If you read the 'stupid tax' stories on DaveRamsey.com, you'll find that it comes in many shapes and sizes, but what can you do to avoid paying it? Is there some kind of formula or set of rules you can put in place to save yourself a lot of financial grief later in life? In this post, we'll explore answering the question of, "how to avoid paying stupid tax."
It is Inevitable
First, let's be straight about stupid tax: you will pay stupid tax at some point in your life and it is almost guaranteed that you will do it many, many times. With that statement, you might think trying to avoid stupid tax is a fool's errand, but the reality is that your goal should be to limit the amount of stupid tax you pay rather than completely eliminate it. Trying to avoid it altogether will only create added frustration, so acknowledge that it is part of life and let's get moving in reducing the amount you pay over your lifetime.
Stupid Tax = Buyer's Remorse = Cognitive Dissonance
Sometimes the best method for reducing stupid tax is to consider what stupid tax really is - buyer's remorse. Wikipedia defines buyer's remorse as "the feeling of regret after a purchase". Sure enough, when you recognize you've paid stupid tax, you will invariably experience buyer's remorse. This is usually followed in short order by cognitive dissonance.
While you might not be familiar with the term, cognitive dissonance occurs when you have two differing ideas in your head that you then set about to rationalize. The problem is that once you've experienced buyer's remorse, rationalizations will abound in your mind telling you that you didn't really pay stupid tax. Eventually, these rationalizations reach an end and you simply accept that you've done something stupid with your money.
What's great about knowing the last couple of paragraphs of information is that you have a better understanding of the psychological process of stupid tax: (1) pay stupid tax thinking it's a good idea at the time, (2) realize that maybe it wasn't such a good idea and buyer's remorse sets in, (3) rationalize why it wasn't so 'stupid', and finally, (4) accept that stupid tax was indeed paid. By knowing this, you'll more quickly realize when you've paid stupid tax which can help you avoid paying it in the future (How does that saying go? Once bitten, twice shy?).
Simple Strategies to Avoid Stupid Tax
There are countless tips and tricks that could be presented here, and feel free to tell us yours in the comments section, but what we've found that works best are a few simple strategies as follows:
- Sleep On It - when making a financial decision, take your time and sleep on it. There are very few times when you need to make a snap decision, and putting more time between you and the decision is one of the best ways to reduce your stupid tax. The bigger the decision, the more time you should take to consider the potential costs and benefits.
- Inject Objectivity Ahead of Time with a Plan - most bad decisions are made in the heat of the moment and that's why our first strategy was to sleep on it. However, there are some decisions that are very emotional in nature - e.g. buying a new home, purchasing a car, reacting to the stock market, etc. When these bigger decisions come up, it's extremely helpful to have a plan in place ahead of time. This means setting hard limits on what you will pay for a home or car and having an investment policy in place that details your plan when the market is hot or not. By putting a plan in place before an emotional financial event, you'll be better served.
- Find Your Brand of Objectivity with a Third Party Advisor - if sleeping on a decision doesn't work and you don't have a pre-fabricated plan in place for a financial decision, seek out the advice of a third party advisor that fashions your brand of values and logic. When you're emotional, you're not the same person. Often, we can give advice to others far better than we can counsel ourselves. For this reason, if you're facing a major decision, it's worth taking an hour or two to consult with a third party (preferably someone with expertise like a fee-based Certified Financial Planner).
- Expand Your Knowledge and Analytic Skills - the best, and most time consuming, way to avoid paying stupid tax is to get educated about a particular subject. If you're looking at buying a house, it's a good investment of your time to understand real estate, the national market, your local market, and what constitutes a 'good buy'. Realtors are famous for being crafty salespeople that play on emotions, but there is a segment of these folks that really enjoy teaching real estate. Find one of these folks and have them teach you what you need to know before you go out to look at houses. This is true in many areas. Some investment advisors are salespeople, some are numbers nerds, and others are teachers. If you learn what you need ahead of time, you'll be far less likely to do something stupid.
Again, we all pay stupid tax (this writer included), and it is very difficult to eliminate from our lives. However, recognizing it and employing some simple strategies will ultimately reduce the amount you pay over the course of your lifetime. How much money will these simple strategies save you? Who knows, but even if it stops you from wasting money just once, your time reading this article will have been well spent.