Free Money Finance

How to Be at the Bottom of the Financial Barrel

The past three days I've talked about the book The Difference: How Anyone Can Prosper in Even The Toughest Times by Jean Chatzky. We reviewed the 20 factors that separate the wealthy from the not-so-wealthy, have detailed who the wealthy actually are and how that got that way, and have covered the next-highest group, the Financially Comfortable, and what got them to their lofty position. Today, we'll cover the majority of people in the US -- those barely treading water financially and those in the midst of drowning.

The book classifies these two groups as Paycheck-to-Paychecks (54% of the population) and Further-in-Debtors (15% of the population.) We'll cover each of these groups separately, starting with what makes the Paycheck-to-Paychecks what they are.

The book says that both personality attributes and financial habits contribute to locking the Paycheck-to-Paychecks where they are financially -- living from one paycheck to another, barely getting by, and one financial problem away from money trouble. This said, the book notes that the habits are the keys -- what really locks them into a dismal financial life. Take a gander of what goes into making a Paycheck-to-Paycheck person:

• Overspending is the key reason that people slip from a position of financial security into a paycheck-to-paycheck existence. It's a vicious cycle. Once you overspend, it's tough -- if not impossible -- to tap into the habits that move people into the range of the financially comfortable. Once you overspend, you cannot save habitually. Credit card debt is a savings killer, and only 22% of paycheck-to-paychecks can pay off their balances every month.

• Paycheck-to-Paychecks have investable assets, on average, of $83,000. That number is skewed by what I like to call the "six-figure Paycheck-to-Paychecks." These are the high earners who still can't seem to make ends meet. The folks who feel broke despite the fact that they're bringing in $100,00-plus a year. Fully half of paycheck-to-paychecks, however, have less than $25,000 to put to work to grow their financial futures.

And here are a few tidbits that typify the Further-in-Debtors -- people who are already in a hole and are tunneling down further:

• Less than 1/4 save anything each month or make a contribution to a retirement plan.

• 56% have less than $10,000 in investable assets.

• They're both unhappy and insecure.

• Nearly half get physical symptoms like insomnia, heartburn, stomachaches, or headaches when they think about their finances.

The book goes on to say that Further-in-Debtors blame bad luck for their financial situation. The author blames "hubris," commenting the following:

The Paycheck-to-Paychecks overspend and know they're doing something that's not in their own best interest. The Further-in-Debtors overspend without a thought because they feel entitled. They deserve the nights out, the new clothes, the latest technology. How do I know? Our research gave me a peek into their budgets. A full third devote a decent chunk of their budget to entertainment or extras -- nonessentials as far as I'm concerned. Far fewer devote any money at all to saving for tomorrow.

Here are my thoughts on this subject:

1. I often get ridiculed for saying that spend less than you earn is my best piece of financial advice. After all, the hecklers note, this is "common sense." It's not common sense for 69% of the US population!

2. Yes, if you're overspending, you don't have any surplus to help build your net worth. The only solution is to create that surplus by increasing your income, decreasing expenses, or both.

3. Notice how high-earners can also be in a less-than-stellar financial group? Yep, because even if you make $100k per year, if you spend that much or more you're going nowhere financially (except perhaps backwards.) We've profiled many of these people over and over again here.

4. On the flip side, wealth doesn't require a high income. Even if your income isn't as high as many others, you can still save if you simply spend less than you earn. It works!

5. The Paycheck-to-Paychecks and the Further-in-Debtors are doing the opposite of what it takes to get rich. Is it any wonder they are not making financial progress?

6. Interesting to see how money problems impact people's health. Maybe I should write a piece on "how to become healthy by becoming financially secure."

7. The entitlement (or "I deserve it") mentality is alive and well in the US today. Unfortunately it's invaded our government big-time over the decades and hence we overspend as a nation since everyone "deserves" certain "rights." (Certainly there are people that need legitimate financial help to survive, but this group is much smaller than the one that actually gets aid, IMO.) If the US government was a person, it would be a Further-in-Debtor. Interesting point to consider.

From the Ugh Files

Here are some stats I found recently that give us a lot of bad news on how people are managing their money. The highlights (or lowlights if you prefer):

• 61 percent of workers report they always or usually live paycheck to paycheck to make ends meet. This is up from 49 percent last year and 43 percent in 2007.

• 30 percent of workers with salaries of $100,000 or more report that they too live paycheck to paycheck, up from 21 percent in 2008.

• To get by financially, 21 percent of workers say they have reduced their 401(k) contributions or personal savings in the last six months.

• Twenty-three percent of workers who earn six figures or more report that they have also reduced their 401(k) or savings.

• Thirty-six percent of workers say they do not participate in any programs such as 401(k), IRAs or retirement plans, up from 31 percent in 2008.

• One-third of workers (33 percent) report that they don't put any money aside into their savings each month, up from 25 percent in 2008.

• Thirty percent set aside $100 or less per month for savings and 16 percent save less than $50.

Ok, so here's what I get from this:

1. The majority of people are on the brink of big financial trouble. One month without a job and they're in deep do-do.

2. A large portion of people who make a great salary are in this boat. It's unbelievable to me that 30% of people who make over $100k (or more!) are living paycheck to paycheck. Maybe the live in ultra-expensive cities? If so, that's just another reason to move.

3. Reducing savings is never a great option. Isn't there something else that can be cut (like cable TV, expensive vacations, etc.)?

4. Obviously the economy has a part to play in these numbers since things have gotten worse since the last survey. That said, the results weren't all that rosy in 2007 and 2008, were they?

How does living paycheck to paycheck happen? (I've never done it, so I honestly don't know.) Is it an ever-increasing lifestyle as salaries increase? Or maybe it's an income hit that takes away all the slack in an otherwise decent budget? Or maybe something else? Anyone have any insights here?

The Biggest Barrier to Becoming Rich

I always like reading what Knight Kiplinger has to say. Why? Because 99% of the time, he and I are on the same page financially. For instance, here's a thought of his that Kiplinger's recently ran that I couldn't agree with more:

The biggest barrier to becoming rich is living like you're rich before you are. Why? Because all that discretionary spending -- the chic apartment, frequent travel and restaurant meals, consumer electronics, fancy clothes and cars -- crowds out the saving that will enable you to be rich someday.

He goes on to talk about how people spend so much on lavish lifestyles, then wonder why their net worths aren't increasing and why they can't even do the basics like save for a house. The reason is that they're spending their savings! Duh!

As I've said before, the first step to becoming rich is to spend less than you earn. If you can't do this, no matter what your income is, you won't be making any headway financially.

BTW, is anyone starting to connect the dots on this advice? Seems like a lot of reputable people are giving it out these days.

Another Case from the Clueless Files

Why are all these people from Pittsburgh? Sheesh, it gives one of my favorite places a bad name.

Anyway, here's a story about a couple that's been "hounded by debt collectors". Here's a quick review of their great personal finance decisions:

After paying about $12,000 -- using their savings and credit cards -- for the wedding and reception in May 2008, they settled into married life with $10 in the bank and thousands in debt. The weeklong honeymoon in Virginia Beach didn't seem extravagant compared with the exotic getaways in St. Lucia and Bahamas some of their friends had enjoyed.

After graduating with a bachelor's degree in liberal arts and $88,000 in private student loans, she took a job as a home health aide making between $300 to $500 every two weeks. She thought it would be temporary while she planned for the wedding.

Three years later, she's still underemployed. She has never made a full payment on her $700-a-month private student loan. Her mother makes the $160-a-month payments on a separate federal student loan.

Meanwhile, Mr. Obringer, 29, was laid off from his $64,000-a-year job in April. The couple has no health insurance, and they are $500 short each month even before buying groceries or gasoline for their cars.

In addition to the student loans, both of them have car loans of about $6,000 each. Mrs. Obringer has another $6,000 in credit card debt, and Mr. Obringer has about $5,000 in credit card debt, a $650-a-month mortgage and a $250-a-month payment on a home equity line of credit.

The piece is written as a "here's why we should feel sorry for this couple" sort of article, but when you look at the facts, they made some really poor financial decisions and are to blame for their own mess. For instance:

1. They spent $12k on the wedding and reception. I bet that money would come in handy now, wouldn't it?

2. Looks like the honeymoon in Virginia Beach was on top of that.

3. "Home health aide" and "$88,000 in private student loans" do not compute. She didn't match her expected earnings with the amount she borrowed (translation: she borrowed too much) and now she's in a world of hurt.

4. Ok, he lost his job -- that wasn't something that was his fault (probably, but who knows?) Still, if he was making $64k before, can't he find something for $40k? Seems like this would be better than doing nothing.

5. Look at all that other debt. Ugh -- there's no control here. They've been spending like wild.

In the end, I actually do feel sorry for them because they are clueless. Obviously, no one taught them the basics of personal finance and they are now suffering for it. That said, did they ever stop and think about how much they made versus how much they spent? It seems unlikely that they considered it at all until it was too late.

Wealth Doesn't Require a High Income

I've been reading Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest, a great personal finance book IMO. Over the next week or two I thought I'd share parts of it with you and add my comments to what the author says. Today, I want to highlight a paragraph where he refers to studies about millionaires and says the following:

Wealth doesn't require a high income. Most millionaires don't have million-dollar incomes. They accumulated their wealth the old-fashioned way -- by living beneath their means and giving their money time to grow.

I'm a believer in this general idea (that people can get rich without a high income), but to be fair I need to point out that the statement above doesn't make the point clearly. It says that "wealth doesn't require a high income" and that "most millionaires don't have million-dollar incomes", which can be contradictory. For instance, what if we found out that most millionaires had incomes of $200,000. This certainly isn't a million-dollar income, but it is a high income. Maybe I'm being picky, but I wanted to point out the discrepancy before someone else did. :-)

That said, I'm 100% with him that spending less than you earn and giving your money time to grow are the keys to becoming wealthy. Of course it's a lot easier to spend less than you earn while making $100k per year than it is when you make $50k per year (that's why I focus so much on growing and managing your career -- so you can maximize your earnings), but anyone that makes a decent income (like $50k+) can do very well by applying the two principles above. We've seen it work again and again and again.

Why Do Some Wealthy People End Up Broke?

US News covers the recent Annie Leibovitz debt problem that I highlighted awhile back. At the end of the piece they grapple with the question of why so many famous, high-earners spend so much more than they earn and eventually go broke:

In all three cases, the celebrities in question spent far more than they earned, and eventually, those habits caught up with them. What is it is about fame that seems to render people's financial decision-making skills inoperable? Do they feel the need to keep up appearances and live the high life, even when they can't afford it? Or are they just as likely to go into debt as the rest of us, it just happens to them on a bigger scale?

