to go towards your federal taxes, plus whatever your provincal tax credit rate is (for BC it is 5.7%). So in BC, for every $1,000 of student loan interest you pay, you get a credit of $207 towards your total income tax bill.
I agree with the math in terms of paying off higher interest rate debt first, but there is something to be said for knocking off debts with the smallest balance first. It is a wonderful feeling to just have less bills to pay then rolling the payment onto the next smallest balance. If you crunch all the numbers, you are probably not paying all that much more interest once everything is said and done and it is so motivating to tick them off the list.
Last year we made the big push and paid off the last of my husband’s student loans (after 7 years) and that was a great feeling!
November 26, 2008 at 3:58 pm
One thing I thought of while reading this….
My income is more than my parents, and they had way less stuff to store, insure, maintain, power, etc… I know in my home growing up, there was only one car, one phone, one TV (and the VCR came much later). The cupboards were not crammed with single-purpose, small appliances. There was no computer, no walk-in closet full of fashions, and us kids had only a modest selection of toys that fit entirely in a toy box — forget about a whole play room or family room for the kids! My home is bigger than the one I grew up in, it needs more room for all the extra gadgets that are “essential” to 21st centurey living (and I don’t even have a cellphone or iPod!), and all that space needs to be maintained, heated, kept-up, etc… our existing convenience items and gotta-have-it items are really as much the issue as the dreaded taxes, evil minimum monthly payments, and other fees and expenses that eat our gross incomes.
November 26, 2008 at 4:14 pm
There was this radio ad they were running in Greater Vancouver a year or two ago for home equity loans. It said something to the effect of, “You’re the instant gratification generation. Why wait to buy what you want? Make your home work for you!” It caused me to cringe when I heard it.
Gail, you make a good point on the difference between net income and gross income. When you’re quoted, for example, that your housing costs should be about 25% of your income, does that mean net or gross? There might not be a clear answer, but I always wonder, because it is a BIG difference. I personally calculate everything based on take-home pay, it just seems more practical.
As for whether we get our money’s worth for our tax dollars, all that I will say is that this is why I vote in every election. Including every little school trustee by-election or municipal run-off. Then at least I have the right to my opinion.
November 26, 2008 at 4:23 pm
I agree with Tracy J on other thoughts. My home growing up was small – no room for extras – yet I grew up happy and healthy. Didn’t need all the stuff others had – no room for it! As for taxes, yes, I would love not to have to pay for them, but I’m proud of being Canadian and what we have in this great country. Our systems may not be perfect, but we are better off than a lot of others in this world.
November 26, 2008 at 4:39 pm
Some very interesting conversations going on here! My two cents on the issue of taxes. I don’t mind paying for essential services that help me, as well as the other important services that help other Canadians and people abroad. I will never use the money that CIDA spends in Africa, but I fully support sending my tax dollars to programs that help to make a positive difference in other parts of the world. If the money was spent wisely, I would feel good about paying my taxes, the same way I feel good about making charitable contributions. My problem is that I don’t think our tax dollars are wisely spent. As someone who works in the nonprofit sector, we get all kinds of inquires as to administration and fundraising costs. But how much do governments waste on their admin costs? How responsible are they? What percentage of my tax dollars go to health care and education and how much goes to ugly art in the House of Commons? Or those ridiculous ads that line the subway, or those terrible “what’s new in Toronto” pamphlets. THere is waste everywhere, and as a hardworking young person who is trying to get ahead, be responsible with her money, while working for a charity, I resent it. And FYI – assistance for small business owners? What assistance? My father is a small business owner and I am about to start my own too – I’ve just sought assistance and found pretty much zilch. Having said all that, this is the situation we are in – paying taxes and complaining abuot the government is a fact of life. All we can do is be responsible, plan for the future, and make the absolute best of what we’ve got.
November 26, 2008 at 4:57 pm
I actually have so much more to say on this issue that i just blogged about it at saverqueen.com. Beyond the tax issue, there lies a much more important topic for discussion – the possibility that many of us are richer than we think – but we fritter away our riches through our “miscellaneous consumption”. We fritter away our money on “crap” (another Gail-ism) and then wonder where it all goes. If that average couple earns just 45,000 a year (after tax) and invests NONE of it they will earn, over 40 years, they will earn a total of $1,800,000. That’s a lot of money. Think carefully about what you want to do with that $1,800,000. You can spend it carefully, save, invest, and make something happen with it, even if your goal is just a stable family life. Or you can fritter it away, bit by bit, into thoughtless purchases that go in and out of your life, adding no real value. Using this philosophy, many of us our richer than we think! We just need to show better respect for our riches.
November 26, 2008 at 5:21 pm
Hehe I have to chime in here too.. I’m gladly paying taxes, because I cherish our health care system. We are truly blessed with it.
November 26, 2008 at 6:24 pm
I’m with Saverqueen… I’m a small business owner and have been for awhile… I’ve never received assistance from the government. I looked for it when I was first starting my business but there wasn’t anything at all that I could find.
