Free Money Finance

You Can Spend It All

Wow.

I don't know why it surprises me when I see articles on how people can't manage to survive on $100k income or more.

I've been writing on this issue for years so you would think I'd be numb to it by now.

But every time they come around, I shake my head like it was the first time I've ever heard stories like these.

And they always seem to come in bunches -- so I have a few to share today.

We'll begin with this couple who makes $100k and says they don't ever expect to retire:

Theresa Sahhar and her husband make a combined $100,000, which is nearly double the median annual income in the United States.

They live in Olathe, Kansas, where the cost of living is "pretty reasonable," Sahhar told NPR's Lulu Garcia-Navarro during a segment on living on $100,000 a year. Still, they're "struggling to make enough money to do all the things that we normally do."

I don't need to go any farther into the article to know that these people are spending way too much.

I've been to Olathe, Kansas several times and it's not that expensive -- 5% above the average US location according to Best Places.

At the same time, as mentioned, $100k is twice the average income.

If you make twice what most people make and live in an average cost-of-living city, you have some BIG expense outflows in some area.

But we'll get to that in a minute. For now, let's move on to later in that article where it says:

They aren't the only residents earning six figures and struggling to set aside money for retirement, college and other major expenses. Some living in the area who earn $100,000 "are living paycheck to paycheck," the Post reports, and even families earning up to $250,000 "don't consider themselves to be high-earners."

My goodness. Not higher earners at $250k?

On to the next article. Here's a couple making $180k per year who don't feel like they are doing well:

On the income distribution charts at the center of tax overhaul plans, Courtney Mishoe knows she’s doing well. She works as a tax manager at a firm in the Atlanta suburbs. Her husband is a police officer. Together, they make more than $180,000 a year. They are solidly in the upper middle class. But they have a mortgage and three kids, including one in day care and another in high school with plans to go to college. It all adds up. They depend on tax deductions to make their budget work.

“I don’t feel wealthy,” Mishoe said. “I don’t have a bunch of money stashed away anywhere.”

They depend on tax deductions to make their budget work? Really?

Things are that tight on earnings of $180k?

And yet it gets worse.

If you think you can stomach it you can watch this:

It's a boo-hoo interview with a writer who talks about how hard it is to make things work financially.

He admits that he's made some bad financial decisions including:

• Choosing to be a writer (low income)
• Choosing to live in NYC (in the Hamptons -- high cost-of-living)
• Choosing to have two children and send them to expensive colleges (expensive colleges can kill!)

Uh, yeah. Those things do impact your finances!

But then he doesn't really take responsibility saying, "But those choices are what I call life."

No, they are not simply "life". It isn't life to live in a resort area, high tax state, and send your kids to Harvard and Stanford.

BTW, he never gives his income but I don't think he's a starving writer. My guess is that he "only" makes $100k or so.

Towards the end of the piece he quotes USA Today as saying that a "middle class existence would cost $130,000 a year."

He then goes on to say that most people make $50k, so there's the problem.

But that's not what USA Today said. (I can't believe he as a writer or PBS as the interviewer didn't fact check this.)

They said the cost of the "American Dream" is $130k:

In fact, three-quarters of Americans polled by the Brookings Institution in 2008 said the dream was harder to attain.

They're right to worry. An analysis by USA TODAY shows that living the American dream would cost the average family of four about $130,000 a year. Only 16 million U.S. households — around 1 in 8 — earned that much in 2013, according to the U.S. Census Bureau.

They basically make a bunch of over-priced assumptions (more than I've ever paid in almost every category) to "prove" that it takes $130k to make the American Dream work.

I'm thinking there's an agenda here...but we move on.

The video above is an interview with the writer who is covered in this Atlantic piece.

If you read far into that article you'll find this:

Lusardi, Tufano, and Schneider found that nearly one-quarter of households making $100,000 to $150,000 a year claim not to be able to raise $2,000 in a month.

It also states this -- which I can agree with 100%:

Basically, a good many Americans are “financially illiterate,” and this illiteracy correlates highly with financial distress. A 2011 study she and a colleague conducted measuring knowledge of fundamental financial principles (compound interest, risk diversification, and the effects of inflation) found that 65 percent of Americans ages 25 to 65 were financial illiterates.

Then there's this piece from NPR about what it's like to live on $100k. A summary:

NPR's Lulu Garcia-Navarro spoke to a variety of people in different cities about what their lives look like on $100,000 a year. On paper, that kind of salary is considered well-off. But as we heard from many, it often takes just one major expense for that to not feel like enough: student loans, health care, childcare or housing costs.

They try to make a good story but when you read between the lines you see "credit card debt" and high cost-of-living cities.

But hold on to your hats. We're about to take this to a whole new level!

Check out this post:

Vanamee consulted experts to estimate the "happiness number" for a hypothetical, wealthy, non-working couple in their 40s with two teenage kids in an expensive private school in New York City. They live in a parkside Fifth Avenue apartment, buy art, take private jets, donate to charity, and have a household staff — a chef, a driver, and a housekeeper — plus two vacation homes. They're also setting aside $25 million for each child to inherit.

An analyst from US Trust cited in the Town & Country report estimated the hypothetical couple would need to have a net worth of $190 million to sustain this lifestyle.

Of course! I know I certainly wouldn't be able to be "happy" on anything less than $190 million!

Are these people real???!!!

As you might imagine, I have a lot to say about these stories:

• No matter how much you make, you can spend it all. We've seen athletes, musicians, actors, and others who have made multiple millions go bankrupt, so there's no amount where you can't spend it all.
• The main problem: no financial discipline. And discipline, discipline, discipline, discipline is vital to financial success.
• Living in a high cost-of-living city is a killer. If you make a given income, it's so much better to live in a place where costs are 20% to 50% lower, right?
• Many will say that incomes are higher in higher-cost areas. Some incomes are higher, but if you look at the numbers you'll see that the higher incomes don't offset the higher costs http://www.freemoneyfinance.com/2006/09/move_save_money.html.
• If you really want to become wealthy, the best bet is to earn a high salary in a low cost-of-living market. This has been talked about in detail by financial bloggers at ESI Money and Physician on Fire.

In the end, the fact that someone can't make it on $100k, $180k, or $190 million isn't an earning problem, but a spending problem.

I want to close with a quote from a podcast interview I heard recently with Jonathan Clements, a personal finance journalist and writer for the Wall Street Journal, and one of the few financial writers who IMO actually knows what he's talking about.

In the interview he's asked, "What’s the most important thing that you’ve learned since you’ve started writing about personal finance?"

His reply:

It sounds ridiculously simple, but the one lesson that’s been driven home to me year after year, is the importance of being a good saver, everything else is secondary. Over the years, both when I was at the Wall Street Journal, when I was at Citigroup and even now, I’ve spoken to thousands of every day investors who have accumulated seven figure portfolios. Many of them have modest incomes, most of them were mediocre investors but almost all of them shared one attribute in common, they were extremely frugal, otherwise known as cheap.

The way they achieved financial success was living way beneath their means and saving great gobs of money every month. If you wanna be financially successful, it is indeed as simple as that, everything else is gravy. If you have great savings habits, you could afford to buy advantage funds. I wouldn’t suggest you do it but you could take that risk and end up with market lagging returns. You can pay too much to a financial advisor and you’ll still be fine. If you have great savings habits, good things are gonna happen, everything else is gravy.

So true. Because the fact is that without saving, you can simply spend all you make -- even if you make a fortune.

Frugal Spending Habits of Millionaires

As a contrast to high earners who can't control their spending, here's a post on the frugal spending habits of millionaires. The highlights of how rich people spend:

• 8% shopped at Goodwill stores
• 20% used coupons
• 64% said they lived in a modest, middle-class home
• 28% mowed their own lawn to save money
• 44% only purchased used cars
• 19% managed their investments themselves – they did not use financial advisors in order to save money
• 60% said they were frugal with their money
• 81% used credit cards that offered reward dollars. This way they could get something for free
• 41% spent less than $3,000 on their annual vacation

Some good stuff to comment on here:

• We've shopped at Goodwill and similar stores. You can get some good stuff there at great prices, though it's a bit hit and miss and you have to dig for the values.
• The not only use coupons but probably stack multiple discounts and ask for better prices.
• Buying a house you can afford is a big key to becoming wealthy. Doing so helps you pay off your mortgage early which limits the downward drag of debt. It also helps you control tons of other expenses related to home ownership. This is why the house you buy determines your wealth.
• We've never paid anyone to mow our grass. Either I've done it or my son has. It saves money plus gives some good exercise. Thankfully we have a small yard now anyways.
• I deviate from many millionaires on cars since I buy new. But I get great deals on new cars and drive them forever.
• I manage my money myself. Heaven forbid I'd use a financial advisor!!!
• We are moderately and selectively frugal. You don't have to re-use toilet paper and make your own toothpaste to save money. If you have a good enough income, you have plenty of room to spend AND save.
• I certainly use credit cards for cash back and make a good amount each year doing so. Now that my daughter is off to college, we're paying her tuition with credit cards and earning a fortune.
• We spent less than $3k on vacations for years (we simply went to see relatives when the kids were young). Once the kids got older, we went on a few cruises and have traveled much more.

So, that's how I stack up to the habits. Do you identify with any of these?

Yes, You Can Spend It All

Here's an article talking about high-earners living paycheck to paycheck. The highlights:

If you are struggling to save money and think that a larger paycheck is the key to solving your problems, a new report suggests that may not be completely true. According to a recent survey by SunTrust , almost one-third of survey respondents making $75,000 per year or more live paycheck to paycheck on occasion, as do one-fourth of the respondents making over $100,000 annually. The secrets to saving are as much of a mindset issue as they are an income issue.

Now some might think these people are struggling because they live in a high cost-of-living market or have some sort of extra expense like doctor's bills weighing them down. I'm sure that happens, but that's not the main reason these better-than-average earners are spending too much. It's because they can't control themselves:

The response to another question highlights the financial discipline aspect. Within the group that aren’t saving as much as they want to save because of their lifestyle choices, 68% said that expenses from dining out was the main reason for their lack of saving. The number was slightly higher among millennials (70%), but in general, this was true across the generations. Entertainment and clothing were also listed as reasons that saving was limited. These are all discretionary purchases related to fiscal discipline, regardless of income.

Let's repeat that: "These are all discretionary purchases related to fiscal discipline, regardless of income."

Lots to say on this topic:

• This is why controlling your spending is just as important as earning a decent income. Because no matter how much you make, you can spend it all if you have little self-control.
• As I've said many times, discipline is one of the keys to building wealth.
• If you spend like crazy, you can't grow your wealth on any amount: $100k per year, $133k per year, $250k per year, $1 million a year, or $2 million a year.
• I've posted on this topic previously. For more insights, see How Many Americans Live Paycheck-to-Paycheck? and How to Be at the Bottom of the Financial Barrel.

Not much else to say other than get a handle on your spending, America! Develop a budget and use it to control what you spend. And do it asap!

Americans Continue to be Horrible Savers

Check out this article on America's savings habits. The summary:

Nearly six in 10 Americans don't have enough savings to cover a $500 or $1,000 unplanned expense, according to a new report from Bankrate.
Powered by SmartAsset.com

Only 41% of adults reported having enough in their savings account to cover a surprise bill of this magnitude. A little more than 20% said they would put it on a credit card, the report said, while 20% would cut their spending and 11% would turn to friends and family for financial assistance.

"This is a persistent American problem of how you should handle your finances and spending," said Jill Cornfield, retirement analyst for Bankrate.

The scary fact is that this stat is actually BETTER than what it was last year when only 37% could cover a $500 emergency.

Some people might say that this is a reflection of how bad our economy is. I say it's a reflection of how we can't control our spending.

Want proof? Here are some areas where people could cut spending to save more:

• 95% of Americans own a cell phone. 77% own a smart phone.
• Nearly eight-in-ten U.S. adults now own desktop or laptop computers, while roughly half now own tablet computers and around one-in-five own e-reader devices.
• As of 2014, there were around 100 million households subscribed to some kind of paid TV service, purchased through either a cable, satellite or phone company. This means that approximately 90 percent of Americans had access to paid television services. 83 percent of households are still shelling out money every month for TV.
• The average American family spends $225 a month eating away from home – dinners eaten out, quick snacks grabbed, and coffees ordered and consumed on the run. Sales at restaurants and bars overtook spending at grocery stores for the first time ever.
• The average household spends $2,482 a year on entertainment.
• The average American family spends $1,700 on clothes annually, according to the Bureau of Labor Statistics. "What is significant is whether that money is spent on need or waste. The answer is, largely, waste."

And this is only the tip of the iceberg! Here's a long article from Forbes that details all the wasted spending each year. It's a long, detailed article, but here's the summary:

In other words, we spend money on spending, then we spend money to warehouse and organize the stuff we spend on. Then we pay to discard it. Then we pay to maintain the landfills where it sits for ever and ever. But the expense of shopping doesn't stop there! You pay in time and mental health, too.

Wow. Is that a huge indictment on spending or what?

Needless to say, most Americans could have $500 set aside for emergencies. No doubt, some don't have much and really can't afford the $500. But most spend that money (and more!) simply because we consume, consume, consume.

No Matter How Much You Make, You Can Spend It All

I love Denzel Washington! He's probably in my top five leading actors of all time along with Leonardo Dicaprio, Russell Crowe, Christian Bale, Tom Hanks, Hugh Jackman, and Chris Pratt. Ok, I know that's more than five. And I've probably left some out. :)

Anyway, I was thrilled to watch this interview Denzel did with 60 Minutes at the end of last year. But the end of it gave me pause. Here's the exchange between Denzel and interviewer Bill Whitaker:

Bill Whitaker: So what’s next? I mean, are you enjoying this, directing?

Denzel Washington: I won’t be directing anytime soon.

Bill Whitaker: You will not be?

Denzel Washington: No. No.

Bill Whitaker: Going back to the acting?

Denzel Washington: What’s your first name?

Bill Whitaker: Bill.

Denzel Washington: Right. Put a “s” on it.

Bill Whitaker: Gotta pay a couple of ‘em.

Denzel Washington: That’s-- that’s correct.

Bill Whitaker: Acting pays the bills, so—

Denzel Washington: Acting pays the bills. Do what you gotta do, so that you can do what you want to do. I’ve just done what I wanted to do. Now I gotta get back to what I gotta do.

Let me tell you why this exchange gave me pause: my guess is that Denzel Washington has made a lot of money in his lifetime. That seems reasonable, right? So why does he need to do anything to "pay the bills"? Shouldn't he have more than enough to last several lifetimes?

So I did a bit of Googling and found several sites reporting on Denzel's wealth. This one says his net worth is $140 million. Another one says $190 million. This one says he makes $20 million per movie and has been in 54 movies.

So let's agree that Denzel has many, many millions of dollars. Probably at least $100 million, maybe much more. So again, why does he have to do anything to "pay the bills"?

It's probably because he's spending like crazy! Yes, you can spend it all even if you make a fortune! I've posted on this time and time again -- here's a list of rich people who lost it all, here's a piece on star athletes who lost over $1 billion, and here are stars who have lost fortunes. Why? Because they all couldn't control their spending.

And it's not just the fabulously wealthy. My post titled News Flash: $225k Not Enough to Live On links to a host of people who can't make it work on $100k, $250k, or even $1 million a year. Boo-hoo for them!!!!

On the other hand, I also list people who can become wealthy on $60k a year or even $40k. The difference? These people SPEND LESS THAN THEY EARN. It's that simple.

Now I hope Denzel isn't in the over-spenders group since I like and admire him so much. But his comments lead me to believe he may be. And if that's the case, I'm really sorry.

