Interested in reading this with me? Check it out here:
The Millionaire Next Door - https://amzn.to/2K1z0jt
While I was reading The Millionaire Next Door - they kept referencing this idea of realizing income. Basically, realized income is income that you make after taxes, and tax advantages accounts (insurance, 401k, etc). The way it relates to income is interesting, if you are discussing income - you would probably say, “I make $50,000 per year”, or “I make $24 an hour”. Very rarely do people discuss post tax income during these conversations.
Annual Salary: $50,000
Weeks in a year: 52
“Working” Hours in a week: 40
Working hours in a year: 2080
Hourly Rate: $24.04
Let’s say you were on the market for a new phone, and wanted to purchase the new IPhone X plus at $1000. Well, based on your hourly rate, this would take you about 41.5 hours of work to cover the cost of the phone. However, that is not the real story, the money that we realize is really the amount we take home.
After Taxes (~35%): $32,000/year
Hourly Income: $15.63
Hours to Purchase: 63.97
While you may have a statement that says you earn $50,000 per year, in reality once the tax man gets his, it quickly becomes far less than that. The cost of that new phone is no almost 64 hours of your time. I am not going to make any judgements on whether or not that is worth it to you, but it is a different way of thinking. There is a lot more coming related to a high consumption lifestyle in my next reading summary, but I wanted to get the idea of realized income out there.
I am just a regular guy who does far to much research on financial independence and early retirement (FI/RE). I look forward to sharing my journey with you all.