We played a lot of Monopoly and other board games when I was a kid. Cable television hadn’t been invented and there were no movie theaters, arcades, skating rinks, bowling alleys or shopping centers in our little township.
Some of these things existed nearby, but they might as well have been on the moon: Not only was there no public transit in our region, there was not much disposable income in our lives.
Hence, hours and hours of board games. I don’t think that we understood Monopoly’s underpinnings: Get rich by ruining everyone else! One thing I’m sure we didn’t get was the square that read “luxury tax.” We groaned when we landed on it because it cost us money, but the word “luxury” was not in our vocabulary.
We had everything we needed, mind you, but much of it was homegrown, homemade or handed down. Luxury was something we saw on TV, maybe, but I never figured it could apply to people like us.
As adults, we can choose luxury if we’re willing to pay for it. Which brings me to the idea suggested by a Get Rich Slowly reader: a DIY luxury tax.
The reader, Beth, was reacting to my recent GRS post about building an emergency fund out of thin air. The article featured stealth savings tactics like the dollar bill challenge and rounding up your checking-account balance.
I liked Beth’s suggestion, too:
“How about charging yourself a luxury tax for ‘wants’? For instance, if you can afford a dinner out, you can afford to put 10 percent of the cost of the bill into a savings account. Saving up $500 for a new TV? Add $50-$100 to that goal for your emergency fund.
“This tactic works for finding money to give to important causes, too. If you can afford a $1000 vacation, you can afford $100 to help a homeless shelter.”
This reminds me of the advice Liz Weston gives about windfalls. She suggests setting aside 10 percent for something you really want (or need) and putting the rest where it will do you some long-term good, e.g., saving for retirement, debt service or the pay-cash-for-next-car fund.
With Beth’s idea, you’d be making your own windfall. That is, you’d be realizing that if you can afford X then you should set aside a little more for Y. The result, eventually, is a nice big Z: a financial cushion to deploy the next time your kid breaks his glasses or the car makes a funny noise.
My own luxury tax is reverse-engineered: Because I do without a lot of everyday goodies, most of my earnings stay in the bank. (Except for those that go toward retirement, charitable giving and helping out family members as needed.)
A favor for Future You
However, I think I’ll start recommending the luxury tax. Want a frou-frou coffee drink every day? Budget for it and enjoy it – and add 50 cents to the daily line item. Determined to play in the local softball league? Find the fees-and-equipment money in your salary, and figure an extra eight or 10 bucks into the equation.
Those monies can go the emergency fund, the Someday Fund or whatever you call it. (One reader calls it the “Oh Shit!” Fund. Appropriate.) Think of it as tipping yourself, or at least making life for Future You a little easier.
Incidentally, my decision to do without certain treats isn’t nearly as dismal as it sounds. In fact, it’s not sad at all. That’s because I define luxury in a way that suits me, and am pretty happy with the result.
I save where I can so I can spend where I want. If I can say “no, thanks” to the stuff that doesn’t matter to me then I’ll be in a better position to say “yes, please!” to the things that do.
Readers: Do you/would you charge yourself a luxury tax? If so, where does/would it go?
Related reading:
- Can’t get ahead? Try a ‘savings challenge’
- Frugal-hacking my way through a month without pay
- 9 smart ways to use all that ‘extra’ cash
- Digit update: Still stealthy, still effective
My problem is patience. It is the one thing that I struggle with still to this day. It takes a lot of patience to build up a stash/pay down a bill. Now don’t get me wrong, I get a thrill out of snowballing but it doesn’t seem to count in my mind until it’s in the thousands of dollars. Maybe, its just my mind set and I should learn to celebrate the pennies the same way as the dollars?
Everyone looks at/deals with money differently. I understand the “oh, it’s only $10” mentality but I also know it’s a good way for a budget to get nibbled to death.
Here’s one way you already celebrate those pennies: your annual Christmas stash. All year long you build it up (and report on it in your blog) and ultimately it adds up to a lot less stress when it’s time to do the holiday shopping.
Wish we could have the “thousands of dollars” rain down on us. As most of us won’t get that, we have to operate on a smaller scale. But it’s the same principle.
If you’re looking for another way to make those pennies count, why not start a “get son to and from college” fund? Every buck or two you set aside is money that won’t make the monthly budget wobble. Use one of the hacks from that “try a savings challenge” article that’s linked in this one, and see how much of a difference it could make.
Thanks for being such a consistent reader and commenter.
