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How to Avoid Paying 'Stupid Tax'

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:

1. 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.
2. 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.
3. 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).
4. 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.

Wrapping Up

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.

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Stupid Tax Calculator Plus Investment Opportunity Cost

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:

Excel:  Download Stupid Tax Calculator
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:

1. 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.
2. 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.
3. 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.
4. 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).

Wrapping Up

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.

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What is Stupid Tax?

The grand master of debt elimination is Dave Ramsey and one of the terms he has introduced to the world of personal finance through his book, The Total Money Makeover, is 'stupid tax'.  While the exact definition is somewhat of a moving target, stupid tax can generally be defined as:  (1) anything that cost money, (2) created some form of pain, and (3) later was discovered to be a stupid decision.  Note that it's the third part that makes stupid tax difficult to avoid because going into a purchase or other financial transaction, most of us will believe we're making a good decision.  Only later do we realize our error in judgment.

It doesn't matter who you are, you either have paid or will pay stupid tax sometime in your life, but it's worthwhile to educate yourself and try to avoid it altogether.  To be an expert in any subject, it has been said that you need only know the pitfalls and avoid them.  When it comes to stupid tax, the greater your expertise, the less you'll have to pay.  

In an upcoming post, we'll walk you through how to calculate stupid tax as well as the most common ways to avoid paying a heaping ton of it.  Until then, if you're looking for a little schadenfreude fix or just want to read more about it, click here to go to DaveRamsey.com where readers have posted their stupid tax stories.

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