What's your take on the issue?

A Frugal Star

Mashable tells the story of a frugal star, Daniel Radcliffe of Harry Potter fame.

It starts with a guess of how much he's worth (somewhere around £60 million) and then transitions to the fact that he doesn't spend any of it.

The highlights:

"I don't really do anything with my money," Radcliffe told the Belfast Telegraph.

"I'm very grateful for it, because having money basically means you don't have to worry about it, which is a very lovely freedom to have."

"It also gives me immense freedom, career-wise."

From the sounds of it, Radcliffe is essentially keeping his money as a buffer-zone in order to give himself as much creative freedom as possible when it comes to choosing acting projects.

A few comments here:

• Good for him! We seem to find stories quite often of celebrities who make a ton of money and spend it all. Finally one of them has some financial sense -- and someone so young too. Bravo!
• Of course he isn't hurting even if he spends none of it. As of this writing one pound is equal to $1.22. This means he has roughly $73 million. At a 3% return, his annual income is $2.2 million. Not bad.
• He hit the nail on the head -- having enough money to do whatever you please is a great sense of freedom. It allows you to choose what you want to do with your life versus being dictated to (or at least highly influenced) by others. There's a reason they call it financial FREEDOM!

Ok, so he may not be "frugal". But he's certainly living within his means and I for one applaud him!

Wealthy Athletes Who Actually Know How to Manage Their Money

Bankrate shares what they call "6 top NFL cheapskates". I call them wise spenders.

They list players who:

• Drives a used 1991 Mazda he bought used
• Lives close enough to the stadium that he doesn't even need/have a car
• Focuses on "buying appreciating assets [rather] than depreciating. No yachts, no sports cars."
• Lives on $25,000 a year despite a multimillion-dollar contract
• Saves all his signing bonus and NFL salary (lives on endorsements)
• Eats a snack and saves his team per diem

Now you may argue that these guys are just cheap.

I prefer to say they know that the big-earning years are short-lived and are spending for a lifetime, just not a handful of years. Seems very wise to me and I applaud them.

They will have a lot more choices of what to do with their lives after football because of the decisions they are making now.

The Joneses' House Sells

I don't know about you, but I don't like the Joneses.

This is evidenced by all the posts I've written about them throughout the years.

I've never had anything positive to say about the Joneses.

A few examples:

• Are the Joneses Keeping You Broke?
• The Greatest Detriment to Building Wealth
• Financial Appearances are Rarely What They Seem
• Actual Versus Acceptable Debts of Americans
• Are You Prone to Magical Thinking?

I guess it's the fact that I don't like trying to keep up with them. After all, they spend, spend, spend, so trying to buy what they buy could make a person go broke!!!

Ha!

By now you know I'm talking about the well-known phrase "keeping up with the Joneses." It's been an often used saying to symbolize trying to spend (or out-spend) someone who lives extravagantly.

Did you know they were a real family? They were! And their 1850's mansion just sold. Yahoo has the details:

The now dilapidated mansion that is believed to be the inspiration for the phrase just sold at auction for $120,000. It was built in the 1850s in Rhinebeck, New York, as a summer getaway for New York City socialite Elizabeth Schermerhorn Jones.

The 7,690-square-foot home, called Wyndclyffe Castle, was so elegant and over the top it prompted neighbors to build even bigger houses in an effort to “keep up with the Joneses.” It boasted nine bedrooms, five bathrooms and four fireplaces.

Well, well. You can see why the Joneses could spend -- they must have been LOADED! Too bad the house is crumbling now. It looks like it was so gorgeous at one point in time.

Anyway, consider this a friendly reminder that none of us needs to try and keep up with the Joneses. They have too much money and if we attempt to roll with them, we'll kill our finances.

Thoughts on Two Personal Finance Truths

I recently ran into a couple articles that reinforced personal finance truths I've noted previously on FMF. It's been a while since I covered them, so I thought I'd review the pieces with you.

The first one (of all things) is an interview with country music singer Kenny Rogers. What grabbed me specifically was this exchange:

FOX411: In your late 30’s your career was at a standstill and you were broke.
 
KR: I was broke in my 50’s! This is a business where you stay broke.
 
FOX411: Wait a second, in your 50’s you’d already made some major money.
 
KR: Yeah but you can spend major money too! It’s one of the downfalls of the business. I had nothing as a child. I kind of blew it out as an adult. When I was a kid growing up in the projects I walked to school through a very wealthy neighborhood and everybody had automatic sprinklers and I thought, ‘That is so cool. Someday I want to have automatic sprinklers.’ So when I got a lot of money the first thing I did was get automatic sprinklers on a 1,200 acre property. I would drive around on my golf cart watching the sprinklers go off. I loved that!

Ha! He's so right! No matter how much you earn, you CAN spend it all! I like to say that if you earn $5 million a year and spend $5 million + $1 a year, you're going backwards financially. No matter what your income, you have to spend less than you earn if you want to grow your net worth.

These points highlight the differences between people who are income statement affluent (they make a lot of money) and those who are balance sheet affluent (those with high net worths.) While having a high income can certainly help you grow your net worth, making a lot of money doesn't necessarily (and often doesn't) lead to a high net worth. Why? Because people simply over-spend, committing what I have labeled the worst money mistake anyone can make.

I have a whole category titled "spend less than you earn" that lists high earners who have spent it all and then some. A few highlights:

• More Rich People Who Lost it All


• Seven Costly Pro Athlete Screw-ups


• Stars Who Have Lost Fortunes

The second piece covers another long-time topic here at FMF: that where you live has a major impact on your finances. Choosing a place to live is a balancing act because the cities where you can earn the highest incomes are also usually the most expensive to live in. Thus you need to weigh income versus expenses to see how each net out. As I highlighted over six years ago, it's usually better financially to go with a moderate income and low expense city from a total return standpoint.

This new article comes to about the exact same conclusion. Here's where they ended up when they compared incomes to living expenses:

In first place is Houston, where the average annual wage in 2011 was $59,838, eighth highest in the nation. What puts Houston at the top of the list is the region’s relatively low cost of living, which includes such things as consumer prices and services, utilities and transportation costs and, most importantly, housing prices: The ratio of the median home price to median annual household income in Houston is only 2.9, remarkably low for such a dynamic urban region; in San Francisco a house goes for 6.7 times the median local household income. Adjusted for cost of living, the average Houston wage of $59,838 is worth $66,933, tops in the nation.
 
Most of the rest of the top 10 are relatively buoyant economies with relatively low costs of living. These include Dallas-Fort Worth (fifth), Charlotte, N.C. (sixth), Cincinnati (seventh), Austin, Texas (eighth), and Columbus, Ohio (10th). These areas all also have housing affordability rates below 3.0 except for Austin, which clocks in at 3.5. Similar situations down the list include such mid-sized cities as Nashville, (11th), St. Louis (12th), Pittsburgh, (13th), Denver (15th) and New Orleans (16th).

They go on to note that only two very expensive markets made it into their top 10: Silicon Valley (San Jose-Sunnyvale-Santa Clara) and Seattle. The former simply has the high incomes that can support its high expenses. The latter is still expensive (though not as bad as most other pricey cities) but has decent enough incomes to compensate.

The major losers in the income/cost comparison? They include Boston, San Francisco, New York, Los Angeles and the like. Yes, incomes are high, but these are eaten and then some up by even higher living expenses.

Of course there are many other factors to consider when deciding where to work: opportunities in your chosen field, closeness to relatives, and so on. I'm not discounting those nor am I saying anyone should make a decision of where to work based totally on finances alone. I'm just saying you should consider the income/expense ratio as one of the factors if you have options where to work/live. In my experience, most people don't consider these issues at all.

BTW, the option that's worked for me all these years is to have a very high income in a very low cost-of-living city. Case in point: this page and the list of all the cities I've lived in. :)

Broke Athletes

Has anyone seen this? It's the ESPN series 30 for 30 -- with this show being about athletes who made a bundle of money and then lost it all (a topic we've covered here several times). I have it on DVR and will probably watch it this weekend, but I thought I'd highlight it for those of you who love personal finance and sports since it's being shown a few times over the next week.

Top Five Ways Stars Lose All Their Money

We have a long list of people who have made millions and lost it all (think singers, actors, athletes, etc.) and discussed this issue over several posts in the past years. In these posts we've had a lot of thoughts as to why these people have lost their money. Fox News recently summarized these for us all when they posted the top five ways stars lose all their money as follows:

• They have no idea how money management works.


• Bad advice.


• Theft and fraud.


• Drugs, booze, and bad habits.


• Ridiculous overspending.

Looks like a pretty good list to me.

Unfortunately, those who make millions are not the only ones that can be done in by these bad money habits. "Regular people" can too. My thoughts on this list:

• One reason I write this blog is to educate people so they know how money works. Most of the concepts are simple -- so simple in fact that almost anyone can understand them. And with just a basic working knowledge of how to manage money, most people will never have to worry about money problems simply because they didn't know enough.


• Another benefit of knowing how to manage money is that you can recognize bad advice when you see it. We've all heard stories of people who turned their finances over to some planner or financial advisor simply to have him lose it all. Those who get educated on how to handle their finances can avoid this problem for the most part.


• Financial security is a key issue in good money management. My two main suggestions on how to keep your money secure: 1) don't let anyone know how much you make/own and 2) be diligent about managing your money -- knowing where it is, checking account balances regularly, etc.


• All the education, planning, and diligence in the world can be undone by bad habits like too much drinking and, of course, drugs. Not much else to say on this subject other than it should be pretty clear to avoid these like the plague.


• Overspending can kill your finances whether you make $20,000 a year or $20 million a year. That's why I have it listed as my worst money mistake anyone can make.

So these problems aren't limited only to the very wealthy, they can take advantage of anyone. It's just when the numbers are so high (like when a person earns several million dollars a year) and loses it all, it makes for a more interesting story. :)

How to Earn $100k and Still Feel Poor

Here's another piece (this time from Yahoo) from a person who makes a $100k annual income and says it's not all it's crackled up to be. This one isn't as outrageous as our last guy (who couldn't make it on $350k a year), but the mere fact that "makes $100k" and "feels poor" is even in the same conversation is strange.

Here's a brief summary of their financial situation:

• The couple purchased a house at the height of the boom, before the housing bust. It doesn't seem like they stretched too far to buy it (it was a $183k house, owe $1,200 a month on the mortgage, and have enough to pay $250 extra on it each month), but they are left paying for a home worth far less today than what they paid for it.


• They have two kids in college. This is a financial killer and from what I'd guess, the main source of why things feel tight for them. They probably make enough not to qualify for aid but not so much that it's easy to afford college. And if they didn't save up in advance (I don't know if they did or didn't) then this puts them in a tough spot.


• Other expenses: $500 a month on gasoline and $1,000 a month on food. $350 a month for utilities, $300 for car insurance, $175 for Internet, cable and phone. $300 on a car loan. No other debt. Save 10 percent of income for retirement. $15k per year on college costs -- just for a community college -- which will soon more than double. Then there are taxes, of course.

So here's a rough annual budget for them:

• Income: $100,000


• Taxes (federal, no state income tax in Florida, and real estate): $20,000 (guess, they just say it is "high")


• Mortgage (including extra $250 per month): $17,664


• College costs: $15,000


• Food: $12,000


• Retirement Savings: $10,000


• Gasoline: $6,000


• All others noted above: $13,500

Amount left over for all other spending: $5,836

They have less than $6k left over to spend on clothing, vacations, eating out, gifts, giving, house repairs, and on and on. I can see how it feels tight. I'm not sure what they are going to do when the college costs double...

That said, the question she poses seems outrageous. She asks, "Is six figures the new minimum wage?" The vast majority of Americans would laugh at this thought.

But things are tight. Sure they could do this or that, but there doesn't seem to be much wiggle room in their budget. But how CAN'T there be wiggle room? So many people make so much less than this (the average income is HALF what they make) and somehow they make it. What gives?

What would you do in their situation? Do you think they have plenty coming in and that it's just an expense problem or is it honestly hard to make it on $100k these days? Let me know your thoughts.

Why "Spend Less Than You Earn" is Money Rule #1

In the book 7 Money Rules for Life®: How to Take Control of Your Financial Future, author Mary Hunt talks about the reason she lists "spend less than you earn" as her first and most important rule. Her thoughts:

Until you spend less than you earn, you can forget the other six [rules]. Without rule #1 it will be impossible to master the rest.

As most of you know, I list spend less than you earn as my best piece of financial advice for the same reason. Or as I like to say:

Even if you earn $1 million, if you spend $1 million plus five dollars more, you're going backwards financially.

And believe me, you can spend it all and more no matter how much you make. I've made a hobby of collecting articles on athletes, movie stars, and other high income people who have lost it all and gone bankrupt. It's sad to say, but the bankrupt athlete/famous person story almost seems to be the rule rather than the exception.

That's why spending less than you earn is a vital, foundational money principle. If you don't spend less than you earn, all of your other money moves are worthless. That's why I list spending more than you earn as the worst money mistake anyone can make.

It's also worth noting that it's FAR easier to spend less than you earn (as well as become wealthy) when you make a good income. That's why I write so much about maximizing your lifetime earnings -- which for most people means growing your career.

And BTW, I realize that this issue is well below the financial level/ability of many of you. But there are some people reading this who are still working on controlling their spending. This post is for them.

Another Person Who's Having Trouble Making Ends Meet on a Huge Salary

Add this piece to the list of people who are having trouble making ends meet despite the fact that they have HUGE salaries. It's enough to boggle the mind!

Now I'm not going to make fun of these people (I guess I'm maturing in my old age), but I do want to highlight and comment on several parts of the Bloomberg piece linked above. Here's the first:

Schiff, 46, is facing another kind of jam this year: Paid a lower bonus, he said the $350,000 he earns doesn’t cover his family’s private-school tuition, a Kent, Connecticut, summer rental and the upgrade they would like from their 1,200-square- foot Brooklyn duplex.

His 10-year-old daughter is a student at $32,000-a-year Poly Prep Country Day School in Brooklyn. His son, 7, will apply in a few years.

“I can’t imagine what I’m going to do,” Schiff said. “I’m crammed into 1,200 square feet. I don’t have a dishwasher. We do all our dishes by hand.”

He wants 1,800 square feet -- “a room for each kid, three bedrooms, maybe four,” he said. “Imagine four bedrooms. You have the luxury of a guest room, how crazy is that?”

The family rents a three-bedroom summer house in Connecticut and will go there again this year for one month instead of four. Schiff said he brings home less than $200,000 after taxes, health-insurance and 401(k) contributions. The closing costs, renovation and down payment on one of the $1.5 million 17-foot-wide row houses nearby, what he called “the low rung on the brownstone ladder,” would consume “every dime” of the family’s savings, he said.

Wow. Lots to comment on here. Let's go:

• $350k. It's a huge salary on almost any measure you can imagine.


• $32,000-a-year day school? I'm starting to see the problem from the get-go.


• "...will go there again this year for one month instead of four." I don't know about you, but my annual vacation time is well below four months. Seems like one month is still pretty good.


• "The closing costs, renovation and down payment on one of the $1.5 million 17-foot-wide row houses nearby, what he called 'the low rung on the brownstone ladder'..." Yes, real estate is VERY expensive in New York City. Ever watch "Selling New York"? It's unbelievable what apartments cost there. Then again, a lot of this could be perspective. If you HAVE to live in Manhattan and HAVE to have a house of a certain size and not be "below the low rung", then yes, it's going to be pricey.


• "would consume 'every dime' of the family’s savings." It looks like income has been equal to expenses for quite some time now as savings is fairly small (at least compared to what they need it to be.)