I think it must be a little of both. Most people can't get so deeply embroiled in debt because lenders refuse to give them so much money. In Jefferson's case, his reputation kept creditors from coming after him, and American Express made a special exception to get Leibovitz, whose application had previously been turned down, a credit card. At the same time, celebrities live in public, and might feel more pressure than the rest of us to live large. But wouldn't it be great if they didn't, and if they showcased their frugality, instead?

Here's my take on what's going on:

1. Most of these people are excellent at one thing (art, politics, sports, entertainment, etc.) -- and this one thing makes them a TON of money.

2. What they aren't excellent at is money management. In addition, these people seem to always hire "advisors" that make poor financial decisions (usually investments) for them.

3. They think that the money is flowing in endlessly, that it will always flow freely, and they spend accordingly.

4. Then something happens -- the sports star is hurt or retires, the singer isn't as popular as before, or they simply spend so much over what they make that someone (like a bank) calls in the loans.

5. Now, they're in a world of hurt financially.

Anything I missed? Agree or disagree?

Another Story of Too Much Spending

We've covered this story a bit in the past, but it's coming up again (I heard it talked about recently on NPR). It's a classic case of someone making a boatload of money, spending it all and then some, and having tough financial times as a result. The details from NPR:

A New York-based company that loaned $24 million to photographer Annie Leibovitz is now suing her, claiming she has failed to pay the associated fees.

"She has a contract with Vanity Fair that's worth supposedly tens of millions of dollars during the course of her lifetime."

So, she has a very high income, but is in the process of defaulting on a $24 million loan. How did this happen?

Details are a bit sketchy, but here's what the NY Times has said:

Friends and colleagues said that despite her many successes, Ms. Leibovitz has been shadowed by a long history of less than careful financial dealings. Public records show that in the last two years, Ms. Leibovitz has faced tax liens of $1.4 million and two lawsuits claiming that she has not paid more than $700,000 in bills for photography services.

It's not clear what's exactly going on (for instance, she's disputing the lawsuit) but here's what appears to be the case to me:

1. She makes a ton of money every year. No one is questioning this fact.

2. In addition, she has a very valuable asset in all the photos she's taken in the past.

3. She appears to live a modest lifestyle personally.

4. Where she's not great is managing her business finances. They appear to be out of control on several fronts.

5. As such, she's had to borrow against her biggest asset to free up cash.

6. Since then, she's kept up the bad habits and has gotten into worse trouble.

7. Now there's nowhere else to turn other than possibly outright sale of her photo library.

8. Even then, if she keeps burning through cash at the rate she is, she'll be bankrupt sometime soon.

In the end, no matter what the reasons, the points remain that:

1. She has a high income and big assets.

2. She's spending all her income plus some, which is forcing her to take on debt.

3. As a result, she's going backwards financially.

The reason I bring up this story is because I often hear the comment that spending less than you earn is both 1. too simplistic and 2. not the key to financial health (they say making more money is.) While the concept may be simple, it's also a powerful one and is the foundation to solid finances IMO. If a person can not spend less than they earn, no matter what their income, they'll be going backwards financially. But if someone can spend less than they earn -- especially if they have a low income -- then they can REALLY grow their net worth as they keep spending in check while concentrating on growing their income. This is why I list spending less than you earn as priority #1, and making more money as financial priority #2.

God's Stimulus Plan and Living Below Your Means

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Here's a piece by Robert Morris (author of the excellent book The Blessed Life: The Simple Secret of Achieving Guaranteed Financial Results) called God's Stimulus Plan. In it he says that for Christians, God is our source of life, not the economy, not the government, and not our money.

You can click through on the link above and read the specifics you like since today I won't be covering most of it. Instead, I wanted to highlight what he says well down the article about what you can and should be doing to get control of your finances. His thoughts:

Live below your means. Most people mistakenly think they understand what it is to live below their means, but I have news for them: Living on 90 percent to 95 percent of your income is not living below your means.

Truly living below your means requires living on about 70 percent of your income. For example, if you tithe 10 percent, put 10 percent in savings, put 10 percent in retirement or other investments, and give something in offerings above your tithes, you’re going to be living on 60 to 70 percent of your income at the highest level.

Yet rather than living below their means, many people live above them.

Because I’m a pastor and love people, my heart is burdened when I meet believers who are experiencing financial difficulties. But when I see the homes they’re living in, the vehicles they’re driving and the clothes they’re wearing, I know many of them are supporting their lifestyles by living entirely on credit. They’re digging a hole of debt for themselves that may take years to dig out of.

Here are my thoughts on this subject:

1. I love the advice. It's the best advice I can give anyone.

2. He's right about the percentages -- you have to be way under 90% to be living below your means. We are roughly 1/3, 1/3, and 1/3 -- living on 1/3, saving 1/3, and giving 1/3. It fluctuates a bit from year-to-year and it's not exact, but these are decent ballpark numbers.

3. He's also right about how many people live. They get all the toys they need -- a nice big house they stretched to get into, a couple new (leased) cars, all the electronics someone could want (big screen TV, iPods, computers, gaming systems, etc.) -- then round these out with things like full cable TV, cell phones, and nice, expensive vacations every year. Some (but not most) kick it into over-drive with something like a boat or a summer vacation home. Then when asked about giving, they say they "can't afford to give." I'm not making this up. I've counseled people and seen their budgets. I've also asked others to donate to charitable causes. And I know the comments I get here. For most people, giving is an after-thought and something done if there's anything left over after they spend like crazy (which there usually isn't.)

A couple verses to end this post. Let's start with my favorite one about spending less than you earn found in Proverbs 21:20:

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.

And a good one about giving/helping others (to the poor in this case) from Proverbs 19:17:

He who is kind to the poor lends to the LORD, and he will reward him for what he has done.

I Stand Corrected

Found this piece this morning that says Michael Jackson's net worth in 2007 was $236 million. So he either died wealthy or spent a TON of money in two years (who knows, maybe he had stock losses too). That said, it seems unlikely that he ended up $400 million in debt, though the piece says he had little cash on hand and was known to go on lavish spending sprees, certainly not the picture of financial restraint.

Just wanted to set the record straight...

How to Spend More than You Earn When You Make Millions

Here's a story a reader sent me about past NFL quarterback Bernie Kosar and how he's fallen on tough times. Despite the fact that he's made a boatload of money, he recently declared bankruptcy. Yes, you can spend it all.

The article doesn't say how much he made during his career, but it leaves hints that show it was a good amount. For instance:

Kosar was one of the smart ones. He graduated from the University of Miami in 2 ½ years. Smart enough to help build several businesses after football, with a 6 percent interest in a customer-service outsourcing company that sold for more than $500 million.

How much has he lent teammates over the years without being repaid? ''Eight figures,'' he says.

Friends and family? ''Eight figures,'' he says.

Charities, while putting nearly 100 kids through school on scholarships? ``Well over eight figures.''

Ok, so he made enough to hand it out without much problem. But in addition to being generous, he was quite a spend-thrift. This sentence summarizes the situation:

And even the live-in maids had assistants.

Plus, he's surrounded himself with people with people that seem less than honest:

He says financial advisors he loved and trusted mismanaged his funds, doing things like losing $15 million in one quick burst. There's a $4.2 million judgment against him from one bank. A failed real-estate project in Tampa involving multi-family properties. A steakhouse collapsing with a lawsuit. Tax trouble.

And despite the fact that he's a smart guy, it seems he didn't really know or care much about handling his own money:

His finances have never been something he controlled. Dad would handle the bills; the son had to handle the Bills.

And now, to top it off, there's an expensive divorce:

He says the divorce has cost him between $4 and $5 million already.

''That's just fees,'' he says. ``And they keep coming. Attorneys charge $600 an hour just to screw things up more.''

So, despite the fact that he made tens of millions and had some good business dealings that brought him even more, he managed to go through all of it. You certainly can spend more than you earn, no matter how much you earn. This story is simply another one to add to my ever-growing list illustrating this fact.

But at least Kosar still has a good attitude and he had a fun ride while it lasted:

''Let me tell you something, bro,'' he says. ``It was all worth it.''

More High Income Celebrities Who Spent More than They Earned

Here's a new list of celebrities who spent more than they earned to add to the one I already have. Here are the highlights on this group that can't control their spending:

• Mick Fleetwood - Filed for bankruptcy in 1984. He blew millions on real estate, failed restaurants and drugs. Fleetwood estimates he spent $8 million on cocaine.

• Meat Loaf - Meat Loaf's 1977 album "Bat Out of Hell" earned him millions of dollars, but his managers were stealing most of it before he could see it.

• TLC - The album ended up selling more than 11 million copies, but it wasn't enough to save the band from bankruptcy. They were on the hook for $3.5 million of debt from Lopes' arson, Watkins' medical bills (she suffers from sickle cell anemia), and a bad record deal.

• Marvin Gaye - The Motown legend lost his fortune like a lot of dudes...in a divorce. He filed for bankruptcy in 1979.

• Willie Nelson - Long before Wesley Snipes decided he didn't need to pay the IRS, Willie Nelson was dodging the tax men.

• Cyndi Lauper - Cyndi Lauper got her bankruptcy out of the way before she made a bunch of money.

• Andy Gibb - Gibb was drug-addicted and reduced to playing gigs in hotel casinos. He went broke in 1987 and died within the year.

• Isaac Hayes - Despite the sales, Hayes' record label, Stax, was in dire financial straits and not paying him. Hayes, in turn, was not paying the bank that loaned him money.

• Tom Petty - Tom Petty's 1979 bankruptcy became a negotiating ploy against The Man.

So, what are the few factors that killed these people's net worths? A summary:

1. Bad decisions. Doing drugs and trying to cheat the IRS are not good net-worth-building moves.

2. Poor relationships. Divorces, setting boyfriend's home on fire, etc. is usually not a pathway to financial success.

3. Trusting the wrong people. If you make a ton of money but your manager and/or record label don't manage it properly, you're in trouble.

Still, in the end, it all comes down to two factors:

1. They made a bundle of money.

2. They spent all they had and/or made terrible financial decisions that wasted their fortunes.

As I say, even if you make a ba-zillion dollars, if you spend a ba-zillion and one dollars, you're going backwards financially. These people are certainly examples of this.

