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.
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.