Friday, February 19, 2010

By 

James W. Stone

There's a lot of talk today about not having enough money. If you don't have enough money, that’s a problem. The question that needs to be asked is whether the problem comes from not having enough income, or whether it comes from spending too much. Of course, the answer can be "Both."

This problem with a lack of funds doesn't just happen in your household. It happens in many households. It happens in business. And we are hearing a lot right now about how it happens in government.

I like to point out that it is easier to reduce your spending than it is to convince your boss to pay you more. To most of us, that is an obvious fact. Still, some people find they can't do either of those two things. Eventually, something has to give. When you run out of money, and your credit dries up, you have no choice but to stop spending.

Your life is much easier to live if you never get to the point where the money runs out. There are people in the news today who serve as examples of how bad it can get when the money runs out. We hear about the family whose bread-winner lost their job and the bank has foreclosed on their home. They have nowhere to live and the kids get yanked out of school because they no longer reside in district. Here's where I like to point out the need for a significant Emergency Fund.

I think we can agree that life is pretty good if you spend less money than you make and have saved for an Emergency Fund, the children's education, and your own retirement. Maybe you can't afford a second home for vacations. Heck, maybe you can't afford a second pair of shoes! But whatever your social class, it is better to have your finances covered with good planning.

Up until now, I've been talking about the finances of an individual household. But, I want to broaden the context of this because I heard a sound-bite on the news recently from one of my state (Illinois) legislators who said, "We don't have a spending problem. What we have is a revenue problem." And I have to vehemently disagree with him on that point. I think you will disagree with him too. Let me explain my indignation.

I'm preparing my tax returns for federal and state taxes. We're all getting ready for our taxes, aren't we? While we are looking at how much of our money is going to the government, we review our property tax bills, the taxes we have already paid to the IRS, and the state department of revenue — and we take a casual look at how much we have paid into Social Security and Medicare. We made all these payments throughout the year as automatic deductions from our paycheck, or some quarterly payments on estimated taxes due. In my part of the world we also pay around 9% of our spending as a sales tax, and then there is a big chunk of taxes added to the cost of a gallon of gas. We have gotten so used to paying taxes everywhere we turn and we don't usually add it all up. But during this time of year, we have enough paperwork on our desk at home that the numbers jump out at us.

All these taxes and the state has a REVENUE PROBLEM?

I am not going to list where they are spending the money. And I don't want to start on the issue of government efficiency. But, if there is a problem because they can't find enough money to pay the bills, it gets pretty obvious they have spent too much already! I know that is oversimplifying things a lot. But the problem is really that simple to see. We can confuse ourselves and each other if we try to justify each expenditure individually. Sure we can justify programs to hire better teachers, to build better roads, to protect wildlife, etc. It’s easy to do when each spending decision is made independently without considering how it will impact the bottom line. But when you take all of those well-intended spending actions and lump them together you are likely to spend more money than you have coming in. And there you have it — our current situation as a country (or state, or city, or household).

So, while I'm preparing my tax return, I realize that I am one of the people who is paying for all of this government spending. If congress or my state legislature wants more money they have to ask people like me — and you. I did say "ask." Of course the government will just "take" it if they can find a way to defer the payments, or mask the impact with bond issues or whatever. But it's like having dinner out, then charging it on a credit card. The bill must eventually be paid. And if I don't like the way they solve the problem, my recourse is to vote against them in the next election. That's the American way.

But if the government really wants to solve the problem, they need to reduce spending and show they are capable of managing our affairs. They can take more money from us by increasing our taxes. They can take a little bit more when money changes hands with paychecks and purchases; or take it because we own a valuable asset (like real estate). But we do have a say in this matter. Our lobbying is done at the polls.

And what about your personal finances. Have you been looking at the government's example to justify your own spending? I'm sure you can find reasons to buy a new sofa, or travel across the country to visit friends. Of course, you need to eat — and that sounds like a good reason to go out for dinner with friends.

If you keep thinking about how you can justify each expenditure on its own merit without looking at the total impact on your bank account, you'll be headed for financial disaster. Ask yourself, "Is that disaster caused by not enough income, or is it caused spending more than you can afford to spend?"

James W. Stone
(follow me at http://twitter.com/theJamesWStone)
Copyright 2010, James W. Stone, all rights reserved worldwide