The King of Debt

I really liked Michael Jackson (the younger, pre-creepy version.) His record Thriller was sensational and I remember listening to it over and over again. I think it was the reason my parents got me my own phone -- hoping I'd retreat into my room and talk to friends rather than play that record for the 17th straight time that day. :-)

Unfortunately, we all know how the story progressed from that time. So much talent. So much strangeness. Such a waste. And such a mountain of debt.

How much did Michael Jackson owe? A boatload according to Fox News:

Yet after selling more than 61 million albums in the U.S. and having a decade-long attraction open at Disney theme parks, the "King of Pop" died Thursday at age 50 reportedly awash in about $400 million in debt, on the cusp of a final comeback after well over a decade of scandal.

$400 million in debt. That's a hefty sum for someone who sold a ba-zillion records, owned rights to the Beatles' songs, and had a 2,500-acre primo home in California.

How could someone with so much spend it all PLUS another $400 million? Easy. He simply spent more than he earned. Like I say, even if you make a ga-zillion dollars, if you spend a ga-zillion and one dollars, you're going backwards financially. Michael Jackson spent money left and right, as fast as he could, so that while he lived his life as "The King of Pop", he died as "The King of Debt."

This is why I say that spending less than you earn is my most important piece of financial advice. Because you can always spend everything you make and more if you can't learn to keep your spending under control. And if you can't control it, then you're not going to make financial progress no matter how much you make. There are examples on both sides of this equation: people who have a ton and still spend more than they have and people who have little and yet do very well financially. The key is always controlling or not controlling your spending.

Of course, it's best to do both -- grow your income AND keep spending in check -- but spending less than you earn is fundamental. Unfortunately, Michael Jackson's life is a sad illustration that if you break this principle, you become broke.

Best Advice for Graduates

The Wall Street Journal asked several prominent people about the best and worst financial advice they received—and their guidance for this year’s grads. Here's what each of them said their best advice was for those graduating this year:

• David Bach, author of the best-selling FinishRich books - Don’t give up if you’re not finding a job. Ask someone for an informational interview. At the meeting, get three more names of professionals to meet. That’s how he eventually landed a job.

• Paula Deen, restaurant owner, author and Food ­Network host - Get all the experience you can and be persistent.

• Robert Kiyosaki, businessman and author of the best-selling “Rich Dad, Poor Dad” books - If you’re going to be an entrepreneur, find a successful one who will teach you.

• John W. Rogers Jr., chairman and CEO of Ariel Investments - You want to be known as the best teammate in whatever organization you join. Look out for your teammates every step of the way. Be a good listener, teammate and friend, and live up to the commitments you make. Whatever you promise you’re going to do, you’ve got to do that.

• Mary L. Schapiro, chairman of the U.S. Securities and Exchange Commission - Live within your means. People need to know how to manage debt so don’t borrow without understanding the implications of the debt and how you’ll repay it.

• Carrie Schwab-Pomerantz, ­president of the Charles Schwab Foundation - Live off 90% of your income. Save the other 10%, first as a cash cushion. “When you’re young you don’t need all the bells and whistles in life,” she says.

Not bad advice, huh? All of these basically boil down to two thoughts: make the most of your career and spend less than you earn. Hard to argue with those two, isn't it?

BTW, this is not only good advice for graduates, but for all of us.

Are You Tempted to Spend MORE When Money's Tight?

The following is a guest post from Dr. Bonnie Eaker Weil.

If you answered yes to the above question (or thought you might be inclined to answer yes, but didn't really want to admit it to yourself) you're not alone. A Stanford University study identifies one in twenty Americans as compulsive shoppers, and a recent survey determined that  80 per cent of women would go on a spending spree to cheer themselves up.

This survey, conducted by  Professor Karen Pine, from the University of Hertfordshire, concludes what some of you with one-too-many pairs of “retail therapy shoes” may already know: that some people use shopping as an emotion regulator, “a way of anesthetizing themselves to negative feelings or dissatisfaction with life.”

So here's what it boils down to – some of us are actually spending MORE during this recession. Or at least, spending more in proportion to our income. In other words, if we've lost a job we may not be spending more, dollar for dollar, than we did when we had a full time job. But if you fall into the above-mentioned one in 20, or 80 per cent, you could be spending more, proportionally to what you're bringing in, than you were before we hit this financial crisis. That's sobering.

But I guess the good news is: if you find yourself wrecking the budget  - or even fantasizing about wrecking it! - when you should be more concerned with keeping money matters in check, you're not alone. I'm referring to this phenomenon as a “pent up purchase.”

This type of purchasing is actually allowing us to participate in different stages of the grief process: anger and denial. Out of denial, Americans have awakened to a new emotional response to the economic collapse. We might be in denial about our financial situation, or we might be really upset about it. Either way, we're looking for a way to feel better about it. Of course, our rational, calculating minds know that the way to feel better about a tight budget is not by spending more! But in the moment, it makes sense: our addiction to spending to get that “high” is a common response to spur dopamine production (feel good hormones).

If you're indulging in spite of your budget – or worse, because of it – you may be headed down a dangerous path that will be unhealthy both financially and emotionally. Work to re-wire the pattern of thinking that leads you to shopping, opting instead for spending time with friends, trying something new like taking a class, head to the gym, or use your energies to volunteer. Work to divert your energy and attention into something positive – the possibilities are nearly endless!

How to Save $10k in 10 Months While Making a Low Wage in an Expensive City

I get all sorts of "I can't save that much" comments quite often here. That's why I post examples of how people have gotten rich (or at least well off) despite the fact that they didn't/don't earn very much money. The key? Spending less than they earned. And if they can do it, so can others (including you, Mr. Excuse-opotamus.)

Here's yet another example of how someone can significantly grow their net worth if they're willing to control their spending. There are the details:

• He saved $10k in 10 months.
• His monthly pay was $2,400 (I'm assuming this was take-home pay)
• He lived in LA, a very expensive market

Here are the steps he took to do this:

#1: I Tracked Every Expense
#2: I Opened a High Yield Savings Account & Paid Myself First
#3: I Saved on Rent & Utilities
#4: I Saved on Food (I bagged my lunch to work, I had a meal plan, I followed the deals, I ate out sparingly.)
#5: I Saved Huge On the Commute
#6: I Saved On Entertainment
#7: I Read Personal Finance & Travel Blogs Daily

So, what's the "secret" to his success? He controlled his spending. He did all he could do to create the biggest gap possible between his earnings and his spending. Note that he didn't earn any more money -- he just cut expenses to generate the largest amount of savings possible.

But he had to make sacrifices. It wasn't easy. But he had a goal and the discipline to make it happen. Good for him.

I can hear the nay-sayers already -- "how do you know this is true?" I don't. How do you know it's not true? besides, it doesn't really matter, the point is that if you can create a big gap between your earnings and your spending, you can save a ton of money and dramatically grow your net worth.

How can you do this? For some specifics, see these posts:

• 11 Great Ways to Earn More Money

• The 10 Most-Hated Money Saving Tips

• A Simple Example of Why Spending Less than You Earn Works

• And Yet Another Millionaire Says the Same Thing

• How to Have a High Net Worth

• More Thoughts on How to Have a High Net Worth

• How to Make Money and Save Money

25 Traits Of The Not So Well To Do

I LOVE this list from Free from Broke. It's listed as "25 traits of the not so well to do", but to me it's more of a "you're probably poor the more you do/have of these things" list. But either way, it's a great list IMO, really a tribute to people paying for stuff they really can't afford (and thus the reason why they aren't so well off.) A few of my favorites:

6) TV in every room (with cable).

11) Tons of gifts for the holidays when you can’t afford it.

13) Don’t take care of their stuff.

14) Tons of gadgets.

17) Doesn’t budget.

20) Hates job but won’t do anything about it.

22) No financial priorities.

25) No personal responsibility.

In short, this is a list of people who don't make the time and effort to manage their finances and they likely don't have the discipline to carry out a plan if they did develop one. As a result, their spending is out of control and they're on the train to financial nowheresville. Now I'm not saying you need to save every penny, but you have to have a bit of control!

It's a shame, really, because becoming wealthy (or even financially stable) doesn't take that much time, effort, or discipline. If you have just a small amount of these three, you can follow a few simple steps that will ultimately make you wealthy.

Then again, a TV in every room with cable is hard to beat, isn't it? ;-)

A Simple Example of Why Spending Less than You Earn Works

It's simple math really, spend less than you earn and you have a surplus and are growing your net worth. Spend more than you make and you're going backwards no matter what else you do. This is the reason that my best piece of financial advice is to spend less than you earn. It's also the first step to becoming rich (or growing your net worth if you prefer.)

Today we have an excerpt from Trent Hamm's free ebook Everything You Ever Really Needed to Know About Personal Finance On Just One Page that deals with this subject. It's a simple example that gets the point across very quickly:

In the end, this is the fundamental rule of personal finance: spend less than you earn. It's the one point that comes up time and time again in almost every personal finance book you read or talk that you hear.

It's easy to see it when you look at each side of the coin. Let's say you earn $30,000 a year and you spend $31,000 a year. That extra $1,000 has to be borrowed, often from sources like credit cards. The following year, in order to maintain your lifestyle, you still spend $1,000 a year more than you make, plus you spend $300 more than that just making the minimum payments on your debt, leaving you a total of $2,200 in the hole (the $1,000 extra you spent the first year plus the $1,000 extra you spent the second year plus the $300 extra you spent repaying that debt minus the $100 you actually managed to pay off). The debt builds - after the third year, you’re $3,600 in debt. It keeps growing and growing and growing until that debt is eating up all of your income, leaving you in misery.

On the other hand, let's say you only spend $29,000 a year - only $2,000 less in spending. That extra $1,000 goes into your savings account and earns 3%. The next year, you drop another $1,000 in the account and now you have $2,030 in there. The next year, another $1,000, bringing you to $3,060.90. That money builds up and soon you have a house down payment or the seed money to start the small business of your dreams - or even something as simple as the ability to easily pay for a car repair without your heart skipping a beat.

The difference between these two stories is only $2,000 a year. There are two avenues to achieving this goal: spending less and earning more. By working on either (or both) of these areas, you can increase the gap between those two numbers - and that gap is your ticket to freedom. The harder you work on either spending less or earning more, the bigger that gap will become and the quicker that train to your dreams will arrive at the station.

As I've documented again and again and again (and even more than that), these same principles apply even if you're making a boatload of money. If you spend more than you earn, you're going backwards financially -- period!