…and as for taxes, I receive a salary from my business and pay the same taxes as anyone else. Sometimes it’s depressing to have to pay so much every month in taxes but all you have to do is watch “Sicko” by Michael Moore and you’ll be thankful for our health system… even with it’s problems. I’m so proud to be a Canadian!
Also, my home growing up was small but my siblings and I just played outside all day coming home for dinner only! Felt like the whole world was my playground. It’s a shame that it seems that can’t be done anymore but that’s another story altogether…
November 26, 2008 at 7:00 pm
Hi everyone,
Just a quick comment from Down Under….
I too am happy to pay higher taxes to have a reliable health care system that won’t send you broke if you get sick (I’ve seen Sicko as well, scary!).
I know that I can send my kids to a public school and have them receive a decent education and that they can go to Uni without coming out with a million dollars of debt they’ll never pay off.
I watch Suze Orman and read Gail’s blog every day and really feel like I’m thinking differently. When I was 18 and earning 11k a year the bank gave me an 8k credit card for goodness sake and boy did I appreciate it. Lol.
Now that’s gone and I’m much much more sensible.
November 26, 2008 at 10:02 pm
Andrea – Ironically I am a federal employee and my statement was broad as I can’t possibly list all of the programs the government supports that allow me to live a great life on a modest salary. But for arguements sake consider this: I drive to work on roads that are maintained with my tax dollars, I am protected by an amazing police force that is paid for – you guessed it by my tax dollars. I am able to purchase food that meets a high quality because my self appointed government ensures its quality. I am fortunate to not need the wage supplement services of my government nor any other social program, unfortunately many Canadians do and thankfully our appointed officials are doing the best they can to ensure access to all programs by any Canadians.
Again our government is far from perfect but I will take it any day. I go to work with some of the most intelligent, and passionate people I have ever met. Because NO ONE GETS INTO POLITICS FOR THE PAY!
My challenge to anyone who thinks that there life is not a part of the Canadian political system is to take a really hard look around, the government is responsibly managing every aspect of our lifes to ensure our quality of life remains world class and envialble by the citizens of many other countries.
November 26, 2008 at 10:48 pm
Thank you “budget cruncher” for your comments as you have expressed exactly how I feel about where my tax money goes. In fact, didn’t our federal politians just announce that they were tightening their belts with their expense accounts!!
I am so proud to be a Canadian and I believe in our social systems that have served both me and my family members well – including the infastructures in our cities and towns.
I wish that we had more disposable income BUT I am willing to give to my fellow Canadians so that we can live in our beautiful and wonderful country.
Oh and yes, I am not richer than I think because I do quite a bit of “thinking” about where our money goes. It amazes me that people don’t know what they “really” make and where they spend. Yikes!!
November 26, 2008 at 10:51 pm
well said budget cruncher
agreed! We should be thankful for all we have here in Canada.
November 27, 2008 at 3:02 am
I second everyone else who wakes up to a big cup of Gail in the morning.
I’m a student so this is really interesting to know considering I know very little (except what I learn from your blog and tv show) about finances. It’s more comforting than scary to know what my actual income will be when I get a full time job in the ‘real world’. So thank you for making it clear that people should really think more in terms of their net income. My brother (31 year old career man) complains that he makes so much but pays so much more in taxes and now I understand why.
November 27, 2008 at 11:03 am
“NO ONE GETS INTO POLITICS FOR THE PAY!”
Have truer words ever been spoken? I doubt it.
SQ and I are going to disagree on this one, but I actually think those subway ads are some of the best money the government spends. I have seen far too many a great government program waste away (and taxpayer moolah along with it) because nobody knew about it. What’s the point of spending all that money if nobody knows about the program?
November 29, 2008 at 3:38 pm
I DO think we are richer than we think. The point of the ad is to encourage people to think about their money, savings & investing. With guidance, people do have the ability to be better off just as Gail councils. A lot of people feel the need to have expects help – and that’s a good thing! Sometimes a fresh pair of eyes can really help us see where we need help in terms of our finances and insurance protections – someone to help get all your ducks in a row. But we also have to take responsibilty for our spending and what we do with the money that we DO have. Focusing on what we can do instead of whaat we can’t makes you richer than you think!
We need to step back and look at what we really do have in our lives instead of what we don’t. Having a flat screen pretty tv on the wall and a swanky car in the driveway doesn’t make you rich IMO. What makes you rich is a warm roof over your head, food in your cupboard and some money in the bank for emergencies. Having good people in your life you can count on makes you rich. Having somthing in your life that brings you joy makes you rich.
I’m sure a lot of you would agree with me that most people could find a few dollars extra to save each month or pay down debt faster – a few less timmies coffees or in my case less trips to Reitmans! Do I really need that diet Coke? Do I really need to by the box of snack crackers or that choo-choo train for my Christmas tree that I bought today? – no I don’t need them but I make choices with my money everyday. I could make better choices and when I decide to, I’ll be richer than I think.
November 29, 2008 at 9:47 pm
awesome way to look at it ..
April 22, 2010 at 1:09 am
insightful post