• We all know that where you live is has a GIGANTIC impact on your cost-of-living and hence your finances. You may make a ba-zillion dollars, but if you spend it all plus some, you're going backwards financially.

Much of the money trouble appears to be their expectations. Does the daughter really need a $32k per year day school? That seems pretty excessive to me. And I think it would seem excessive for the vast majority of people in the U.S. who make well below $350k a year.

How about this for an idea? Move to somewhere besides New York, take a job for "only" $200,000 a year, and adjust your expectations of what's reasonable in life. I guarantee that if the guy would be willing to do this, he'd be much better off financially and I'm guessing he'd be better off in many other ways as well (less stress, more family time, etc.) And he could easily afford a much larger house.

Let's move on. Here's the next story:

Wall Street headhunter Daniel Arbeeny said his “income has gone down tremendously.” On a recent Sunday, he drove to Fairway Market in the Red Hook section of Brooklyn to buy discounted salmon for $5.99 a pound.

Executive-search veterans who work with hedge funds and banks make about $500,000 in good years, said Arbeeny, managing principal at New York-based CMF Partners LLC, declining to discuss specifics about his own income. He said he no longer goes on annual ski trips to Whistler, Tahoe or Aspen.

“Wow, did I waste a lot of money,” Arbeeny said.

At least this guy is honest. He made a boatload of money and he wasted a boatload of money. Now he's 49 and struggling. Ugh.

Here's the real heart of the matter these people are facing -- found in another story:

Richard Scheiner, 58, a real-estate investor and hedge-fund manager, said most people on Wall Street don’t save.

“When their means are cut, they’re stuck,” said Scheiner, whose New York-based hedge fund, Lane Gate Partners LLC, was down about 15 percent last year. “Not so much an issue for me and my wife because we’ve always saved.”

Yes, no matter what you make, if you spend all you earn, then there are going to be problems if your income goes down. It's true if you make $25,000 a year, $100,000 a year, or $500,000 a year. This is why you have to have a cushion between what you make and what you spend -- in case of sudden drops like this. It's also why you have an emergency fund -- so if the drop is way more than you can manage (like losing your job completely) then your finances aren't devastated.

Now that last guy said he and his wife were "savers", but they must have a very large income because some of their spending is pretty high. Check this out:

Scheiner said he spends about $500 a month to park one of his two Audis in a garage and at least $7,500 a year each for memberships at the Trump National Golf Club in Westchester and a gun club in upstate New York. A labradoodle named Zelda and a rescued bichon frise, Duke, cost $17,000 a year, including food, health care, boarding and a daily dog-walker who charges $17 each per outing, he said.

Let's look at the expenses noted above:

• $6k per year to park ONE car.


• TWO Audis!


• $7,500 EACH (that's $15k annually) for club memberships


• $17k on their dogs. Ha!

But they are still doing fine -- including giving away $100k to charity. As I said, their income must be very high.

Stories like the ones above (as well as the other profiles in the Bloomberg piece) really fascinate me. Sure there's the "I can't believe this dude is so out of touch with reality" factor associated with why anyone would consent to be interviewed for such a story in the first place. But it's the glimpse into a whole different world that really intrigues me. There's this whole subculture of super high-income people whose outlook on and expectations of what life is "supposed to be like" are just so far off what I would consider "normal" or "average" that it's almost like a fantasy world. Maybe it's the same reason I like to watch "Selling New York." It's the chance to see a side of life that I would NEVER run into in any other way.

Spend Like You Want to Grow Rich

The following is excerpted with permission of the publisher John Wiley & Sons (Asia) Pte. Ltd. from Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam. Copyright (c) 2011 by John Wiley & Sons (Asia) Pte. Ltd.

I wasn’t rich as a 30-year-old. Yet if I wanted to, I could have leased a Porsche, borrowed loads of money for an expensive, fl ashy home, and taken five-star holidays around the world. I would have looked rich, but instead, I would have been living on an umbilical cord of bank loans and credit cards. Things aren’t always what they appear to be.

In 2004, I was tutoring an American boy in Singapore. His mom dropped him off at my house every Saturday. She drove the latest Jaguar, which in Singapore would have cost well over $250,000 (cars in Singapore are very expensive). They lived in a huge house, and she wore an elegant Rolex watch. I thought they were rich.

After a series of tutoring sessions the woman gave me a check. Smiling, she gushed about her family’s latest overseas holiday, and expressed how happy she was that I was helping her son. The check she wrote was for $150. Climbing on my bicycle after she left, I pedaled down the street and deposited the check in the bank.

But here’s the thing: The check bounced— she didn’t have enough money in her account. This could, of course, happen to anyone. With this family, however, it happened with as much regularity as a Kathmandu power outage. Dreading the phone calls where she would implore me to wait a week before cashing the latest check finally took its toll, and I eventually told her that I wouldn’t be able to tutor her son anymore.

Was this supposed to be happening? After all, this woman had to be rich. She drove a Jaguar. She lived in a massive house. She wore a Rolex. Her husband was an investment banker who should have been doing the backstroke in the pools of money he made. It dawned on me that she might not have been rich at all. Just because someone collects a large paycheck and lives like Persian royalty doesn’t necessarily mean he or she is rich.

The Hippocratic Rule of Wealth

If we’re interested in building wealth, perhaps we should all make a pledge to ourselves much like a doctor’s Hippocratic oath: above all, DO NO HARM. We’re living in an era of instant gratification. If we want to communicate with someone half a world away, we can do that immediately with a text message or a phone call. If we want to purchase something and have it delivered to our door, it’s possible to do that with a mobile phone and a credit-card number— even if we don’t have the money to pay for it.

Just like that seemingly wealthy American family in Singapore, it’s very easy to harm our fi nancial future by blowing money we don’t even have. The story of living beyond one‘s means can be heard around the world. To stay out of harm’s way financially, we need to build assets, not debts. One of the surest ways to build wealth over a lifetime is to spend far less than you make and intelligently invest the difference. But too many people hurt their financial health by failing to differentiate between their “wants” and their “needs.”

Many of us know people who landed great jobs right out of college and started down a path of hyperconsumption. It usually began innocently. Perhaps, with their handy credit cards they bought a new dining room table, but then their plates and cutlery didn‘t match so they had to upgrade.

Then there’s the couch, which now doesn‘t jive with the fi ne dining room table. Thank God for Visa— time for a sofa upgrade.

It doesn’t take long, however, before our friends notice the carpet doesn’t match the new couch, so they scour advertisements for a deal on a Persian beauty. Next, they’re dreaming about a new entertainment system, then a home renovation, followed by the well-deserved trip to Hawaii.

Rather than living the American Dream, they’re stuck in a mythological Greek nightmare. Zeus punished Sisyphus by forcing him to continually roll a boulder up a mountain, only to have it maddeningly roll back every time it neared the summit. Many consumers face the same relentless treadmill with their consumption habits. When they get close to paying off their debts, they reward themselves by adding weight to their Sisyphean stone, which knocks them back to the base of their own daunting mountain.

Buying something after saving for it (instead of buying it with a credit card) is so 1950s— at least, that’s how many consumers see it. As a result, the twenty-first century has brought mountains of personal debt that often gets pushed under the rug. Before we learn to invest to build wealth, we have to learn how to save. If we want to grow rich on a middle-class salary, we can’t be average. We have to sidestep the consumption habits to which so many others have fallen victim.

According to The Wall Street Journal, the average U.S. household in 2010 was strapped with $7,490 in credit-card debt. A Huffington Post business article reported in 2011 that 23 percent of Americans owed more money on their mortgages than their homes were actually worth. In Nevada, 66 percent of homeowners could sell their houses and still not have enough money to pay off their mortgages.

Now here’s where things get interesting. You might assume it’s mostly low-salaried workers who overextend themselves. But consider this: According to U.S. author and wealth researcher, Thomas Stanley, who has been surveying America’s affluent since 1973, most U.S. homes valued at a million dollars or more (as of 2009) were not owned by millionaires. Instead, the majority of million-dollar homes were owned by non-millionaires with large mortgages and very expensive tastes. In sharp contrast, 90 percent of those who met the defined criterion to be a millionaire— having a net worth of more than $1 million— lived in homes valued at less than a mil lion dollars.

If there were such a thing as a financial Hippocratic oath, many people would be committing malpractice on themselves. It’s fine to spend extravagantly if you’re truly wealthy. But regardless of how high people’s salaries are, if they can’t live well without their job, then they aren’t truly rich.

More Rich People Who Lost it All

I recently found a couple pieces that illustrate you can, in fact, spend it all -- no matter how much you make.

The first is from Daily Finance where they list 11 celebrities who went bankrupt as follows:

• Sherman Hemsley (George Jefferson)
• Kim Basinger
• Wayne Newton
• Vince Neil (Motley Crue)
• Mike Tyson
• Stephen Baldwin
• M.C. Hammer
• Jose Canseco
• Anna Nicole Smith
• Walt Disney (this one is weak -- he went bankrupt before he made it big)
• Mark Twain

Then Moneyland listed the top 10 celebrity bankruptcies as follows (I'm just adding the ones not mentioned above):

• Willie Nelson
• Larry King
• Jerry Lee Lewis
• Elton John
• Lawrence Taylor
• Gary Coleman

Despite the differences in why these people went broke, the general storyline is this:

• Person makes a BOATLOAD of money. We're not talking only millions but tens of millions (and sometimes hundreds of millions).


• Person loses it all (and most of the time -- even more than that.) While some of the contributing causes can be poor investment decisions, theft (from trusted advisors), and run-ins with the IRS, a key part of every situation is that they simply spent more than they earned. It's that plain and simple.

This is why spending less than you earn is my best piece of financial advice and why "over-spending" is listed as my worst money move anyone can make. Because no matter how much you earn -- even if it's million and millions of dollars -- if you spend more than that amount, you're going backwards financially.

The Need to Save Money is Life or Death

The following is excerpted with permission of the publisher John Wiley & Sons, Inc. from What Would Ben Stein Do: Applying the Wisdom of a Modern-Day Prophet to Tackle the Challenges of Work and Life by Ben Stein. Copyright (c) 2011 by Ben Stein. 

I keep saying it––and it's true. We writers and actors and economists do not live off on a desert island. We live in the world. We interact with other people. Sometimes these other people tell us heartrending tales.

For many years while I was doing Win Ben Stein's Money,  I had as a colleague a woman now approaching middle age as a member of our production crew. She was and is a highly capable, pleasant woman, whose work product was spectacularly fine.

After Win Ben Stein's Money ended, she got a far better job on a much bigger show and worked on it successfully for eight jolly years. Again, her work product was well liked.

Then, with zero warning, she was fired for absolutely no cause in early 2011. WHAM! Right out of the blue. She was given six weeks’ worth of severance pay and asked to leave.

She was extremely dismayed. Terrified might be a better way to put it. She had savings equal to about three months’ expenditures. Hollywood production jobs are notoriously hard to get. Even someone as talented as she is would have trouble getting the kind of steady work she had on her most recent eight-year run.

The situation gets worse. She has an enormous dog. For the enjoyment of the dog, she bought a home she could barely afford even when fully employed. Now, facing possibly prolonged unemployment, she couldn't possibly afford the home. She considered downsizing to a rental, but it was difficult finding one that accepted pets. She loved that dog the way parents love their children. So she was literally left with no clue for what to do.

So here's the lesson. While my friend fell into some bad luck, the reality is that there is a country in which about half of the working families have savings of less than two months’ expenditures, and never imagine that they might lose their source of income. That country is called the United States of America. This is a country of wonderfully kind and pleasant human beings. I marvel at how sunny they are as I crisscross the nation on my endless travels. But it is a country of many wildly imprudent, slobby people where money is concerned.

This is a country where, as a matter of course, men and women use the last of their savings to buy big-screen TVs or boats or trips to Buenos Aires, always in the magical thinking delusion that things will somehow work out right in the end––just as they do in movies.

The problem is that life is not the movies. Things very often do not work out right. This problem of things turning out badly is especially cruel when it comes to money. So much of this country is exposed to likely bad outcomes where money is concerned that it approaches crisis levels.

It is so important that you not let yourself be included in this vulnerable, exposed group, that it's impossible to overstate the seriousness of the matter. YOU MUST HAVE SAVINGS.

Maybe you don't need them if you are a Rockefeller and you are under 16 years old. But everyone else needs them.

How to Blow $1.2 Billion

It's been awhile since we detailed rich people who couldn't control their spending and lost a fortune, so this piece is a good catch up. It lists ten star athletes who excelled at losing millions. In all, these ten lost over $1.2 billion. Yikes!!!!

It's a pretty sad read -- full of over-spending, bad business decisions, bad personal decisions, shady managers and partners, and the like. But it does illustrate a principle that we've covered over and over again through the years: that no matter how much you make, you can spend it all (and more!)

This is why spending less than you earn is my best piece of financial advice. Because even if you make $100 million, if you spend $100 million plus $1, you're going backwards financially.

Not that making money and growing your income aren't important -- they are. But you can make all the money in the world, and if you can't control your spending, it's all for naught. That's why over-spending is #1 on my list of the ten worst financial moves anyone can make.

And don't think that over-spending is a problem just for rich athletes and celebrities. We've also seen a wide range of high-earning "average" Americans who have found that they have no problem spending more than they make.

It all boils down to self-control. If you have it, you can become wealthy even on what some would consider a modest income (here are some examples). But if you don't have it, you're doomed to financial failure even if you earn hundreds of millions of dollars.

Consider this my regular reminder of these facts. ;-)

How to Live Well on $40,000 a Year

Yahoo tells us how to live well on $40,000 a year. It's an interview with author Danny Kofke who tells how his (and any) family can do well on a $40k annual income:

This took long-term planning. Raising a family of four on my teacher's salary would be next to impossible if we had a huge mortgage and a lot of debt. Before we had children, my wife, Tracy, was a teacher, too. We had a plan for her to be able to stay at home once we had children. We weren't exactly sure when this would happen, but we had an idea on when we would start trying.

We ended up being married four years before Ava was born. During this time, we tried to live off one of our teaching salaries and used the other one to pay off debt and establish an emergency fund. We were not sure how long Tracy would be able to stay home — we initially aimed for one year — but were able to have her stay home for six years and work part-time for one. We were able to do this even after having our younger daughter, Ella, three years after Ava. The key for us was the long-term planning.

So, the summary:

• They decided they wanted to live on one income. They knew what that income was and how they would need to live to make it work.


• They developed a plan -- pay off debt and save an emergency fund. They did this over a four-year period.


• They were disciplined and lived below their means.

By the way, he says that living below your means is the toughest rule for him to follow. No, this plan isn't easy at all. But if you really want to make it work, you can.

One thing they don't mention is what part of the country they live in. It would be a lot harder to live on $40k in New York City than it would be in small-town Iowa.

Financial Appearances are Rarely What They Seem

Here's a piece from US News that talks about avoiding money envy. The key? Realize that the extravagant lifestyles (or even "nice" lifestyles) most people have are funded with debt on a financial house of cards. They note:

What we don't realize is the amount of debt that is supporting other people's lifestyles. We naturally assume that other people can afford what they have and do, when in fact a majority of Americans report living paycheck to paycheck. Twenty years ago, we saved $11 out of every $100 we brought home. Now we don't save anything. Because most people don't talk openly about money issues, especially money stress, we're fooled into thinking it must just be we who are struggling, when in fact it's most people. And once you get beyond the poverty level, income is almost irrelevant: The more you make, the more you can borrow, and people certainly do.