And Yet Another Millionaire Says the Same Thing

I'll probably get a ton of flack for this post (as I do on many around this subject), but at some point people need to start listening to people who are where they want to be. For instance, if you want to be a millionaire (or multi-millionaire), who do you listen to, someone who's not even close to that goal or someone who's already surpassed it and knows what works? Seems like the answer to that is pretty clear to me.

That's why I loved this post -- it's an interview with a real life millionaire -- someone who isn't speculating on how to get rich, but someone that is already rich. It's really great stuff IMO.

And just to set the scene, this guy never made a bundle of money. He was a shop teacher at a junior high school, a carpenter, and worked in the juvenile court system. Certainly not a recipe for making a fortune. Sure, is family was rich, but there's no indication he got any of that wealth. Nope, he just applied simple principles over time and became rich. Oh, and he retired at the age of 58.

What's his advice for becoming a millionaire? Here are the highlights -- all quotes from this man:

• The real secret is to spend less than you earn. I don’t care how much you earn, you spend less than you earn. Spend less than you earn. This is true whether you’re on welfare or a millionaire.

• No smoking or alcohol consumption. This has nothing to do with morals and health — okay, maybe health — it’s all about the money.

• No-load mutual funds are the only way to go. To give anybody 3-4% of your money off the top is insane.

• Volunteer to help others.

• I can buy whatever I want. Not need, but want. I just don’t want very much.

• Wealth is created by investing money, not by working longer and harder.

He also shares various ways to save money. It's obvious that he's frugal, and that he's built his wealth from simply making sure that the difference between what he's made and what he's spent has been as big as possible.

A few more thoughts from me:

1. Told ya.

2. Funny how this guy who's never made a ton, contrasts so positively (from a wealth standpoint at least, though probably in many other ways as well) with those we assume are rich.

3. Index funds are as no-load and least expensive as you can get.

4. Again, a wealthy person talks about giving back. Must be a relationship between giving and wealth, huh?

5. The road to wealth really is pretty easy.

Ten High Income Celebrities Who Spent More than They Earned

My spend less than you earn category is becoming testimony that no matter how much money you make, you can spend it all. A few examples of this come from Nicolas Cage, athletes, Annie Leibovitz, and a bunch of others.

Now you can add the following to the list -- 10 celebrities who are poorer than you:

• Willie Aames
• Kim Basinger
• Anita Bryant
• Gary Coleman
• Corey Haim
• MC Hammer
• Don Johnson
• O.J. Simpson
• Mike Tyson
• Michael Vick

If you like, you can click through and read all the details on each of these, but they all have a very similar story:

1. They made a bundle of money.

2. They spent all they had and/or made terrible financial decisions that wasted their fortunes.

As I say, even if you make a ba-zillion dollars, if you spend a ba-zillion and one dollars, you're going backwards financially. These ten people are surely evidence of this fact.

Another Example of Getting Rich on a Low Salary

Get Rich Slowly points to a story of a social worker that amassed a $1.4 million net worth. How did she do it -- amass a fortune way above what most Americans will ever own while earning an "average" salary at best? A few of the details:

She drove a 30-year-old car, watched an ancient TV, lived four decades in a house bought with cash in 1969, and just kept stacking charity donation envelopes in her sun room, until, once a year, she sent them all in.

[She] saved because spending more just didn't occur to her.

She dressed plainly. She wore costume rings. She dyed and permed her own hair.

The house furniture was her parents'. She resisted replacing the old TV and icebox. And when she went out with friends, they nearly always split the bill.

When she died, coupons waiting to be clipped still covered her dining room table.

"Always, always. She'd reach into her purse, pull out a handful of coupons, and ask me where I wanted to go to lunch," said Brueggemann, her co-worker.

Buri even looked for deals within deals. For instance, she would buy five sandwiches for $5.95 from Arby's. She'd eat one and freeze the four others for later.

Nor did she deny herself small indulgences. Some weeks, she ate out three meals a day, friends said. She traveled to Europe, and to the Rose Parade in California. She bought a baby grand piano. There was nothing she wanted and didn't buy, said Brueggemann, the co-worker.

"She was frugal because she didn't need anything else," she said. "She wanted that old car. She dressed the way she wanted to dress."

There are a few things that hit me from this piece:

1. She was able to spend less than most people because she was more content with the "simple things in life" than most people are.

2. Despite the fact that she never had a huge salary (as far as I can tell from the story), she ended up with a HUGE net worth (compared to the net worths of most people, that is.) She serves as yet another example that you can become wealthy on almost any salary as long as you spend less than you earn. Of course if you keep your spending low AND grow your income, you'll be even better off.

3. Want some more examples of people like this lady? Here are a few:

• How to Get Rich on $20k a Year

• Generating a Great Net Worth on a Small Income

• How to Grow Your Net Worth When You Don't Make a Lot of Money

• How You Can Own Two Homes with No Debt on $33,000 a Year

When It Comes to Money, You Can't Judge a Book by Its Cover

Five Cent Nickel has an excellent article on the fact that appearances can be deceiving when trying to determine whether or not a person is rich. This same principle is what made the book The Millionaire Next Door so popular -- that you can NOT tell who is rich simply by looking at someone, their clothes, their house, their cars, etc.

For instance, let's say you see two people:

• One is wearing top-of-the-line clothes, has hands full of jewelry, drives a Lexus, and lives in the most exclusive part of town.

• The other is driving a 10-year-old car, dressed casually Dockers and a polo shirt, sports only a wedding band and a watch, and lives in a middle class neighborhood.

Ok, so which of these two is wealthier?

Answer: You can't tell.

Sure, the person that appears to be rich obviously has something going for them -- even if it's only the financial capacity to borrow a ton of money. And the other person could be rich or could not be -- you simply don't know. But in many (most?) cases, the average observer would say the first person is the "rich" one. But the more we find out about personal finances and how people treat their money, the more we know that this is often not the case.

I see these principles at work all around me as follows:

• My kids will see a home and/or car and say, "That person is RICH!" We have to then explain that the person may or may not be rich -- that you can't tell by looking. Perhaps they simply borrowed a ton of money to buy things they couldn't afford.

• We haven't yet informed our kids that our net worth is several times that of the average American and they haven't figured it out for themselves -- because we live a lifestyle way below our means.

• We have friends that make an "average" income (from what I know talking to the husband.) Yet they drive a high-end SUV and live in the most expensive home in their neighborhood. Looking at them, many would say they are "rich." Yet now that they want to move across the country, they're having a hard time because they have to sell their home at a price that's far above market value to afford the move. To the informed observer, the reason for this is because they've been living well above their means.

Over the past few weeks we've seen several examples of people who make a very large income but can't control their spending and, as a result, they are going backwards financially. It continues to shock me but we see the same thing happen over and over and over again -- those that appear to be rich are going bankrupt, hurting for "cash flow", or simply in tough financial shape despite giving appearances that they're beyond wealthy.

Just goes to show that when it comes to money, you certainly can't judge a book by its cover.

Nicolas Cage is Yet Another Example

Here's a report on movie star Nicolas Cage selling a home "due to the difficult economic situation." As the piece points out, Cage makes $10 million a film. Isn't that enough to insulate him from "difficult economic situations?" Let's see, at that rate, I'd need to be in about 1/4 of one film to retire for good!

Then again, this piece says he makes $20 million or more per movie. If $10 million per film isn't enough to insulate him from "difficult economic situations", surely $20 million per film is, isn't it?

I went to Bankrate's celebrity spending power tracker and plugged in Nick's name. It lists him as making $20 million a year (one film or two, who knows?) and then lists the following information:

• For Cage, a house that would cost $275,000 for the rest of us, has less of an impact (because he earns so much) and it "seems to cost" him only $412.50. Imagine that -- getting a $275k home for just a bit over $400! I'd be RICH! Oh, that's the point -- he is rich (or at least earns a lot).

• For Cage, a car that would cost $20,000 for the rest of us "seems to cost" him only $30. No wonder stars have so many cars. I might too if they only cost me $30.

• For Cage, a laptop that would cost $2,000 for the rest of us "seems to cost" him only $3. I'll take 10.

• For Cage, a good meal that would cost $40 for the rest of us "seems to cost" him only 6 cents.

Let's go back to the original article and do the math. He's trying to sell his home for $2.3 million. That's big money for us, but for him it's worth only a few months of pay. And if you reverse the Bankrate math above, him selling a place for $2.3 million is like you and I selling something for $3,450. In other words, he's in such financial trouble that he has to sell some of his "better furniture", a used car in "decent" shape, or a set of collectibles he's been gathering for the past 15 to 20 years. At least those are the sorts of things you and I would have to sell if we needed $3,450. In other words, he's desperate for money -- he needs it because he's in tough financial shape.

Ok, so what's the point? This is simply another real-life example that it's not what you make, it's what you spend. Make $20 million a year and spend $19 million and you're doing pretty well. Make $20 million a year and spend $21 million and after a few years, you're in really, really bad shape. That's why I say that spending less than you earn is my best piece of financial advice and the key to becoming rich. You may earn a ba-zillion dollars a year, but if you spend more than that, you're going backwards financially. Step 1 in solid financial management is to make sure you can control yourself enough so that you spend less than you earn.

Of course, you can REALLY super-charge your net worth if you start to earn more and more while keeping your lifestyle/spending in check (or even lowering it.) :-)

Unfortunately, Cage isn't alone. There are many, many, many people who simply can't control their spending and, as a result, find themselves in financial trouble.

How (and Why) Athletes Go Broke

For awhile now I've been "collecting" pieces about all sorts of individuals -- artists, singers, business people, etc. -- that make very, very high incomes and yet somehow manage to blow it all. Athletes are regulars among this collection and here's another one to add to the pile -- this time from Sports Illustrated.

This piece is quite extensive and gives a lot of good insight on how (and why) athletes go broke. Let's start with a few pieces of data about how athletes handle their fortunes:

Although salaries have risen steadily during the last three decades, reports from a host of sources (athletes, players' associations, agents and financial advisers) indicate that:

• By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.

• Within five years of retirement, an estimated 60% of former NBA players are broke.

