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We Tracked Every Dollar 235 US Households Spent for a Year, and Found Widespread Financial Vulnerability (hbr.org)
Income inequality in the United States is growing, but the most common economic statistics hide a significant portion of Americans' financial instability by drawing on annual aggregates of income and spending. An article on the Harvard Business Review adds: Annual numbers can hide fluctuations that determine whether families have trouble paying bills or making important investments at a given moment. The lack of access to stable, predictable cash flows is the hard-to-see source of much of today's economic insecurity. We came to understand this after analyzing the U.S. Financial Diaries (USFD), an unprecedented study to collect detailed cash flow data for U.S. households. From 2012 to 2014 we set up research sites in 10 communities across the country. The USFD research team engaged 235 households that were willing to let us track their financial lives for a full year. We tried to record every single dollar the households earned, spent, saved, borrowed, and shared with others. [...] Our first big finding was that the households' incomes were highly unstable, even for those with full-time workers. We counted spikes and dips in earning, defined as months in which a household's income was either 25% more or 25% less than the average. It turned out that households experienced an average of five months per year with either a spike or dip. In other words, incomes were far from average almost half of the time. Income volatility was more extreme for poorer families, but middle class families felt it too.
But why is it on Slashdot?
Now, if you'll excuse me, I have backups to corrupt.
tax returns on the side for friends since I like seeing what people make, I've noticed it's more about throwing money away on stupid stuff rather than lack of money that's the problem. At my company, all of the developers make $140k or more a year, and they constantly whine about having no money. No one in the office goes out to lunch any longer because they can't afford to eat. Working through lunch is depressing. You should get out of the office and talk to people. My office mate just wasted $12k on an expensive stove, and he doesn't even cook. My boss spent $130k on a BMW and has since asked to borrow money since he's about $100 short each month. He makes over $200k!
People are financially vulnerable because they make the decision to be. Personally, I save just over 60% of my income and have since two years after college when I finally learned throwing money in the trash on things like expensive speakers, car models that depreciate badly, expensive home remodels, etc. just aren't worth what they cost.
to understand is you can't budget what you don't have. I see this a lot, where people are struggling and convince themselves if they could just budget the numbers a bit better it'd all work out. I'm seeing apps that say they'll do it. But fact is we make about 20% less than the boomers did. That's why we're struggling.
It reminds me of all these stories after the crash of folks who paid off debt by living frugal. The stories always glossed over the $100k+ salaries. It's a lot easier to be frugal when you make that much. It's the difference between a new car and paying rent...
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People who follow your rules do well
unless they get sick.
"In America, first you get the sugar, then you get the power, then you get the women..." -H. Simpson
How come people say that we need companies to make a profit so that they are encouraged to grow and do things, and that without the profit there is a lack of motivation to enter that endeavor. Yet when the common worker has raises and bonuses taken away, and is negotiated down to the minimum rate, they are expected to work their hardest or they are considered lazy.
Laws are rules for the court, but merely a bottom bar to hit for life. Think beyond laws in your actions always.
I beg to differ.
1) If you can borrow at a lower interest rate than your current interest rate, then borrowing to pay off borrowing winds up saving you a lot of money. It is the wisest thing you can do, when the option is available.
2) If the interest rate you can get is less than the interest rate you can MAKE on that chunk of money (when properly invested) then you should borrow the money. For example, when you need to buy a car for, say, 20,000, and you have that money...you could either:
a) just pay up, you are out the 20,000
b) borrow the money at 2% interest, and invest the 20,000 in a bond index mutual fund that pays 5% interest. By the time you pay off the loan, you are 3% richer than you otherwise would have been.
3) make sure that cash hedge is invested in something interest-bearing but liquid, like an after-tax mutual fund. If you just let the money sit, you are slowly losing its value due to inflation.
These principles are a bit more advanced than the ones you propose. One must be on top of one's financial game to be able to apply these principles properly, but they are superior and will result in one being wealthier, if properly applied.
You just outlined the true cause of "income inequality."
People who follow your rules do well, those who don't, end up on welfare.
It's that simple.
No it's not... People run into lots of unfortunate circumstances... Mental health, disability, bad luck, substance addiction, lack of gainful employment...
These rules are sound, but if "sunk cost" is food, I can't fault a parent for borrowing to cover it.
Exceptions to all of these.
1) Credit aggregators can change 21% interest debt to 6% interest debt. That is a better move than defaulting or bankruptcy in many cases.
2) Food and rent for housing are unavoidable fixed costs and you need both to live, regardless if you have cash now to pay for them.
3) Only people who have never been poor utter such classist nonsense.
Is that income is a rate. Savings is an amount. More precisely, your savings (or checking) account balance is simply the integral of your income minus your expenses. (Or if you prefer, (income - expenses) is the first derivative of your account balance.)
What this means is that unless you're racking up debt (loans, credit cards), you have to live within your means. The average rate of money coming in (income) has to equal the average rate of money going out (expenses). And (this is the crucial part) that requirement is the same whether you have zero savings or a million dollars saved. In other words, the person with a million dollars saved up has to live by the same constraints as someone living paycheck to paycheck. This realization struck me when I was counseling a co-worker who was having financial difficulty, and when we went over the numbers I realized she made just as much money as I did. Except instead of saving 20% of it like I was (both for retirement and as a buffer against unforeseen expenses or loss of income), she was blowing it all on toys and going out.
If you're living paycheck-to-paycheck and aren't accumulating debt, you''re already following the first rule of personal finance management - limit your spending to equal your income. All you have to do is lower your expenses slightly and you'll start accumulating savings. That savings will act as a buffer, evening out the dips and spikes TFA describes so that they don't turn into a financial emergency.
The person with a large savings account isn't necessarily better off than you because they make more money than you. They're better off because having a savings buffer frees them from having to waste time (and pulling their hair out) dealing with spot shortfalls in income or spikes in expenses. Instead of having to pay the electric bill at the last minute because you haven't gotten paid yet, you can just pay it whenever. It all adds up to exactly the same amount of income and expenses at the end of the year regardless of which way you do it. Just the paycheck-to-paycheck way is a lot more frenetic and nerve-wracking, while with a savings buffer you can just pay it, and go on doing things you enjoy instead of worrying. The savings way may even be cheaper as you won't be hit by late fees and penalties.
I realize many of you already know this. But in my experience talking with friends and co-workers, the majority of them live the paycheck-to-paycheck way. Many of them don't even track their spending - they deposit their paycheck, then spend money until the ATM tells them they have none left. This country really needs to make basic finance management a required course in high school. If you do use the ATM method, open up a free savings account. After depositing your paycheck, take, say, 5% of the amout you just deposited and transfer it into the savings account. Over time, gradually increase the percentage to 10%, 15%, and hopefully 20%. Make ATM withdrawls only from the checking account. If an emergency occurs, you can transfer some money from savings to checking to tide you over. No, your friends asking you to go to a concert with them does not constitute an emergency. But if an item you were saving up to buy next month goes on sale this month, then yes you can tap into your savings to get it now. Just be sure that you "pay back" any money you "borrowed" from yourself for the item on sale or for the emergency, by increasing the percentage you put into the savings account until you've caught back up to where it would've been without the "loan" to yourself.