STUPID MISTAKE #3
Feeding the Monster
We’ll show the world we are prosperous, even if we have to go broke to do it.
—WILL ROGERS
It had taken several years for Trent and Julie to realize they needed to talk. Specifically, about their financial situation.
It wasn’t that they were in desperate straits. They brought home a good, upper-middle income. Resided with their kids in a nice home in a covetable community. Drove late-model vehicles and enjoyed many of the accoutrements of fine living.
But Julie summed up their frustration in a single sentence: “We aren’t in control of our finances; our finances are in control of us.”
Trent agreed, with some qualification. “We bring in decent money— we do okay. But money is always tight around our house. We know we need to be saving and investing more, but our monthly nut* just seems to eat it all up.”
“And we’ve talked about how we need to give more,” Julie added. “We’d like to give more regularly to our church and to a mission organization that feeds and clothes needy kids around the world. But except for a few random gifts here and there, we keep having to put those things off.”
As Trent and Julie discussed their situation and we looked at the numbers, it was evident that their income should have provided enough for them to pursue their other financial goals while providing for themselves and their children. I had seen many families do a lot more with much less. Trent had called their monthly financial obligations their “nut.” And it was a big nut. At the expense of some other important financial goals, their regular cost of living was consuming almost every dollar they were bringing home.
I offered another term for it. In some financial circles, Trent and Julie’s situation is known as “feeding the monster.” While we all have basic monthly obligations such as rent or mortgage, utilities, groceries, and car and insurance payments, it is increasingly tempting in our society to continue reaching for more than we presently have. At first, upon graduating or getting married, we may be content to simply “do okay.” But before long, “okay” is no longer good enough. An innate human discontent inside all of us combines with advertising, peer pressure, malls, television, the Internet, and even a shaky sense of self to convince us that we really do need—and deserve—more.
It might be another, newer vehicle . . . to make a better impression and to feel better about ourselves.
A bigger, nicer house . . . so we’ll be more comfortable and feel more successful.
A cell phone for every family member . . . for convenience, yes, but also so we can feel important by talking while we walk.
A TV with a satellite hookup for every bedroom . . . so neither we nor our kids will feel deprived or have to share.
A handheld computer . . . so we can stay current with appointments, news, and stock quotes and complicate our lives even further.
A “couldn’t resist” item from QVC . . . because, although we didn’t realize it before we came across the channel, we really can’t live without that gizmo.
It’s so easy to spin wants into needs. It’s almost as if we believe that we are what we own, that we derive and demonstrate our worth by spending and accumulating. But once we step beyond the essential basics to establish any new level of financial obligation for ourselves, we’ve spawned the monster. He grows larger and more ravenous as we take on one new commitment, then another. Those nurturing the monster eventually find themselves in a vicious feeding cycle: The monster grows huge and hungry. In order to sustain him, we have no choice but to scramble faster, work harder, find more money, take on more consumer debt—in order to continue the care and feeding of the monster. By trying to attain a sense of worth and freedom through spending, we’ve chained ourselves to Jabba the Hutt.
Feeding the monster is not financial freedom; it’s financial bondage. The accumulation of “more” may feel good for a moment, but financing it only keeps us from other things that we know, deep down, are far more important. As Julie put it, we’re not in control of our finances; our finances are in control of us.
The Priority Inversion
To help us understand Trent and Julie’s mind-set, we could diagram their situation this way:
Figure 1
Feeding the Monster: The Priority Inversion
Their foundational financial priority was meeting their monthly living expenses. Their mortgage was nearly five times their annual income. They had three nearly new vehicles for two adult drivers; a speedboat and Jet Skis; a small RV; a riding mower; multiple phone lines and cell phones; and cable TV hookups and PCs for each family member. Considering all the trophies of success to which they had committed themselves, Trent and Julie’s monthly “nut” consumed an inordinate percentage of their income.
You May Be Making Stupid Mistake #3 If . . .
