By Harold “Hap” Castner
February 6th, 2006
I have ranted and raved about this subject before, but the news demands another letter. The Nashville Tennessean reported on January 31 that Americans as a group spent more than they took in last year. This is the first time since 1932 and 1933 that this has occurred. The excuse back then was 33% unemployment, which is almost enough to cause someone to dip into their savings. Now, we are in the midst of one of the longest periods of prosperity in history, and we can't avoid spending more than we take in.
Let's give that a little thought. Millions of Americans are plowing money into retirement plans. Some of us, surely, are saving some outside of retirement plans. That means that someone out there is spending a whole lot more than they are earning. This is really easy to do in our society, but the costs, over time, are huge. I refer more to mental costs than financial costs. Anyone who is in the process of sinking into a morass of debt is aware of it. They know the debt gets continually bigger and they see no hope. They are right. As long as they continue the imbecilic practices, there is no hope. There is even an absolute certainty that the piper will have to be paid, sooner or later. What I would hope to convince a few people is that sooner is easier.
After years of working with people's finances, I am convinced that everyone, or nearly everyone, has the ability to live within their income, no matter how small it might be. I am also convinced that everyone must do so, sooner or later. The perennial hope among debtors is that income will increase enough to make them whole again. This has happened, but it is generally not likely. The only sure cure to deficit spending lies in reducing the spending rather than increasing income. It's a lot faster, too.
The cure to deficit spending is astonishingly simple. Not simple to execute, but easy to understand. Spend less than you make. Pay yourself first. Avoid debt. Those are the entire answer. A monkey can understand it. Obviously, millions of American's can't do it.
The key is in looking at your paycheck from a different direction. Take money out for your retirement plan and savings first. That's right. First! Before you worry about your private school tuition or your car payments, take the money out for you. Then pay your expenses. When the money runs out, stop paying until the next paycheck.
The easy way around this is to start using the credit cards when the money runs out. That's a no-no. Cut up the credit cards. Never use them.
All of this will involve some painful decisions. If you find you can't afford the payments on your BMW, then you must get rid of it and get a cheaper car. If you think your friends won't like you if you drive a Toyota, then get some new friends.
If you find that private school tuition is killing you, then find a way to put your children in public schools. Maybe the private schools really are better, and maybe not. If you maintain the ridiculous level of spending, it will be a lot tougher to fix things when you are compelled to do so
There has been no mention of a budget. That is not an accident. Budgets are fairly easy to construct, but very difficult to use. The only thing that works, in my opinion, is to stop spending when the money runs out. Budgeting may be useful when your spending is under control, but I have never seen it help anyone who was headed toward trouble. Again, pay yourself first, avoid debt, and quit spending when the money runs out.
There are lots of ways to economize, and it is not my intention to tell you how to manage your spending. Beans are good for you. Planning shopping excursions can reduce gasoline expenditures. There is lots of free entertainment in the world. Mainly, stop spending when the money runs out.
The mental cost of indebtedness is huge. The mental advantages of being in really good financial condition are huge. We have a number of clients who have paid off their mortgage at our urging. Their cash flow is vastly easier to manage, and their savings rate generally increases.
It is really disheartening to talk with people who are in their late fifties who come seeking retirement planning assistance and have saved far too little. They sometimes have no recourse except to continue working as long as their health holds out. Sometimes they have children who can house and feed them. No one seems to like that idea a lot.
On the other hand, I talked this week with a client who is fifty-five and wants to retire in ten years. He can afford, however, to retire today. We agreed that that is a wonderful situation to be in. It gives one a great feeling to be able to tell your employer or associates that you can quit anytime it suits you.
An old banker once told me "you should manage your finances so you can tell your banker to go to hell anytime you want to" Pretty good advice, and a very comfortable feeling too.