• Numerous retired MLB players have been similarly ruined, and the current economic crisis is taking a toll on some active players as well. Last month 10 current and former big leaguers—including outfielders Johnny Damon of the Yankees and Jacoby Ellsbury of the Red Sox and pitchers Mike Pelfrey of the Mets and Scott Eyre of the Phillies—discovered that at least some of their money is tied up in the $8 billion fraud allegedly perpetrated by Texas financier Robert Allen Stanford. Pelfrey told the New York Post that 99% of his fortune is frozen; Eyre admitted last month that he was broke, and the team quickly agreed to advance a portion of his $2 million salary.

The piece then summarizes why athletes have a hard time converting their sizeable incomes into a decent net worth:

The Wall Street meltdown is only the latest threat to athletes' financial health. "Athletes have a different set of challenges from, say, entertainers," says money manager Michael Seymour, the founder of Philadelphia-based UNI Private Wealth Strategies. "There's a far shorter peak earnings period [in sports] than in any other profession, and in many cases they lack the time and desire to understand and monitor their investments."

Finally, they detail four specific reasons for the financial problems most athletes face:

I. THE LURE OF THE TANGIBLE -- For the risk-averse investor, an adviser such as Butowsky would suggest allocating 5% to private equity, 7%--12% to real estate, 50%--65% to a mix of public securities (stocks, mutual funds and the like) and the rest to alternatives such as gold and hedge funds. Yet with athletes, who are often uninterested in either conservative spending or the stock market, those percentages are frequently flipped. Securities are invisible, after all, and if you don't study them, they're unintelligible. Not to mention boring. Inventions, nightclubs, car dealerships and T-shirt companies have an advantage: the thrill of tangibility.

II. MISPLACED TRUST -- Salary aside, the closest analogue to a pro athlete is not a white-collar executive. It's a lottery winner—who's often in his early twenties. "With athletes, there's an extraordinary metamorphosis of financial challenge," says agent Leigh Steinberg, who has represented the NFL's No. 1 pick a record eight times. "Coming off college scholarships, they probably haven't even learned the basics of budgeting or keeping receipts." Which then triggers two fatal mistakes: hiring the wrong people as advisers, and trusting them far too much.

III. FAMILY MATTERS -- In 1996, when Panthers owner Jerry Richardson—a former NFL flanker turned businessman—addressed his players, one of them asked, What's the most dangerous thing that could happen to us financially? "Without blinking an eye," Ismail recalls, "Mr. Richardson said, 'Divorce.'"

IV. GREAT EXPECTATIONS -- The thorniest question for a pro athlete, however, isn't how he handles himself and those closest to him. It's "how you handle the new people suddenly emerging in your life," says Richard Lapchick, director of the University of Central Florida's DeVos Sport Business Management program. "They'll be expecting help or money or jobs. Often players don't know how to say no." It's all part of that ossified notion of how a pro athlete should live and provide for those around him. If he isn't consuming conspicuously, then he hasn't made it.

A few thoughts from me:

1. This is why "spend less than you earn" is my best piece of financial advice. Because you can make $40k a year and spend $39k and be making financial progress. Though you can also make $5 million a year and spend $5 million plus $1 and be going backwards -- as the stories in this article demonstrate.

2. Lots of the trouble simply boils down to the things that plague the rest of us too -- lack of knowledge and issues with friends and family. But it's on a larger scale here since the money is much more and there are other issues complicating the situation such as fame and expectations (both internal and external). Throw into the mix an athlete who is used to "winning" and doesn't think he can make a mistake, and it's easy to see why so many of these men fail financially.

3. I know the leagues are trying to help them out with education, etc., but most of them won't listen and/or don't want to deal with learning. It's a shame, but they're often their own worst enemies.

4. Why aren't the agents better at guiding their clients financially? Seems like it would be easy for them to at least point their clients in the right direction.

5. I saw a piece on Lebron James on 60 Minutes a couple weeks ago. Though he surrounded himself with friends as advisors, it looks like they have their heads on straight and are doing a fairly good job of making good decisions for him. Good for him.

Here's Another Broke Multi-Millionaire

Adding yet another person to my list of people who made a bundle of money and yet are broke. This one almost seems unfair since there are probably a million or so sports figures that fall into this category. But we'll let this one (about former football star Travis Henry) serve as our representative for all of the others today. The details:

“I love all my kids,” he said in the interview, but asserted he could not afford the designated amounts, estimated at $170,000 a year by Randy Kessler, his Atlanta lawyer. Kessler said Henry was virtually broke.

“I’ve lost everything in this mess I’ve gotten myself into,” Henry said.

The Denver Broncos gave Henry a five-year, $25 million contract in 2007. Cut last year by the team, which cited injuries and off-the-field commotion, he received only $6.7 million.

Henry is seeking to modify child-support obligations. Some mothers and their lawyers will have none of that, saying he has squandered a small fortune on luxuries like cars and jewelry.

“I feel sorry for the guy, trust me,” Wellon said. “On the other hand, when you take those kind of actions, there are consequences. He could have taken care of the money.”

Henry argued that, within the context of richly paid athletes, he was not out of line. He contended that he owned no more than three vehicles at once and figured he had spent $250,000 on jewelry. “That ain’t a lot,” he said. Nevertheless, he was hoping to pawn some jewelry to pay off one of many debts and gain freedom.

If there were excesses, Henry said, they involved his immediate family, like picking up travel expenses to games during his seven-year career, highlighted by three 1,200-yard-plus seasons.

It's really simple math: make a ba-zillion dollars and spend less than that, and you're moving your net worth in a positive direction. Make a ba-zillion dollars and spend more than a ba-zillion dollars, and you're going backwards.

I'm not really surprised anymore by the actors, musicians, sports figures, lottery winners, artists, and the like who think they have an endless supply of money, spend it all, and end up broke. Seems like a regular occurrence these days. Too bad someone close to them wasn't around to give them solid financial advice.

Another Example of a Rich Person Who Can't Control Her Spending

US News lists another example of someone who's making a boatload of money (according to Gawker, she makes $2 million a year -- and she's made a ton for years) and yet seems to find herself in financial trouble. The details:

American portrait photographer Annie Leibovitz, known for her iconic images of celebrities, has borrowed $15 million in exchange for the copyright, negatives, and contract rights of all her work—past and future—until the loan is repaid.

The New York Times reported today that the artist, who's been drowning in mortgage debt, borrowed more than $15 million from Art Capital Group, a company that assists art owners in creating liquidity from art assets. Sounds more like a glorified pawnshop.

Yep, even the mega-rich need pawn shops these days. Why? Because no matter how much you make, if you spend that much and then some, you're going backwards financially. That's why spending less than you earn is my best piece of financial advice. If you don't follow this rule, none of the other things you do to grow your net worth will help.

Add her to the list of rich and famous people in financial trouble because of spending too much. Sheesh. Will people ever learn?

Eminem: My Kind of Frugal Celebrity

US News quotes the following about an interview with rapper Eminem:

"After his second album he was in the jewellery store. He really liked a watch, but was worried that he'd not be able to afford it, so called his manager, Paul Rosenberg, to check he had enough cash. The watch turned out to be $15,000. At the time, Em was one of the hottest artists on the planet. He was worth millions. So Paul told him not to be silly, and just buy the watch.

"But Em was like, 'I don't want to run out of money, I want my daughter to be able to go to college.' That's really tells the kind of guy he is. I think fame surprised him. I don't think he really had realised who he was what kind of money he had, and what he'd achieved, until suddenly he woke up one day as the biggest star in the world. Whoever you are, that's going to make you a bit nuts."

Kudos to him! He's doing a LOT better than these famous people (many of whom are rappers). Yeah, he might not be "frugal" (after all $15k for a watch is a bit over the top), but at least he's able to spend less than he earns -- which is more than I can say for many celebrities.

Why Some People Don't Save (And How They Can)

Here's an article where a reader writes CNN Money and says he makes a decent salary but he simply can't save any money. Here is Money's response to him:

I'll admit that there may be instances when people really can't put money aside. If you don't make enough to cover basic expenses like food and shelter, then saving isn't an option. Similarly, if you find yourself out of a job, then you have no income from which to save.

But barring such extremes, most people don't lack the ability to save. It's the will or discipline that's missing. And given that you make a decent salary, you, my friend, fall into that large group of people who can save, but need some help to get started.

Ahhh, again we face a simple, but not easy, money issue. And, BTW, discipline is one of the toughest qualities to get under control -- and doing so is vital to growing your net worth.

So what does Money suggest? Turns out they like the "two-line budget." Here's how they describe it:

On the first line you write in how much you make. On the second, you insert the percentage of salary you would like to save, at least initially. I'd say 10% is a good place to start. You can always change it later. You then save that percentage of your salary from each paycheck and do whatever you have to do to live on the rest.

The point, though, is that in this approach, instead of first looking at your spending to see whether you can cut back, you force yourself to live on less by committing to a level of saving. The idea is you can't spend it if it's being saved.

This idea is similar to the 10-10-80 budget. In both of them, you set aside money up front to meet specific priorities, then live on what's left.

A great way to force yourself to save is to do so automatically through your 401k (it's an especially good idea if the company offers some sort of match.) The money is deducted from your paycheck even before you get the chance to see/feel/use/spend it. It's a GREAT way to save if you "earn a decent salary and yet can't seem to save money."

Then again, you could also work up some discipline and just cut back on your spending. But that's probably not a choice for many "I gotta have it now" Americans...

How to Live on $44k Per Year (Almost) Debt Free

Check out this piece on a family who lives (almost) debt free on $44,000 a year. A few highlights:

• The family’s total Christmas shopping bill this year was $90 for 27 gifts.

• Breaking down their budget to 19 categories, they paid off their first house in nine years on an average income of $33,000 a year. Their second home, which they estimate to be worth more than $700,000, was purchased for more than $200,000 and is almost paid off.

• They plan every meal before going to the grocery store, building their menu around specials and coupons. The monthly bill to feed a family of seven is $350.

FYI, they also have a blog.

A few comments:

1. I guess $40k is all you need to be happy after all.

2. These people have learned the secret -- you don't need "just a little more" to make ends meet.

3. Funny how this family of seven can make it on only a fraction of what others can't make it on.

How to and How Not to Handle Lottery Winnings

This article tells the story of two friends who won a lottery in 2005. They each won $3.7 million (not a fortune, but nothing to sneeze at either) and went their separate ways (for the most part.) One of the guys, Aristeo Robelin, has managed his money wisely. The details:

With most of his winnings reserved for his children, Robelin says he lives on $80,000 per year.

Soon after he picked up his check from the state lottery office in Lansing, Robelin quit his job installing windows. He avoided the spending sprees and extravagant gifts for family and friends that befall many lottery winners and estimates he has more than $2 million remaining.

