Food for Thought: Taxation

An interesting idea that was discussed to me by a friend was an alternate way to pay your taxes. The normal scenario is that a certain percentace of your wages is deducted from your paycheck that goes towards income tax and other things like EI and perhaps medical benefits.

What this does though, is allows the government to use your money for projects and investments right away and they get to see the fruits of your tax dollars down the road. This short changes yourself a bit since there is another way to do it provided you have a strong sense of responsibility and willpower. What's the answer?

Don't pay taxes.

At least not yet. What you can do instead is request your payroll department to not take deductions for income tax. Then, you deduct the money on your own and stick it someplace safe, like a high-interest savings account. What you are doing is delaying paying your income taxes until tax time (around April) at which point you will have accumulated interest that in effect reduces the total amount of taxes you have to pay.

For example, lets say you make $30,000 a year and you have to pay 20% in income tax. That's $6,000 gone! Thus rather than payroll deduct $230.77 from your pay each pay period, you instead take $230.77 and stick it in a high-interest savings account.

Monthly Savings vs. Weekly

Currently our savings plan has us setting aside roughly 15% of our gross pay into a main account every week. The purpose of which is to build up a hefty emergency fund that can cover 8 months of living expenses. The account we use is the fee-free (for our purposes) PC Financial Intrest Plus savings account which gives 3.05% APY.

For this particular savings account, interest is paid at the end of every month based on your average balance for that month.

Since I am a spreadsheet whore, I wanted to determine what type of savings frequency for the average individual would yield the best return and how much the different scenarios varied. For the experiment, I am

Assume the following

1. Assume annual take home income of $30,000 (any number will work, this is the one I chose)

2. You get paid every two weeks (as per most payroll schemes) on Friday which works out to be $1153.85

Note that it doesn't really matter when you get paid (weekly or bi-weekly), rather it matters when you put the money in the savings account.

3. You wish to save 15% of your annual income (most people say you should do 10%, but more is better; $4500 in this case)

4. The frequency of your placing dollars into a savings account is the variable

You can either put the money in once a month (your first check of each month), every two weeks when you get paid, once a week, or once a day

4.5 Since you are getting paid every two weeks, why would you space the savings over two weeks? Maybe it's a comfort thing and you feel better having a higher balance in your checking account in case something happens. Why would you spread things over a daily period? You likely wouldn't but if you did then it would likely be for similar reasons. Note as well that for the weekly or daily cases, you could consider that a different pay scheme as well. Instead of getting paid every two weeks, you get paid every week or every day and deposit into the savings on that same pay schedule.

5. In each case the total amount put into the savings will be the same

6. The calculation is done for 2007 so your first paycheck is on January 5.

7. The savings account we look at pays 4% APR and pays interest monthly (for the difference between APR and APY, go here ). Interest is calculated on each day’s closing balance and is paid into your account monthly (on the last day of every month at 11:59 pm). I may be wrong, but I assume that this means a daily interest rate is applied to your balance and the daily amounts of interest are added up at the end of the month. This is the way I will apply interest in this experiment.

8. You create the account on January 1, 2007 and the balance starts at $0 and you will start saving with your first paycheck.

We are looking for the way that generates the most interest in an average sense. Meaning the average person will not do the most optimal scenario of putting 15% of total income into the account as soon as possible. This would entail putting 100% of their paycheck into the account until the $4500 is reached at the expense of all other bills. Once $4500 is in the savings, then no additional savings would be put in. Mathematically, this will generate the most interest, but is simply not feasible or desired for most people. This is where the personal in personal finance comes in. Most people would not want to devote nearly 4 entire paychecks to the savings account right off the bat. The reason most people would be uncomfortable is that it would mean bills and other expenses get put aside, which would cause stress and potential penalties in terms of late fees. Thus for this experiment, "reasonable" savings plans will be employed.

If you were to employ this "brute force" method, you will have your 15% annual savings on February 16, 2007 with $115.40 left over to start paying bills. For me, this isn't worth the undue stress, but your mileage may vary. However, for completeness, I will look at some special cases: the brute force method of putting 100% of your paycheck away until your goal is reached, getting paid on the first of every month and making a deposit then, and depositing every day of the year rather than miss out on the first 4 days of 2007 waiting for the first paycheck.

In the case of putting money in monthly, you will put in $375 from the first paycheck of every month. This means that for the some months you won't be putting in the $375 till sometime mid-month.

In the case of putting money in bi-weekly (ie. every time you are paid), you will put $173.08 into the savings from each paycheck.

In the case of weekly, you break your savings contribution from your paycheck into two and in the case of daily you spread the contribution over two weeks. With the daily example, you miss out on the first 4 days of the year, but for your daily savings, you just divide $4500 by 361 instead of 365 to get $12.46/day.

