You will always be poor and broke and never rich and wealthy. What a devastating thought! You actually probably don’t even think about it, but if you also don’t think it’s a big deal to rack up credit card and consumer debt you are well on your way down the poor and broke road.
Often, we don’t recognize it ourselves and think it is only happening to other people but being poor and broke has nothing to do with your salary and income but everything to do with your spending.
Bad Spending Habits
You need to leave behind the notion that salary controls all of your money destiny and outcome. I know people who make the same salary, and one is wealthy and the other is living paycheck to paycheck and on credit cards. The only difference is their spending habits. Bad spending habits make you financially strapped, not your salary.
Same Salary but Two Different Outcomes
So, let’s talk about these folks who are both new schoolteachers and making $30,000 each and yet one is poor and the other is rich (by rich I mean no debt and has money to invest). That is my definition of rich. When you have no debt you have control of your life, that makes you rich in many ways. People with extreme wealth but no spending control will soon be poor, it never fails.
Poor Teacher
Poor teacher earns $30,000 a year so around $2,500 a month before taxes. Not a lot but it is doable for your first job. Poor teacher has $28,000 in debt from school, so they are dealing with that extra payment. Poor teacher also decided that because they graduated school they needed to celebrate and bought a new car to replace the used car they had been driving.
We won’t go crazy and will say that poor teacher spent $17,000 on the new car. Poor teachers decided on renting a two-bedroom apartment and does not want a roommate. Poor teacher loved the atmosphere in college and wants to keep going out with friends a few nights a week.
Poor teacher also has a smart phone bill (and the latest new smart phone – so many apps!), internet bill, cable bill and is even thinking about getting a dog but is still deciding on that. Poor teacher was offered to teach a few classes in summer (which would have added some extra money) but decided not too because they are enjoying their three months off plus they are planning on a trip to Cancun with friends. (Oh man another $110 for a passport as well, totally forgot about that, no big deal, add it to the credit card.)
At the end of the month poor teacher is not able to save any extra because they are actually spending more than they are making. Being able to save and invest is no big deal. Poor teacher is young and doesn’t need to worry about it right now, after all poor teachers will make more money in the future and then be able to pay things off and invest. Poor teacher just started working and retirement is way off, so they’ll worry about that later on.
We’ll talk about Rich Teacher who works in the next classroom down the hall in the next blog, but you can guess where it’s going to go by doing a 180 on things up above.
It is All Mindset
The only differences between someone who is rich, and poor is their mind set and of course their spending. When you receive money is your first impression to spend it or to save it? A spend first mentality will most likely not make you rich (again my definition is out of debt and investing). Someone who actively saves and tries to control costs is more likely to be successful. Again, it doesn’t matter on salary.
I know people making lots of money who have nothing, well they have lots of stuff, but they do not have anything to fall back on and eventually they pay the price. They are spending everything they have and often more as soon as they can.
The Stress of the Spender
When you do not have any extra money, or you know you will be short on money the stress is tremendous. The strain from that pressure seeps into every aspect of your life and creates panic and depression.
That spreads out into your job and relationships and causes you do have more pressure than you need in your life.
The immediate satisfaction of buying something is great, but it fades, the stress from debt is very long lasting and unfortunately can stay with you for most of your life so that it feels like you are digging out of a never-ending hole.
Reality Check for Poor Teacher
Poor teacher all of a sudden at 32 years old has a huge reality check. It’s been nine years and their income has improved substantially. They earned a masters (picked up some more student loans) and now make over $45,000 a year. However poor teacher did not start saving yet despite an increase in salary.
They instead decided to increase their lifestyle and bought a home and are dealing with a $1,200 mortgage. Poor teacher didn’t factor in the increase in utilities going from a 800 square foot apartment to a 2500 square foot house, so tack on a couple hundred extra a month. With utilities and their mortgage, they are now paying an extra $500 higher than rent.
Poor teacher lives in the suburbs now and the commute is a little longer so the amount for transportation is higher. The car is 9 years old and its probably time to get something new, but poor teacher is starting to think differently.
The obligations are piling up so much that poor teacher is really stressing out. A collection service made a call the other day. Poor teacher gathered up all the bills and started looking at them on the brand-new dining room table wonders how in the world they can pay for everything.
Poor teacher also went to the school district’s retirement consultation meeting the other night and saw that the amount they will need in order to retire. They are way behind because they haven’t started investing yet. So, add that on to the list. How is poor teacher going to get out of this hole or even get ahead?
What decisions could have been made earlier in life to completely eliminate this situation?
Sacrifice and Hard Work
With money there is always some form of sacrifice needed. It’s not only when trying to get out of debt. At some point in your life, you have decided to forgo something you want in order to save some money.
If you save and invest that money you could end up with even more later on. That is a sacrifice you are willing to make. When you learn to make that decision in life it will affect you quite a bit. Usually, we don’t learn it until we have felt the extreme pain of debt. How awesome would it be to learn it before!?!
If you are in debt, then there is lots of work to do. It is not impossible to turn things around, but you have a lot of changes to make and even more sacrifices coming your way than if you had done things earlier in life.
The best money managers know that you should always be looking at ways to sacrifice or plan things out, so you have money to save.
Just because you are doing well doesn’t mean you can’t do better. Just because you are saving 10% into retirement doesn’t mean you can’t save more or invest more down the road. What about 15% or even 50%. You determine when you are done working.
It takes hard work to get your money. It takes just as much work to learn how to maintain your money and the will not to spend, but the more practice you have the easier it gets and the less stress you have in life.
Pay Yourself
Poor teacher has never paid themselves so far. They are 9 years behind and after looking at the bills the earliest they can be out of debt is another 8 years with extreme sacrifice. 40 years old is really late to start things, but it’s better late than never. Poor teacher now has a plan and is willing to take on the challenge.
After poor teacher paid off their first credit card bill, they saw the light at the end of the tunnel. It’s a long way away, but now the compound interest of debt has come to a screeching halt. Instead of continuing to grow it is now slowly decreasing. Way to go poor teacher!
Now poor teacher only has one regret at this point.
“I wish I had started this sooner.”
Rich Teacher nods their head and sympathizes.
