A Sobering Reality: Where Did All of My Money Go?
Posted on | February 23, 2011 | 11 Comments
Perhaps you feel that you have not saved any money or that you are in debt because you do not earn enough money. After all, it would be easier to have a fully funded emergency fund if only you were making $70,000, $80,000, $100,000+, right? Not completely. For those of us disciplined enough to harness extra earning power, of course we would save more money as our earnings increase. But the majority of folks who earn more also end up spending more, and amazingly enough find themselves still living paycheck to paycheck. In other words, it’s not just the paycheck amount that counts.
We’ll discuss fighting lifestyle inflation in a later article. For now, let’s talk about the leaks that occur once our $X,XXX paycheck makes it home. All of us have leaks in our budget; it’s just a matter of whether or not it’s a trickle we don’t really care about or a gushing geyser that is bleeding us dry. And of course there are the subtle nuances in between, which is where I suspect most of us fall. Chances are good that even those of us who budget and diligently save are not aware of the size of our leaks. Think about it: as long as we max out our IRAs and have an eight month emergency fund touted by the financial gurus, we don’t think to look twice. Whichever category describes you, I want you to do a sobering exercise.
Your Lifetime Earnings
If you don’t ever take a step back and see the forest for the trees, then you might miss out on plugging some major holes. In order to quickly capture your financial history (income earned and money spent) without hours upon hours of probing, I’d like you to open up your last Social Security Earnings Statement and add up all of the income you have made in your lifetime. Unless you have just recently graduated college, your lifetime earnings is in the six figures. Of course, this number is your gross and not your net income, meaning that it is before taxes have been subtracted out. In fact, we need to subtract several amounts from this lump sum to get a more accurate picture of your leak.
Calculating Your Leak
Multiply your lifetime earnings number by an approximate tax bracket (try 33% or 28% as an average of the years you have worked if you don’t want to figure out each year individually) and subtract them out. With what is left, subtract out your estimate on rent/mortgage for each year that you look at, perhaps a car payment (we’re not talking a second mortgage here—be reasonable), and an extra $7,000 per year (depending on the number of family members you have) for other “necessary” living expenses like food, gas, debts, medical, etc. Now, take a look at your current savings account, retirement account, investment account, perhaps any home equity that you paid into (careful here, as this would be if you sold your house in a relatively favorable market). Here’s the thousand-dollar question: Where did all of your money go? Really?
That’s the first question that came to my mind when I looked at my statement, and we’re talking about a person with a frugal mindset and a hungry appetite for savings.
Wasted Life Energy
After the shock of finding out my lifetime earnings and then taking a look at my “for keeps” accounts, I just felt plain angry. We just discussed paychecks in terms of time and energy traded in exchange for money. I think back to all of the stress, the time, the energy, and the heart and soul I have put into my work over the last five years, and I feel a bit gypped.
Flip that Frown Upside Down
There are always two ways to look at things. Now that we’ve seen the consequence of our spending decisions, let’s look at the bright side to this exercise. You, like I was, may be shocked at all of the money you have made in your working life thus far! I don’t, and have not, earned a huge income since graduating college. In fact, my little brother who never went to college likes to tease me about how he is still making more money than I am! Yet my number is quite impressive. Looking at your figure, think about your earning potential in the future, and how you can better harness it for your goals, dreams, and ambitions. If you feel like you don’t make enough money, you should now feel much more optimistic and capable of making choices that will lead to a more sound financial future. Your earning potential will be critical in the coming articles, as you cannot save money that you don’t first earn. As your income continues to (hopefully) grow over the years, with the right saving and frugal mindset, so can your saving account.
The Takeaways
In conclusion, I’d like for you to see that you are capable of earning a decent living, and furthermore, that the majority of you have made enough money in the past and are making enough money as we speak to have a sizable saving account. I’d also like you to give some thought to the squandering of your life energy thus far. Both of these takeaways are extremely important as we move forward to learning how to better harness your life energy and add money to your saving account.
- Saving by Spending Money
- A New Series: Save Beyond Your Means
- Life Energy Consumption — Balancing Time and Saving Money
- Reclaim Your Paycheck
- Honeymoon Savings Goal: March and Final Tally
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February 23rd, 2011 @ 5:05 am
The biggest where all my money goes is taxes. It’s unbelievable how much is paid. Need to do a better job at minimizing taxes!
The Beta Class Member posts are now up. Pls stop by and say hello when you have time!
Cheers, Sam
Yakezie recently posted..Yakezie Member Post- Live Real- Now
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FruGal Reply:
February 23rd, 2011 at 6:49 pm
Hello Sam!
Thank you for visiting. Ahhhh taxes:). I have recently gotten into “tax minimization”, but am just in the research phase right now. Fascinating stuff!
Will visit the Beta class articles soon…am in Austin for training and have limited internet access for this week.
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February 24th, 2011 @ 7:42 am
Amanda, I certainly agree with the leaks, but also, don’t forget about the amount of pleasure that can be derived from smart spending. We spend a large amount on planned travel, and have memories that last a lifetime. (This one is going in my round up)
Barb Friedberg recently posted..Six Dangerous Investing Myths
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FruGal Reply:
February 26th, 2011 at 12:05 pm
Hello Barb!
I’ve been in Austin all week with limited interent access. Thank you for including in your roundup. Also–you are completely correct. Money is a great vehicle for pleasures, memories, and other wonderful things. We should all prioritize our spending (after setting aside an amount for saving) to create the most pleasure in our lives.
Thanks for your comment!
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February 24th, 2011 @ 9:31 pm
Well… I know now where my money goes but a few years ago I was clueless. Always lived from paycheck to paycheck until we came up with a budget. Made a huge difference. Tracking expenses and staying on the budget definitely helps.
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March 2nd, 2011 @ 5:06 am
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March 23rd, 2011 @ 2:01 am
Good way to explain and easy to understand
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March 23rd, 2011 @ 2:01 am
Excelent Incomes and very fast
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March 23rd, 2011 @ 2:02 am
Very nice detailed explanation
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