Ha! Lots of truth here IMO -- based on the stats I've seen through the years as well as counseling people one-on-one. Yes, people may look "wealthy" but oftentimes that "wealth" is funded with debt -- or at the very least by a lack of savings (spending all that they earn and saving nothing.)

It's also true that most people spend more when they make more. Sad state of affairs, but it's what happens more often than not in my experience.

They go on:

I went behind the scenes and found out that things are not how they look. That's such a relief and makes it a lot easier to ignore what others have and do.

First, I went literally next door and asked my neighbors, whose life looked so cushy, what was really going on with their money. Somehow I never thought those Marc Jacobs clothes and trip to Paris were charged to a credit card, even though I knew the statistics about credit card debt. It shouldn't be any of our business, but finding out that on her side of the wall, my neighbor was going online constantly checking her credit card balance and stressing out over how to pay for those clothes helped me get over that she dresses more stylishly than I do.

Appearances are very deceiving. We don't see what's going on behind closed doors, but what I've learned, and surveys show, is that there's very widespread anxiety and stress over our personal finances, pretty much regardless of how much money we're making. When we find out we're in the same boat, we can start to calm down, be more rational about our money choices, and conquer our tendency to envy.

So the next time the "Joneses" next door leave driving that brand new BMW on the way to their two-week trip to Hawaii, just remind yourself that appearances are deceiving. Sure, they MAY have saved up in advance to pay for all they have. If they have, good for them. But odds are, they have not saved and are, in fact, funding their high-on-the-hog living through debt.

Consider this your financial reality check for the day. ;-)

News Flash: $225k Not Enough to Live On

We've discussed how $100,000 a year, $250,000 a year, $250k per year (again), and even $1 million a year is not enough to live on in the United States. Now we can add a family that makes $225,000 to the list of those barely able to make it. The details:

With a combined income of $225,000 and a nest egg of $330,000, Rick and Amy Mendez, 41 and 43, seem like they are in good financial shape. But a closer look reveals that they're lacking something crucial: emergency savings.

As a result, when they needed a new roof in 2009, they had to borrow from their 401(k)s. Credit cards got them through other jams, but they've run up a $20,000 balance.

"After the bills are paid, the piggy bank is empty," says Rick.

About $1,800 a month, pretax, goes to retirement. Preschool and child care for Averi and Alexander, ages 2 and 5, cost $2,300. Mortgages -- for their home and two underwater investment properties in Florida -- plus payments on 401(k) loans and car loans eat up $4,450.

Can you say "over-spending?" Yikes! This couple is out-of-control!!! Credit card debt, car loans, 401k loans! If I spent like this, I'd be barely hanging on as well.

Can you guess the first bit of advice Money Magazine gives them? Yep, cut spending. I'm guessing that they will find this hard to do. I'm also guessing I could find plenty of fat to cut fairly easily. FYI, Money starts by axing $5k per year for vacations.

The fact that they don't have an emergency fund shouldn't surprise me given that so few people do, but come on! These people make $225k a year -- well above the national average income. And they have NO emergency savings? Ugh.

Of course, they live in an above average cost-of-living area too, but only 18% above average, so that isn't a HUGE issue. Let's face it -- they're well ahead of the averages even when you adjust income for where they live. Their financial problems simply are a result of them not being able to control their spending.

Consider this example #4,593,292 of the fact that a high income does not guarantee you financial stability, money management savvy, or a high net worth...

Looks Like the Income Needed to Become Wealthy is Far Lower than Most People Think

Here's an interesting article that will likely cause some heated discussion. :-)

Sign On San Diego recently featured a piece on Roger and Ericka Covalt, residents of Poway, California, and their financial situation. The highlights:

• Roger Covalt, 51, Supervising park ranger
• Ericka Covalt, 42, After-school program employee
• Combined annual salary: $59,400
• Two kids
• Net Worth: $425,330

What struck me about this piece is that the Covalts are doing so well financially despite the fact that they have an average income and live in a high cost-of-living city (more on this in a bit, but Poway is 42% more expensive than the average American city.) In our recent discussion, we had several people say $250k per year was not enough to live on -- especially if you lived in an expensive city. And we had an NPR interviewee tell us that $67,920 was the minimum needed for a family of four to simply have economic security -- forget about getting ahead. And yet the Covalts seem to be doing well despite the odds stacked against them by their choice of hometown.

How well are the doing? The Covalts $425k net worth is two to four times above the median according to Money magazine. For a couple earning $59,400 per year, the median net worth is $168,500. For a couple 48 years old (I picked an aged between the two, but a bit closer to the husband's age since he's been working longer), the median net worth is $98,350. In other words, the Covalts are doing a great job growing their net worth despite the fact that they have 42% in extra living costs compared to the average American.

I dug up the costs to live in the cities highlighted in the "$250k is not enough to live on" study from Sperling's Best Places. Here's how they rank (along with Poway) compared to the total US. In addition, I've listed the income someone living in each city would need to make them comparable to the Covalt's $59,400 annual income in Poway. The details:

• Poway, CA: 142, $59,400
• Huntington, NY: 177, $73,863
• Pinecrest, FL: 152, $63,664
• Plano, TX: 105, $43,724
• Naperville, IL: 124, $51,750
• Glendale, CA: 164, $68,555
• Bethesda, MD: 203, $84,857
• Alexandria, VA: 135, $56,516
• Washington, DC: 133, $55,680

Here's an example of how you'd read these numbers. Huntington, NY is 77% more expensive to live in than the average US city. Residents of Huntington would need to make $73,863 to earn as much (when costs are accounted for) as the Covalts living in Poway.

And for fun, I threw in a few other cities I knew were pricey:

• San Diego, CA: 133, $55,471
• San Francisco, CA: 206, $86,028
• New York, NY: 167, $69,725
• Boston, MA: 162, $67,551

Since San Francisco is the priciest city on this list, let me use it to illustrate the main point I'd like to make here. This would be the most extreme example from the cities we're looking at -- most would be much better. But by my way of thinking, a family of four in San Francisco making $86,028 should be able to replicate the results of the Covalts. In other words, our $86k family in SF should be able to have a net worth in the $425k range by the time they are in their late 40s. Seems reasonable to me based on the numbers.

So looking at the above, I can't do anything but conclude that most people, even if they live in the most expensive cities in America, can not only survive but thrive with an income far less than $250k. And you can also forget about $67,920 being the amount needed to reach economic security. For all but the priciest locations, this amount is enough to provide a good living as well as allow the family to rack up some significant savings. In the end, anyone earning six figures certainly has the potential to grow a decent net worth no matter where they live and for most places in America, $50,000 or so is more than enough to do well financially.

But there's a catch. Just how did the Covalts get such a high net worth? Here are the comments from two financial planners who reviewed the Covalt's finances:

Following an initial review of the couple’s finances, Dell and Dorn commended them for their diligence at living within their means, having a dependable system in place for tracking their expenses and maintaining focus on saving for the future.

“They are focused on spending time with their children, love their jobs and take care of their expenses without stress,” Dell said. “Overall, I think they’re in really good shape.”

So, they controlled their expenses and lived within their means, huh? Wow, what an innovative strategy? ;-)

I'm sure there will be people who will try and pick apart the Covalt's success, but no matter how you look at it, the income needed to build up a decent net worth is far below what many would argue is a "minimum" just to survive. Far, far below.

P.S. Mark seems to be doing ok too though he lives in a high cost-of-living city.

Another Perspective on Base-Level Income

Surprisingly we had a lively discussion on whether or not $250,000 was enough to live on. I won't generalize and say we came to some conclusions because we didn't (much to my amusement -- the issue seems pretty clear to me), but obviously many people do live on well below $250,000 in annual income. I don't think there's any disputing that fact.

But what income is required to "get by" or to "live" in America for an average family (if there is such a thing)? Well NPR recently interviewed Shawn McMahon, the research director for Wider Opportunities for Women, a group that works with low-income women and families. He discussed their just released Basic Economic Security Tables index, which measures the minimum income workers need to achieve basic economic security.

So that we're clear, they are not measuring the bare minimum needed to survive. Here's what they cover in Mr. McMahon's own words:

"We're not talking about surviving," McMahon tells Morning Edition host Renee Montagne. "We are talking about economic security that allows people to live day to day without fear of a lot of the economic insecurity that we've been seeing in recent years."

So, what do you think the number is? Here's the take from their study:

According to the report, to achieve economic security the average minimum income needed for a family with two workers and two young children is $67,920 — that's with both parents working, and earning just over $16 an hour.

More specifically, here's their monthly budget for "basic economic security" for two working parents, a pre-schooler, and a school-aged child:

• Housing: $821
• Utilities: $178
• Food: $707
• Transportation: $1,019
• Child Care: $1,080
• Personal and Household Items: $460
• Health Care: $443
• Emergency Savings: $170
• Retirement Savings: $56
• Taxes: $1,060
• Tax Credits: -$334
• Monthly Total (per worker): $2,830
• Annual Total: $67,920

IMO, it's pretty interesting to compare this budget to the $250k budget.

And if you don't have a family, here are the results:

A single worker with no children needs to make about $30,000 a year, which means working full-time and earning twice the minimum wage.

And for perspective:

• Median Family Income: $61,265
• The Federal Poverty Line for a Family of Four: $21,756
• The Federal Poverty Line for an Individual: $10,956

Just to state it again, this isn't the minimum required to survive. It includes money for emergency savings and retirement for example. That said, it doesn't include some expenses that many Americans consider "necessities" such as vacations, eating out, flat-screen TVs, cable TV, movie tickets or other entertainment.

I also found this interesting:

The biggest expense is generally housing and utilities. However, once a family has two or more children, then child care is often a bigger expense.

As you might imagine, the comments on their post are all over the board -- from some saying their numbers are way too low to others saying they are way too high -- very similar to our $250k discussion. The one thing that seems to be the differentiating factor: where people live. As you may guess, the New York, Boston, and similar residents think there's "no way" to live on that kind of money (too low) while others (no location given, but I'm guessing it's not a high cost-of-living locale) say it's way high.

Here's one comment I thought was worth sharing:

Money management is what is really important. Knowing where to shop, having a budget, and knowing when to say "no" are the important concepts that must be mastered to survive on a low income. It can be done, and it is done every day. Someone that is buying candy bars and pop is not in poverty.

I think "poverty" is not what this article is about, it's about living comfortably. "Poverty" in this country is nothing like what many other countries consider poverty; where families survive with no running water, no electricity, and farm the food they eat.

There are several points here worth noting IMO:

• No matter what you make, you need to budget/plan to live within that amount. If you don't plan and/or don't have any discipline when telling yourself "no", you're going to be in trouble no matter what you make.
• One more reminder that the numbers above are not meant to be "just barely making it" figures. They are for a family that's doing at least "ok."
• It's all about perspective, isn't it? In America we're discussing whether or not $68k is enough to get by on. Much of the rest of the world would feel extremely wealthy earning a fraction of that amount.

There's no real conclusion here, just more to think about in our on-going discussion of what income constitutes "enough" in America, but I'm sure many of you have some thoughts. Please share them with the rest of us in the comments section below.

Is $250,000 Really Not Enough to Live On?

We've discussed how $100,000 a year, $250,000 a year, and even $1 million a year is not enough to live on in the United States. Until now, the examples we had were simply individuals complaining that they didn't make enough to make ends meet -- even though they made much more than most Americans. But now there's a new "analysis" that attempts to see if any of this belly-aching is actually legitimate. A summary of the study:

The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public schools, using national data on spending.

The analysis assumes that this hypothetical couple -- let's call them Mr. and Mrs. Jones -- both have professional positions at their companies. They take advantage of all tax benefits available to them, such as pretax contributions to 401k plans and flexible spending accounts for medical care, child care and transportation. They have no credit card debt, but Mr. Jones racked up $40,208 in student loan debt in undergraduate and graduate school, and Mrs. Jones borrowed $22,650 to get her undergraduate degree (both amounts are equal to the national averages for their levels of education). They also have a car loan on one of two cars, and a mortgage for 80% of the value of a typical home in their communities for a family of four, which includes one toddler and one school-age child.

Here are the results:

The bottom line: It's not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast. Even with an additional $3,000 in investment income, they end up in the red -- after taxes, saving for retirement and their children's education, and a middle-of-the-road cost of living -- in seven out of the eight communities in the analysis. The worst: Huntington, N.Y., and Glendale, Calif., followed by Washington, D.C., Bethesda, Md., Alexandria, Va., Naperville, Ill., and Pinecrest, Fla. In Plano, Texas, the couple's balance sheet would end up positive, but only by $4,963.

Ok, so this is the headline finding -- that "$250,000 is not enough for people to live on in many cities." But come on. We all know this isn't true -- at least for someone that knows anything about managing money. After all, a $250,000 household income is six times the national average and just 2.9% of couples earn that much or more. If these people can't make it, then who can?

So I decided to dig into the numbers a bit. (You can too if you like -- they can be found here.) Overall, here's what's dragging them down: they are spending too much. Surprised? I'm not. After all, how else could someone making $250k not make it? They have enough income, right? So the problem has to be the spending. Here are some specifics:

• Let's start with the fact that they really aren't in the process of going bankrupt as the headlines imply. They are saving money -- $41,000 per year ($33k for retirement and $8k for college.) They are probably also getting an employer match on some of the retirement funds, so they're doing quite well here. That said, they should get their budget to balance and have a surplus even after these savings are accounted for. And there's plenty of room to do this...
• Taxes are a big killer, and mostly unavoidable. But why is there a separate line for sales tax? Sure, we all pay sales tax, but isn't it added into the cost of an item in another area? Of course it is. For instance, if I bought a basketball, I'd put the total cost (of the ball plus any sales tax) under "working out" or some similar category in Quicken. I wouldn't put the cost of the ball in one spot and the sales tax on the ball in another spot. Who would do this? Answer: no one. Therefore the costs for sales tax are included in the categories below, so this line can be eliminated completely, saving them a couple thousand dollars a year.
• Their homes are too expensive. The mortgages, property taxes, and associated costs are killing the couples in almost every city. What they should have done is buy a house they could easily afford. This move alone could balance the budget for many of them.
• They spend a lot on medical bills -- insurance, out of pocket, and dental. They spend $13,000 a year for a family of four. My family of four spends about $2,000 a year -- $5,000 in a "bad" year with braces for one of the kids. Even if they "only" spent $7,500 a year (still a good amount), they'd be almost $6,000 a year better off.
• Day care and after-school activities are $19k per year. These costs are hard to reduce if both parents are working. But they need to make sure that it's worth it for both of them to work. For instance, if each person earns $125,000 a year, then financially, it's good for both to work. But if one earns $200,000 a year and the other earns $50,000, it may not be worth them both working (at least financially.) They might be able to re-coup that $50,000 by eliminating work-related costs (including day care, taxes, etc.) if the parent making the lower amount quit working. For specifics on how to do this, see Real-Life Example of Going from Two Incomes to One and How to Become a One-Income Family.
• They have $10k per year set aside for maintenance and cleaning of their home. Really? Really? The $5k for cleaning can mostly disappear if one parent quits working. And I would have thought that the homes they purchased were good enough that they didn't suck up an extra $5k in maintenance each year. Perhaps this includes some services that the at-home parent could do (like mowing the lawn.)
• Don't get me started on the car loans. Over $7,000 a year. Ugh. They need to cut expenses, pay off the car loans, start saving for their next cars, and pay cash from here on out. They may need to sell one car and buy an older one for the second car. Again, pretty easy to do if one parent is at home.
• Parking is a killer in a few cities. More savings here if only one parent works.
• They are spending almost $14k on food and household supplies. This should be $10k at the most IMO (based on what we spend -- and we're way below this) and could easily be $7,000.
• Student loans are $6,000 per year. If both parents earn about the same amount, it looks like the loans were well worth the cost. If one makes the lion's share of the income, the lower-earner didn't do a great job of matching college debt with potential post-college income.
• They need to reduce the number of days they eat out at work. That $5,000 a year can be easily cut in half (and even more if they need it to be) by taking their lunches a few days a week.
• The family trip of $4,000 isn't excessive IMO, but if they are underwater, they'll need to cut it.
• Their gift budget is $3,000. It's a bit high, but not totally out of line. Then again, if they're struggling, this can be cut to $1,000 or so.
• Between eating out, entertaining, entertaining at home, and their dog, that's $8,000 per year. These people need to make some choices! Sure, they can enjoy themselves however they want, but they need to be more selective and set priorities. In other words, they can't have/do everything they want to have/do.
• Another thing this illustrates is the high costs of living in some cities. The swing is $30k per year from high to low. And as we've shown, you'll save much more in cost reductions than you'll lose in earning potential when you move to a less expensive city. Even better, keep your income high AND live in a low cost-of-living city. That's what I've done, and it's been great. ;-)

Here's the tally of what they could save every year if they simply managed costs (even if both parents kept working):

Sales tax (already counted in other categories): $2,000
Downsizing to a reasonable house, lowering their mortgage (my estimate): $7,000
Medical costs (conservative savings): $4,000
Interest on car loans (estimate): $1,000
Food and household supplies: $4,000
Eating out at work: $2,000
Family vacation: $2,000
Eating out, entertaining, etc. : $2,000

Total: $24,000

This $24k more than balances their budget and gives them plenty to save (for new cars, for instance.) And it leaves plenty in their budgets to enjoy life IMO. If they wanted to go on my plan, I think I could squeeze out another $15,000 a year. ;-)

In addition, they could have one parent quit working (depending in the income split) and likely break even on that (the cost reductions would offset the loss of income), still saving the $24k per year and probably leading a much less hectic life to boot.

