How to trick yourself into being good to your future self

UK Chancellor of the Exchequer Savid Javid

UK Chancellor of the Exchequer Savid Javid

Barely a day goes by without an announcement from the Boris Johnson led Cabinet of new public spending. Health, education, criminal justice and BREXIT preparations are just some of the recently announced priorities that will cost many billions of pounds to deliver.

While the Chancellor, Savid Javid, has said the government can fund all these initiatives from the UK’s current ‘fiscal headroom’ (which means more borrowing), and that may well be the case, it’s also entirely feasible that he could raise taxes to meet some or all of this spending.

Income tax goes up, take home pay goes down

So, let’s pretend that the Chancellor has an emergency budget soon and announces that from 6th April 2020 income tax rates at all levels will rise by 10% of income. If you pay no income tax now, you’ll pay 10% in future, if you pay 20% now, you’ll pay 30% and if 40% now you’ll pay 50%.

While I doubt that the government would introduce such large increases in income tax in the lead up to a general election, and so shortly after leaving the EU (if that does come to pass), if it did happen you wouldn’t have a choice, unless you decided to earn no income or emigrate.

You wouldn’t be able to delay paying it, it would just come out of your pay each month if you’re employed or be payable in the following January if you’re self-employed. So, how would you ‘afford’ this hypothetical tax rise?

1.       You could earn more money through promotion, overtime or, if self-employed, raise your prices or hourly rate

2.       You could move jobs for a higher income

3.       You could reduce or cut out unnecessary spending on luxuries

4.       You could look for savings on your core living costs like utilities, food, debt and housing costs

5.       You could ask your parents or grandparents for financial help if that was feasible

6.       You could make no changes, spend more than you earn, incur more debt and not build future wealth          

While the last option – do nothing – is the easiest, it’s also the most dangerous because your finances will be built on sand and end up causing you more stress and reduce your future options and financial security.

Unless you are on a very low income or have exceptionally high living costs or debts, it’s likely that a combination of options 1-5 could help you afford the tax rise, without a massive change to your day to day lifestyle.

Have your own emergency budget

Why not pretend that your income tax rate will rise by 10% of your income from next April and look to make the necessary changes NOW to accommodate it. Assuming it doesn’t happen (which I think it won’t) you’ll have freed up 10% of gross income to use to reduce debt, increase savings or build long-term wealth. If you earn, say, £30,000 per annum, that would be an extra £3,000 per annum to improve your financial situation. Even an extra £1,000 per annum would make a big difference to your financial position over time.

The truth about becoming financially resilient and secure is that it takes several years of hard slog to build up the initial capital (or free up monthly cashflow by clearing expensive debts) before you start to see progress. In the meantime, you have to be more discerning about what you choose to spend your money on, including on those things that you want but don’t need.  

As humans we’re mentally wired to prefer immediate gratification from spending now for instant (if often superficial) rewards. But by pretending that your tax rate has risen, and directing that money to debt repayment, savings or long-term investments, you can trick yourself into being good to your future self.

Jason Butler