“You can’t outrun a bad diet” is a common saying in health and fitness. To work off a serving of ice cream can take over 45 minutes on the treadmill. Start adding in whipped cream, chocolate sauce and sprinkles and you might need to sign up for a half-marathon.
A less common, but equally important statement is “you can’t out earn overspending”. As spending increases, it becomes more difficult to earn the income required to fund those purchases. This is in large part due to the layers of taxation that occur along the way to your final purchase.
Taking Ontario as an example, $1 on a price tag is not actually $1 to you. Harmonized Sales Tax (HST) is an additional 13%, boosting the price to $1.13. If you received a $1.13 raise at work, you still would not be able to spend $1. In order to have net (after income-tax) income equal to $1.13 your gross (pre income-tax) income needs to be much higher.
The top income tax bracket in Ontario is 53.53%. After taxes, a $1 raise is less than 47 cents on your paycheck. To receive an additional $1.13, you would require a $2.43 (1.13/(1-.5353)) raise!
Only 41% of your pre-tax income is available to you to spend after the layers of income and sales tax. If you work for a week, you don’t start earning for yourself until 59% of the way through the week, late Wednesday afternoon at about 4:30! Here are the same calculations for all provinces:
| Province | Sales Tax | Top Tax Bracket | Pre-Tax Income to Spend $1 |
| Alberta | 5% | 48.00% | $2.02 |
| British Columbia | 12% | 53.50% | $2.41 |
| Manitoba | 12% | 50.40% | $2.26 |
| New Brunswick | 15% | 52.50% | $2.42 |
| Newfoundland & Labrador | 15% | 54.80% | $2.54 |
| Northwest Territories | 5% | 47.05% | $1.98 |
| Nova Scotia | 15% | 54.00% | $2.50 |
| Nunavut | 5% | 44.50% | $1.89 |
| Ontario | 13% | 53.53% | $2.43 |
| Quebec | 15% | 53.31% | $2.46 |
| Prince Edward Island | 15% | 51.37% | $2.36 |
| Saskatchewan | 11% | 47.50% | $2.11 |
| Yukon | 5% | 48.00% | $2.02 |
If we invert the script and look at reducing expenses, this is a great tool for motivation. If spending $1 required a $2.43 raise then cutting expenses by $1 is like getting a $2.43 raise! Reframing $1 as $2.43 is a fantastic tool to reframe perspective around cutting costs (possibly without cutting consumption).
Here are some examples:
Ask for Discounts on Existing Services
Take an hour to see what promotions are available for cell phone service then call your provider and say you are thinking of leaving unless they can match those rates. The cost of getting a new customer is high, many businesses are fine with reducing their revenue to avoid trying to replace you. Conservatively, let’s say your bill is reduced by $10/month. That is $120/year or, if we think of it in pre-tax salary terms, $291.60 for one hour of work!
Negotiate Small on Big Ticket Items
Oftentimes when purchasing a new vehicle or a home we neglect to negotiate small amounts. Say you are purchasing a new vehicle for around $50,000. $500 does not feel like it is worth haggling over, both to you and the seller. What if you translate $500 into $1,215 of salary and ignore the truck – how hard would you work for $1,215? This might be motivation to make an additional counteroffer or investigate a few more comparable options.
Shop Around
See something you like on Amazon? Before you add it to your cart, copy the name and put it into Google. Google has a ‘shopping’ tab which will show you the price across all online retailers. This is less convenient, but 20 min to save $50 on an air fryer = $364.30 an hour pre-tax.
This works in-store as well! Both iPhones and Androids have a ‘search by photo’ feature which will show prices from online stores for most items.
It is hard to go backwards, to reduce the activities and items you are used to spending money on. Rather than grit our teeth and rely on willpower to reduce what we spend, reframing taking time to save money in terms of pre-tax income per hour can help motivate us to save small amounts of money with higher frequency. This framing creates motivation to start and starting is the first step in forming a habit. Reduced expenses free up funds for additional savings which can be used to move you closer towards your financial goals.
