Many people struggling with finances dream about coming into money or boosting their income. The financial equation actually has two parts: what you earn and what you spend. We don't have as much control over earnings as we do over what we spend, particularly in discretionary areas. In fact, you can dramatically improve your financial situation if you can control your spending patterns.
When you're in debt, it is easy to buy lottery tickets. That's because you think that coming into more money will solve your financial problems. In fact, most people struggling with debt will tell you that the thing they need most is more income. But the equation for financial prosperity is actually a little more complicated than that.
Take an average family in an average neighborhood in a small town that's earning, all together, about $60,000. Chances are that family is wishing for more money. They probably even have an amount in mind. If only, they will whine, we could earn $70,000, we'd have it made! Even $68,500 would be enough! That would be all it would take for us to be well off.
Meanwhile right down the road is another family in the same general circumstances, and they're also moaning about not having enough money. The thing is, this second family already earns $70,000. But it's not enough. They need $80,000, maybe even $85,000.
Whatever you earn, if you're strapped for cash right now, chances are pretty good that some people in very similar circumstances are doing just fine with the same amount (or less than) you're earning.
And whatever sum you're dreaming about ... wake up! There's somebody out there that fell into that much money and is now flirting with bankruptcy.
It's just as easy (maybe even easier) to go broke earning $100,000 a month as it is to go broke earning $4,000 a month.
If you're a typical American you probably wonder: how on earth can you go bankrupt if you bring in $100,000 a month? That's over a million a year!! How can you be anything but rich?
It is not hard to go broke. Here's how. Spend $101,000 a month. Believe me, that extra $1,000 can really sneak in unnoticed when the income shoots up. That's why so many lottery winners and movie stars and the "silly rich" end up bankrupt. When you only bring in $4,000 a month, it's pretty hard to "make a mistake" and spend $5,000 since you're probably counting your pennies.
Your financial health is made up of two things. Many people with money problems focus on the one while ignoring the other.
Part of your overall financial picture is your income. That's true. I don't want to underestimate it. Your income is vitally important. And don't get me wrongmore is better when it comes to income.
But the other part of your overall financial picture is what you spend. This is where many of us go wrong.
We act like we have control over our income because we fixate on income. The truth is, you don't have much control over your income.
Let's say you have a job. You really don't have much control of what kind of raise you'll get. You can do a good job, but if the industry suffers a downturn or your boss doesn't like you or you make some career mistakes, you may not even get any raise. You may have heard that hard work will bring you rewards but that saying does not guarantee that working hard for a corporation is going to guarantee you large and regular raises. You may not get them.
You might think you could just find another job. That's true. But the kind of job you can get depends a lot on your education, skill set, and background as well as where you live and the competition to nab those elusively rare high-paying jobs.
Let's face it, at some point, you max out. Even if you're a world-famous brain surgeon working at a world-famous brain surgery hospital, you may be already at the top of your game. You can't walk out and figure you'll work somewhere else, because there may not be a "somewhere else" for you.
On a smaller scale that is where many of us find ourselves. We earn decent pay and it is unlikely we are going to be able to do much better somewhere else (if there even is a "somewhere else").
But you do have a lot of control over what you spend.
Some people are mystified by that. They see debts and expenditures as things that "just happen."
It's true that you have to pay rent, buy food, and pay your taxes, but you have some control over the first two items. When it comes to entertainment, clothing, and vacations, you have a lot of control!
However, many people struggling with debt act like discretionary spending cannot be controlled.
A family in five-figure debt took an expensive vacation one year and ended up getting dunned by collection agencies because they let some of their already festering debt fall into worse arrears than previously. When I asked them why they went on an expensive vacation that year, they seemed stunned.
"It was summer. We always go on vacation."
I recently overheard a woman discussing which hotel she was going to stay at during her upcoming vacation. Then she ran into her landlord. She was two months late with her rent! Somehow, she never made the connection between spending on a vacation and being late with her rent.
Expenditures relating to discretionary things (vacation, entertainment, amusement, eating out, travel, clothing, jewelry, costmetics, and so on) is controllable.
Most household budgets can be trimmed by a good 10% before anyone feels a pinch. Most of us can save even more by making conscious decisions and adjustments. And it's possible for zealots to cut expenses radically without giving up a decent lifestyle.
If you cut your expenses by 20% (a good target, by the way), that's like getting a 20% raise. You can't reasonably expect your company to give you a 20% raise, but you can give one to yourself!
Besides that, watching your pennies is not some gruesome and grueling exercise in deprivation. It can be creative, engaging, and fun. It forces you to do things differently, and that can give you some pretty amazing insights.
Here's what I mean. You may feel like your life is out of control and you dream that a bigger income would "fix things." But then you decide to start saving money. You give up cable TV and going to the movies. Now this is going to force you to interact more with your family and friends. You start playing ball in the park after work or board games at night.
I've heard of restaurants-only couples who went on frugality plans who discovered that cooking at home was not only fun, it was healthier. The couple loses weight, finds a hobby they both can enjoy, and learns (here's a surprise) that it's really no more time consuming to cook regularly than to eat out.
Money-saving strategies may encourage you to take up sewing, start a garden, or bake your own bread ... and many people are amazed to find they enjoy these things.
Not only that, frugality is a good incentive to proper work-life balance. Most of us get into the debt whirlwind because we're living too much in the work zone. (Work is expensive! It requires gas, clothing, day care, and all sorts of special services to permit us to log those long hours.) Frugality is going to force you to spend more time at the home front.
And when it saves you money, you realize you not only can afford to spend more time at home with the family, you can't afford not to.
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