DIY and Save More Than You Think

I was just talking to a friend tonight who built a dining room table for his wife. He told me for $80 he built a $500 dollar table. His savings was $420 dollars. Oh really?

The Fed and their suppression of interest rates tells consumers that spending is the easy thing to do, and is good for the growth of our nation's economy. Money is cheap, imports are aggressively priced, and shoveling money back into our economy is the patriotic thing to do. Spending and creating jobs is king.

I've had many professionals tell me that they are consummate consumers because of their economies of specialization. A lawyer makes $200 dollars an hour and a plumber makes $75 an hour so it makes supreme economic sense for a lawyer to hire a plumber to fix his leaky faucet. In other words, its ok to be a cog in the machine as long as you are the one on top.

But is spending disposable or available income to pay for others' labour or goods always the best for our financial well being?

Consider how taxes and time opportunity costs spin the tale of my table building friend. If he were to purchase the table, he would have to reach into his pocket and pull out $530 (cost plus 6% sales tax). My friend makes $48,000 dollars per year as an employee, or $4,000 a month. So the table would only set him back about 12% of his monthly income, right?

Not quite. Congress has strapped a load of rocks to my wage earning friend called payroll taxes. So off the top his wage comes 6.2% for Social Security and 1.45% for Medicare. To make our example as uncomplicated as possible (something the IRS does not do) lets not consider withholding but just concern ourselves with my friend's end of the year income tax liability. Assuming the standard deduction and assuming my friend contributed $2,000 to an IRA his end of the year liability would be $3,710. This amount is 7.73% of his total income of $48,000. So the amount of money in my friend's pocket after all sorts of taxes is $40,617.60. The annual amount is $3,384.80. The table would cost him nearly 15% of his take home pay for the month.

Another way to describe the effect of taxes is to say that my friend has to make $623 ($530/(1-.15)) at his job to pay for the $500 table.

Instead, he paid $80 out of pocket or $94 of his pay to build the table. If he spent ten hours building the table, he has saved $52.90 for each hour of his time. Based on a 40 hour work week with two week vacations, at work he brings home $20.31. So my friend, although not a table builder, is much more personally economically efficient (>50%) building his table than working at his "cog in the wheel" job.

The Fed wants us to spend, yet the IRS encourages DIY which discourages spending. Who should we follow?