If you are like most normal folks, you have a job. You go to your job every day. Every week or two weeks or month you get a pay check for some amount. For the sake of example let's imagine a fictitious person named Bob, a 24 year old computer programmer out of college two years. Bob is paid $3,000 each month, or $36,000 per year.
You have taxes. The government, in an effort to make your life easier, politely lifts something like a third of your pay check without your having to do a thing. Poof, it's gone - you never even get to touch it. The federal government takes perhaps 23%. The state government takes perhaps 7%, depending on the state. The social security administration (FICA) and Medicare take another 7.5% or so. Bob's $3,000 paycheck therefore diminishes to perhaps $1,850 by the time he sees it:
$3,000 gross income - $ 690 Federal income tax (23% of gross) - $ 210 Typical state income tax (7% of gross, depending on state) - $ 250 FICA, medicare, and other witholdings ------ $1,850 Bob's net take-home payThe amount subtracted depends on whether Bob is married (and if so whether his wife works), whether he owns a house, and so on.
You have expenses. As you live your life it costs money. A normal person in America has some pretty typical monthly expenses. Bob is a single guy, and his monthly expenses look like this:
[For many people it would mark a major financial milestone if they could create a simple, clear monthly vision of their expenditures like this one. See the article on "Understanding your current position" for details.]
The total expenditures shown here are $1,850 per month. If that were all there were to life, Bob would be set to some degree, because in this example expenses exactly match income. Unfortunately in life there are two other things
You have problems. For example, you get a speeding ticket one day. The court fines you $60 to begin with, and then your insurance goes up $30 per month. Or your car blows a gasket and it costs $500 to repair. Or you meet "special friend" and feel compelled to take him or her out to dinner 14 times in one month, tripling your entertainment budget. Or you lose your job.
Then you have desires. All humans do, some more than others. You might desire new living room furniture, a new TV or stereo, a nice gift for your mother or spouse at Christmas, a special piece of jewelry, new clothes . Whatever. You may desire all of it all at once. Occasionally you cannot control yourself and one of your desires is filled. Perhaps one month Bob buys a $400 TV without realizing it.
Therefore you have debt. Debt makes up the difference between income and expense. For most people day-to-day debt goes on a credit card, and large items like cars and houses are handled with more formal loans. Debt itself is not bad. The problem arises when debt accumulates for no apparent reason. In Bob's case, problems and desires would push his credit card balance upward each month because there is no other place for the money to come from. Since his expenses match income in a normal month, any abnormal spending will go on the credit card.
Notice what Bob does not have in the above scenario. There is no mention of a "savings program", for example. Nor a "retirement plan". There is no particular hope of reaching future financial goals (in fact, no goals to begin with). No "safety net." And most importantly, no peace of mind. Let me make an assertion: For a thinking person, it is very difficult to feel comfortable when you have no savings and a rising credit card balance. It feels uncomfortable because you know it cannot last; it is not sustainable. It also eliminates any sense of control, and most thinking people would like to have control of their lives and therefore their finances. It is as simple as that. This is a bad place to be because there is not a lot of future in it.
Let's say I waved my magic wand and doubled Bob's salary. Wouldn't that be nice? It would indeed, except that 99% of us (Bob included) would feel an irresistible urge to double our expenses at the same time. In fact, it is likely that if I told 100 people that their salary would double in six months, 99 of them would begin doubling their expenditures immediately, in anticipation of the actual funds. They would immediately move to a nicer place, drive a nicer car, buy more stuff, and so on until they got in exactly the same expenditures-are-greater-than-income position again. Clearly, making more money is not going to solve this problem, because we seem to have a natural tendency to spend what we earn in the same way that we eat everything on our plate and fill all available closet space. It is normal. That is why there was a "welcome to the club" message in the introduction to this series. The vast majority (90% or 95% of the people in the U.S.) live their lives just this way.
So is there a solution to this problem? The answer is "maybe." It requires a big mental shift. If you are willing to make the mental shift the answer is "yes." It turns out there is a different way to live life. This way of life involves figuring out what you really want to do, and what is really important to you as an individual, and then working toward those goals rather than proceeding randomly. What you gain in the process is a sense of control and satisfaction, and a sense of achievement, that is difficult to beat.
The rest of this series shows you how to start down that path.