A $100,000 Ain’t What It Used to Be
Some of the people who watch the show who don’t make a ton of money are often dumb-struck that a couple can be making $100,000 a year or more and still be in debt. “Where’s the money going?” they ask. “How can you make that much money and still need to use credit?” they wonder. “How much would they have to make to not go into debt?”
There a couple of problems with the way people look at their money. The first is that many people think of the money they earn in GROSS dollars – that’s before taxes. But if you make $100K and pay 30% in tax, you’re left with $70K. “That’s more than enough,” you say. Maybe. But if all your thinking is based on $100,000, then you’ll be in the hole $30K every year and you’ll never understand why.
So we think of our incomes in GROSS dollars. But we think of our expenses in NET dollars. Yup. And that adds to the problem. Can you see why?
The other thing that adds to the problem is that $100,000 doesn’t buy what it used to. According to the U.S. Federal Reserve, between 1960 and 1990, money lost a whopping 77% of its buying power. That means if you paid a buck for something in 1960, you’d have to come up with about $4.40 to buy it in 1990.
So did incomes rise four-and-a-half times over the same period? Not on your life. Which means a $100,000 income doesn’t buy all the bread and butter it used to. But it still sounds like a lot of money, right? So we still THINK it should buy everything we need. There ya go: another gap between perception and reality.
If $100,000 doesn’t buy all it used to, how come we have more stuff than ever before? That’s easy. We’re using credit. Gobs and gobs of the stuff. We’re borrowing against the equity in our homes. We’re using lines of credit in record numbers. And we’re carrying more plastic than ever before. And we’re giving no thought to how we’re ever going to pay back the principal.
Sure, we’re careful to make our minimum payments. We don’t want to ruin our credit histories, after all, and limit our access to even more credit. But a suggestion that someone pay more than the minimum is met with a laugh… ha ha.. it must be a joke. Who’d be silly enough to do that?
The media has also been lying to us. They’ve been telling us we’re rich. We’ve lots of money in terms of home equity, after all. And that’s money in the bank.
Well, it’s not. It can evaporate – as it has in the U.S. – even more quickly than it grew. And since you have to sell your home to use your equity as money, you better have a nice rock picked out that you can crawl under when the caca hits the fan and you HAVE to sell your home to pay for all those toys you put on your credit card.
It’s time for us to grow up and act like adults. We can’t keep operating under the delusion that just because the amount of money we make sounds like a lot, that we can buy whatever we want whenever we want. And we can’t keep talking about our income in gross dollars while we spend in net? We have to come to terms with the reality of our money and our lives. If we put only $100 in the bank, then we can spend only $100 – at the most. (We should save $10.) And we can’t put $100 on a credit card if we don’t have $100 in the bank to pay it off IN FULL when the bill arrives.
People who aren’t aware of how much they make, how much they spend, and how much their debt is costing them in terms of money and life’s energy expended are not heading anywhere good. It really doesn’t matter how much we make. What matters at the end of the day is what we do with it and how truthful we are with ourselves.
Have you ever thought about how much money it would take to make you happy? Is that net or gross?
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July 28th, 2008 at 9:06 am
Another thought provoking post Gail! I really enjoy checking for new posts each day. You’re blogs help me stay focused on the big picture.
My friend & I were talking about money recently and commented how when we were graduating from high school (1993) we thought $20K or $25K was a good job! heck $10/hr was good in our thinking then.
Of course we didn’t have mortgages and children then either. I am greatful to have a good job and that I do not have to live off $10/hr in todays economy.
It’s so true that we think in Gross dollars when we should be thinking of our income as Net income.
July 28th, 2008 at 11:42 am
I live in the US and am in the process of purchasing a house. The reality of home equity is that until you sell the house it isn’t yours. I am purchasing a house for $145,000. I just recieved the title paperwork on the house it was refinanced just over a year ago for $218,000 (first mortgage) and $45,000 (second). Before I started house hunting I figured out how much I could afford to pay for the mortgage, taxes and insurance then asked my lender to work backwards to a purchase price. Out of curiosity I asked what I actually qualified for and was completely mordified. There is no way I could afford to pay that mortgage and utilities let alone life. I also don’t plan on furnishing the house right away. I will buy things as I can afford them. There are definently a few toys that I want but they will have to wait untill I can afford to pay for them in cash.
July 28th, 2008 at 11:45 am
On an additional note I view my income as what I make after taxes and retirement. I have all of my retirement taken out before I get my check so that you never miss it. All of my budgets have been based around my take home. There is a huge difference between before and after taxes. It is definently enough to mess up your budget significantly.
