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# How a \$100 Pair of Shoes Really Costs You \$1,376.46

Posted: 03/18/2013 5:12 pm

When I'm lecturing to students I like to ask them how much a \$100 pair of shoes costs. The most common answer is \$100 plus tax. Would you believe me if told you it could be as much as \$1,376.46?

A basic truth in finance is that when you give your money to someone else they get to use it, not you.

As a 20-year-old, if you convinced yourself not to buy the shoes, and invested it instead -- with an assumed rate of return of 6 per cent -- you'd have \$1,376.46 by the time you were 65 years old.

Now, some of you are going to start thinking about taxes and inflation and those are valid considerations but there are ways around that. The important thing here is that every decision you make with money has a current effect and a future effect.

No one has a limitless amount of money. The money you earn either works for you, or it works for someone else.

If you earn \$60,000 per year, your net income after taxes, CPP & EI contributions is about \$48,000. Your effective tax rate is 20 per cent so that \$100 you're spending on shoes required you to earn \$125 (\$125 - 20 per cent = \$100). If you live in Ontario you would also need to pay HST of 13 per cent and since that tax is paid with after tax dollars, that means it actually costs you another \$17.50. So now those shoes have cost you \$142.50 of earnings.

If you took the \$142.50 of earnings, and put it into an RRSP for 45 years at 6 per cent you're now at \$1,961.46!

Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't ...pays it."

Now, I just want to say that I'm not against buying shoes, and I don't want you to stop living and horde all your money, but I do want you to think about all those things that you may not need but buy anyway.

When we start to look at all the ways people mishandle money or have money taken from them, we can start to see why being aware of how things work is so important.

I'll leave you with this thought. If you're paying \$25 per month in bank fees, assuming 6 per cent growth over 45 years, that's equivalent to \$73,678. Using our very conservative 20 per cent tax rate, that means that you have to earn over \$90,000 just to pay your bank fees.

I wonder if those shoes ever go on sale?

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08:30 PM on 03/20/2013
The \$100 shoes I can wear today. At 65 I may not alive to enjoy the \$1,376.46.
08:09 AM on 03/20/2013
This is why I buy close out shoes online and ship to a relative in the US. I report my purchases at the boarder because I'm always under my spending limit, so free shipping and no tax. A mindful spender = a wealthy person one day.
01:22 PM on 03/19/2013
that was an object lesson in the difference between kinds of assets ------

depreciating and hopfully appreciating-----
01:08 PM on 03/19/2013
Why?
09:38 AM on 03/19/2013
At least your not barefoot in winter.
HUFFPOST SUPER USER
sgillhoolley
Occupy the discussion.
08:04 AM on 03/19/2013
Of course what will the value of a dollar be by the time the 20 year old is 65? Enough to buy a pair of shoes probably.
06:54 AM on 03/19/2013

It is later than you think......buy a homeless person some socks and shoes.
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06:31 AM on 03/19/2013
What a failed philosophy. That kind of thinking is exactly the wrong ideology to be teaching our young.

Rather than talking shoes; what if you gave the \$100 dollars to Oxfam? Would this guy still put a price tag on spending?

Albert Einstein also said:

"Try not to become a man of success, but rather try to become a man of value."
HUFFPOST SUPER USER
Dolly Lama
I think too much
11:53 PM on 03/18/2013
If I had every penny that I ever earned I still would not be able to retire! Some of us only earn 24 thousand a year, we can't go around in bare feet!
11:05 PM on 03/18/2013
Horde: large number of people. Hoard: store a large amount of things.
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10:11 PM on 03/18/2013
People need to learn to do without.

But we are talking about people who today are bombarded with advertising telling them they must have everything.

How about those two large coffees everyday from Tim Hortons, the single most wasteful use of money today.

The average coffee drinking will spend \$936 per year for coffee from a coffee shop.
06:55 PM on 03/18/2013
Not a bad thing to say,
But Lets call that 6% growth 4% because you're losing an average of 2%/yr in buying power due to inflation.
additionally that 6% growth is probably losing another 1% MER in the mutual fund you must be in to get 6% so now you're down to 3% growth.
Saving is important, but you can't look at future money in the same way you look at current money without accounting for those basics.

Instead of buying the \$100 shoes, you now go out and save money and buy the \$40 shoes because heck you do need shoes. So much math.

I show kids who are 20 how much actual money they would have at 65 if they were to put \$2000 per year for 10 years into a 8% fund, and how much they would have if they put \$100/month in for the rest of their adult lives,
THIS really shows the power of compounding and why it is more important to save when you are young.
11:41 AM on 03/19/2013
Also think about risk - If inflation is 2%, and you're earning 6%, that's because you've assumed some level of risk in your investment. There is a real possibility that you could have LESS buying power after 25 years if your investments take a couple of big hits along the way.