The importance of control

by Nick on September 1, 2011

CNNMoney had an interesting take on America’s debt crisis.  Feel free to read it, but for this purpose it boils down to this: By 2020, Social Security, interest, Medicare and Medicaid are predicted to require 92% of the Federal government’s income to support if nothing changes.  That leaves just 8% for everything else.  Here’s a pic they put together demonstrating what they mean:

Let’s get one thing out of the way:  This blog is not about politics.  It’s about people.  It’s about what I do, what I should do but don’t and my dumb ideas about money.  So with that focus, what’s the takeaway?

Simple: You need to take control of your money before it takes control over you.  Sure you don’t have Social Security, Medicare, or Medicaid expenses like the government does.  But you may have your own retirement, insurance and other medical costs, interest on purchases made on credit, rent/mortgage, taxes, etc. to worry about. 

So you’re not much different than the government in this regard are you?  And many people spend more than they take in (like the gov’t) because they don’t keep control of their large expenses.  Yes, it’s tough to have a mortgage of 25% or less of your take home (even on a 30-year) in Manhattan.  Yes, there’s not a ton you can do to control your taxes.  There’s more, but not complete, control over health care by shopping insurance plans and other things.  And there’s some, but not complete, control over necessities like electricity, basic food and clothing and transportation.

So what should you do?  KEEP IT SIMPLE AND IN CONTROL.  Control what you can.  Set a budget.  And stop thinking in terms of descriptions.  Start thinking in terms of categories.

Here are some examples: 

  • Think in terms of “shelter” and not “homes” when house shopping.  I like nice things, too, but when it comes down to it, my home is where I provide a safe place for my family to grow.  I have some luxuries, but I make sacrifices to keep my rent within my (conservative) budget;
  • Think in terms of “transportation” and not “cars” or “trucks” when shopping for a vehicle.  I have a buddy who was talking about buying a car to get to the train station in the morning.  Initially he planned to lease a car for a couple hundred bucks a month.  After some thought he started realizing that the purpose of the car was “transportation.”  It was to get him to the train station and then home at night.  So the lease turned into a purchase and the new car turned into a beater.  He’s a “handy” guy, so he doesn’t mind making some fixes.  Heck, he may even have some fun doing it; and
  • Think in terms of “buying” rather than “shopping.”  “Shopping” talks about the process of going to the store and bringing stuff you want home.  Buying requires you to pay for stuff.  That means not using credit cards unless you pay it off in full every month and have a budget to make sure you’re not spending more (even if you pay it off).  As you may recall, I like to make multiple payments to my credit cards, so it’s more like a debit.  A new credit card limits payments each month, so I don’t make daily payments anymore…

This helps remind you what exactly it is that you need and allows for some simple and select upgrades that you choose.  And maybe you won’t end up like those crazies on House Hunters!

The point is, after taking out for taxes and fixed costs, our free money is a small fraction of our salaries.  But with careful planning you won’t be stuck “deficit spending” or even living off of just 8% of your income.  Of my salary, I try to keep my income taxes and fixed costs, like housing, utilities and my damn student loan under 60%, save at least 10% and spend no more than the remaining 30% to live and for generous giving.  It’s worked out well so far.

Also, I’ve mentioned it before, but I’ll talk in some more detail about my savings strategy soon.  The key is to make some automatic (I have weekly and monthly draws come out of my checking account automatically and budget for less than my take home, intentionally.) and some intentional (this helps make you “a saver” instead of just relying on automation).  This way your money can work for you and create more income to increase your standard of living.

More later.  But don’t let yourself end up like the government, trying to squeeze “everything else” into 8% or spending more than you make!

And, of course, until next time, put your credit card down and slowly step away from the mall!

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