So in the end, the "answer" is that $250,000 is more than enough to live on (of course, what did you expect the answer to be?) But people need to control their spending. If they don't, then sure, they can spend all they make and then some no matter how much they make.

Really, this isn't new news to anyone here, is it? ;-)

Are the Joneses Keeping You Broke?

This is a guest post from Mike Collins of Saving Money Today. I've written about keeping up with the Joneses myself in Why Do We Try to Keep Up with the Joneses? and Thou Shalt Not Keep Up with the Joneses.

When I was a little kid my friend Tony always got whatever he wanted from his parents.  He always had the newest video game, the cool sneakers, and pretty much anything else he asked for.  And whenever I would ask my parents for something that Tony already had they’d respond with the old line, “If Tony jumped off the Brooklyn Bridge, would you jump too?”

Each time my mom or dad said that, I’d always walk away rolling my eyes and grumbling to myself about how cheap they were.  But now that I’m an adult with kids of my own I can finally understand the wisdom that my parents tried to instill in me.  I only wish I had learned that lesson sooner. 

Of course, I’m not the only one who could benefit from my mom and dad’s wisdom.   Our society has become completely obsessed with instant gratification and “keeping up with the Joneses.”  We constantly compare ourselves to our neighbors and try to one up each other.  Failure to keep up means you’re a failure at life.  

Here’s a real life example of what I mean.  I have two friends who are extremely competitive and always trying to top one another.  When Dom bought a big, flat-screen TV Paul ran out and bought a bigger one.  When Paul got a backyard swing set for his kids, Dom ran out and bought a $2,000 playground with swings, monkey bars, and a gigantic slide.  Where does it end?

In private conversations with each of my friends, I’ve come to learn that they’re both up to their eyeballs in debt.  Yet instead of putting an end to their foolish spending, they just keep the cycle going indefinitely as they each get closer and closer to the poorhouse.

Does their competition sound a little familiar?  Maybe you don’t compete with someone in particular, but how many things do you buy just to make yourself look or feel good?  Do you buy a new cell phone every few months and jam it full of apps and a data package costing $120 a month?  Do you trade in your cars every few years just because you get tired of driving an “old” car?  Do you always get the most expensive, top of the line gadget with the most features even if you don’t even know what half of those features do?  If so, you may be trying too hard to keep up with the Joneses instead of focusing on your own goals.

Remember, the Joneses might not be as well off as they appear to be.  As the story of Dom and Paul demonstrates, perceived wealth is often no more than a smokescreen for deep financial problems.  And if you spend all your time and energy worrying about what other people have, you could wind up just as broke as them.

And Yet Another Example

It's almost become a hobby of mine to "collect" stories of people who spend more than they make (or close to it) even though they have high incomes. For some examples, see Now $1 Million is Not Enough to Live On, Seven Costly Pro Athlete Screw-ups, and Stars Who Have Lost Fortunes. Yes, there's no shortage of people who make a bundle of money and then spend it all (and even more!)

Today's addition to my collection centers on NFL players. They are, by the way, in the midst of negotiating a new labor agreement with the NFL owners. Well, it turns out many of them won't be able to survive long if there's a lockout and they stop getting paid. The details:

Though a lockout has been threatened for years — and despite an apparent rise in the number of football stars safeguarding their millions — roughly 380 of the NFL's near 1,700 players still live paycheck to paycheck, according to financial experts familiar with the league.

While this may seem like a high percentage of highly-paid people, 22% actually isn't bad. As a population, 54% of people live paycheck to paycheck (and another 15% go further into debt each month). Then again, the average person doesn't have such a high salary either.

Just how much do they make? It's what you'd expect -- they do pretty well:

There is a wide variation in NFL players’ salaries. The average player salary for the 2009-10 season using USA Today's numbers is $1,870,998. But the number isn't particularly meaningful since superstars can earn far more and second- or third-stringers far less. The league rookie minimum salary is $320,000.

As a reality check, $320k per year for playing a game isn't bad. Do that for five years, and you've earned more than many people make in their lifetimes.

Now I'm sure it's difficult to "only" make $320k when some around you are making millions. But still -- you have to control your spending no matter how much you earn (even multi-millionaires can spend it all), take responsibility for yourself, and forget what others are earning.

Those 22% living paycheck to paycheck are going to be in a world of hurt if there is a lockout. And to add salt to the wound, they will be losing another precious commodity as well -- time. A person's athletic ability only lasts so long. So if they miss a year or so of their peak-earning years, it's something that can't be replaced. Ouch.

So this is for those 22% of NFL players living paycheck to paycheck:

When you get back to earning a salary (whether that's tomorrow or a year from now), follow these two simple equations that will lead you to financial success And if that is too hard, just focus on making your gap as large as possible, and you'll be fine.

Or, you can send your money to me, and I'll manage it for you... :-)

Update: Found this while surfing today. Guess you can spend $32 million quickly.

Some NBA Players Who Are Doing It Right

I've detailed many sports figures, movie and TV stars, and even "everyday" people who have made a ton of money and then spent and/or lost it all. In fact, it's almost become the norm to see someone famous with great wealth blow it over a few years.

But this is a story about some rich and famous basketball players who are taking a different road. The details:

Brandon Jennings of the Milwaukee Bucks, who earned about $2.2 million last year in his first NBA season, is the proud owner of a Ford Edge, which cost $26,000.

New York Knicks guard Roger Mason Jr. said he recently traded in his Bentley convertible for a used Cadillac Escalade.

And when he needed to work out and get therapy during the offseason, James Jones of the Miami Heat said he used the team's facilities instead of paying for a private trainer. "We've got a lockout coming," Mr. Jones said. "I'm not going to pay that much money to have somebody stretch me for an hour."

Brandan Wright of the Golden State Warriors, who was a first-round draft pick and will have earned $11 million before his 24th birthday, is typical of a new attitude. He said he owns one BMW and a home in Nashville, Tenn., for his immediate family. Mr. Wright said he likes to get "nice sandwiches" rather than lavish meals when he's eating out on the road in order to save cash. And if his spending ever gets out of hand, he said, he has trained his financial advisers to call him to tell him to rein it in. "Cheap is the best way to be," he said.

Mr. Jones of the Heat, who is the players union's secretary-treasurer, was a finance major when he was at the University of Miami. He said he tried to keep himself on a 20/80 budget when he joined the league in 2003—spending 20% of his salary, saving 80%. When he played for the Suns from 2005 to 2007, he rented an apartment in Phoenix while paying off a mortgage and taxes on a home he bought in Miami. If he came into the league now, he said, he would have only had one property at a time.

Ok, so there's a potential lockout coming, forcing these guys to prepare in advance for a tough time. Still, they are going against the flow and making financial moves that most people would not. James Jones is to especially be commended. He's been living on a 20/80 budget for seven years now. He has to be set financially for the rest of his life (assuming he can keep his spending under control that long.) Good for him!!!!

As I like to say, if you make $1,000,000 a year and spend $1,000,001 a year, you're going backwards financially. Unfortunately, that seems to be the norm these days for high-income athletes and movie stars. That's what makes the people above so impressive -- they are going counter-culture and making the right money moves -- and they deserve recognition from us all for doing so.

16 Mindsets of the Cheapskates Next Door

The book The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means lists 16 mindsets that set cheapskates next door apart from the typical American consumer. Here they are paraphrased (the actual titles listed in the book are "cutesy" but not always descriptive):

1. They don't try and "keep up with the Joneses."
2. Time is more important than money.
3. It's not about getting the best price, it's about getting the best value for what you spend.
4. Cheapskates don't like to shop (less time spent shopping equals less time spent buying.)
5. They don't often have purchase regrets because they buy right in the first place.
6. They look for purchases/items/investments that appreciate, not depreciate.
7. Cheapskates know the differences between needs and wants.
8. A cheapskate is a premeditated shopper.
9. They place a greater value on "experiences" than "things."
10. They do what they love for a living.
11. They don't like to spend money.
12. Cheapskates are brand blind and advertising adverse.
13. They understand the difference between change and progress (they don't need a new item unless it delivers more value/does something new/better than an old one.)
14. They hate debt.
15. They are self-reliant and self-sufficient.
16. They believe in a higher authority (not always religious in nature -- though most were.)

A few thoughts:

• If looked at in an extreme context, these could be taken as very negative attributes. The book is careful to note that these actions/thoughts are not taken to the limit to where they eliminate all fun/joy in life. In fact, quite the opposite. Most of these people can enjoy what they want to do because they manage their money well and can afford to participate in activities they like.
• I would have guessed at many of these, but some are real shockers. For instance, #10, #13, and #16 are ones I would not have listed myself if asked to come up with a list of frugal mindsets.
• #13 struck me as almost being a political comment. ;-) We've all been inundated so much with "change" from politicians over the past three years that it's almost hard for me to think of it in any other context. Interesting to see the delineation between "change" and "progress" though. I assume that "change" means "better" (or "progress") in this case, but these people don't see this as being so. Example, a new phone might offer a change versus and old one, but the basic performance is the same, so why is there a need to buy the new one?
• #16 could be a topic for a Sunday post here. I don't see much else in the book related to this though, so there's not much to comment on.

Any of these surprise you?

Earning Your Age, Spending Your Age

The book The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means details what it calls an old financial rule-of-thumb (it admits that the concept is out-of-date -- saying it was valid 30 years ago.) But I'd never heard of it, so I thought it was worth sharing. It is as follows (paraphrased):

You were considered to be doing well financially if you were "earning your age." In other words, if you were earning $30,000 by the time you were 30-years-old then you were making good money.

Yep, I think we all can see how this is out of date today. ;-)

Since I got out of graduate school, I have always earned more than my age -- usually multiples of my age (two times, three times, etc.) After all, you'd expect me to be making the most of my most valuable financial asset, wouldn't you? I'm sure many of you are the same.

The author suggests taking this old rule and revamping it to "spending your age" (or less.) In this scenario, if you were 30-years-old you'd spend $30,000 a year or less.

Sorry, I don't fit that one. Though I do spend less than my age on a percentage basis. ;-)

Anyway, I was wondering what you thought of this "new rule" of spending your age or less? Good idea or bad idea? And why do you rate it how you do? I'm interested to find out what you think.

The Gap

The more and more I think and learn about personal finances the more I think that becoming wealthy really just comes down to one vital step: making sure the gap is as big as possible.

The gap is simply the difference between what you make and what you spend. The larger it is, the more money you have to do all the things needed to build and protect wealth -- pay off debt, invest, buy insurance, etc. And the larger it is, the sooner you can meet your financial goals.

With a good gap, you're on your way to financial security.

With a bad gap (or worse yet, no gap or a negative gap), you're going nowhere fast.

And of course the steps to growing your gap are well-known, fully documented, and often discussed: grow your income and keep your spending under control. Seems simple huh? And yet most of the people in our country have a difficult time making their gap all they want it to be.

Lately it's just struck me how we (mostly me, I run a finance blog after all) endlessly discuss retirement strategies, tax moves, investment philosophies, and on and on. And of course, these things are important and give us ideas for making the most of our money once we have it. But the foundation to it all, the key to success for everything financial, the step #1 in any plan to become wealthy is, and always will be, developing and growing the gap.

Characteristics of Cheapskates Next Door

The book The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily Below Their Means lists the characteristics of Americans who, as you might expect, live below their means (aka, spend less than they earn) as follows:

• Roughly 85 percent of cheapskates polled said they plan to pay off their home mortgages early or already have.
• More than five out of every six cheapskates buy their automobiles used instead of new, often paying cash instead of taking out a loan.
• They teach their children about money and frugality from a young age.
• They believe strongly in the value of a college education for their children, but feel equally strong about how to pay for that education: the kids need to shoulder much of the burden and don't even think about taking out a student loan.
• They spend considerably less than the typical American family on food, clothing, and recreation, and way, way, way less on dining out.
• They equate "debt" with "cancer," "imprisonment," and "death."
• They report throwing away only about 10 percent of the amount of food most Americans toss out.
• They rarely replace an item unless it's worn out and can't be repaired.
• Most of them still proudly wear a couple of pieces of clothing that they bought during the Carter administration.
• They are nearly one hundred times more likely to own a pet they found as a stray, or adopted from an animal shelter, than they are to buy one at a pet store or from a breeder.
• They're far more likely to own a Crock-Pot than a plasma TV, to have a clothesline than an iPod, and a good many of them are among the few non-cave-dwelling holdouts yet to own a cell phone.

I'm sure you can guess that I love this book. :-) I'll be posting on it over the next couple weeks or so.

Anyway, here's where I stand on the above:

• We've had our mortgage paid off for over 13 years now.
• As you know, I buy new cars, but I do pay with cash.
• Yes, we're teaching our kids to be frugal.
• I do think that college is a great investment -- it just needs to be done the right way.
• I'm not sure how our spending compares, but based on comments I've received here about our grocery spending, I'm guessing we're below normal.
• It's true -- I don't like debt.
• We don't throw out much. We either use what we have or give it away. We only toss stuff that's worn out and/or doesn't work.
• Why replace something if it still works? Exception: we will replace a computer after several years to get better performance, even if the other one "works."
• My wife still wears several pieces of clothing that she wore in high school/college (jeans mostly.) I like that she still fits into them. ;-)
• We don't have any pets. But if we were going to get one, the animal shelter would be stop #1.
• We own a Crock-Pot, LCD TV, two iPods, and two cell phones (one paid by my work and the other a Trac Phone.) We do not line-dry our clothes. We live in a neighborhood and I'm not really interested in hanging my underwear out for all to see.

So I guess we could be classified as Cheapskates Next Door. How about you?