Which plan will emerge the victor? Read and find out. You can download the spreadsheet with all the calculations here.

First Paycheck of the month used for savings: $4594.03. Total Interest: $94.03

Every Paycheck or Biweekly: $4591.14. Total Interest $91.14

Weekly: $4589.41. Total Interest: $89.41

Daily starting on first paycheck of 2007, Jan 5: $4588.67. Total Interest: $88.67

Daily starting on January 1, 2007: $4589.66. Total Interest: $89.66

Brute Force method: $4662.58. Total Interest: $162.58

Depositing on the 1st of every month: $4597.31. Total Interest: 97.31

So obviously the Brute force method will get you more interest, but as I mentioned above, the way to do so would likely not be worth it for most people. As for the other methods the differences aren't huge.

A few things I found interesting was that a difference of 4 days on a daily deposit schedule net's you another buck and getting your money in on the 1st of every month scores an extra 3 bones rather than waiting for the first check of the month.

So why does this happen? All it is, is the situation that if you have your money in earlier for interest to accumulate on, you will have more in the end. In terms of a bigger picture though, think about what type of savings plan works for you in whatever employment situation you're in.

Slowing down....

Due to school starting back up, I am rolling back the frequency of posts to one a week (hopefully).

Goals to Complete in 1001 Days

Here are my modified goals that I am actively working towards. You can read the thought process behind the change to some of them here.

1. Read the complete works of William Shakespeare.
2. Have $18,000 in savings.
3. Measure my body fat percentage in some scientific fashion.
4. Exercise for a minimum of 30 minutes a day at a minimum of 4 times per week. 4a.Plan 1 week of suppers (the meal I usually over-eat on) in advance.
4b.Do not buy non-meal food outside of normal grocery shopping.
5. Get Married
6. Open an RRSP
7. Liquidate unwatched DVDs.
8. Liquidate old books.
9. Make homemade gifts for people for various events whenever possible and appropriate. Possible items include: paintings, hot chocolate mix, salsa, bread, tomato sauce, scrapbooks, hand-written letters, gift of time to help someone with something.
10. Walk/bike the equivalent of Summerside to Toronto not including every day
walking (620/1700 km).
11. Talk to Sam about his history with money.
12. Plant and grow my own tomatoes.
13. Vacation in Vancouver.
14. Become an Ebay seller.
15. Do 100 push-ups without taking a break (personal best: 32/100).
16. Spend at least 30 minutes each day with fiance that is engaging and meaningful to both of us (ie. not watching TV).
17. Help fiance's parents clean out a room in their house by taking pictures of sentimental items, compiling electronic photo album for it, and selling the actual item.
18. Offer to babysit 3 times for my friends so they can go out (0/3).
19. Plant a tree. Look at this for next summer as well
20. Determine my personal CO2 emissions (estimate)
21. Reduce those emissions by 20%.
22. Make 10 jars of homemade pasta sauce and give it as gifts (0/10).
23. Finish the few pieces of the puzzle for the paper based on my masters project.
24. Do 150 sit-ups without taking a break (personal best 0/150).
25. Add regular maintenance tasks for car onto the calendar and do them on that day (ie. wash and wax our car, clean and vacuum the car interior every 3 months, check the car's air filter and replace/clean if needed every 6 months).
26. Move towards a (mostly) vegan diet. My philosophy is to choose non-animal products as a preference when making food for myself and to create dishes for my fiance and I that are vegan that she can eat. I am not going to get hung up on not-eating animal products in other situations where non-animal products are unavailable to me (ie. I'm not going to not eat at a family function just because there is meat).
27. Purchase a filing cabinet and organize our files.
28. Pay off completely the debt I expect to incur over the next 2 years from my Bachelor of Education degree.
29. Obtain my class 4 license so that when I get a teaching job, I am qualified to drive a bunch of kids on field trips etc...
30. Catalog our possessions for insurance purposes.
31. Learn how to swim
32. Give Blood 6 times (2/6):
1. August 29, 2007
2. August 19, 2008

Net Worth Update: August 2008

Well another month gone by and I'm actually posting this on the day it should be. Numbers go a bit wonky when you go from negative debt to positive, but we'll see what happens.

Assets - 2.0% decrease
Goal set: +2.0% increase

We went in the opposite direction on this one. This is due to the combination of vacation at the start of the month where my fiance wasn't getting paid, the freezer purchase, and the fact that my comics still sit unsold. However, I did make progress on that front as I have read Ebay's selling tutorial and have approached the manager of a new local comic shop in the area.

