I am a major coffee drinker. My staff knows I am a major coffee drinker. It is a running joke in our office as I like to have 2 cups around the morning time and then 1 more cup in the afternoon. I don't hide the fact that I operate on a daily fix of caffeine in order to get things done. We have a coffee maker pod machine in the office and I buy coffee pods in bulk, which makes it a less expensive alternative than going to the local coffee chain and purchasing a cup of coffee. Many of us are busy and on the go, so running to the local coffee chain and ordering that cup of coffee is more convenient as opposed to making it ourselves. However, have you ever stopped to wonder exactly how much does purchasing that cup of coffee cost you?
Take the following scenario:
John is a w2 taxpayer who holds a management position at a technology firm. Due to John earning great money and being a single filer, he is in the 32% tax bracket.
Mary is a self-employed individual running her own catering business. Her corporation continues to grow year over year and most recently, she finds herself in the 25% tax bracket.
Both visit the same local coffee chain and purchase the same coffee: a large cappuccino that comes at a price of $4.50.
Question: How much does it cost John and Mary to pay for that cup of coffee? If you answered $4.50, you are wrong.
Here is why….
Although the purchase price for the cup of coffee is set at $4.50 for all patrons who wish to purchase it, based on John and Mary's respective income tax brackets, they have to earn different amounts in pre-tax dollars to pay for it.
John will have to earn approximately $6.62 [$4.50/(1-32%)] in pre-tax dollars to be able to purchase that coffee while Mary will have to earn $6 [$4.50/(1-25%)] in pre-tax dollars to purchase that same cup of coffee. Keep in mind: they are purchasing the same cup of coffee at the same price set by the coffee chain but yet, the cost for both of them is different.
Most of us don't look at economic purchases such as coffee in this way because we remain fixated on the price that is set for us for the goods we want to buy (and what the retailer wants in order to give those goods). If we viewed purchases in pre-tax dollars that we must earn or in hours we must expend working to earn them, we would be smarter in evaluating those purchases we make on a daily basis and look for alternatives that help satisfy our needs and wants without putting ourselves in a financial hole.
Still think it is worth it to buy that cup of coffee?