Posted by Lending Club :: April 10, 2009 @ 6:34 am

I recently described the practice of actually saving the money you save by shopping sales, using coupons, etc. A related activity that can be used on all purchases, not just those on which you receive a discount, is to tax yourself on every purchase you make.

The basic idea is to add a percentage to each purchase that you must then transfer into a savings or investment account. So if you set your personal tax rate at 10% and filled up your car for $40, you would obligate yourself to save $4 (10% of $40). Every dollar you spend would effectively cost you $1.10. The key to this saving method is to make it mandatory. You can’t leave a store (in most states) without paying sales tax, so don’t allow yourself to make a purchase without applying your personal tax.

At first glance, it may seem that this technique would cause your spending to increase an amount equal to your personal tax rate. In practice, an interesting event occurs. Knowing that you have the added personal tax cost on all purchases will make you less willing to spend money and more diligent in searching for deals. If you have $100 to spend on groceries this week, you’ll need to find a way to spend less, so that the total – including your personal tax – is within your spending limit. You won’t necessarily be able to reduce all of your expenses, like your mortgage (yes, the personal tax applies to your mortgage too!), but you will be very inclined to adjust those expenses which you can control.

Taxing yourself is a great way to start saving, but this practice can also be used to supplement another form of saving. Even if you already save a significant portion of your income, by adding a personal tax on expenditures you will only accelerate your progress towards meeting your savings goals.

We’ve grown so accustomed to taxes in our lives that one more isn’t going to kill you. The fact that a personal tax pads your own accounts, rather than the government’s, makes this the one tax you’ll be happy to pay.

Have you tried taxing yourself?