It Cost How Much?

by Gary Foreman

John knew that his wife was baiting him. And yet, he couldn't help but ask. "She said she paid how much for the dress?" Mary clearly enjoyed the game. "$163. That's what Sue figured. But I saw that the price tag said $100, so I asked her how she managed to pay more than retail." Mary paused for effect. She knew that John loved riddles. There was no way he'd pass this one by without trying to solve it.

"So what happened? Did she get in some bizarre bidding war over the last dress in the store?" John's furrowed brow was ample evidence that he couldn't figure a way that you'd pay more than the price tag asked for a dress. "That's when Sue explained about her 'cost plus pricing' plan. She had gotten tired of hearing about low monthly payments and decided to figure out what different purchases really cost her. So she start thinking in terms of how much she had to earn to afford to purchase an item."

Now John understood how Sue priced the dress over retail. But he still couldn't see how she got all the way to $163 from $100. He listened as Mary continued her story. "She says that she starts with the cost of the item. To that she adds the 6% sales tax. So her actual out-of-pocket expense is $106. That wasn't a surprise to any of us. But, what she said next was an eye opener. She started to include the costs of earning money into the price of the dress.

"Her share of social security tax is not quite 7%. She says she's in the 28% tax bracket. Together, that makes 35%. So she can only spend 65 cents out of every dollar made. So she divides the $106 she's about to spend by 0.65 and arrives at the 'cost plus' price. It tells her that she needs to make $163 in gross earnings to pay for a $100 purchase."

John had to admit that it was an interesting way to look at spending money, and probably pretty accurate if you thought about it. Sue really did have to earn $163 to buy that dress. "Hey, Hon, Sue doesn't use credit cards, does she?" Now it was Mary's turn to be puzzled, at least until she realized that paying interest on credit cards could boost the price significantly. "No, she doesn't. But, you're right. Interest charges could quickly get you over $180. Boy, that's getting to be some expensive dress!"

John was reminded of a guy he used to work with. "Remember George? He used to do something similar. He'd figure out how many hours he'd have to work to pay for something. George knew exactly what he made per hour after everything was deducted. I'm not sure I agree, but he even included deductions for medical and life insurance. If I remember right, he figured he made about $12 per hour take-home, in-his-pocket pay. He'd look at Sue's dress and say that it would take nine hours of 'slavery' to pay for it."

Mary remembered George. "He was a bit of a character, wasn't he?" "Yeah, I guess so. But, he never seemed to regret a purchase after he made it and he thoroughly enjoyed the things he finally did buy. Wonder what ever happened to him? I remember one day we were talking about how many hours you'd have to work to pay for a new car. It was something like 1,500 hours. When he saw it was nearly 40 weeks of work, he decided to keep the old car!"

"The way Sue hates her job, if I tell her about that, she'll never buy anything again!" Somehow, Mary knew she'd never resist the temptation to tease Sue tomorrow at work. "I wonder what it would look like if we figured all our expenses that way. Bet a lot of people get to Friday afternoon before they've covered all the commitments they've already made. Really gives you a whole new perspective on how you spend your money."

John could see that his wife was really getting into this. And he was glad because he had always felt that their ability to discuss financial matters was a strength in their marriage. Yet, there were times that he just couldn't help needling his bride a little. "You know, Hon, there's this fishing boat I've been looking at. I figure it would take about 2,000 hours. Any chance you could spare a little time?"

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.

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