Who pays a tariff? (Tariffs explained)

Who pays a tariff? How do tariffs affect you? Will tariffs affect your personal finances? Will tariffs affect your salary or take your job?

Sooooo many questions with so few answers!

Personally, I’ve heard the word tariffs more now than I ever did in my high school economics class. Tariffs are in the news again, and they might soon hit your wallet harder than you think. Recent reports suggest that Americans could see an average 2.3% decrease in disposable income due to proposed tariff increases, which is like taking a pay cut without changing jobs. This reduction could amount to around $1,600 per year for the average household.

According to Google, a tariff is a tax imposed by a government on imported goods. These taxes are levied on the goods when they enter a country, and they are typically paid by the importer to the government. Tariffs can be used for various reasons, including raising revenue for the government, protecting domestic industries from foreign competition, or as a tool for trade policy.

Your salary might stay the same, but your purchasing power (how much you can afford to pay for your wants and necessities) won’t. Understanding how tariffs affect product prices helps you prepare for potential impacts on your budget, investments, and retirement plans. From everyday purchases to long-term financial goals, these trade policies can influence nearly every aspect of your personal finances.

For those who work closely with international trade, like working on ports or being a truck driver, it could affect you far quicker than anyone else. It is important to understand what tariffs are, how changes in the cost of tariffs can affect you and your income, and how to create a good budget to handle the hard times you will face from tariffs being imposed on countries that the US depends on.

Understanding Tariffs

Tariffs are taxes imposed on imported goods that affect prices and trade relationships between countries. These special taxes can influence your personal finances in both direct and indirect ways, changing what you pay for everyday items. In most cases, so that additional fees are not imposed on either country’s finances, the cost is pushed to the consumer.

How political elections affect the workplace & work benefits

History and Purpose of Tariffs

Tariffs have existed for centuries, originally serving as a primary source of government revenue before income taxes became common. The United States relied heavily on tariff income throughout the 19th century to fund federal operations.

Today, tariffs mainly serve two key purposes:

They protect home-grown manufacturers from foreign competition by making imported goods more expensive. This helps preserve domestic jobs and industries that might otherwise struggle.
Governments use tariffs as diplomatic tools to punish foreign countries for what they consider unfair trade practices. When negotiations fail, raising tariffs can pressure trading partners to change their policies.

Tariffs and International Trade

When a country imposes tariffs, they essentially act as a tax on consumption. For example, a 60% tariff on Chinese imports means an additional 60% tax on the cost of those goods.

This creates a ripple effect throughout international markets. Foreign companies face difficult choices:

Absorb the tariff costs and accept lower profits
Pass costs to consumers through higher prices
Relocate production to avoid tariffs

Tariffs often trigger retaliation. When one country imposes tariffs, trading partners typically respond with their own tariffs on different goods, potentially starting trade wars that disrupt global supply chains.

Your purchasing options may become limited as some international products become too expensive to import or companies withdraw from certain markets altogether.

Impact of Tariffs on Domestic Economy

Tariffs affect your finances in several ways. Most directly, you’ll likely pay more for imported goods as companies pass tariff costs to consumers. This reduces your purchasing power, especially for products with few domestic alternatives.

Domestic industries protected by tariffs may see job growth and higher wages as they expand to meet demand previously filled by imports. However, industries that rely on imported components face higher production costs, potentially leading to layoffs or price increases.

Your investments might also feel the impact. Stock markets often react negatively to tariff announcements due to concerns about reduced corporate profits and economic slowdowns.

To prepare for tariff impacts, you can take steps like reviewing your budget, diversifying investments, and considering purchases of major imported items before tariffs take effect.

Navigating Personal Finances

In today’s uncertain economic climate with tariffs affecting markets, managing your money wisely has become more important than ever. The right approach to budgeting, saving, and investing can help you build financial stability despite market fluctuations.

Creating a Personal Budget

Start by tracking your income and expenses for a month. List all income sources and categorize expenses as either essential (housing, food, utilities) or non-essential (entertainment, dining out). Some banks offer this in their online service. If you prefer an easier and automated method, then check with your bank first. Personally, I use an Excel sheet for my budgeting, but I compare it to what shows in my checking account online as well.

Use the 50/30/20 rule as a starting point:

50% for needs
30% for wants
20% for savings and debt repayment

With tariffs potentially affecting prices, review your budget monthly and adjust as needed. Consider using budgeting apps like Mint or YNAB to automate tracking.

Reviewing how you spend money, knowing how to categorize those costs, the 50/30/20 rule, creating your own budget, and so much more is completely laid out in Finance and Budgeting: Essential Tips for Effective Money Management.

