Since everyone loves taxes so much (right??), let’s talk about a tax that’s a little bit more fun and interesting than income taxes.
With income taxes, you pay the government for money you earn. But with a personal tax, you pay yourself for money you spend.
I stumbled upon a Reddit post of a 29 year old looking for help curbing an expensive spending problem. He and his wife make a decent income and have great pensions and their only debt is an $8,000 car loan at 1.9%. Despite that, they have basically nothing saved up. They just are not good savers.
One reader commented (and I am posting his idea with his blessing) with a solution that I think is great in this situation, but can and should be used by anyone who has a difficult time saving money each month.
How Does A Personal Tax Work?
The idea is a 100% personal tax. Whenever you buy something that isn’t a necessity, you impose a 100% tax on yourself that goes toward your savings account. For example, if there is a Blu-Ray you want to buy on Amazon for $20, you have to have $40 to spend on it. $20 goes to the Blu-Ray and $20 goes to the savings account. As the redditor puts it, “your larger savings plan can dictate where the money goes that accumulates in this account. (i.e. IRA, 401k, emergency fund, etc)”
Who Should Use a Personal Tax?
This plan is not for everyone. It’s not for Lauren and me because we are already saving nearly 50% of our after-tax income. We save plenty (some would say more than enough) and we already have our motivation to save.
This plan is for people who make more than enough to cover their basic needs but who, at the end of the each month, find that they are not saving as much as they want to.
The 100% personal tax is great for a few reasons:
- It’s free
- It keeps you accountable
- It forces you to do something you can’t do on your own
If you aren’t able to save much each month, give this a try for a month. There’s no ‘I can’t afford it’ because this only applies to non-necessary purchases. You don’t need to match your rent and food spending, only items and activities that you choose to partake in. Your needs aren’t taxed, only your wants are. If you spend $100 on gambling, even if you have a betfair promo code, you should match that with $100 to your savings.
Do you need a little more help saving? Would you try the 100% personal tax?
Update: There’s now a way to automate the 100% personal tax!