"I know the value of a dollar," Robelin says. "It's not like I worked hard for it, but it's mine."

In other words, he's living within his means and making his winnings last a good long time. Sure, he's not living the high-life, but $80k per year is a decent amount to live on -- and he's not even touching the $2 million he has in the bank ($2 million at 5% a year is $100k -- and he's spending below that amount.) Good for him!

On the other hand, his buddy, Keith Bryce, isn't doing as well:

Since Bryce won the Mega Millions lottery three years ago, he has clashed with family, spent close to $3 million and isn't far from the poorhouse - a place he assumed he'd never visit again.

In the first 30 days after hitting the jackpot - which brought him $3.7 million - Bryce dished out at least $1 million.

He has stopped the $100 tips for Applebee's waitresses, drunken, late-night check writing and footing the bill for his three adult children.

Facing life as a thousand-aire at 47, Keith Bryce is back installing windows for his brothers' company, the same part-time job he worked before winning.

''When you don't have any money to begin with,'' his sister Kay Popp says, ''I wouldn't wish (winning the lottery) on anybody.''

Disagreements over money have divided the Bryce family.

The piece goes on about bad decision after bad decision this guy made. Now he's in bad shape physically, his finances are wrecked, and his relationships with various family members are in ruin.

It was interesting to read the contrasts about these two guys. One managed his money the way most lottery winners manage their money -- like $3.7 million would last forever even at a high rate of spending. Now, he's paying for those decisions. The other, even though he had no extra financial education or experience, managed his money very wisely, and if he keeps it up, he'll be set for life. What a contrast!

Looked at from a bigger perspective, these two guys represent two groups of people (millions in total) across the country. One group spends more than they earn and end up in tough financial shape. The other group manages what they have wisely and does well in almost any financial climate. Hopefully, you're a member of the latter group.

The Right and Wrong Way to Stay Wealthy

The wrong way to stay wealthy: spend more than your huge salary. An example:

Rod Blagojevich is the third-highest-paid governor in the country, but you wouldn't know it from conversations recorded by federal authorities.

He is heard on six weeks of recordings saying he is "struggling" financially, even though he makes $177,412 a year and his household income has averaged $344,000 annually for the past five years. He allegedly says he feels he is "stuck" as governor and imagines making as much as $300,000 as the head of a group pushing organized labor's agenda or a not-for-profit organization.

Blagojevich's salary as governor trails only California and New York among 55 states and territories, according to the Council of State Governments. It's 40 percent higher than the $124,000 average gubernatorial salary.
 
And with his wife Patricia's income in real estate, which federal authorities also have been investigating, the Blagojeviches have averaged $344,000 in income since he took office. It topped $375,000 in 2003 but fell as low as $220,000 in 2007, according to federal tax returns.

Ok, so the guy makes a very, very good salary (especially once his wife's earning are added in), and yet he's "struggling" financially. How does this happen?

On the other hand, here's a piece I found amusing -- it's about how even celebrities love a bargain. Sure, some of the suggestions are still expensive by the standards many of us have, but when a celebrity can afford (and is expected to wear) a $2,000 dress, it's nice to see some of them "only" spending $70. ;-)

Even the Mega-Rich Need Pawn Shops These Days

Check out this NPR piece about a pawn shop in Beverly Hills. The highlights:

The Beverly Loan Co. is...an upscale pawn shop in one of the nation's priciest ZIP codes. The fine items for sale today are remnants of tough times for the well-heeled. Either sold outright for quick cash or used as collateral on loans that went unpaid.

"Never before have we seen so many white-collar customers — doctors, lawyers, accountants, businessmen and women — getting $50,000-plus loans," says Tabach-Bank. "Normally these are people with great credit who could go into a bank and get the big loans, but that's not the case anymore."

A few thoughts:

1. Tough times for everyone -- even those with a good amount of wealth.

2. See, I told you that no matter how much you make, you can spend it all.

3. Why does someone with a huge income (presumably) need a $50,000 loan anyway? Shouldn't they have a decent surplus on a month-to-month basis not to mention a decent emergency fund?

More Examples of the Wealthy Over-Spending

Here are a couple more examples that again demonstrate you can get into financial trouble no matter how much money you earn. Yep, even high-income earners can spend it all -- and more! We'll start with details on an ex-Fugee:

Proving that foreclosures spare no one, a Miami Beach property owned by hip-hopper Wyclef Jean is about to be auctioned on the proverbial courthouse steps, according to court records.

The property stayed nearly abandoned for two years as it racked up $6,200 in fines from the city of Miami Beach.

Then the $900,000 construction on a property appraised at $1.4 million stopped when Jean and his partners couldn’t come up with $177,913 to finish.

And then there's an American Idol Winner:

"American Idol" winner Fantasia Barrino is again finding that, like the title of her autobiography, life is not a fairy tale.

Court documents obtained Tuesday show one of Barrino's houses in Charlotte is up for auction after a company said Barrino failed to repay money it loaned her to cover her taxes in 2006.

The Mecklenburg County Sheriff's Office is scheduled to sell the home, valued at $1.1 million, in January. The home isn't in foreclosure, but rather is being used to compensate the company that loaned Barrino money to cover taxes.

Add these two to my ever-growing list of famous/high-income people who are facing financial troubles.

Three Costs to Keep Under Control

Vanguard has some thoughts/suggestions on how to keep your expenses under control. They focus on three areas -- investment costs, controlling overall spending, and learning to say "no". I'll cover all three along with FMF posts that provide additional information. Let's start with a summary of the impact investment costs can have on your overall return:

Obviously, none of us has the power to determine the direction of the markets. Even the savviest, most experienced investors can't predict what will happen on Wall Street from one day to the next. But you can control how much you pay to invest—and you may be surprised at how much investment costs can affect performance over the long run.

If a fund with a 1.0% expense ratio goes up 8% over the course of a year, you actually end up earning 7%. And if the fund loses money—an all-too-common occurrence recently—its expenses drag your net return even deeper into the red.

If you want more information on how costs impact your investment returns, check out Costs Matter If You Want to Maximize Investment Returns and How I Easily Improved My Investment Returns Using Vanguard Admiral Shares.

Next, they cover a topic near and dear to my heart:

Of course, if you're looking to put your financial house in order, keeping an eye on investment costs is just part of the solution. For many people, living within their means—spending less than they earn and saving diligently for the future—is a larger and more fundamental challenge.

"Many people simply aren't accustomed to living within a budget," said Mr. Ameriks. "But if you're looking to trim your expenses and find more to save, creating a detailed budget is a good way to start. Remember that saving simply means not spending."

Spending less than you earn is my best piece of financial advice. Certainly having a good budget is the first (or at least a key) step in keeping expenses lower than income.

Finally, here are their thoughts on saying "no":

The hardest part about saving money may be saying "no" when the urge to spend strikes. Getting your spending under control may mean more than just passing up the $4 cappuccino now and then. You may need to develop—and sustain—more financial self-discipline than you've ever known.

One word: discipline.

Another Case of a High Income Killed by Over-Spending

Check out the details of this couple who wrote to Bankrate for advice:

My husband and I have $80,000 in credit card debt in addition to a mortgage of $136,000. We are paying our bills on time but I do not see a way out of this if we continue making the minimum payments.

He makes $80,000 and I make $20,000. He refuses to make a budget because he knows we won't stick to it.

What are our options? When is bankruptcy an option?

Ok, so these people make $100k a year and they are MASSIVELY in debt. $80k in credit card debt? Are you kidding me? It's just another example that no matter how much you make, you have to spend less than that amount or you'll be going backwards financially. Want a few more examples of this fact? Then check out these posts:

• How the Rich Go Broke

• Another Case of Spending More than You Earn

• You MUST Control Your Spending

And before you tell me that you make so little that you can't spend less than you earn, read this.

Bankrate tells this reader what you might expect -- that their spending is out of control, that they need to develop and stick to a budget, that they should close all their credit card accounts, and that they should start buying things only in cash. Whether or not they succeed will be determined by the amount of discipline they can apply to their personal finances. Based on their past history, that's going to be a tough road for them.

All You Need To Make Ends Meet: Just a Little More

Recently a reader left this comment to my post titled You Only Need $40,000 a Year to Be Happy:

We make $110,000 as a couple combined. I find this is just "getting by" and we have little debt and no children. I think at least $150,000 should be made by a couple to live comfortably - depending on where you live of course!

I'm sure some of you are thinking what I was: Really? $110k is "just getting by"?

This comment reminded me of a story I heard long ago. It goes something like this:

A financial counselor had an appointment with a couple at 9 am one day. They made $30,000 a year and told him all would be fine if they "just made an extra $100 each month."

At 10 am, another couple came in. They made $50,000 and were convinced that their finances would be great if they "just made an extra $200 each month."

At 11:30 am he met with a couple that made $85,000 per year. Their only problem was that they "just needed to make an extra $500 each month" to be on solid financial ground.

After lunch, he met with a couple that made $150,000 per year. They needed his advice on how to make an extra $1,000 per month -- then their finances would be fine.

We've been over and over this point before -- you have to control your spending and spend less than you earn no matter what you make. Otherwise, you're going backwards financially.

Most people think that just a little more income will solve all of their money problems. But they are mistaken. Why? Because they have no discipline and will spend any surplus (and more!) they get. They fall victim to the "just a little more" fallacy and, as a result, most never get their finances completely back on track.

The Way to Wealth

Our family just got done watching a PBS DVD series (checked out free from the library) on Benjamin Franklin. It was very, very interesting (and entertaining!) I'll be looking for more DVDs like this one in the future. But I digress.

One piece of information that was new to me was that Franklin wrote a piece called The Way to Wealth. where he dispenses some GREAT financial information -- most of which is still good advice for today. This article does a good job of summarizing Franklin's thoughts in The Way to Wealth and I thought I'd highlight a few of my favorites from it:

Early to bed, and early to rise, makes a man healthy, wealthy and wise.

One of the most familiar quotes ever from Franklin:

God helps them that help themselves.

So common that many people think this is actually a quote from the Bible.
 
A few more I liked but won't comment on:

• Sloth, like rust, consumes faster than labor wears, while the used key is always bright
• Dost thou love life, then do not squander time, for that’s the stuff life is made of
• At the working man’s house hunger looks in, but dares not enter

And here's a part I REALLY liked:

If you would be wealthy, says he, in another almanac, think of saving as well as of getting: the Indies have not made Spain rich, because her outgoes are greater than her incomes. Away then with your expensive follies, and you will not have so much cause to complain of hard times, heavy taxes, and chargeable families; for, as Poor Dick says, "Women and wine, game and deceit, make the wealth small, and the wants great."

