Why your income doesn’t matter

Lack of income rarely explains why you just can’t keep your finances afloat

Like many people, you’re likely working to pay down a mortgage, a car and some debt, all while keeping the bills paid. As these expenses pile up, it can be hard to save money for emergencies, retirement and your children’s education. Sounding familiar?

But instead of trying to reassess your budget, you conclude: “It’s not that I spend too much, it’s that I don’t make enough money to save!” Um hmm. Granted, it seems a logical conclusion, but it misses a key part of the equation: the money you earn and the money you spend hold equal weight. You see, your budget has two sides: one is indeed income, but focusing on that while ignoring the other (ahem, spending) is like trying to right a boat with a hole in the bottom...by acquiring a bigger bucket! You’re just not fixing the leak.

Keeping your finances afloat

Let’s stick with that boat analogy. There are a lot of ways to sail. You could be cruising in luxury across the sunny Mediterranean or bobbing along in a modest sailboat. What matters is that you stay above water. What this means in financial terms is that you need enough income to meet your basic expenses and to set a little aside for your future. Everything beyond that is really just for piña coladas and suntan lotion, no?

Now, if you’re picturing yourself on the cruise ship, remember that you’re not just a passenger on the ship, you own the ship! Yep, its huge diesel bill, the docking fees, the maintenance and staff – that’s all yours too. And as you might have guessed, the more you bring on board, the more it’ll cost you to keep this ship afloat.

But here’s the real kicker: if you spring a leak, your only hope is rescue – because, honey, that big ship is going to go down fast.

Back to dry land

If the ship story sounds a bit out there, consider that this is actually how a large percentage of Canadians live. Recent data from Statistics Canada shows that we are increasingly spending more than we earn – about 50 percent more. This means that we choose the luxury cruise every year, perhaps throwing life rafts and flotation devices overboard in favour of a bigger party on deck. As a result, we are increasingly being dragged down by debt and interest expenses, all the while hoping for a cash infusion to come and bail us out.

More money, more problems

You might still be thinking that if you could only get a raise, a higher paying job or just flat-out win the lottery, you’d be able to get yourself out of this mess. The problem is that this unbalanced equation (i.e. spending more than you earn) is a habit that tends to grow in magnitude, rather than settle out in favour of a balanced budget. Take the United States, for example. As a country, it’s able to generate a lot of wealth – about $2.17 trillion in 2011 – through taxes and investments. Heck, they can even print their own money. But even with seemingly infinite amounts of revenue, their budget just doesn’t balance out. In fact, they spent about $3.8 trillion in the same year, accumulating trillions of dollars of debt along the way. Want proof? Check out these numbers, which were widely publicized by the Tea Party Group, a U.S. political movement, in September:

U.S. Tax revenue:	$2,170,000,000,000
Federal budget:	$3,820,000,000,000
New debt:	$1,650,000,000,000
National debt:	$14,271,000,000,000
Recent budget cuts:	$38,500,000,000

Those are huge numbers (a little hard to relate, no?), but what if we removed some of the zeros (say, 8 of them) – you know, to bring this down to a household budget. Now, have a look:

Annual family income:	$21,700
Money the family spent:	$38,200
New debt on the credit card:	$16,500
Outstanding debt:	$142,710
Total budget cuts:	$385

Wow! If you saw this family on a television debt show, you’d shake your head in dismay. The truth is, no matter how you rearrange the numbers, the ratio is the same. Whether it’s a household, a cruise ship or a country, the equation remains: how much you earn and how much you spend are actually two sides to the same coin. Flip it whichever way you want, but you’ll always come up a loser if those two sides don’t balance out.

Sailing or bailing?

There’s nothing wrong with striving to boost your income. After all, the money you make can have a major impact on how you live and how much you are able to save for the future. But if you’re really serious about being financially secure, look to your spending first. Chances are there are a few leaks you can plug. Plus, reducing your expenses is a lot more within your control than boosting your income, especially in the short term.

The lesson here: Drop that bucket and take a look at why you’re really struggling financially. You don’t need some big wad of cash to come in for the rescue? No, you just need to rescue yourself.

 

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