How to Save a Third of Your Income

The Bucks Blog details the experience of how one author used to save a third of her income:

The biggest thing was where my husband and I chose to live. We lived in a one-bedroom apartment long after we could afford to live in a two bedroom or three bedroom. We basically never upgraded our lives after school and just continued living like college students.  . . . We also made sure to always live near public transportation so we only needed one car . . .  and we make sure to cook relatively inexpensive nonmeat-focused meals most nights at home so our grocery bill is pretty low at about $120 a week.  . . .  Another big thing was we use old clunky cellphones that are definitely not glamorous but saved us money, and we skipped cable a couple years ago.  . . .  Just across the board, we tried to live more frugally than we could have actually afforded to.  . . . It’s not like we denied ourselves everything. I think giving ourselves some small indulgences like a nice television made it easier to make the big sacrifices.

So, the key is keeping spending low -- especially on high-ticket items like homes and cars. Who would have ever guessed that? ;-)

It's interesting to note that they are no longer saving a third of their income. They have bought a more expensive house, have a child, have new expenses (like daycare), etc. But they are still saving 15% -- not a bad level at all. And since they are young, they certainly have time on their side -- several decades for the money saved to compound like crazy.

I've been saving a third of my salary for some time now, so I can agree with their basic premise -- live well below your means. Of course, it's much easier to live well below your means if you take my other bit of advice and grow your career/income to its potential. After all, it's easier to save 1/3 of $150,000 (still allowing you $100,000 to live on) than it is to save 1/3 of $50,000 (giving you only #33,333 to get by on), isn't it?

Now $1 Million is Not Enough to Live On

We've already covered one story of a couple who can't make it on $100,000 a year and another who can't make ends meet on $250,000 a year. Now, here's a family who is struggling to make it on $1 million a year. Here's where it all goes:

• $1 million in compensation for a year
• -$500,000 -- half of pay is in deferred stock
• -$250,000 -- taxes
• -$50,000 -- Wife wants to upgrade their Hampton's rental
• -$60,000 -- Private-school tuition (one kid in kindergarten and another in second grade), ballet and fencing lessons
• -$60,000 -- Mortgage (for 1200 sq. ft. apartment in NYC bought for $1.4m -- ha!!!!)
• -All the rest and then some - housekeeper, babysitters, gym memberships, therapists for husband and wife, plus couples therapist

Cry me a river...

Ok, I'll give them a break on the deferred compensation and the taxes. He really earns $500,000 a year (which is still good BTW) and a boatload of that goes to the government. So he has $250k to live on. Should be enough, right?

But he's got two other problems:

• First, he lives in New York City. Very expensive. $250k in NYC isn't the same as $250k in St. Louis, Cincinnati, Nashville, etc.
• Second, he and his wife can't control their spending. It's a DEADLY money mistake -- the worst you can make. No matter how much they earn, they'll always fall behind if they can't control their spending.

The result? They are racking up debt every month. Get this quote:

"I don't know where it goes every month, but I know my credit card is being used to pay for it."

Ugh.

Well, I guess it's true that $1 million isn't what it used to be. ;-)

Boo-Hoo -- This Couple "Only" Makes $250k

As if the couple who couldn't make it on $100,000 a year wasn't bad enough, here's a piece from the Wall Street Journal where a University of Chicago law professor and his wife, an oncologist, make more than $250,000 a year and they're having trouble making ends meet. Ugh.

We'll get back to this couple in a minute, but for now let's add another example of "we make a boatload of money and yet spend it all" from the WSJ piece:

"I can show you a client of mine right now who lives in a suburb of Chicago, he's a doctor, makes $350,000 a year, and he routinely racks up $25,000 on his credit cards," says Michael Kalscheur, a financial planner at Castle Wealth Advisors in Indianapolis. The reason? Too many people have "unrealistic expectations," says Mr. Kalscheur. They figure they should be vacationing in Italy, driving expensive cars, the whole deal. "We need to knock him upside the head. He's got to stop spending money."

Double ugh.

Well the WSJ looked over the post written by the law professor (he took it down, but here's the cached version -- update: this link is broken and even the original article doesn't have it, see comments below) and gave him some steps to take to improve his finances (like refinance his mortgage (either he's paying way too much or his house is a multi-million dollar home), get a grip on his spending (ha!), and so on.) They even suggest he consider moving (yep, moving)! Check this out:

Think about relocating. No kidding. It's not about how much you earn, it's about how much you get to keep, and if you are paying too much to live in an expensive town like Chicago, you may be much better off earning less somewhere cheaper. You and your wife both have highly portable jobs. According to the ACCRA Cost of Living Index, someone earning $350,000 in Chicago could get the same standard of living on just $230,000 a year in, say, Austin, Texas or Cincinnati.

I think they are confusing the $250k and the $350k from two separate couples, but their point is still a good one.

Several thoughts from me on this piece:

• Again, this is why over-spending is the worst money move you can make. Because no matter what your income, you can spend it all -- and more. (And conversely, you can become wealthy on an average salary.)
• CONTROL YOURSELF!!!!!! Unless this couple masters their spending, they won't be able to make progress even if they earn $1 million a year.
• Interesting that his wife is a doctor. Adds a real-world example to our recent conversation about doctors versus farmers.
• Huge school loans are part of their problem. He says, "My wife has school loans of nearly $250,000 and I do too, although becoming a lawyer is significantly cheaper." Does this mean he has big loans in addition to the $250k but not as big (maybe $100k)? Yikes!!!!
• Have to say it: move, move, move!!!

And don't get on me about not having any sympathy for them. I don't have any and don't think anyone should. It's time for some tough love and it's really the only answer if these people hope to make any progress financially.

Jewish Thoughts on Wealth: Extravagance and Frugality

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

In my Sunday posts we're currently digging into the book The Jewish Phenomenon: Seven Keys to the Enduring Wealth of a People. It notes that Jews are disproportionately wealthy and accomplished and much of this success is due to seven keys which can be traced to the teachings of the Jewish faith.

Today we're going to talk about one of the "seven keys to Jewish success" that the authors list: be selectively extravagant but prudently frugal.

The authors spend the first few pages of this chapter talking about the stereotype that Jews are "cheap." They conclude that what may be perceived as weakness is simply basic wealth management -- you need to control your spending if you want to become wealthy.

They also mention that Jews tend to splurge on things they really want. The general feeling between frugality and extravagance is summed up in this quote: "I do not like to throw my money away, but when something is important to me I want the best."

The next part of the chapter reads like something from the books The Millionaire Next Door or Stop Acting Rich. It tells how Jews (on average) don't buy huge homes, don't drive expensive cars, etc. -- all the things studies have shown are habits of most millionaires.

The chapter then ends with a laundry list of great ways to save money (including tips we discuss here all the time.) Some of them are:

• Take your lunch to work
• Use coupons
• Eat at home more frequently (versus eating out)
• Skip junk food and expensive coffees
• Don't smoke
• Buy term life insurance
• Stay married, divorce is expensive
• Avoid credit card debt
• Consult Consumer Reports for major purchases

And the list goes on and on...

In short, this chapter says that Jews spend less than they earn. As we learned last week, they also make more income than average. And we all know what happens to those who make high incomes and control their spending: they get rich.

Any thoughts?

This Couple is Killing Me

Check out this couple profiled on CNN Money. A summary of their financial situation:

• They currently make $133,000 combined.
• They recently had a second child and wife wants to work part-time.
• This will bring their income down to just over $100,000.
• They can't afford to do this because they have too much debt (mortgage, home-equity loan, auto loan, and credit cards.)
• They need to cut debt by $500 a month and other expenses by $1,300 to make the finances work.
• The mom says, "We really have to think about it."

What????????!!!!!!!!

Let me be a bit more clear: these two make a great income -- over $100k even with the wife's salary reduction -- but they can't afford to live on that amount. Now their hopes and wishes for their family are put on hold because they haven't been able to control their spending and show no signs of wanting to start.

This is just one more in a long line of examples of why over-spending is the worst money move anyone can make.

Now the one thing not mentioned is what part of the U.S. they live in. As we all know, $100k in St. Louis goes a lot farther that $100k in New York. That said, if cost of living is beating them down, I just have three comments:

1. See, I told you that where you live can have a big impact on your finances.

2. No matter where you live and what you earn, you still have to spend less than you make. It's simple math.

3. $100k is a decent salary even if they live in a costly city. Granted, it's not a wonderful salary for people living in costly cities like Boston, San Francisco, etc., but it's certainly not poverty level either.

In short, they have over-spent and now have so much debt that they can't live like they want to. And unfortunately this seems to be more of the rule than the exception in America today -- people simply spend way too much. Don't believe me? Then check out the low median net worths in America today and then tell me what you think.

Boats and Cottages

A couple of interesting situations have occurred in my life recently. Since they are related and deal with money, I thought I'd share them in one post.

The first is the number of people I have run into that have "cottages." For those of you who might not be as familiar with the term, here's a brief review:

• In Michigan, there are about four (maybe five) months of really great weather. As such, when the weather is nice, people want to be outdoors.
• Many people prefer to be outdoors in a wooded or semi-wooded location that's at least somewhat remote.
• As such, a good portion of the population here owns a "cottage."
• Contrary to my initial thoughts, a cottage isn't (usually at least) a 50-year-old, one-bedroom shack without running water or indoor facilities. Quite to the contrary, a cottage is more likely to be a "regular" house -- just one that is located in the woods, on a lake, or in some other scenic location, generally "up north" (in northern Michigan.) It's likely that this house is smaller than the home they live in most of the time (perhaps it only has two bedroom and one bathroom rather than four bedrooms and three bathrooms.) But make no mistake about it, it's a house.
• Some people inherit their cottage from family (or even use a family-owned cottage.) Others buy one outright. Both spend most of their summer weekends "up at the cottage."

Now think of the financial implications of owning two homes (not to mention the time commitment). Even if someone gave you the second home (like a family member), you still have maintenance, taxes, utilities, etc. associated with another home that you have to deal with. And for those who have to BUY a cottage, this might mean TWO mortgages. Yikes!

Now throw this into the mix. Over the last few months, I've had several people who either are: 1) in financial difficulty, 2) have been in financial difficulty, or 3) who could be in financial difficulty (because I know what they make) tell me that they have recently purchased a cottage (i.e. a second home) or have mentioned that they have a cottage. Each time I've thought "how can these people afford a second home?" The likely answer, "They can't." (Some will say they got a "great deal" on one due to the poor economy, but who can afford two homes even if the second one is 40% off what it once was?)

Thomas J. Stanley recently discussed owning two homes. Some of his key findings:

Most millionaires can afford to purchase and maintain a vacation home.  Yet, as I mentioned in Stop Acting Rich, 64% of the millionaires surveyed never owned a vacation home, beach bungalow or mountain cabin, not even a lean-to or a tree hut in the woods. 

In 2006, the second home buyer had a net worth of approximately $380,000 and a median annual household income of $80,600.  Are you thinking of buying "an affordable second home" because you want to emulate the behavior of most millionaires?  Be careful.  Most people who own second homes are not millionaires.  Most millionaires rent instead of buying vacation homes.

Within the same age and income cohort, who is better at transforming income into wealth?  Overall those who don't own vacation homes are more productive than those who do.

No doubt some second home buyers have enhanced their wealth by having another home.  Yet far too often even investment driven buyers of second homes grossly underestimate the real costs in terms of buying, furnishing, maintaining, commuting to, renting and possibly selling a second home.  Time is money.  Place a high price on your time, all that time it takes to shop for a second home, set up utility related services, pay bills and hire people to maintain your home.  Even renting your home takes time. And if you have a property management company handling and renting your home, you may pay up to 50% of the gross rent for this service. 

There are a variety of reasons why millionaires don't own vacation homes.  Most self made millionaires don't need to collect "things" to define and demonstrate their achievements.  Also, most wealthy people have a wide variety of interests and activities.  There is a substantial correlation between the number of interests and activities that people are involved in and their level of financial wealth.  Some wealthy people feel that owning a vacation home would restrict them, obligate them to spend a lot of time there.  And if they do not spend much time there they feel guilty spending lots of dollars on something that is underutilized.  Most millionaires realize this without having to make the first mistake of purchasing a second home. 

That's exactly what I thought.

Now look at the issue of spending on things most people can't afford in another way. My wife and I spend many summer evenings walking around our neighborhood. It's a nice, middle class neighborhood with several hundred homes in it. What do you think we find in driveway after driveway (other than multiple cars)? Yep. Boats. And I'm not talking row boats. I'm talking big power boats -- some so big that they barely fit into the driveway.

Again I'm thinking, can these people really afford these big boats (and all the expenses that go along with them). In many cases, I think the answer is "Not really."

Of course people can spend their money on whatever they like. It is their money after all. But I find it interesting that Americans have such low levels of net worth, are struggling with saving for college, are worried about whether or not they can retire (or if they'll have to work until they are 75) and yet they are bleeding money left and right on second homes and big boats.

And what's more sad is that fact that those of us who are financially responsible will be called on to care for many of these over-spenders later in life when they can't provide for themselves (have failed to save for their needs.) After all, it's only "fair" to help others, isn't it (at least that's what many in our government say)? I'm all for helping those who need help and are in trouble through no fault of their own, but I'm not too excited about helping someone who could have provided for themselves and chose instead to own a cottage, boat, or some other extravagance.

Or maybe I'm just becoming a grumpy, cynical old man... ;-)

The Biggest Secret to Becoming Wealthy

Yahoo lists the five secrets of self-made millionaires. But the real gem in this piece is at the end where they share the "biggest secret" of self-made millionaires. Want to guess what it is? Simply "stop spending." Their thoughts:

Every millionaire we spoke to has one thing in common: Not a single one spends needlessly. Real estate investor Dave Lindahl drives a Ford Explorer and says his middle-class neighbors would be shocked to learn how much he’s worth. Fitness mogul Rick Sikorski can’t fathom why anyone would buy bottled water. Steve Maxwell, the finance teacher, looked at a $1.5 million home but decided to buy one for half the price because “a house with double the cost wouldn’t give me double the enjoyment.”

Hmmmm. Sounds familiar. ;-)

Again and again we see wealthy people talking about how they simply spent less than they earned and, over time, they became wealthy. And we've seen this happen to people who don't earn a tremendous salary. Of course, it's easier to become wealthy when you make a good income AND control your spending -- that's why I talk as much about making the most of your career as I do keeping spending low.

Fortunately, success in personal finance boils down to a couple simple concepts (or several if you want to expand them a bit.) Apply these (and avoid the major bad money moves), and you WILL be wealthy.

Unfortunately, it's not that easy to become wealthy. Because while the concepts are simple to understand, they are not easy to implement. They require patience, time, discipline, persistence, and self-control, qualities that many Americans have either given up on or can not muster in themselves. Yes, most people have the ability to become wealthy (assuming even a moderate salary), but they can't (or won't) implement the steps needed to become financially independent. Perhaps they are happier the way they are.

But my experience is that you don't need to choose between happiness and wealth. If you work to grow your income, keep your expenses low, and over time make the gap between the two bigger and bigger, you'll have plenty to do the things you enjoy as well as an ample amount left over to save and invest. Yes, you can have your cake and eat it too.

The Seven Pillars of Financial Success, Pillar 1: Spend Less than You Earn

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

The Bible discusses the keys to personal finance success quite plainly. If you read the book of Proverbs in particular, you'll see that the path to financial success isn't that difficult or extensive. In fact, the wisdom to be prosperous can be found in a few simple steps.

Over the next few weeks, I'll be sharing what I consider to be the seven pillars of financial success from the Bible.  I picked up on the number seven from Proverbs 9:1 where it says:

Wisdom has built her house; she has hewn out its seven pillars.

