In our previous post, we introduced the concept of 'stupid tax' that has been popularized by Dave Ramsey. Rather than keep this as a nebulous idea that reminds us of some of the stupid mistakes we've made with money, let's take it a step further and actually count the costs. You can download our Stupid Tax Calculator by clicking the links below that are in Excel (.xls) and Open Document (.ods) formats:
Open Document: Download Stupid Tax Calculator
The reason we decided to offer this calculator to you is because it is an extremely helpful exercise to see exactly how much you paid in stupid tax, say in 1999, and what that is worth today after adjusting for inflation. Taking it another step further, we also include the investment opportunity cost which is the amount of money you would have today if the money had been invested in a portfolio at a given rate of return. These two numbers - inflation adjusted stupid tax and the investment opportunity cost - don't necessarily go away over time. They get bigger.
This reality means that you could hypothetically comb through your entire financial life from start to finish and figure out how much you've paid in stupid tax. For many, it will be a substantial sum. Regardless of what your numbers come out to, the point of the exercise is to avoid paying stupid tax in the future.
How to Use the Calculator
When you open the file, you will see two worksheets on the bottom tabs. You need only look at the first worksheet entitled 'Assumptions and Inputs'. From there, here is the step by step:
- Enter Your Assumptions - Here, you'll lay the groundwork for the calculator by entering the current year, inflation rate, and investment rate of return. We've defaulted these values to historic averages for inflation and a balanced growth portfolio. Feel free to change them as you see fit.
- Enter Your Stupid Tax Events - Under the assumptions, you need to enter each of your stupid tax events by inputting a description, the estimated cost, and the year in which it occurred. This is so the calculations will be accurate in adjusting for inflation and investment returns over the proper time period.
- Stupid Tax in Today's Dollars - Knowing that you paid $1,000 in credit card interest 11 years ago is one thing, but adjusting it for inflation is another. In this column, you will see what your stupid tax would equate to in today's dollars.
- Investment Opportunity Cost - The previous column tells you what your buying power could have been today after inflation, but this column shows you how much you would have if the money were invested. The further out from the time of the stupid tax event, the greater this number (and the queasier you'll feel).
We're not big fans of crying over spilled milk, which is what this exercise can lead to. However, looking back at past mistakes and learning from them is a critical component to becoming smarter with your finances. As you go about handling your money in the future, it's always a good idea to ask if you'll later be counting an expense as stupid tax later.