Kind of like what I said, huh? ;-)

Anyway, I was very impressed that someone who lived so long ago had such financial wisdom that it was valid information today. If you have the chance, take some time to read The Way to Wealth. Or, just keep reading Free Money Finance -- we cover the same topics. ;-)

How the Rich Go Broke

I just had to add this article on how to go broke like a rock star to my collection of "how rich people go broke" stories. Here are a few of the facts they start with:

• Earlier this year, court documents revealed that Britney Spears doesn't save any of her $737,000 monthly income.

• Last month, the New York Post reported that photographer Annie Leibovitz racked up some $715,000 in debt, despite her $2 million annual contract with Vanity Fair.

• Wrestler/celeb Hulk Hogan spends almost twice as much as the $57,000 he earns each month.

• Dustin Diamond, best known as Screech on the early 1990s series Saved by the Bell, faced foreclosure in 2006, despite royalties from reruns.

• And more recently, Evander Holyfield, Ed McMahon, Jose Canséco, and Aretha Franklin ran into housing-related money problems of their own, despite being former heavyweight champion, Tonight Show personality, ex-slugger, and Queen of Soul, respectively.

So, how did these people with HUGE incomes get into financial trouble? It's very easy to explain -- they spend more than they earn:

"The most common mistake that celebrities, and especially professional athletes, make is ridiculously high spending in their newfound financial success," says Tim Maurer, director of financial planning for Financial Consulate, a Baltimore advisory firm.

This is why I always say that spending less than you earn is my best piece of financial advice. It's pretty basic and common sense (I often get "no kidding!" sorts of comments when I say it's a good piece of financial advice), but it seems difficult for many people to live by -- even the rich. As I like to say, you may make $1 million a year, but if you spend $1,000,001 per year, you're going backwards financially (though, admittedly, you're probably having a good time doing it.) ;-)

One more thought on how important spending less than you earn is -- it's one of only three steps you need to take to become rich.

The Test: Can You Handle a Troubled Economy?

Here's a piece on wealthy people (or at least relatively wealthy people) who are worried about the bad economy's negative impact on their finances. What caught my attention is the "test" the psychologist in the article gives her clients in order for them to see if they can have the confidence that they can handle a troubled economy. Her test:

She asks [clients] to calculate their monthly expenses — from Botox shots to country club fees — and their monthly income from work and investments. Then she has them cut 10 or 20 percent off the income figure. If they can still afford their lifestyle, she tells them that they have enough of a cushion to protect them from a troubled economy.

Ok, don't get me started on the Botox shots and the country club fees.

But her point seems to be a good one: if your income takes a decent hit, are you still able to manage your current expenses? If so, you should be fine -- especially since you could probably weather an even bigger financial hit because you could cut out some of your current expenses (like Botox shots and country club fees.)

Having a financial cushion is probably how these people got rich in the first place (it's step #1 in my three steps to becoming rich.) If you do the same, you'll get the same results they have -- you'll grow your net worth and have a surplus that will allow you to handle even a very difficult economy.

For more details on how to become wealthy, see Two Steps to Being a Millionaire and Retiring in Your 40's. If the whole "retire at 40" thing turns you off to the post's ideas, simply ignore the first part and concentrate on the tips to making more money and saving more money.

Loved This Comment

Alpha Consumer asked why celebrities get into money trouble and I simply loved the first comment made -- especially the last sentence

You can make a million a day, and spend a million and one dollar a day, and you are broke and in debt.

Priceless!

Another Case of Spending More than You Earn

Here's an interesting comment recently left here:

Thought this newspaper article was interesting. It is a great showing of living beyond you means (not presented that way). If you have the time to read any of the comments, you'll see the reason this family is broke (42K salary). She quit her job, they consider many luxuries to be necessities and so forth.  I think the old idea that you wanted to do better than your parents did is being taken to mean that you should start off better than your parents are now. When did this change? The American Dream is supposed to be about the chance to improve you life, but that usually takes work and determination, it is not a forgone conclusion!

It's a "fascinating" read from the standpoint that the author tried to make it sound as if the couple was destitute because they didn't make enough money. But the real problem seems to be as the reader above comments -- they want the "American dream" and they want it now! As such, they took a mortgage that they (now) admit they probably couldn't afford. Somehow, this gets glossed over in a couple lines as the story winds on about how unfortunate and down-trodden they are -- and how the system seems to be working against people in similar situations. Obviously, the writer has more of an agenda than simply reporting the facts.

At the time of this writing, the article has 1,003 comments! Holy cow! As you can imagine, they break into two groups -- one talking about how hard it is to live these day with a small income and the other feeling no pity for a couple making $42k that seems like they got themselves into trouble. Here are a couple comments I felt summarized the situation accurately. We'll start with this one:

The husband makes $3500 per month, plus overtime pay that probably adds an additional $1000 per month, has Teamster health insurance, and the wife sits home not working......And we are supposed to feel sorry for them 'cause they can't pay their gas bill? I don't think so. It sounds to me like they are in desperate need of help in money management more than anything else.

And the second:

Here's the key sentence:

"They bought into the American Dream, whether they could afford it or not."

The "American Dream" is NOT a house in the suburbs, two cars, a bass boat, and a cabin by the lake. The American Dream is that you have the liberty to make of your life whatever you can make of it. You are not bound by caste, or ancestry, or religion. You can work for any employer who will hire you, at any job for which you are qualified. You can live in any house, in any neighborhood you choose, provided you can afford it. You can carve out your own destiny by your own sweat and the labor of your own two hands. THAT is the American Dream.

Yes, life is tough for a family on $42,000 a year, apparently. But there is no injustice here.

Short summary, they simply spent more than they earned and now they're paying for it. It's that simple. The math doesn't lie. And there are plenty of examples on both sides of them -- people who made a lot less and thrived and people who made a lot more and got into deep financial trouble.

This is why spending less than you earn is the foundational financial principle -- if you don't get it right, the whole house of cards quickly collapses. It's also why I call this my best piece of financial advice and why I list it as the first step to getting rich.

Two Steps to Being a Millionaire and Retiring in Your 40's

Here's a Money magazine article on a pair of 27-year-olds who are well on their way to being millionaires (current net worth of $516k) and to retiring when they hit 40. As I read the piece, I was struck at the simplicity of how they were growing their net worths -- it was just two simple steps. They are:

Step #1 -- Earn a good income. From the article:

At age 27, John and Gina already earn a combined $174,000 a year.

Step #2 -- Spend less than they earn (significantly less). From the article:

John and Gina...save half of what they make.

Do either of these steps sound at all familiar to any FMF readers out there? ;-)

They should sound familiar -- I write about them all the time. I've even listed what I consider to be the three steps you need to take to become rich.

I don't really have much more to say on this topic (haven't I said enough already?), but I thought I would list some of my key posts out there for those of you who would like to make more money, spend less money, or both.

Some posts on how to make more money:

• 11 Great Ways to Earn More Money -- A great summary of my best money-making ideas.

• How I've Grown My Income -- Details on how I've grown my income through the years.

• Making Money 2008 -- 58 different money making posts (scroll down to see them all) from 2008 alone.

• Making Money pre-2008 -- 202 different money making posts (scroll down to see them all) from before 2008.

Some posts on how to save money:

• The 10 Most-Hated Money Saving Tips -- You might hate these ideas, but they'll save you tons of cash.

• Saving Money 2008 -- 162 different money saving posts (scroll down to see them all) from 2008 alone.

• Saving Money 2007 -- 220 different money saving posts (scroll down to see them all) from 2007 alone.

• Saving Money pre-2007 -- 519 different money saving posts (scroll down to see them all) from before 2007.

How to Go Bankrupt

I was listening to a podcast on my morning walk the other day when the speaker referred to an Ernest Hemingway quote about bankruptcy. Here it is:

"How did you go bankrupt?" "Two ways, gradually and then suddenly."

I was struck by the simplicity and truth in this statement. Here's my spin on it:

1. People start to go bankrupt slowly when they spend more than they earn. At first, they can keep up with the extra payments, increasing debt, juggling finances, etc., but eventually, the small spending starts to add up and puts increasing pressure on them. This is how they start to go bankrupt -- at a very gradual (maybe even unnoticeable) pace.

2. Then something "big” happens -- a layoff, a baby (forcing one parent to stay home), an accident, a bad loan (think housing), and so on. Suddenly, the family that was going bankrupt gradually is upside down in a BIG way. There's nothing that can be done (in their minds), so they go bankrupt.

To an outside observer, it might seem that these people went bankrupt very quickly due to a bad/expensive event in their lives. But the truth is that they had been going bankrupt for a long time. Their finances were getting progressively worse over time and they just needed a big push at the end to send them over the edge. Their actual bankruptcy may have started years and years prior to the actual event when they started the cycle of poor money management and excessive spending.

This is why I continually remind people that spending less than they earn is a must for financial success.

Five Signs that You're Living Beyond Your Means

As most of you know, I love to tell people that spending less than they earn is the key to financial success. Much of this blog is about that -- and how to get to the point where you have more and more surplus coming in to your finances.

That's why I like this Yahoo piece that lists five signs that you're living beyond your means. It serves as a good guide to keep us all aware of money moves that could derail our finances. Here are their thoughts along with some comments from me:

Sign No. 1 - Your Credit Score is Below 600

Not an issue for me, but having a good credit score is certainly a key part of good finances.

Sign No. 2 - You are Saving Less Than 5%

I currently save about 20% of my salary, though many FMF readers save much more. Good for you.

Sign No. 3 - Your Credit Card Balances are Rising

I'd change this to "you have credit card balances." Carrying any balance on a credit card is a BIG sign that you're spending more than you earn.

Sign No. 4 - More Than 28% of Income Goes To Your House

Taxes and maintenance are the only things I pay on our home since we haven't had a mortgage in over a decade. If we buy a new place, the longest we should have a mortgage is a couple years. But if we don't buy something this summer, it's likely we'll be able to pay cash for the new place outright as we'll have a few more months of saving ahead of us.

Sign No. 5 - Your Bills are Spiraling Out of Control

Uh, yeah. Of course.

So, how can you spend less than you earn (or widen the gap if you already are doing so)? Only two ways -- spend less or earn more.