Today we'll be discussing Pillar #1: Spend less than you earn.

In Proverbs 21:20, the Bible says:

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

Let me paraphrase and expand this passage:

Wise people have plenty left over because they don't spend all they make. On the other hand, fools spend all they get (and maybe even more).

As I've said numerous times, the core principles for personal finance success are fairly easy to understand -- you need to spend less than you earn for a long time and you'll more than likely be wealthy. Notice what's VITAL in this success? It's spending less than you earn. Without this one, simple step, you're dead in the water financially -- you're going nowhere. With it, you have extra amounts left over that you can save and invest -- and thus grow your net worth. This is why spending less than you earn is the one, main key to financial success (and thus my best piece of financial advice).

If you spend more than you earn, you're going backwards financially -- whether you're making $40,000 a year and spending $41,000 or making $4,000,000 a year and spending $4,100,000. No matter what your income is, if you spend it all and then some, your finances are doomed (yes, I've collected lists of many "rich" people that have spent all that they've earned despite making a boatload of money). So having more income isn't the main issue. It's important, that's for sure, but spending less than you earn is crucial. That's why it's Pillar #1 on the road to financial success.

Do you agree or disagree?

Come back next week as I discuss Pillar #2!

An Example of How to Get Rich on an Average Salary

Here's another example of the fact that anyone can become wealthy with even an average salary -- as long as they spend less than they earn. This story comes to us from the Wall Street Journal. The summary:

Jimmie Dean (not to be confused with the sausage magnate) worked for 33 years as a technician at Phillips Petroleum. The most he ever earned was around $50,000 a year.

But he scrimped and saved and invested in mutual funds. When he died in 2008, he had more than $2 million in the bank. His bequest was to set up a scholarship fund.

“He did it through being frugal with his money,” said Mr. Dean’s nephew, Bob Boyd, who now runs the Jimmie Dean Foundation.

Let's forget the "he deprived himself just so he could give the money away" comments for now and focus on the facts:

• He didn't have a great income -- it was average at best. Remember that $50k was the MOST he ever earned in a year. I'm guessing many years were well below that amount.
• He lived frugally, had an excess, and saved/invested it.
• All this effort ended up generating a net worth of $2 million.

Not bad, huh? And if he can do it, so can the rest of us.

In fact, many, many people become wealthy this way. Check out these posts for details:

• Another Example of Getting Rich on a Low Salary 
• How to Live on $44k Per Year (Almost) Debt Free
• And Yet Another Millionaire Says the Same Thing 
• Wealth Doesn't Require a High Income

Seven Costly Pro Athlete Screw-ups

It's been awhile since we've covered fabulously wealthy people who have spent all their money and then some, so when a reader sent me this piece covering seven costly pro athlete screw-ups, I knew I had to run it.

Here's a summary of the athletes and their screw-ups:

• Scottie Pippen - Former Chicago Bulls star Scottie Pippen lost $120 million in career earnings due to poor financial planning and bad business ideas.
• Evander Holyfield - Four-time boxing champ Evander “The Real Deal” Holyfield reportedly made over $250 million in cash during his boxing career, but despite this he reportedly is flat broke.
• Lenny Dykstra - According to Dykstra’s July 2009 bankruptcy filing, he owed more than $30 million to creditors, including his $18.5 million purchase of Wayne Gretzky’s home.
• Latrell Sprewell - Sprewell, who made over $96 million during his career, lost his $1.5 million dollar Italian yacht, named “Milwaukee’s Best”, in 2007.
• John Daly - Two-time PGA major champ John Daly gambled away between $50 and $60 million in career earnings, according to his 2006 autobiography.
• Jack Clark - Former professional baseball slugger Jack Clark was driven into bankruptcy in 1992 by his appetite for luxury cars.
• Mike Tyson - The king of them all is boxer Mike Tyson, who squandered a $350 million to $400 million dollar fortune.

It's amazing to read these stories. These guys had more money than they ever needed, more than enough to live several lifetimes, and they still blew it all!

Just goes to show you that it's not how much you make, but how much you spend. No matter how much you earn, you MUST control your spending or else you'll end up flat broke.

The Best Ways to Quickly Improve Your Cash Flow

In Seven Steps to Get Out of Debt, step #3 was listed as "look for ways to improve your cash flow." I just listed a few basic thoughts on that post, and I want to add some details for those interested in improving their cash flow. In particular, I want to focus on how to improve your cash flow QUICKLY if you're in a tight spot and need extra money to pay off debt.

Just so we're all on the same page, let's start with what I mean by "cash flow." Quite simply, it's the difference between what a person makes and what they spend. In this case I'm talking about monthly cash flow -- what someone earns in a month versus what he spends that month. It's his "surplus."

We all know that there are only two ways to improve your cash flow -- increase income or decrease expenses. Do either of these things and you will grow your cash flow.

In the short term, it's much easier to decrease expenses than it is to increase income. If anyone could have easily increased their income, they would have probably done so and it would already be part of their cash flow. It's a fact of life that money making efforts usually take a decent amount of time to develop and show results. I'm NOT saying that you shouldn't start working on money making ideas -- just that it will take some time for these to noticeably improve cash flow. Therefore, if you're looking to improve cash flow NOW, you'll need to focus on decreasing expenses.

I have a whole host of suggestions for saving money, so if you're really serious about cutting costs, check out that post. But here's a list of areas where many people can cut costs quickly to improve cash flow -- especially those who have never had a budget and are looking to get into financial shape. I've counseled scores of people just starting their budgets and looking to improve cash flow so they can pay off debt, and these are the most common spots to "find" money:

• Premium TV packages - Does anyone really need 500 channels? Or 250 for that matter? Cutting from a premium cable or satellite service to a basic one can improve cash flow immediately in a big way ($50 to $75 a month.) Want entertainment? Read a book (free at the library) or watch one of the 30 channels on basic TV.
• Eating out - We all know that it's a lot less expensive to eat at home, right? So why is it that people with money issues always seem to eat out three or four times a week? Hmmm, maybe there's a connection here. At $30 a pop, eating out once a week (or even a month!) versus three times a week will add $240 per month to anyone's cash flow. Cha-ching!
• Movies - A family of four going to the movies and wanting snacks can easily drop $50. Instead, stay home, rent a movie ($5 at most), and pop popcorn. Do this a couple times a month and save $100.
• Vacations - Many with money troubles seem to take very nice vacations -- a lot nicer than the ones I generally take. So how about staying home this year and pocketing the $3,000 to $5,000 you're forking over for a cruise or trip to Europe?
• Hobbies - I'm all in favor of turning a hobby into an income, but most people do the opposite -- they sink a ton of money into a hobby that never makes a dime. Now I'm not saying you shouldn't enjoy life, but can't you do something for fun that's not so expensive?

Looking at this list, you're probably thinking I'm the biggest kill-joy alive. But if people are in financial trouble and need to pay off debt, the fact is that they have been having too much "fun" (and spending accordingly) for their income. They need to back it off a bit -- not everything, just some things -- so they can come into balance and get out of debt. Then, as the do that and also increase income, they can slowly add back the things they enjoy doing which they can now afford.

Do you have anything to add to my list? Any ways you've noticed to cut spending and improve cash flow quickly?

Why Do We Try to Keep Up with the Joneses?

This article about how rich friends can make you feel poor really got me going. Why is it that we put so much emphasis on what people think about how we're doing financially? I know it's part of human nature (just like we care about how people think we look), but does it really matter that much with money? Do we really care so much what friends and family think of us that we need to lie to avoid the issue?

And what gets me even more is the whole "keeping up with the Joneses" mentality. As we've seen, when people live around others that appear to be wealthy, they spend more to appear wealthier themselves. And as a result, they get into financial trouble. When will we learn that the Joneses are not people we want to model our financial lives after? Why? Because the Joneses are broke! They're in debt, spending more than they make, and are living paycheck-to-paycheck. You don't get to be successful financially by trying to emulate someone who's not financially successful. And yet we often spend, spend, spend to keep up appearances. It's frustrating to me!

I know I'm preaching to the choir here at Free Money Finance. Readers here don't do this (at least not to the extent that it puts their financial lives in jeopardy), but I just had to vent a bit.

Whew! Now I feel better. ;-)

Two Simple Equations that Lead to Financial Success

Last night I spoke to several hundred people on the basics of personal finance success. The following post is a summary of my opening comments. If you enjoy it and would like to receive free, daily suggestions on how to grow your net worth, you can subscribe to Free Money Finance using your feedreader and this link.

Americans today are in need of financial help. And for the life of me, I can't figure out why. Ok, actually I can, but it is still puzzling to me that so many people are having so many financial problems when the keys to success are so simple. And this was BEFORE the economic downturn too, so don't think people are in trouble only because of a poor economy. Granted, the slump hasn't helped, but things were bad before things were really bad.

How bad are they? According to a survey of 5,000 people highlighted in the book The Difference: How Anyone Can Prosper in Even The Toughest Times by Jean Chatzky, 54% of Americans live paycheck-to-paycheck, barely getting by, and are one financial problem away from money trouble. Another 15% are what the survey calls Further-in-Debtors – people who are going backwards financially every month. So between these two groups – almost 70% of people are either struggling or going backwards financially.

And what makes these results so perplexing is the fact that the principles to succeed in managing your money are pretty simple. They are both easy to understand and few in number. You don't have to be Einstein to succeed financially -- anyone with normal intelligence and a bit of self-control can prosper.

You have probably heard of the 80/20 rule, right? Also known as the pareto principle, it states that, for many events, roughly 80% of the effects come from 20% of the causes. In finances that would equate to getting 80% of the results out of 20% of the advice or tips. But in money management, the rule is more like 90/10 or even 95/5. Following a few steps will get you almost all the results you need (and certainly enough results to make you wealthy.)

Personal financial success ultimately comes down to two very basic financial equations. There’s no doubt about it – if you master these two equations alone, you will become wealthy and be far ahead of most Americans:

• Income – expenses = surplus

• Surplus x many years = wealth

Yep, that’s it. It seems pretty simple, doesn’t it? In fact, these seem to be “common sense.” But remember that these are two equations that 70% of Americans can’t get right.

If you look at these equations, you’ll see that all efforts to improve your finances come down to two things: increasing your income or decreasing your expenses. The more you do of each of these, the better.

So why can't most people get these two equations to work in their favor? Many would say it's simply because they don't earn enough money. And for a small portion of the population, this is the reason. But the survey above also identified why so many people are in tough financial shape: they spend too much. They can't control themselves and they simply over-spend. So they live paycheck-to-paycheck or worse, are falling more behind every month.

I've covered all this information previously when I wrote How to Be at the Bottom of the Financial Barrel. I also posted thoughts from the book above on What Makes Wealthy People Wealthy, The Difference Between the Wealthy and Everyone Else, and How to Be Financially Comfortable. But for those of you who don't want to read all those articles, here's the short version of how to be financially successful:

• Spend less than you earn (the bigger the [positive] gap between the two, the better)

• Do it for a long time

And for those of you who want a ton of suggestions on how to make and save more money, check out Thousands of Ways to Make and Save Money.

Do Financial Journalists Really Know Anything?

Call me picky, but articles like this rub me the wrong way. In particular, get this quote:

For those of you making more than $250,000, I regret to inform you yet again: Yes, you are indeed rich—any way you slice it.

Well, not exactly. And it makes me want to read nothing else this guy has to say. Why? Because he doesn't understand the difference between income and wealth (or "being rich.)

Now I understand the point he's trying to make -- that if you earn $250k per year, you are among the top earners in this country. So why doesn't he say that? No, he has to say that because you're making $250k a year you're rich. The term "rich" means "wealth" or, in personal finance terms, "net worth." And as we've seen over and over and over again, just because someone has a high income doesn't mean they are wealthy.

Sure, someone with a high income has more potential to become wealthy, but potential often counts for zilch.

In short, "income" and "wealth/rich" are two different things, any anyone who writes a snarky, opinionated piece on how they are the same, needs to check his facts a bit more before he gets published in Newsweek.

I'm already suspicious of most of the TV, print, and web "reporting" that I see, and this piece is simply another reason I'm getting more and more leery every day. 

Stars Who Have Lost Fortunes

Here's a list of stars who have lost fortunes. Or, in other words, people who have earned a ton of money, spent all of it and more, and are now in financial trouble. They list 19 celebrities in total, and here are some of the highlights:

• Nicolas Cage - In response to the suit, Levin maintains that Cage brought about his own financial ruin by living above his means, and that he had warned the actor to scale back his lavish lifestyle. The actor's purchases included said castles, 15 palatial homes, a large collection of yachts and a fleet of Rolls Royces.
• Joe Francis - The 'Girls Gone Wild' creator reportedly owes over $34 million in back taxes. Francis tells TMZ that the feds have frozen his various accounts amounting to more than $100 million and that he's planning to file for personal bankruptcy ASAP.
• Mike Tyson - The famous boxer reportedly earned $300 million in his career, but it wasn't enough to support a lavish lifestyle that famously includes pet tigers. He filed for bankruptcy in 2003, owing $27 million.
• Kim Basinger - Alec Baldwin's ex came across financial problems after reportedly buying the town of Braselton, Georgia for $20 million, then selling it for $1 million. Basinger filed for bankruptcy in 1993 when a judge ordered her to pay Main Line Pictures $8.1 million after backing out of a commitment to star in 'Boxing Helena.'

Other stars profiled include Lorraine Bracco, Randy Quaid, Don Johnson, Michael Jackson, Dorothy Hamill, Gary Coleman, Corey Haim, Burt Reynolds, Meat Loaf, Zsa Zsa Gabor, Wayne Newton, Mickey Rooney, MC Hammer, Willie Nelson, and Donald Trump.

To be fair, not all of the financial problems noted in this series were due to overspending. Some were simply poor management (like trusting the wrong person -- a crook in most cases) or business deals gone bad. And some of these people have popped back as well and are now doing fine. For instance, Trump seems to have fully recovered (and more) from his financial troubles.

That said, many in this group simply spent more than the tremendous amounts they earned. I know, it's hard to believe, but it can be done -- and they're proof of it.

I know I've said it a million times, but let's go for a million and one: if you earn a ba-zillion dollars and spend a ba-zillion and one dollars, you're going backwards financially. That's why I list spend less than you earn as my best piece of personal finance advice.

Mindless Spending 2: You'll Get By with a Little Help from Your Friends

The following is a guest post from Marotta Wealth Management.

Both mindless eating and mindless spending rely on our subconscious need to follow scripts to pace our consumption. Community plays a huge role in regulating our financial destiny--either a path of savings that builds real wealth or a path of spending that leads to impoverishment.

In one study cited in Brian Wansink's book "Mindless Eating," people were invited several times to a lunch of pizza, cookies and soft drinks. They were watched both eating by themselves as well as in groups of four or eight. When the subjects ate alone, researchers used a baseline that allowed them to categorize people as typically light or heavy eaters. Interestingly, when people dined in the groups, the quantity they ate changed.

Light eaters ate more in a group, and heavy eaters ate less. Both kinds of eaters conformed somewhat to the average pace and quantity of the group's consumption. Mindless spending works the same way.

If you tend to be a conservative spender, shopping in a group can easily entice you to buy more than you would normally. Conversely, if you have trouble saving money, taking along a frugal friend will help you resist. In fact, following the lead of penny-pinching friends or family can help you evaluate your own lifestyle and change the way you view money.

Millionaire couples may have very little in common except that they all answer "yes" to these three questions: "Are you frugal? Were your parents frugal? Is your spouse even more frugal than you are?" A culture of frugality builds a lifestyle of wealth. You subconsciously learn an appropriate lifestyle from those around you.

