
Let's be honest. Who among us has not made a boneheaded financial mistake? Too often it was because we were stung by the power of now. We simply could not wait, and our impatience led to a financially dumb decision.
While I have made my share, let me take you back in time, about thirty years ago. While working for my dad we had a guy working for us named Larry. He had been with the company for a while and was very dependable. As a result he eventually got a company truck, which meant he no longer had to buy gas, tires, insurance, brakes, and whatever other expenses a typical truck owner incurrred.
As I recall he was making $9 an hour. Thirty years ago that was not too bad, plus throw in the truck.
My guess is that Larry wanted to make a little more money so he went shopping. A competitor offered him $9.50 an hour. That translates into $20 for a forty hour work week. Or $1,000 more a year in take home pay, or should I say before the taxes come out. Add up federal, state, and FICA taxes and he probably added $750 to what he took home in a year.
He took the $9.50 and left to work for the other company. That day I realized many people are really bad at third grade math. By third grade they typically teach you how to add and subtract.
So let's do a little addition and subtraction.
Let's start by taking away the company truck. That one subtraction item alone will now add the following expenses to his personal account.
Because I can't recall the price of gas, let's just say it was $1 a gallon. Yes, those days actually existed. I forgot to mention, he lived in Winchester, VA. That means he is driving at least fifty miles one way to work as most of the work was around the Beltway which circles Washington, DC. That comes out to one hundred miles a day, five hundred miles a week, and at twenty miles to a gallon we arrive at using twenty-five gallons a week. We are now up to an additional $25 in expenses a week just in gas alone. Hello $.50 raise, good-bye $.50 raise and I'll raise my personal expenses $5 a week ($20-$25= -$5).
Whoa! So Larry just took a pay cut of $5 a week and we have not yet added in the cost of brakes, oil changes, insurance, and tires. Even if all of our estimates are conservative Larry will be spending an additional $1,000 out of his pocket. Also consider that those expenses come after he pays his personal income taxes. In other words, to pay the additional $1,000 in expenses, he must make an additional $1,200, because $200 (probably more) will be eaten up in taxes.
Add, subtract, and think through this. Larry was looking to make more money, but wound up going in the hole at least $1,500 in a year's time. And that is a very conservative calculation.
Now making $20 more a week seems like a small decision. For Larry he thought it was going to put him on the road to prosperity. However, a bad case of financial illiteracy put him in the hole, big time.
At the end of the day financial illiteracy will cost you.