Identify areas where you can cut back, especially on discretionary spending. See if there are any services that you can barter with your friends. For many years, I helped my friends with their resumes, job searching, salary negotiation, watching their dogs and their children, and in turn, they did things for me. Some of those things were giving me rides to places at times when I couldn’t drive my car, watching my dog when I’m out of town, taking my daughter to sports practices when I’m at work, and so much more. This creates a buffer for price increases on imported goods that may result from new tariffs.

One of the biggest things I’ve done for over 10 years is to have side hustles. I targeted and committed to side hustles that had flexible schedules, weekly pay, and working from home. I went through my most recent side hustles on my YouTube Channel, Heyyy HR.

The video is below:

Discover How HR Pros Can Make Money using SIDE-HUSTLES!

Effective Savings Strategies

Build an emergency fund covering 3-6 months of expenses as your top priority. Personally, I have agreed with Dave Ramsey’s idea of having two emergency funds. While I was on a $35,000 annual salary, I was able to fully fund the first emergency fund and start the next one. I’ll explain the difference between the two emergency funds:

Emergency Fund #1

Save $1,000 in the bank for short-term emergencies. Initially, you’ll use this to fund areas that you either fall short on expenses from your regular paycheck or for expenses that may not be in your budget, like oil changes and other car maintenance necessities, or expenses that are annual. It is common to forget to add annual expenses to your budget when you are new to budgeting.

This emergency fund is at the same bank where my checking account is. In times of emergencies, it’s pretty easy and quick to transfer the funds over to your checking account.

Emergency Fund #2

Save 3-6 months of expenses and put them in a savings account at a different bank. This should only be used if you ever get to the point where you have no income and/or no job. It is used to pay your bills so that nothing becomes late and you avoid late fees, and so that nothing is repossessed. Since I’m single and I don’t have an accountability partner, I create ways to make it hard for myself. As a result, I do not have a card for that savings account, and I chose a bank that is not open on the weekends.

Most financial advisors are now recommending saving NO LESS than 3-6 months of expenses in preparation for economic uncertainty. After working in Human Resources for over a decade and being laid off multiple times, I think it’s best to save at least 6 months to 1 year.

Regardless of whether it’s Emergency Fund #1 or Emergency Fund #2, make sure to automate your savings by setting up direct deposits from your paycheck. This “pay yourself first” approach ensures consistent saving before you can spend the money.

Consider a high-yield savings account for your emergency fund to combat inflation. Current rates often exceed 4%, significantly higher than traditional savings accounts.

Make necessary large purchases soon if they involve imported goods, as prices may increase when new tariffs take effect. This strategic timing can save you money.

Investment Basics for Financial Growth

Diversification is crucial during tariff-related market turbulence. Spread investments across different asset classes (stocks, bonds, real estate) to reduce risk (going broke, not able to pay bills on time, repossessions, etc).

Consider these investment vehicles based on your timeline:

Short-term goals (1-3 years): Money market accounts, CDs
Medium-term goals (3-7 years): Bond funds, balanced mutual funds
Long-term goals (7+ years): Index funds, stock exchange traded fund (ETFs), retirement accounts

During market volatility caused by tariff announcements, avoid emotional decisions. Finance influencers recommend staying the course with your investment strategy rather than panic selling.

Dollar-cost averaging—investing fixed amounts at regular intervals—can reduce the impact of market swings. This approach is especially valuable when markets fluctuate due to trade policy changes.

The Role of Salary in Personal Finances

Your salary forms the foundation of your financial life, providing the resources needed for daily expenses, savings goals, and long-term security. How you manage this income directly impacts your ability to build wealth and achieve financial independence. If it is time for your annual performance review, a promotion, or you’re accepting a new job, then those are the perfect times to negotiate your salary. Salary Negotiation Strategies: Securing Your Worth in the Workplace gives step-by-step directions on how to know what salary to aim for and how to negotiate in a professional, tasteful way.

Understanding Your Salary Structure

Your total compensation includes more than just the base pay figure. A typical salary package contains several components worth understanding completely. Salary ranges can be compared on platforms like Salary.com , Built-In, PayScale, Comparably, job postings in Indeed, the US government’s US Bureau of Labor Statistics, and others.

Your base salary is the fixed amount you receive regularly. This is what most people think of as their “salary.” However, many jobs also include variable pay such as bonuses, commissions, or overtime.

Benefits make up a significant portion of your total compensation. These often include:

Health insurance
Retirement plans (401k, pension)
Paid time off
Life insurance
Disability coverage

Understanding your full compensation package helps you make better financial decisions. For example, a job with excellent retirement matching might be more valuable than one with slightly higher base pay but very little or no retirement employer-paid contributions.

Negotiating Salary and Benefits

Effective salary negotiation can significantly improve your personal finances over time. Even a small increase adds up throughout your career.