My wife and I formed our spending habits right out of college. Our first community of friends earned very little. Their lifestyle made even ordering pizza an extravagance. Combined with the example of my parents' depression-era thrift, we started saving and investing early.

In contrast, if your parents golf at Farmington or play tennis at the Boar's Head Country Club, you may struggle to maintain a frugal lifestyle. If your friends live rich, you will too. Your spending scripts will be based on comfort and convenience. You will get the deluxe model with all the features. And you will invariably buy the added service, protection and accessories.

Spending money just to socialize with friends is an especially common trap. Teenagers who work all day for minimum wage and then go out for dinner and a movie can easily end the day having spent more than they earned. Meals out in expensive restaurants with elaborate appetizers, drinks and desserts add both to the bottom line as well as to your waistline. Consider inviting friends over for potluck and a game night, and everyone might afford to send their children to college.

Spending money is contagious. If you go to the mall and a friend is hunting for the perfect purchase, it's easy to get caught up in the excitement. If you want your turn in the spotlight, you have to be shopping as well. Even if what you buy is small, the expense still depletes your finances.

And if you don't spend money or you resist going to the fancy restaurant or the full-priced movie, you risk being perceived as cheap. You may even worry that your friends won't invite you because you spoil the party.

By voicing your concerns, however, you may allow others to agree without feeling as uncomfortable. Truth be told, the person most worried about the expense is often the most secure financially. After all, wealth is what you save, not what you spend. And if your friends won't adjust to help you meet your financial goals, maybe you need different friends.

A life of country clubs, facials and galas will obligate you to spend money. If your social life includes such activities, budgeting will be difficult. Your financial stability may ultimately require developing relationships with people who are more fiscally conservative. It's your choice either to live rich or actually be rich.

Spending habits begin very early as we follow the lead modeled by our parents. In many homes, financial matters are a well-kept secret. Children are left to guess and infer from their elders’ actions and cryptic remarks. As a result many children learn habits that threaten their ultimate happiness and success.

George Kinder, author of "The Seven Stages of Money Maturity," asks his clients to write an autobiography that focuses on their relationship to money and the beliefs they have acquired. This exercise can help you examine your ingrained assumptions about money. Belief is powerful. As people think, so they will act.

And if everyone around you is doing something, it seems normal. Consequently, one person in a family can't single-handedly change the family's financial DNA. Deeply entrenched traditions generally will overwhelm any one family member who tries to question them.

So galvanize the whole family behind budget changes. It takes explicit communication. Children as young as four years old can contribute and learn from the process. There's no stigma attached to living within your means. If a budget isn't a team effort, then one family member will end up holding the purse strings and everyone else will be resentful.

Both spouses must start on the same page and with the same degree of humility. Every financially struggling family has one partner who believes he or she is the careful one with money and that any financial problems are the other person's fault. Most of the time, this generalization is untrue. It is relatively easy to be frugal by comparison if you abdicate all the spending decisions to your spouse. That way you can enjoy the results of spending without any of the guilt.

Serving as a role model in the family includes setting the pace and nature of spending. Learn to regulate when and how much money gets spent. Norms are set in the trenches of everyday spending, not in criticizing the number of presents on Christmas morning.

Even the most reclusive among us relies on spending scripts and norms to regulate when to open their wallet and when to refrain. If you are happy with your spending scripts, that's great. But if you are trying to change them, you need a little help from your friends.

Behavioral changes are best reinforced when you ask everyone you know to help you make the change permanent. It takes explicit thought and energy within your social network to overcome mindless spending scripts. And it takes a consistent effort for at least a month or more before new habits begin to take root.

The task is challenging but certainly not impossible. And small behavioral changes can result in building significant long-term wealth. The reward of financial peace and security is worth developing a prudent and thoughtful lifestyle.

Another Wealthy Athlete is Broke (and Nick Cage Update)

Here are a couple related situations -- people making a ton of money, spending like crazy, and going broke. The first one is former Boston Celtics star Antoine Walker. The details:

In 12 years, Antoine Walker made more than $110 million playing professional basketball moderately well. Take away taxes, throw in some Adidas endorsement money and a "NBA Live 99" cover, and he's left with, what, $60-to-65 million?

The once multi-millionaire athlete has been pursued by multiple financial institutions for unpaid debts. In fact, according to Shira Springer of The Boston Globe, "Employee No. 8" owes more than $4 million to his creditors and is facing felony check fraud charges in Las Vegas.

Just how did he get into debt with this sort of income? He spent it all -- plus some:

"[Walker] liked to move in an outsized entourage; his mother estimates that, during his playing days, he was supporting 70 friends and family members in one way or another. And speaking of his mother, he built her a mansion in the Chicago suburbs, complete with an indoor pool, 10 bathrooms, and a full-size basketball court. [...]

Living at the Bishops Forest condominium complex in Waltham during the Celtics season, Walker turned the pavement surrounding his home into a virtual luxury car lot — two Bentleys, two Mercedes, a Range Rover, a Cadillac Escalade, a bright red Hummer. Often, the vehicles were tricked out with custom paint jobs, rims, and sound systems at considerable added expense. He also collected top-line watches — Rolexes and diamond-encrusted Cartiers."

But Walker's lavish lifestyle wasn't all "me-me-me." He was also a generous friend and teammate who had custom suits made for coaches, routinely picked up giant team dinner tabs and, when there were funds to spare, gave to underprivileged youngsters. He was basically spending money like it was going out of style.

I think that last sentence says it all -- he simply spent way too much. Antoine Walker is another example that even if you make a boatload of money, you can spend it all (and more!). That's why you need to keep control of your spending no matter what your income. Because if you can't do that, no amount of money you earn will get you ahead financially.

And here's an update on our discussion of actor Nicolas Cage. According to Yahoo, he's had a decades-long spending spree. The details:

An article in The Daily Beast says that Nicolas Cage's recent financial problems are, at least in part, due to outrageous, eccentric spending that puts even his most flamboyant fellow celebrities to shame.

If you can dream it, Nic Cage bought it: yachts, a jet, a castle, over 50 cars, over a million dollars' worth of comic books, multiple (supposedly haunted) mansions in New Orleans, two Bahamanian islands, shrunken heads that may or may not have been human, and, famously, a $500k Lamborghini once owned by the Shah of Iran. Most amusingly, Cage spent $276,000 on a dinosaur skull in a "heated auction with Leonardo DiCaprio." And though the article has details about Cage's many pets -- claiming that he kept antidote serum on his wall for the poison of his two King Cobras -- it neglects to mention at least one: Cage's pet octopus.

Ok, this guy makes somewhere between $10 million and $20 million per movie. But somehow, he's managed to spend it all (along with mis-managing some of it -- or so he claims in a lawsuit against a former business manager.) The combination of too much spending and poor money management has now left him in financial trouble -- and yet another example of the fact that if you spend more than you earn, you're going backwards financially.

One Example of Living Paycheck-to-Paycheck

In my post titled From the Ugh Files, I asked the following questions:

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?

Now since that post, I've detailed a bit more on people who live from paycheck-to-paycheck, but one reader sent me an inside glimpse of how it happened to her. I thought the story was worth sharing with all of you, so here goes:

I knew some basics of money, but I don't remember as a kid ever really having a talk about such things or having money spelled out.   My parents did make me pay for my own stuff when I was old enough for a job, including my college and wedding.   However I managed it I knew enough to try and not over spend, I also grew up with frugal parents.  They did not spoil us with gifts and we needed to do our chores to get an allowance.

When I was in college, I had a little savings and a combination of that, work and scholarships paid my way through College.  I went to a state school and lived pretty cheaply.  I could have done better on a few fronts but hindsight is 20/20.   I would have picked a different university, done better about applying for more financial aid and tried for internships instead of working my summer job all through college.  The go to another school option would have involved moving to another state at 18 for a year so get in state residency, probably a bit ambitious for an 18 year old. 

Even though I was mostly broke but not in debt in College, I was too trusting.  One of the worst things I did was my choice in relationships.  I got involved with people who were not good about their money and let it affect me.   I would get pulled out of my default good habits.   For example, a boyfriend borrowed money from me to buy stuff for his business.  I put something on my card for him (He didn't have one) at some online retailer, and for whatever reason they kept letting him buy more stuff from the number on file.  Once it got to $800 and no sign of him paying me back, I called my credit card company and told them I lost my card and needed a new number.   This behavior was passive aggressive, I suppose I should have talked to him about it.  We broke up and most of college was uneventful.

At the end of college, I ended up getting involved with some really bad news.   Talk about an 8 year old in a 25 year old body.  I was seduced by someone paying attention to me, I was geeky and never attracted men.  Anyway, call it whatever you will but I was stupid, I moved in with this guy because "I was in love".  He was totally bad news and had the typical abuser personality (I read up on this later).  Although he had a good job at the time we met, and treated me nicely he got fired soon after.  Somehow things ended up being my fault and I was guilted and abused physically, mentally, verbally you name it.  This guy was extremely controlling.  Not only that but he sucked me dry on credit and debt.   I wasn't able to stand up to him with the person I was at the time.   If he wanted something he bought with my money, exactly what you were talking about a possible issue for the lower 15% with an entitlement mentality.   Once when I said "I don't have any more money" after he sucked up all my savings, he said something along the lines of "If you have credit and can spend it, that is money."  This guy had no credit cards of his own as you can understand from a view like that, he also didn't like to pay credit cards even though he used their credit.   I HAD (past tense) perfect credit up until this time and he forced me to buy all sorts of crap.  

Eventually my parents were able to help get me away from him.  They got him arrested, he had some misdemeanor and they told the police where he was and the nice police people locked him up, just 1 day free from him I packed my stuff and ran off with my parents.  After going through everything with him, I was in enormous debt and had a bunch of collectors hounding me.   I don't remember how much debt I had, but it was over $150k if I am in the ballpark.   Luckily I didn't have any college loan debt and was still able to graduate despite missing the last semester of classes.   I didn't know what else to do so I filed for bankruptcy.  This was 9 years ago, thankfully it is almost off my credit. 

After I got back to normal, I got a job, worked, lived modestly and started saving again.  I managed to save up what I thought was a decent nest egg of about 6-7k and had put 4k into a Roth in E-Trade, this was my early to mid 20's.   For me, working a 30k a year job I thought I was doing great.    I got involved with another guy, ended up marrying him and we bought a house we could barely afford using my savings as the down payment and as a result I was living paycheck to paycheck for years.   I felt chained to the house and to my husband towards the end.  Although we were not stupid enough to get an ARM, we did leverage ourselves in to a house and all the extra money went to paying the house and living.   Because of this, we could not save any money and any little bump could send us over.  I suppose we bought into the "you are married, you should have a house" and the thought that our income would only go up over time.

My husband was also irresponsible but not as obviously as the other winners I had picked.   I'll admit I was stupid, and I'll give the warning if you want to re-post this (anon please) that who you get involved with definitely has a huge financial impact.   The big way my husband was irresponsible was that he decided he hated his job, quit because he thought his boss hated him, was going to fire him anyway and decided to go into business for himself.  We talked this over and I said something along the lines of "OK if that is what you feel is best and what you need to do".   I also put a but statement in that that he always forgot about, which is "but we need to be able to afford to pay our bills, you need to figure out how to do the self employment and get the bills paid because I can't do it alone on my income."   The result is that he sat around at home, poked at selling stuff on E-bay a little, went riding with NASA to try and convince someone to give him a region and to support the house I borrowed money. 

Yelling at him about the money flow issue didn't work, telling him we needed to sell the house because of cash flow issues didn't work, begging him to get a job, do consulting, do anything didn't work.  In general talking to him rationally about this didn't work, there was always an excuse.   I still don't entirely understand what was going on in his head, to me numbers are numbers, if there is less coming in than going out it is a problem.   Perhaps because he didn't feel it till the end the money problem wasn't real.  I ended up taking the hit on borrowing to keep the house from being foreclosed but even when I was borrowing and had "money" I felt it, the debt and obligation felt like walking around with 100 lbs on my back.   Some of my favorite excuses were "working a low paying job isn't worth my time", "but I thought you would make a lot of money at a better job after you finished your Masters and we would be OK." and something along the lines of "You said I could do this" in regards to quitting his job, forgetting my but about being able to afford him jobless.   He also said something along the lines of I was a looser because I couldn't get a better job.  

Yes, I could have done better getting a job, but as a recent college graduate I didn't know a lot of the things you need to do to separate yourself from the pack, also I was tied to a narrow location due to him and the house.  I did better with a wider search, I'm in a different state than the one my former husband and house occupy.   Hopefully I'll do better next time I have a job search, more self confidence and better presentation of why I'm such a hot cookie you would be lucky to have me working for you.  I also realized after going through the third guy with these types of traits that I needed to do better at picking a relationship next time, I went to a therapist to help with that issue.  

Although it really does not matter at this point, I derive some satisfaction from knowing I was right and he was wrong about the money part.  It is cold comfort as I don't see why he couldn't do the math, we were spending more than we earned and this was bad.   Honestly, living with him unemployed and dragging me down financially was the most sustained stress I've had in my life.  I was constantly stressed and felt trapped by the house, that my husband was not working, and I couldn't sell the thing by myself (two to sell!).  If we had sold the house when I wanted it would have been near the peak and I would have been able to afford to support us both in a small apartment.   My best guess is he felt entitled to what he wanted.   At this point I am truly thankful I'm divorced and without children and probably lucky he didn't listen to me.  If he had, and we had sold the house when I first wanted after he quit his job in 2006 I would probably still be married to bad news. 

Long story short, I ended up with a lot of debt that I have been repaying from my marriage.   I divorced him after I made it abundantly clear to myself that he loved himself more than us or me, and he wasn't willing to be what I considered to be a responsible adult.  After getting divorced I got my finances into high gear, I was determined to save for retirement and get an emergency fund.  Two years later I have 10k in an emergency fund (liquid, once I get it o 6 mo worth I plan rolling 6 mo CD's with 1 mo at a time), 25k in my 401k from work and my poor old E-Trade account is about 2.5k after he took his cut from it.  I have approximately 5.5k of the debt remaining giving me a net worth of about 33k.   I could pay off the rest of the debt in one fell swoop to avoid paying the interest on the loan, but I think it is more important to have the emergency fund as a cushion.  I also track my expenses in a worksheet.  I bought Quicken and tried it a few times to try and automate expense tracking and will see how that works instead of the spreadsheet.  I also donate some money from every pay check to charity directly through work and I donate to a local women's shelter.  I have been matched up with a single woman and will be getting her gifts for Christmas.  Honestly, I probably don't donate enough, I am lucky not to be in a terrible situation personally and financially.

In summary, I got into trouble because of relationships and lifestyle inflation.  When left to my own devices I am fine so I get back on track OK, meaning in my normal financial habits I don't spend more than I earn.

I think I've learned from this, I live in a 2 BR apartment now that I share to try and keep costs down although I can afford a 1 BR by myself, where I live it would likely be at least $300-600 more a month for a 1BR or more depending on how good of a deal I got.   I spend some of the extra money on myself and have fun, but save some of it also and use a 401k contribution to force a minimum savings every month.   I also save by having $600 come out of my paycheck to the emergency fund every month.   I could always do better cutting expenses, but I don't feel the need to frugal the fun out of my life.  This is different than before where I felt guilty whenever I bought something plus feeling angry at my husband when I was living paycheck to paycheck.   Truly, the learning that I was making me unhappy and I was letting him was great.   Once I decided to take control of my life I was and have been much happier.

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.