Friday, August 27, 2010

Going Broke on $100,000 a year

Many Americans are feeling financially stressed these days, and yet are quite wealthy. Why is this?

I am starting to downsize my life more dramatically than I have in the last two years since I started this blog. I started this blog in response to the recent economic downturn, but also to try to figure out where all my money was going - and why. I came from a family of spendthrifts - folks who enjoy a good party but are not very savvy when it comes to money or respect for it.

The funny thing is, and the thing that puzzles me, is that I make good money. And yet, each month, it is a struggle to pay the bills while still funding the 401(k) and putting money aside. And it has been that way most of my life. There are two opposite lessons one could draw from this. First, perhaps everyone lives this way - from month to month, struggling to pay bills and stay afloat. Or second, that a lot of people unnecessarily stress themselves financially in order to live a lifestyle that they think they deserve.

And increasingly, I believe it to be the second. Americans love their toys and stuff and STATUS above all. And so they willingly hock themselves to the hilt in order to have "things" instead of real wealth. As I noted in my Owning Money post, most people think of money as something that passes through their hands, not something they possess for very long.

But in our new 401(k) world, you had better think about owning money, or you will end up broke when you retire. And therein lies the fundamental problem with our society. We are trained from birth to look at money as "cash flow" - something to be earned at a "job" and then spent just as fast in monthly installment payments and expenses. Give the average working Joe - even a well-paid executive - a lot of money, say in lottery winnings, and chances are, they will blow it in a matter of months or years.

There are, of course, a few people in this country who don't think that way. Folks who grew up with a respect for money and understand how it works. Accumulating capital and then putting it to work is the real way to wealth, not in some "job".

Retraining yourself to think in this second way is very hard. It is like, as I have noted before, dieting. In order to lose weight, you have to monitor calorie count, exercise more, and keep track of your weight. You have to learn to eat what you need, not what you want, and be content with that - and content with the feeling of better health and less fat to carry around.

Similarly, living within your means is hard to do, when there are so many bright, shiny consumer goods out there that demand your attention. Most Americans, it seems, are in debt to various banks, credit card companies, and other lending agencies, to pay for a whole host of things they think they "need" but really don't. Fancy houses, fancy cars, recreational equipment, restaurant meals, expensive vacations - you name it.

And most of us feel that, so long as we have a "job" that pays the minimum payments on the bills, we are doing "OK". But if that job is lost - well, we're screwed, as most Americans have pitiful savings in the bank - and darn little in their 401(k) accounts.

How the heck do you go broke on a six-figure salary? It is not hard to understand how you can be broke making 20 grand a year - but one hundred? Something isn't right.

In examining my own finances over the last two years, I found I was over-paying for a whole host of goods and services. Nearly double for car insurance, perhaps 20% over on homeowners insurance. Over-insured on life insurance. Paying too much for cell plans, utilities, etc.

But the big expenses are in owning big things. We have two very nice houses, and while one is paid for, the expenses of owning both add up - not in big chunks, but in little bits. Maintenance alone can run into the hundreds of dollars every month. Houses require regular maintenance, or they fall apart. And if you want a house to look good, you have to maintain it. Utilities have to be paid, whether you are there or not. And doubling everything from Internet to phone service adds up over time.

I enjoy my car collection, but I've come to realize that it costs a lot more than I'm willing to admit. I just sold one car, and that decreased my car insurance by $140 a year. Not much, right? But throw in registration, parking permits, oil changes, regular maintenance, and pretty soon you are talking $500 a year or more. And then throw in depreciation - perhaps $1000 a year or more. A car that just "sits" most of the time still depreciates.

And that is just the start of it. Wherever I look around me, I see "things" that for some reason, at some time in my life, I thought I had to have. Compounding this are "keepsakes" that clutter and take up space in my life. They are all too precious to get rid of - or are they? The instinct is to hang on to "things". Hey, I paid money for that, why get rid of it?

Downsizing will be hard, but what will be harder is not getting back on the "things" bandwagon yet again, selling it all, only to accumulate yet more junk to clutter up a new life. Just as in dieting, when you lose weight, the temptation is to say "Well, that's done, time to check out the buffet again!"

Like goldfish that grow to the size of their bowl, most Americans spend up to the limit of their incomes - and then some. They mortgage their future so they can have something "today" - and as a result, end up perpetually in debt.

The secret to monetary success and personal happiness is to live within your means - spend a dollar less than you make - preferably more.

It apparently is a hard trick to learn, as so few actually do it.

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