There are two types of people in this world: those that have perpetual money problems, and those that don’t. Even those that don’t can find themselves in a bind once in a while, but once in a while doesn’t count. People with perpetual money problems are the ones that just can’t seem to dig themselves out of a hole. If you feel like I am describing you, you are not alone. In fact, I would venture to guess that a majority of Americans fall into this category. Why is this?
According to an article printed in CNN Money in 2013, 76% of Americans are living paycheck to paycheck. Even households that make a lot of money are not immune to this problem. In 2015 CBS MoneyWatch published an article claiming that one-third of households earning more than $75,000 were living paycheck to paycheck. How can this be?
The first and most obvious reason that you are always broke is the availability of credit. Credit is a wonderful thing, but it is also a very dangerous thing. Credit allows us to view things that we can’t afford as affordable. Using credit responsibly to buy a house, buy a car, or finance an education makes sense. As long as you don’t exceed your budget on these items, you should not get in trouble financing these items. However, these days, we are financing everything we buy, and that can lead to big problems. Let’s use the example of a $20,000 boat. You don’t have $20,000 to buy the boat, but a 5 year loan at 6% only costs about $387 per month. That seems affordable. What you probably have not thought about is the gas for the boat, the insurance for the boat, the maintenance for the boat, and all the other expenses for the boat. So that $387 per month is probably closer to double that, which means a net outflow of almost $800 per month. And what made it possible to spend that $800 per month? The five year loan that made the boat “affordable.” Next time you are making a big purchase, think about using a different strategy. Put the $800 per month into a savings account for 12 months. If you can do it, you will have saved $9600, have half the boat paid for, and know that you can afford the boat. If you can’t manage to save the $800 per month, you can’t afford the boat.
The second reason that you are always broke is that you don’t have a budget, and you have no idea what you are spending every month. You know what your fixed payments are, but what do you actually spend on groceries, or downloading music, or clothing for the kids, or beer? Do you go to the grocery store for a couple of things and end up spending $150? Do you impulse buy trashy magazines while you are waiting to check out at Target? Do you shop when you are feeling depressed to cheer yourself up, or get on amazon.com to buy useless things when you can’t sleep? Do you have a budget, and if so, do you compare what you actually spent on these items to what you budgeted? I would imagine we are all guilty of least some of the things I mentioned. All of them can lead to budget-busting spending, which will cause you to go broke. It won’t happen in a month, but you will find yourself unable to save money every month, and that is how you get in the situation where you are living paycheck to paycheck.
The third reason you are always broke is related to the first reason, and it is credit cards. How many of you have credit card debt? I am always surprised by how many people think carrying credit card debt is perfectly normal, and not a big deal. Why on earth would you want to be making monthly payments carrying 17% interest or more when you could be making that same payment into your own saving account? Pay off those credit cards! Nothing good comes from carrying a credit card balance.
The fourth reason that you are always broke is that stuff always seems to come up when you don’t expect it. The car needs new tires, the water heater broke, your kids need braces, etc… It is always something. This is why putting money into savings every month is so important. Having that buffer, or what we like to call your emergency fund, is what keeps you from putting these expenses on a credit card and paying 17% interest on them. Having even $1000 in a savings account can end up saving you hundreds of dollars every year in interest payments, not to mention the peace of mind it can give you.
The fifth and last reason that you are always broke is that you have kids. If you have kids, you know exactly what I mean. I am not recommending that you get rid of your kids, but rather to think about how you spend money on them. There are certain items that they need, like clothes and new shoes every 3 months. There are also items that they want, that you know they are going to play with once and then forget that you bought for them. However, it’s the items that you think they need that they actually just want that kill your budget. A great example of this is that my kids think they need to snack on processed foods at all hours of the day. This habit (that drives me crazy) costs me a small fortune. I have tried to convince them that they can actually get full by eating the meals that my wife and I prepare at meal times, but they don’t believe me. They are convinced that they will die without access to fruit roll ups 24/7. And I’m fairly certain that my wife believes them, because she keeps buying fruit roll ups. I haven’t done the math, but I’m pretty sure we are spending at least $400 per month on assorted fruit and gummy snacks at this point. My plan to recapture my budget from my kids is to cut these items from our shopping lists. Of course, I am only joking, but the point is that kids cause us to lose sight of our budget sometimes because we don’t have the same control of our buying habits when it comes to them. Marketers target parents to convince us we need to buy their items or we are bad parents, and then they target the kids to remind us constantly that we haven’t purchased them yet. So be careful that what you are buying for your kids is truly the things they need, and not just the budget busting wants that they will convince you they need.