An Extreme Example of Spending Less than You Earn

When I suggest that people should spend less than they earn as a first step to being financially successful, I often get comments along the lines of "I make so little, it's IMPOSSIBLE to spend less than I earn." Really? Check out this piece/example from the BBC:

A bank in the Indian city of Calcutta has opened an account for a beggar who deposited 91kg (200lb) of coins in one of the bank's branches.

Laxmi Das says she has been saving the coins since she started begging more than 40 years ago as a child disabled by an attack of polio.

"I saved for the days when I cannot beg," she told the BBC. "I knew one day I would grow old and have diseases, so I was prudent and saved for my pension."

A few more key quotes:

Ms Das says that she has been prudent and saved

"Her efforts show that you can save even if you earn a pittance."

Mr Haldar said Ms Das now has a bank account and those who want to help her can send in account payee cheques in her name to his bank branch.

Ms Das began begging aged 16 and saved coins in iron buckets at her home in a shanty town near the crossing.

Think about this example the next time you want to complain that you can't keep your spending below what you earn!

And if this example isn't enough, here are some more people who saved a good amount despite making very little:

• How to Get Rich on $20k a Year
• Generating a Great Net Worth on a Small Income
• How to Grow Your Net Worth When You Don't Make a Lot of Money
• How You Can Own Two Homes with No Debt on $33,000 a Year

And on the other hand, here are several pieces on what happens if you make a fortune but spend more than what you make.

Become Wealthy by Living Below Your Means

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

While reading a commentary recently on the book of Proverbs, I found this Sumerian proverb:

Build like a lord, live like a slave! Build like a slave, live like a lord!

The Bible says the same thing in Proverbs 21:20:

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.

In other words, wise, rich people are the ones that spend less than they earn. In contrast, foolish people spend more than they earn.

And even if someone earns a great amount, if they spend more than this each year, they're going backwards financially. Examples of this include Ed McMahon, Michael Jackson and Evander Holyfield.

Seems like common sense to me? Didn't we all learn this in fourth-grade math?

Six Tips for Improving Your Finances

Slow Down Fast lists how to become wealthy by living within your means (my favorite piece of financial advice) but I think the piece is better named "six tips for improving your finances." His list includes:

1. Do away with the brand names.
2. Change where you shop.
3. Dine in.
4. Buy used.
5. Stay away from credit cards.
6. Learn to do without.

Here's my take on these:

1. For the most part, I follow this advice, though I do admit I like Nike athletic apparel. I buy it at an outlet store -- does that get me any brownie points? ;-)

2. We shop at thrift stores all the time. In fact, my wife just bought three name-brand pairs of shorts that looks absolutely new for $2.50 each at a thrift store. They would have cost her $30 or so at a department store.

3. A weakness of mine -- I love to eat out -- kept in check by my desire to save money (plus my wife hates to eat out -- not enough healthy choices for her.) On average, we MAY "eat out" once a week if you count getting a pizza at Costco as eating out.

4. See #2 above. That said, we don't buy cars used.

5. Certainly, if you can't control yourself, then don't have a card. I can control myself and I use my cards to earn cash back. Doing so, I earned almost $800 last year.

6. Not that you can't splurge now and then, but if you're life is one big splurge, you're in trouble.

Needs Versus Wants

Here's an email I recently received from a reader:

I was browsing the local Craigslist for a bike and came across this random ad. The text says:

"hi have for sale my Specialized Rockhopper Pro Disc 17" the color it's "MANGO", i have to sell it A.S.A.P because i need money for rent, you have to see it ,you will fall in love with it, come and see it and try it....click the link at the end for components and specifications, it has some upgrades as front disc 8", tires, Italian seat, peddals, carbon fiber handlebar(unused), no falls, no cracks, perfect conditions...let me know if you want to come and see it or drive it, i live in escondido ca 92025...will trade it for iphone, itouch, xbox360, ps3, wii....any of this toys plus diference in cash."

Since you always talk about spending less than you earn... I thought that this is a classic example of why so many Americans are finding it hard to make ends meet. Surely a guy who has to sell his prize bike to make rent can afford to go without the "toys" for a while.

;-)

Ed McMahon on Spending More than You Earn

I couldn't have scripted this first quote better myself.

As a follow-up to my post Wednesday about Ed McMahon's home foreclosure as well as this morning's piece on spending more than you earn even with a huge salary comes this piece from CNN. It's a Larry King interview with Ed McMahon where Ed is asked what happened to his finances. He's quoted as responding:

"Well, if you spend more money than you make, you know what happens. And it can happen. You know, a couple of divorces thrown in, a few things like that. And, you know, things happen. You want everything to be perfect, but that combination of the economy, I have a little injury, I have a situation. And it all came together."

Later in the interview Larry asks the following of Ed's wife, Pam:

"But, Pam, the assumption is that the McMahons are multimillionaires and multimillionaires -- how much behind are you, $644,000, right? That's what's reported? ... If you're a millionaire, shouldn't you be able to pay $644,000?"

Her response:

"I think over the years, you know, it's just a kind of a combination of maybe Ed working so hard and not kind of looking at proper management, which happens a lot. ... Because you're a celebrity, people think you have a lot more than you have. And you always want to take great care of all of your friends and your family and everybody, and you do. And you don't, and I think, you know, we didn't keep our eye on the ball. We made mistakes."

Let me translate for you:

• Ed McMahon made a fortune in his career -- a ghastly sum that could have sustained a very large number of people.

• He spent everything he made and then some. In fact, the amount he spent was well over (not just barely over) what he made. Yes, misfortune was part of the issue (the fall), but the rest of the problems were self-inflicted.

If he had managed his money correctly, he wouldn't even have to work -- he shouldn't have to given how much he made. It's mis-management plain and simple (by both him and his handlers.)

Now here's the kicker. Larry asks him why he's going public now. Ed's response:

"Well, I figured I wanted to, in a sense, speak for the million people you mentioned [facing foreclosure]. I heard that figure today and I just couldn't believe it. Anyway, the million people that now have foreclosure signs on their house, or nearby. And I just want to give them hope, give them optimism, give them some kind of guidance. Get the best corrective people you need around you. Keep working on it. Don't stop. There's a lot of people that are hard workers, did everything right, didn't do anything wrong, and all of a sudden, they're in this boat. And I speak for all of them, as far as I'm concerned."

Ok, let me be brief and to the point:

There is a set of people who are truly impacted by the housing situation because of no fault (or little fault) of their own. They bought within an affordable range, had reasonable expectation of paying off the loan, and then the world turned upside down on them. These people, I feel sorry for. But my guess is they are in the very small minority. And, this is NOT the group Ed is in.

The other set of people is one that bought too much house (more than they could afford), and now that they need to refinance, they're stuck. These are the people that are facing the problems resulting from poor financial planning and decisions. This is the group Ed is in. He's not in the "oh the market is so bad and it's the reason for my problems" group. His problems are his own doing. He simply spent more than he earned for too long and it's now caught up with him.

I still feel sorry for him -- he always seemed like a nice guy -- but let's be honest here, the problems are self-induced. And it's a whole lot easier for me to want to do something for a working family making $60,000 who bought a bit too much house than for a guy who made millions and lives in a mansion.

You MUST Control Your Spending

Here's another example of the fact that no matter how much you make, you have to spend less than that or you're going backwards financially. Today's piece is about ex-boxing champ Evander Holyfield who made hundreds of millions of dollars during his career:

Holyfield has likely made hundreds of millions of dollars during his 24-year boxing career, including a reported $34 million for his second bout with Tyson in 1997, the infamous “Bite Fight” that ended with Tyson being disqualified for gnawing off a chunk of Holyfield’s ear.

But somehow it wasn't enough. He spent more than he earned (which is hard to believe) and is now in deep financial trouble:

His $10 million estate in suburban Atlanta is under foreclosure, the mother of one of his children is suing for unpaid child support, and a Utah consulting company has gone to court claiming the boxer failed to pay back more than a half million dollars for landscaping.

He seems to be yet another example of boxers who simply can't control their spending:

Joe Louis kept fighting well past his prime trying to pay off a crushing tax debt. Sugar Ray Robinson admitted he was broke by the time his long career ended. Mike Tyson has squandered most of the vast fortune he accumulated during a career that included two memorable fights with Holyfield.

Not much to say here other than to reiterate the obvious -- no matter how much money you make, you must spend less than you earn. Otherwise, you're losing financial ground. This is why I list "spend less than you earn" as my best piece of financial advice.

And just so you don't think Holyfield and his boxing buddies are the only ones who can spend well above a decent income, check out these posts:

• It's Still Not What You Make, It's What You Spend

• It's Hard to Save Money On Only $250,000 Income

• How to Go Broke on $200,000 a Year

• Michael Jackson and More: It's Not What You Make, It's What You Spend

• How a Billionaire Can Go Broke

And to end this subject for today, The Spending Smart Philosophy: Controlling Spending is the Key to Building Wealth is a worthwhile read as well.

The Keys to Getting Rich

Here's a comments I love -- left on my post titled Inside The Millionaire Mind of Mush—How We Became Millionaires:

High income is not the key, though it certainly helps. Saving a significant portion of your income, investing it wisely, spending less than you earn and having a plan are the keys.

My father-in-law is a lawyer in private practice, and is about 30 years older than I am. He is a good and kind man to his family, and very kind to me. I am certain that if properly focused, his income could be 1.5 to 2 times mine, very easily. Yet at age 33, I easily have 5-8 times the amount of savings he has available for retirement, and my retirement savings are in the five-figure range, not six. Why?

• He has never met a splurge he could pass up to put away dollars for tomorrow.

• He does not invest.

• He does not try to learn new ways to spend and save to be more efficient with his money. If it requires a new habit, or behavior change, he's not interested. I could run his office for half the money he spends running it, but he would have to learn new ways of doing things, which he simply doesn't want to do.

His house currently has a broken window on the first floor- it's nothing but a screen, no glass. His monthly oil heating bills this winter were much higher than usual. Does he think to fix the glass and reduce the amount of heat escaping his house? No, but he does take spur-of-the-moment trips to cities on the East Coast.

At certain levels of poverty and lower-income earning, it is extremely hard, if not impossible to get out of the "poverty trap" even with courageous frugality and positive financial behaviors. But for others, like my father-in-law, the long march from paycheck-to-paycheck to comfortable financial security can be significantly influenced by personal behaviors.

Hard for me to argue with this!