• your mortgage is more than three times your gross annual income
• you’re not saving or giving what you would like to save or give
• there’s just too much month at the end of your money
• your garage isn’t big enough to hold your vehicles and motorized toys
• you’re paying for multiple phone lines, multiple cell phones, or multiple TV or computer hookups for your family
• you feel that you are not controlling your finances, but your finances are controlling you
And because several of their trophies required financing, their next priority was servicing their consumer debt, including monthly payments on the three vehicles and on five different credit cards. In addition to their regular credit card expenditures for gasoline, vehicle maintenance, clothing, meals out, CDs, and furnishings, Trent and Julie had financed Christmas to the tune of nearly $2,200 on their MasterCard (Endless payments at high interest for something your gift recipient won’t use more than twice? Priceless.). Combined, their living-expense and consumer debt commitments chained them to one huge, hungry monster.
After feeding their monster, whatever might be left (which wasn’t much) went to Trent and Julie’s next priority: saving and investing. They did contribute small percentages of their gross earnings to their retirement savings plans at work, but they didn’t contribute nearly as much as they were entitled to. On rare occasions they managed to tuck away an additional hundred or two in a passbook savings account. But overall, saving and investing were being shoved aside and starved by the ravenous monster.
They had also told me that they wanted to do more charitable giving, and to do so more regularly. But, as with their saving and investing, giving was a hit-or-miss proposition. While the need to save, invest, and give weighed heavily on their minds, in practice these were Trent and Julie’s least-important priorities.
The insatiable appetite for instant gratification had forced this family into feeding the monster . . . and into hoping for the illusive Someday.
I’m going to go out on a limb here, but I’m confident that it’s a strong limb. I’m going to propose that the diagram representing Trent and Julie’s situation also represents a good number of other well-intentioned individuals and families in our culture today. It may even represent someone you know . . . quite well.
As you’ve read about this couple, have you come across anything that reminds you of your own financial picture? You may not be as over-committed to monthly living expenses or debt service as they were, but maybe you are feeding a monster of your own—scrambling to keep up with your obligations at the expense of more important things. Perhaps you’ve recently found yourself wishing that money weren’t so tight; felt cornered or consumed by your consumer-debt commitments; realized you aren’t saving or sharing what you’d like to be saving or sharing; or caught yourself hoping to “turn things around Someday.” Like Trent and Julie, your finances may be in what I call the priority inversion—a much-too-common syndrome that causes otherwise smart men and women to live in Somedaytype denial while continuing to load up on all the gotta-haves that seem to define contemporary success.
The antidote to the priority inversion is simple, but it is not easy.
Indeed, it may fly in the face of everything you’ve been doing to keep up with the Joneses or to feel a sense of material progress. It may run counter to some bad habits you might have adopted over the past several years.
But if your finances are anything like Trent and Julie’s, the antidote is absolutely critical to finding some fiscal breathing room, to turning your finances around, to meeting your most important and crucial goals, and to freeing yourself from the tyranny of the monster.
It’s as simple as committing yourself, mentally, emotionally, and financially, to righting the priority inversion by determining to put last things first and first things last—then taking action to make your new priorities the new reality.
Righting the Inversion
As we saw in Chapter 2, the key to successful saving is to pay yourself first. You elbow your way to the front of the line. You send money to your savings program(s) first, before you pay any other bills. This does not mean you pay yourself more than you pay your other commitments; it simply means that your savings are of greater importance.
Likewise with charitable giving. Trent and Julie really wanted to give more generously to their church and other worthy causes, but because they had chained themselves to the monster, any giving they did was an afterthought.
I personally believe that if there is any financial priority greater than that of saving for the future, it is the act of giving—and not from the dregs of our income, but from the top of our income. Giving is an act of both gratitude and faith: gratitude for the provision and blessings God has given us, and faith that he will continue to do so if we are faithful stewards of those blessings. Giving is sharing from our abundance with those who may be less fortunate or with those who minister to spiritual, emotional, and physical needs all around us. It’s the voluntary contributions from people like you and me that sustain all the wonderful ministries and outreaches that help make our world a better place.