July 28th, 2008 at 12:33 pm
Stephanie, I’m like you… The way you thought of the mortgage amount you were comfortable with before applying, the way you think in net for income… it makes things feel tighter, but it is REALITY!
Gail, your post is wonderful as usual. I nice dose of medicine in a sick financial world. The amazing power of consumerism and media public opinion has made the general public feel like there are no consequences, that credit is fun or something…
July 28th, 2008 at 6:56 pm
i’ve been fortunate enough to always think in after tax after pension dollars. i don’t even know actually how much i make a year gross off hand. but i can tell you what’s coming every other friday.
also, even if you make decent money, why on earth should you piss it away? why should you spend it all? why are you so entitled to live a high life because right know (cuz things, they change) you are bringing in the bacon?
so in the end it’s not about what you make, it’s about greed and instant gratification and what’s sitting between your ears. and if you don’t use what’s between your ears wisely, than whether you make 20k or 200k, you’ll be toast soon enough.
July 28th, 2008 at 8:54 pm
Great post as always Gail!!! I was one of those university students who received lots of credit cards after first year in the early nineties and ended up in a mess!!! What were we thinking - we even bought our groceries at the Esso with the card sometimes!! I have worked really hard to get things under control ( I had to learn everything myself because my parents were/are TERRIBLE money managers), but I sure wish I had Gail’s advice and knowledge 17 years ago!!!!
Living on the West Coast in Canada is expensive but we have a condo that we can afford with one income and are saving for our adoption plans. I just wanted to thank you Gail for all that you do for families like us out there- keeping us on track and thinking clearly ’cause man, there are times when the old habits still beckon!!!!
July 28th, 2008 at 8:59 pm
100,000/year might not go far, but it certainly goes farther than my $23,000 post tax!
However, one benefit of being family-free is that the costs are only mine. Yes, I have student loans that I’m paying off (but I’ve accelerated those payments and within another 6 years, they should be paid off!), and rent, and groceries … but I have no other debt. I’ve started my RRSP, have 2 months emergency fund, and once I have that at 6 months, I’ll begin saving for an eventual down payment on a home.
Eventually. I still have lots of life in front of me, and wisdom from financially savvy people like you Gail, to help me pave my way!
Nevertheless, I don’t make lots, but I’m happy with my life. I do lots of free things, spend time with friends and loved ones, and enjoy working at my company. I’d much rather take my life as it is than to make more at a job I hate coming in to each morning, with coworkers I can’t stand. I like being valued and respected at my job, just as it’s appreciated amongst friends and family.
So yes, long story short: you don’t *need* lots of money to be happy - it can certainly help, I’m sure, but the point is to make your life full of quality moments, not quantity of stuff.
Perhaps my mind-frame will change as I “mature” (with new life experiences) from 23, but for now, my life is content!
July 29th, 2008 at 10:11 am
I am totally with you Emma. I am 26 and feel the same way about my job, family, and friends. I CANNOT imagine getting up every morning to go to a job that I hate, with people I don’t respect and can’t learn from. We spend so much time at work - why not enjoy it? Of course is our GenerationNext coming out (or EcoBoom if you want to call us that instead). From the studies I have seen “work/life balance” ranks extremely high for us - not that it doesn’t for other generations too - but it seems more apparent with us. I think becuase we have been taught to ask for what we want, and in some cases “not take no for an answer” - often to a fault I realize. And to be honest some of my generation drive me crazy! The lack of common sense among some of them, and the feeling of entitlement is enough to really make you shake your head.
July 29th, 2008 at 2:11 pm
Brilliant post! I’m amazed at people with good incomes who literally have nothing left! On one income I still save and yet I have friends with more than double and it’s all gone, they think gross rather than what they actually have!
July 29th, 2008 at 3:46 pm
As I tell my clients, it’s not how much you make thats important, it’s making sure you don’t spend more that you make. Save 10% of your take home pay by paying yourself first (use pre-authorized transfer to RRSP, RESP or savings account), pay all your debts, then if you have any cash left you can spend that. If you want some expensive toy, save up the money for it in a separate account and pay cash for it. I hate paying interest on anything (did take 8 years to pay off the mortgage on the house), I even buy my cars on a cash basis, just start saving up for the next car soon as you get the new one. No kids, my wife and I never had a combined income over $70,000 (before taxes).