Goal for next month: let's try for a 2% increase this month as well

Debt - increased by a factor of 10

I had been paying ahead on future debt but the early payment of my tuition sure took me out of that cushy scenario.

Goal for next month: I might going to continue setting aside dollars for the debt to keep it somewhat under control, but because I'm going to get a 6 month grace period at the end of my degree and it won't really be for very much, I might put that money to better use.

Overall Net Worth - 14% decrease
Months of living expenses - 9.23

True Hourly Wage

If you've read Your Money or Your Life, then you should be familiar with the concept of your true hourly wage. In a nutshell, it is a number that takes into account all the additional time related to your job that reduces your on-the-books hourly wage. For example, let's say you are paid $10 per hour at your job and you work 8 paid hours a day for a total of $80.

But maybe it takes you a 30 minute commute each way to get to and from your workplace. Thus there is actually 9 hours of your day related to work, 8 working and 1 commuting. So to calculate your true hourly wage you take the amount of money you make each day and divide it by the total time related to your job. For our example, $80 divided by 9 hours give a true hourly wage of $8.89 per hour.

This process also works in reverse and it is to that situation I will turn my attention. I work at an inbound call center that has low to medium call volume. So during an 8 hour shift I might only be taking calls and doing tasks related to that job for 5.5-6 hours while the rest of the time is spent waiting for calls to come in. If we take the same on-the-books wage of $10 per hour, this works out to be a true hourly wage of $13.33 per hour.


This worked out very well for myself and other students as we could do homework and read our texts between calls. Unfortunately, due to a security breach in a different department, that privilege was taken away from us. That kind of sucked, but at least we still had the internet to surf between calls.

No longer.

In one fell swoop, this action pissed off many people and reduced job satisfaction since now people are extremely bored between calls. There has been talk of filling up between call time with other call center related duties so that you are being paid for what the center wants you to do. From a business perspective, I can understand not wanting to pay employees for non-work related activities. However, what this does is reduce employees' true hourly wage. If those 2 hours are filled with other duties, then employees will be making less per hour worked, plus they will be doing more work. Such a situation is not good for morale.

So I face a bit of a quandary in that I am essentially working at a place that has transitioned from one where I could pursue my own interests between calls, thus being personally productive to one that I am pretty bored at. I am faced with the decision to move on and use that extra time to be productive, yet lose out financially or stick with it and dislike the work environment.

My initial thoughts are that I will stay since I plan to only be there for another year or so anyways and to use the dollars made for the very specific purpose of a new car and a house down payment rather that just having that money be a nice extra in our accounts.

Lessons learned:
1. Don't take for granted what you have as it can be taken away at any time.
2. Defining goals for your dollars can make other parts of your life acceptable/tolerable.

Frozen

Since last week, I did a roundup of current freezer prices and evaluated what we would use such an appliance for. We decided to go with the larger 7 foot model as I plan to keep different flours subject to spoilage and various nuts in there. Stock will be a staple freezer item as will bread, tomato sauce, and ice cream.

Based on my findings, we could get the cheapest 7 foot model at Leon's for $288. However, the brand name, Wood's, was not one either of us were familiar with. For an additional $11 a Frigidaire model at The Brick could be had for $299 and the same model was at Futureshop for $329.

So we went ahead and purchased the Frigidaire 7.2 cubic foot chest freezer from Futureshop even though it was more expensive.



Why go with the place that had the highest price? Here's where things get interesting. Futureshop offers a price match/beat on items advertised at competitors. They beat the price by 10% of the difference of the two items. So the Futureshop price becomes $296. It gets even better as I had $100 in gift cards in my wallet since Christmas that I used to bring the price down to $244 with tax.

When Trent over at The Simple Dollar purchased a freezer he went through an interesting analysis that looked at the total lifetime cost of the item to determine how much they need to save each month to make the purchase worthwhile. The calculation uses the average lifetime of a freezer of 8 years, factors in electricity usage, and the initial cost of the item. I went through this calculation as well for our purchase:

Initial Cost: $244

Electricity usage assuming the freezer will last 8 years it works to be a total of $279 KwH/year x 8 years x 14.45 cents/KwH = $322.52

Monthly Cost = $566.52 / 8 / 12 = $5.90 per month*

What this means is that we need to save more than $5.90 each month through use of the freezer to have made the purchase a worthwhile one. If we eat out one less time a month as a result of having something in the freezer we can re-heat, then the freezer will more than pay for itself. This does not seem an unreasonable scenario and I look forward to creating delicious food I can quickly and easily reheat.

There may be an additional cost associated with transporting the freezer. We can have Futureshop deliver it for $50 or rent a van from U-haul for about $30 taxes included. We will also explore the possibility of using our landlord's truck for free.