Use a Luxury Tax to Trick Yourself into Saving
Not very good at regularly putting money away into savings? This simple little trick could help boost your savings considerably!
We all spend money on luxury goods and services. In fact, the last released survey data by the United States Bureau of Labor Statistics’ consumer expenditures figures shows that the average American household spent $4643 on food away from home and $3059 on entertainment in 2019.
This means that in 2019, the average family spent $7702 per year or about $641 per month on these two categories of luxury spending alone.
If you are like me, you have found it’s easy to overspend and it’s just not realistic to give up luxuries completely. I tried limiting eating out and going to the movies, but this just made me miserable. I needed to trick myself into spending less on nonessential luxuries without feeling deprived of the finer things in life.
What is a Luxury Tax and how can it help me save?
My solution is something I call a “Luxury Tax.” It’s not an actual tax but rather a self-imposed requirement to set aside money in a separate account whenever I spend money on luxuries.
I set my tax rate at 20%, but you could use any amount that you want. My plan is to increase the tax rate by 10% per year, so next year I’ll use 30% and so on. This year, I have already set aside over $1500 in cash. This process is very easy and watching my account grow has been really fun!
Keeping track of the tax is easy.
If I go out with my wife and spend $50 on movie tickets, concessions and dinner, I simply set aside an additional $10 in my luxury tax savings account. I found it is easiest to set the tax amount as an even multiple of 10 since I want to be able to quickly calculate my tax obligation. If I use a 10% tax rate, I need to add one dollar for every ten I spend and so on.
Regular tracking is essential. If I don’t pay attention, I will likely find myself at the end of the month with no money and a big luxury tax bill. In order to avoid this, I use cash as much as possible for luxury goods and services. When I withdraw cash, I immediately transfer the tax amount, under the assumption that I only use cash for luxuries. So if I go to the bank to withdraw $100, I take an extra $20 (20% of the $100) out and immediately transfer it to my tax account. That way, I won’t be surprised later when I go over my expenditures for the month. This also means I don’t have to keep all the receipts and perform complicated calculations in the future. A side benefit of using cash in this way is that it allows me to save up my pocket change and add that to an investment or savings fund as well.
Of course, not all of my luxury spending can be done in cash. To account for non-cash expenditures, I review my banking and credit card transactions online and input them to a spreadsheet. After recording them, I transfer the appropriate amount over to my tax savings account.
Get better results by getting friends or family to join you.
One of my good friends and I started this process together and we email each other a report each month showing where we spent our money and how much we have set aside. By involving others in this process, I increase the likelihood that I keep it up. My buddy initially failed to set aside the money for his tax. It was only after receiving my first emailed report that he actually started tracking his expenses. This kind of mild peer pressure is very useful, and I know that I am much less likely to stop taxing myself now that he is on board.
The main goal is make it simple and stick with it. I use a luxury tax to save money and to increase my savings. If you try it too, I promise that you won’t regret it.
Reviewed June 2021
About the Author
Jeffrey D. Holst is a frequent traveler and periodic over-spender. He has a Bachelor’s of Science and Masters of Business Administration from Grand Valley State University and a Juris Doctorate from Michigan State University College of Law. He is also the CEO and Co-Founder of Newayva.
Jeffrey is also the author of Should I File: A Definitive Guide to Bankruptcy, which is available on Amazon.
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