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Case Study On Poor Money Management
In some of my posts, I make a lot of assumptions and judgments--most of them probably unfair. After all, not everyone reading this blog is a complete idiot with money. If they were, why would they be reading this? They'd probably be in denial about it and think nothing is wrong. The thing is, regardless of who or where we are, we all know people who are steeped in financial idiocy.
That being the case, it just seems safer to assume that most people, even those that seem rich, really do suck at managing their money. So far, this outlook has helped me gain great perspective in life.
Most people where I live, the state of Utah in the United States of Suckiness, make plenty of money to get by and even get way ahead. Granted, we are in the top 12 states based on household income... that being the case, only in extreme circumstances is there any logical reason (except for stupidity) for people in my immediate area to be as bad off as many of them claim they are.
Jason said that he considered himself part of the upper class, so until recently he considered himself "above" shopping at dollar stores. His lovely wife shared the sentiment, even abhorred the idea of visiting one. He alone makes a salary in excess of $200k per year--a decent income, which placed him in the upper-middle class by any definition. Despite income level, the way Jason described himself made it sound as if he was somehow on the brink of financial disaster.
He lamented that lately he and his family had been forced to stoop below their caste system by actually visiting and shopping at a dollar store. Imagine that! As he described it, his family is now "scraping" by, "barely making it", hardly able to put any money at all into savings or investments, with the waves of the economy in their area suddenly shifting out of their favor.
You see, the family's car payments, the children's ivy league private schools, and the payment on their $450k house, among other rising expenditures, were beginning to cause some red ink on their ledgers, so the family was forced to venture across the tracks to these discount stores to save a few bucks.
Smart move by the way, if I may say so myself. Might as well save some moolah where they can. But that is really nothing more than a drop in the bucket. But let's back up for a second.
- Salary is $200,000+ annually.
- Modest increase in food and miscellaneous expenditures are causing the family to go into the red.
- Family is scraping to get by.
If that isn't the definition of sucking at money, I don't know what is.
Time for a reality check, Jason
What does this mean? I wrote today's article because I wanted to better understand exactly how it was possible that this upper class family is basically living month to month on a $200k salary.
Since I live in the same area as Jason, I can offer a bit of perspective into why this is by comparing it to my own financial situation.
My family, who lives a modest existence, gets by just fine, living in a good neighborhood, on around $65k gross income per year. That's before tax. On this $65k, we easily manage to put 15% of our income into savings/investments/debt repayments (mortgage, etc.) regularly, as well as give away approximately 12% of our pre-tax income to church and other neighborhood charities. The average home value in the neighborhood sits at $195,000.
To force further you into some financial voyeurism about my own lifestyle, if you take all my household expenses into account, over the past couple of years we spent roughly $41,000 total on ALL EXPENSES. That's for a family of four to subsist. We own a modest home, two cars (both paid for), give our children experiences in extracurricular activities, we go out to eat, and do family activities. We aren't societal hermits.
The average income in the U.S. in 2014 as about $52,000, so I make a little more than that, and I'm doing fine. Jason and his family make four times the average, and they are scraping by.
To put things in perspective, if Jason's family is "scraping" to get by, they are spending almost four times what mine does on what I consider to be the necessities of life.
This is completely out of control.
I can only come to one conclusion here. This family is living in a state of financial lunacy, or possibly denial. They are living a lifestyle where spending is out of control.
If you've perused some of my other articles in The Village, you know that there are cardinal "to-do" and "to-don't" rules to handling money that must not be broken without the offending individual receiving a swift kick in the crotch by the Village Leader.
Jason's worried that he's not putting any money into savings or investments. And he rightly should be. That's nearly #1 on cardinal "to-do" list. What he doesn't realize is that he and his wife are the source of their own problems in this area.
Judging from Jason and his wife's mentality, it's likely they never shop for things second hand or used. It's also likely that they go out to eat several times a week. Their kids go to private schools. They own brand new cars, and probably upgrade every other year. Their home is without doubt much more than they need for four people.
On the other hand, my wife and I watch our spending like hawks. We shop on Craiglist or the local online classifieds for things that are nearly new, but selling at steep discounts. Our kids go to public schools. We "eat in" 90% of the month. We don't buy expensive luxury cars on credit. We pay in cash. We watch expenditures on things like gas and other miscellaneous expenses. We shop at dollar stores for things that make sense.
Imagine if "Jason" were able to cut down his expenses to what my family of four spends, which I consider to be the median spending of an average American family. As a rich dude, he would stop sucking at money right away, and would be almost swimming in it from month to month.
Assuming Jason falls into the 25% tax bracket thanks to some tax writeoffs, he could be saving $114,000 per year, or more than $9,000 per month! At this rate, and assuming an average return on investments of 5% per year, I don't foresee him having to work very long before he can safely remove himself from the workforce for good. Check out the math.
He's complaining about how bad his situation is, when it could be turned around permanently in a few short weeks, maybe months, by moving into a more modest home, getting some used but nice cars, putting the kids in FREE, but decent, public schools, and eating at home more often.
Open Your Eyes to Financial Freedom
Looking at things under this lens, my eyes have been opened in a lot of ways. It amazes me how wasteful and sucky people are are managing money without even realizing it. People that have money just flowing into their lives are so fortunate, yet they rarely take significant advantage of this fact.
A case study like this prompts me to promise myself that it's never a situation I'll get into. If I ever do, I will personally invite one of you out there to give me a swift kick in the crotch to bring me back to reality.
I hope you've also gleaned a few things from today's observations.
Live long and invest,
Jeremiah
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