Look at this fascinating quote from this week’s Time Magazine: “…as of last week, the income segment with the highest percentage of visitors to the iPhone site was 18 to 24 years of age, earning less than $30,000 per year.”
For decades, personal-finance “experts” have told young people not to buy lattes, fancy electronics, and expensive clothes. To which I always reply: How has that been working, grandpa?
I try to take a different approach. Instead of lecturing young people who will simply press ctrl-w and go back to Facebook, how about showing how everyday decisions impact us?
Let’s take buying a relatively large purchase, like an iPhone or a Balenciaga handbag. If you’re going to buy something big, that’s fine — but consciously know how much it’s actually costing you. Not just how much money it costs today, but the total cost of ownership. One eye-opening way to consider a large purchase is the % of your income.
What percentage of income would an iPhone cost you?
Income — After taxes — % of income
$30,000 — $24,905 — 1.6%
$40,000 — $31,044 — 1.3%
$50,000 — $37,439 — 1.1%
$60,000 — $43,774 — 0.9%
$70,000 — $50,109 — 0.8%
I want everyone to pay close attention because, in the above table, something magical happened: I created the most ghetto HTML table ever constructed. Thank you, thank you.
(Jeff Kuo pulled those numbers here using the following assumptions: single, no children, standard deduction, no adjustments, 7.65% FICA, average state income tax roughly 4%.)
If you’re making $30,000/year, then, a $399 iPhone is roughly 1.6% of your salary. Also consider the opportunity cost of investing $399, and remember that the impact of large purchases is mitigated by holding onto something for a long period of time. For example, you save vast amounts of money if you drive your car for 15 years.
Bottom line: Look behind the numbers when you make a large purchase. It’s not just $399. And while this might seem to complicate things, ignorance really isn’t bliss. Just go to a mall and watch the people shopping. Can they afford their purchases? The sad thing is, most people don’t know if they can or not. But you can.