Wednesday, January 6, 2010

The Two Decisions that Consume Half of Your Income

What if I told you that just two decisions determine how you will spend 50% of your after tax income?

Would you want to know what they are?

If you knew what they were, would you spend lots of time thinking about those decisions? Would you give up six days of earnings just to think about the decisions? Six weeks? Six months? Six years?

I didn't realize until yesterday the situation that the average American family is facing, but it is essentially what I described above. In fact, the average American economic unit spends about 50% of their after-tax earnings on two things: $24,643 per year on two items.

The items are actually obvious. They are 1) Shelter, and 2) transportation. For most people that means 1) a House/Apartment and 2) a Car.

If you're not constantly investing in improving your earning power, 50% of your financial future could be determined just by these two financial decisions.

Just stop and think about that for a minute . . .

I'm not arguing that spending more time on either of these decisions is a financial silver bullet. But the decisions seem pretty important.

They're certainly more important than I realized.

Regarding the questions above. I ran some numbers, and if I were in a situation similar to the average American family, I would definitely be willing to give up 6 weeks of earnings to make a better decision about my car and home. No reservations. If I could save 5% just on the price of a home by taking that time off, I'd definitely come out positive in the long term.