“I save where I can so I can spend where I want.” YES. It took me many years to learn that. Thanks for a consistently interesting blog.
Thank you, because you read it.
I think for some people, the luxury tax might work. It won’t work for me, because I don’t think I can afford to do it. It’s a mental block on my part. I won’t add to a cost.
I am still trying to figure out how to get myself to save, when it’s hard to find a savings route that makes that worthwhile. My passbook savings account is laughable: 0.5%! A tenth of what I used to get for decades, the old 5% savings account.
Instead of a luxury tax, I want to promise myself a matching amount for my savings. If I manage to stash away $50.00, then I can give myself a 10% match: $55.00. It sounds like head games, but I am goal-oriented, and I need to see results. Today’s savings rates aren’t helping me see results. Also, if I make a certain amount off my hobby, then I get to add a percentage of that to my savings, based on the amount I already put in. An extra 10%, say.
One place I used to work had a swear jar (some of us needed it more than others) and the money was used to buy refreshments for meetings. I wonder if I could use that approach for some other habit: put money in a savings jar when I do a certain chore, or avoid a certain behavior. Even if it’s a virtual jar, to come out of the next paycheck, I could still use some visual reminder of the progress I make. I am going to try it, and see if it helps me increase my savings.
I like your idea of matching funds. We do what works for us personally.
The Get Rich Slowly article that’s linked in this piece includes a “Go You!” jar, which sounds like what you’re describing. Every time you do something constructive or avoid something negative (take that two-mile walk/avoid takeout in favor of what’s in the fridge), you put something in the jar. It could be the amount of money you saved or a set amount per go-you incident. Whatever works.
DF has decided to do a version of this for Lent: Every time he makes a pot of coffee at home he will put a dollar in a jar. At the end of the 40 days he’ll drop off $40 at the food bank. He says it’s because even frugal coffee is still a luxury.
I love the idea of the luxury tax. I did’t think we had a lot of luxuries until I read the comment from your DF. When you think about how much of an added expense coffee is for some people, then I do have a LOT of luxuries. Right down to the bag of chips I am snacking on now. I like to read blogs that makes me think, and your is certainly one of them. Thank you.
To be clear, neither DF nor I have anything against nice things. Last night we went to the Metropolitan HD broadcast of “Turandot” and it cost us a little over $45 for two tickets, two popcorns and a shared soft drink. Had we not used three kinds of discounts it would have cost about $59.
Luxurious? Oh, yes. But again, it’s one of the things for which we’re willing to spend a little.
Thanks for your kind words, and your readership.
In a way I pay myself a luxury tax. The last couple of times I’ve gone on a 2 day road trip I get cash out of the bank, and I intend it to be for all my expenditures. But I’ve always taken a twenty or two out of the cash envelope that I haven’t spent, I saved it.
That could be seed money for your next trip.
I always wanted those sorts of tricks to work but it can’t fool my brain. I always know exactly how much things cost and I always round the cost up 10% so that I’m honest about their cost.
But I do occasionally steal from our cashflow when it’s robust and stash it away in our savings. That’s not really a trick, it’s just another way of supplementing our savings realistically.
Whatever works!
I have an even stronger kind of “luxury tax”: If there’s an item that I want but it is pure luxury, then I allow myself to buy it only if I add the amount of its price to this months savings. So I make sure that my savings are profiting from my luxury indulgence (and I don’t have any guilt pangs).
Example: At the end of this month, there are 400 € left over, going into savings. I see some beautiful costume jewellery that I really really love – but certainly don’t need. The price is 30 €, so this means: If I buy it, I’ll spend 30 € AND put 430 € into savings this month! This means I’ll block 60 € from being spent for something else which makes me think very thoroughly if I really want it. If later at some time I regret to have spend 30 € on a luxury item, I’ll always be happy that my savings had a profit!
And time and again, I refrain from buying the item because I see clearly: the double amount of its price is not worth it.
Now that’s disciplined.
We have a robust emergency fund — thank God (or goddess, you pick) — which we almost never dip into. Most everything comes out of current income, and the credit cards are paid in full every month. My question is, should we keep adding to the fund, or should we continue to avoid dipping into it. I guess in an ideal world, the right answer would be “both.”
I hope you can understand this, I’m only on my second cup of coffee.
I think “both” until you feel safe. Some people assume a three- or six-months’ fund is enough; others want a full year of expenses socked away.
Enjoy the third cup.