Recently, I was asked to respond to the following question:
Q: How can I better understand money and deal with my debt?
A: This question appears simple, but the answer is not. For example, a superficial list of do's and don'ts about money management may point out some of the problems we face with personal finance but won't necessarily solve the deep, financial issues embedded in our culture. What is needed is some thought-provoking information about the financial illnesses most of us experience each day, and a few practical solutions on how to begin to solve the problem.
Money is the most precious commodity in our economic lives yet the least understood. Its practical application is simple, an item used in exchange for goods and service. But for those who misunderstand its use or abuse it, money becomes illusive and hard to manage.
In this affluent society, Americans struggle with personal finances. Most are well educated, have great jobs, and earn good salaries. Yet 90 percent still struggle, living from paycheck-to-paycheck. Those who make in excess of $300,000 a year experience the same financial problems as those who make $30,000 a year.
Realistically, most of us work hard trying to become financially independent. But in most cases, our efforts are fruitless. In 1990, Americans saved $334 billion. Twelve years later, we watched our savings dwindle to a negative $3.9 billion. During the same period, our debt increased from $3.6 in trillion 1990 to $8.7 trillion in 2002.
We rationalize our inability to manage money well. 63 percent whites, 53 percent Asian Americans, 52 percent Hispanic Americans, and 49 percent of African Americans say they have too many financial responsibilities and as a result, they can't save money.
Current workers are not the only ones who struggle with their finances. Retired Americans battle with the same problem every day. 90 percent of them rely on Social Security for more than 51 percent of their income. In 2004, the annual distribution of Social Security was $11,640 for singles, twice that much for couples. Only 30 percent say they have enough money to last them through retirement. The majority of them feel uncertain about their financial futures.
On the surface, the answer to this problem seems simple. Some will argue that we spend too much money on non-necessities; we accumulate too much debt; and we don't plan and save enough for retirement. All of these reasons are valid, but they are merely symptoms of the real problem. Our financial issues are deeply rooted within the culture, and they deal with issues, or habits, that can't be changed overnight.
For example, in spite of the enormous amount of financial information available through the media—from basic budgeting to complex investment strategies—most Americans remain clueless about financial concepts. Beyond cash flow (income and expenses), most don't understand the meaning of assets, liabilities, and equity—financial functions that impact our lives daily.
Today, roughly 95 percent of young adults were not taught financial discipline. When asked the reason for this, many admit that their parents didn't know enough about money to teach them. Others say that their parents were poor financial role models.
Unfortunately, good money management skills are not automatically acquired by virtue of age. The skills must be developed over time. So children who grew up without good financial discipline will most likely struggle with money problems throughout their lives, unless they make an effort to change their behavior.
The situation is not entirely hopeless, however. Whenever a person desires to change a financial situation, it can be done. The scope of this writing does not permit a comprehensive view on financial issues. But, you can begin making long-term changes with the following concepts:
(1) Your income is your friend, and you need to maximize its potential. That means, when you earn money, keep some for yourself and allow it to grow through a savings plan. If you permit your entire paycheck to pass through your fingers and end up in someone else hands, you have missed an opportunity to capitalized on your earnings. If this behavior continues month after month, you will always be broke. Remember, "it's not how much money you make, but how much you keep" that matters. Resolved now to avoid letting your entire paycheck disappear with no goal or purpose in place.
(2) Debt is your enemy and will be for forever. In our culture, Americans have embraced the fallacy that having access to money on credit cards is an extension of their paychecks. No wonder so many are deep in hock. The truth is, every time you borrow money to pay for items such as food, houses, cars, jewelry, and more, you become a profit center to the one who loaned you the money. You are legally bound by law to repay, not only the amount borrowed, but also the accrued interest of the loan. Consequently, each time you make payments on the loan, you forfeit your opportunity to either start a savings plan or expand your wealth.
If you're serious about making changes in your finances, incorporate the following principle in your economic plan. Make it a New Year's it solution for 2007.
Visualize your income in three categories:
1. Financial responsibilities: Mortgage or rent, food, clothing, utilities, debt, etc.
2. Family fun and recreation
3. Savings and investments
Devote no more 90 percent of your income to your responsibilities and family recreation. In other words, discipline yourself to live on 90 percent of your income. Save the remaining 10 percent.
The 10 percent you put away in savings will be the most important aspect of your financial future. It will serve two vital purposes: (1) if you save a portion of your income (regardless how small) month after month, you will actually have some money in the bank at the end of the year. (2) more importantly, this habit will aid in the financial discipline you need to meet your new goals.
Be cautions. This simple exercise is more difficult that it sounds. Sometimes, you will get the urge to use your savings to make needless purchases. Stop yourself; don't surrender! Also, avoid the temptation of giving (your savings) to "noble" causes.
There are those who say that one shouldn't save money when there are debts to pay. While this makes sense to a point, this behavior has become part of the problem. We have become a cash-poor culture because our debts keep sapping away our cash and leaving us broke. We pay off the credit cards and re-create the debt shortly thereafter. So as much as you would like to get rid of your debt quickly, you shouldn't sacrifice your 10 percent savings plan to do it. In fact, the anguish over your debt should serve as a reminder to avoid the abuse of credit in the future.
Make the decision today. Start developing the habit of living on 90 percent of your income and saving the remaining 10 percent. Regardless of your income, you make enough money to begin this discipline. Simply take that portion out first, and do what you must with the rest.
Tom Graneau Sr. was born in Dominica, a small island in the Caribbean with a population of roughly 70,000 people. At seventeen years old, he and his mother immigrated to the United States.
After arriving in the United States, Tom's inability to read or write became a major problem. So getting an education was his first priority. At 19 years old, he started school at the second grade level. Two years later, he graduated with a ninth-grade certificate and proceeded to get a high school diploma from a different school.
At twenty-four years old, he got married and started raising a family. After his first child was born, Tom decided to join the military and was shipped to California. During his fourteen years of service in the Navy, he became increasingly concerned about his financial situation. With little or no savings, he was falling further and further behind as a result of debt.
Things got uglier when he left the service. Although he had a job, with debt up to his eyeballs, he had difficulty holding everything together. Consequently, his house went into foreclosure. With added pressure from credit card companies, he ultimately filed bankruptcy.
Shortly after his personal financial tragedy, Tom decided to pursue a college degree to better his life. After graduating with a Bachelor of Science Degree in business administration from the University of Phoenix in 1996, he pursued a Master of Arts Degree in organizational management from the University of Phoenix in 1998.
After graduation, he started working as a Financial Management Counselor and Educator. In 2001, Tom continued his education through a comprehensive Financial Fitness Course generated by the collaborative efforts of the Universities of California, Georgia, and North Carolina State Cooperative Extension Programs.
For the past eight years, Tom has been working with military personnel, government employees and others in the community. His clients have been both married and single people with various job positions, ranks, and income levels.
Over the years, Tom has enjoyed helping his clients overcome their financial hurdles. But after seeing thousands of them struggling with debt, poor money management skills, and little or no financial discipline, he concluded that they are not the only ones in America with these issues.
And he is right. After three years of research, studies show that roughly 90% of our population live from paycheck to paycheck, regardless how much money is earned. Much of the problem is directly related to financial misconceptions, ignorance, and confusion. And while Americans pretend to be doing well financially, most live with financial anguish - a month by month ordeal as we struggle to stay solvent. Hence, came the book: ARE YOU FINANCIALLY CHECKMATE?