Before negotiating, research typical pay ranges for your position, industry, and location. Use salary websites, professional associations, and networking to gather data. Being informed gives you confidence and realistic expectations.

Again, salary ranges can be compared on platforms like:

Salary.com
Built-In
PayScale
Comparably
job postings on Indeed
job postings on the company’s website (most times they’re not accurate in LinkedIn or Indeed’s postings)
The US government’s US Bureau of Labor Statistics

Focus on your value and achievements when discussing compensation. Quantify your contributions with specific examples of how you’ve helped previous employers save money or increase revenue. My childhood friend and I went live on my YouTube Channel, Heyyy HR, where we discussed creating and updating your “Go Off List”. This list is where you constantly add your professional accomplishments so that you can refer to this list during performance reviews and when updating or creating your resume.

Don’t forget to negotiate benefits alongside salary. Additional vacation days or flexible work schedules can be as valuable as extra pay. Some benefits, like retirement matching, directly impact your wealth-building capacity, but are not very flexible for the employer to change for employees individually. Throughout my 10+ years of Human Resources experience, I have seen companies get really creative when employees request this, so if this is important to you, then ask.

Managing Salary Increases and Taxes

When you receive a raise, create a plan before lifestyle preferences take all of your extra income. Consider allocating a percentage to different financial goals. A smart approach is directing 50% of any pay raise toward savings or debt reduction. This improves your financial position while allowing you to enjoy some benefits of your increased earnings.

Tax policies significantly affect how much of your salary you keep. Understanding tax brackets helps you make better decisions about retirement contributions, deductions, and the timing of income.

Tax-advantaged accounts like 401(k)s or Health Savings Accounts (HSAs) can help you reduce your tax burden while building wealth. Contributing to these accounts effectively gives you an immediate return by lowering your taxable income.

Remember that economic policies like tariffs can indirectly affect your purchasing power. When prices rise due to tariffs, your salary doesn’t stretch as far, making careful budgeting even more important.

Key Takeaways

Tariffs may reduce your purchasing power by increasing prices on everyday goods and services.
Preparing your household budget now can help offset potential financial impacts of new trade policies.
Your retirement accounts and investment strategies may need adjustment to account for changing economic conditions.

Frequently Asked Questions (FAQs)

Tariffs impact various aspects of personal finances, from everyday purchases to long-term financial planning. Many consumers have specific concerns about how these trade policies affect their economic well-being.

How do tariffs affect consumer prices and personal expenditure?

Tariffs typically increase the cost of imported goods, which retailers often pass on to consumers. When the government places tariffs on foreign products, you may notice price increases on everything from electronics to clothing and food items.

These additional costs often appear in your shopping cart without explicit labeling as tariff-related increases. The impact varies by product category. Items with few domestic alternatives tend to see more significant price increases, directly affecting your monthly budget and spending power.

What strategies can individuals employ to mitigate the impact of tariffs on their personal finances?

Diversifying your investment portfolio can help protect against market volatility caused by tariff announcements. Consider including sectors less affected by trade tensions or those that might benefit from certain tariff policies.

Creating a flexible budget with room for price fluctuations allows you to absorb some cost increases without major lifestyle changes, which may include setting aside additional emergency funds to counter unexpected price hikes. Shopping for items produced in the US (or your home country) can sometimes help avoid tariff-related price increases. Buying in bulk or during sales periods may also offset some of the added costs from tariffs.

What are the implications of tariff changes on disposable income and purchasing power?

Tariffs can reduce your purchasing power as prices rise while wages often remain stagnant. This creates a silent drain on disposable income, forcing tough choices about spending priorities.

The effect adds up over time as tariffs influence various sectors. What begins as a small price increase on certain goods can expand to broader inflation across the economy, further squeezing your budget.

Retirement planning may require adjustment as higher living costs mean your savings might not stretch as far as previously calculated. This potentially requires either increasing savings rates or adjusting future lifestyle expectations.

In what ways do tariffs influence the job market and wage growth?

Tariffs can create complex effects on employment depending on your industry. While they may protect jobs in sectors directly competing with imports, they can reduce employment in industries relying on imported materials.

Your salary negotiations may be influenced by how tariffs affect your employer’s profitability. Companies facing higher input costs due to tariffs might be more resistant to wage increases, affecting your earning potential. Apple and Costco recently created over 10,000 jobs in preparation of price increases from tariffs.

What methods are available for calculating the potential impact of tariffs on household budgets?

Expense tracking apps can help identify spending categories most vulnerable to tariff-related price increases. By monitoring these areas, you can quantify the actual impact on your monthly expenses. Calculating the percentage of your purchases that are imported goods provides insight into your tariff exposure. This simple assessment helps determine how much of your spending might be subject to tariff-related price increases.