But we know how money tends to trickle through our fingers. If we practice giving as something we’ll do if there’s money left after everything else, then we make giving an afterthought. As with saving and investing, the key to successful giving is to right the priority inversion and make giving our top spiritual and financial priority, to write those charitable checks first instead of last.
Making your giving and saving payments from the top of your income will take some adjustment. Write those checks first, and you may have to juggle some of your other commitments or cash flows for a few months. But I can assure you that if you do this faithfully and don’t take on additional debt or monthly obligations, your budget will soon adapt to your new priorities. Righting the priority inversion will help your new set of financial priorities look something like this:
Figure 2
Righting the Priority Inversion: Making the Monster Wait His Turn
When you right the inversion and put giving, saving, and investing in their rightful places, they will become the first payments you make instead of the last—month in, month out. This ensures that, while you may still be feeding the monster, you’re at least going to make him wait until you’ve first met your highest priorities, after which you will feed him smaller portions. He may growl and snap at you, but you’re going to start showing him who’s in charge. Gradually, as you whittle down your consumer debt and bring monthly living expenses within reason, you’re going to stop feeding him entirely so he’ll go away for good.
Keep in mind that we’re talking priorities here, not necessarily dollar amounts. Your living expenses will most likely always consume the greatest percentage of your income, but you can find ways to reduce that percentage and free up money to give now, save and invest now, and eliminate consumer debt sooner. Consider all the ways Trent and Julie had encumbered their cash flow. How do you think they could have cut back on living expenses?
Consider their mortgage. At almost five times their annual combined gross income, this family’s mortgage was far greater than it should have been. Despite what mortgage lenders tell you, you should try to keep your total mortgage under three times your combined annual gross income. Two-and-a-half times or lower, of course, is even better. By today’s lending standards, Trent and Julie could “afford” the higher mortgage (you will almost always qualify for more mortgage than you should take on). But their mortgage payments drained their monthly cash flow and prevented them from eliminating debt, saving and investing, and giving.
Now look at all their other obligations. Car payments. Boat and RV payments. Insurance, registration, and maintenance. Multiple phone lines and cell phones. Multiple computer setups. Frequent meals out. If you were Trent or Julie, what steps would you take, starting today, to reduce the size, appetite, and domination of the monster? What would you discontinue? What would you sell? What would you cut back on?
You could do it, couldn’t you?
Right the inversion, and you will.
What about debt elimination? Well, Trent and Julie’s monster was gorging on consumer debt. But if they first give and save from the top of their income, they’ll force the monster to wait his turn. Then, as they work to bring their living expenses within reason, they’ll eliminate some consumer-debt obligations (by selling one or more of their expensive toys, for example) while freeing up capital to more aggressively reduce and eliminate their other debt commitments. Eventually, consumerdebt service can go away entirely—providing more capital from each month’s income to devote to giving, saving and investing, and, yes, living expenses.
Keeping the Monster Away
A Spending Plan to Help Keep the Monster Away
No one is going to give, save and invest, eliminate debt, or reduce living expenses for you; it’s up to you! To help make it all happen, consider the following guidelines. A and B are what your employer can do for you; C is what you do once the paycheck is in your hands:
A. GROSS MONTHLY INCOME
Less: Deduction for Social Security
Less: Deduction for tax-advantaged retirement savings
(Goal: Contribute maximum allowed by law)
Less: Deduction for medical and flexible spending accounts
= B. TAXABLE MONTHLY INCOME
Less: Federal and state tax withholding
Less: Automatic short-term savings deposit (if available)
= C. NET MONTHLY INCOME (“TAKE-HOME”)
1. Giving 10 percent
2. Savings (if not by payroll deduction) 10 percent
3. Debt-service elimination 10 percent
4. Living expenses 70 percent
Keep in mind that this spending plan is simply a guideline and that everyone’s situation and priorities are unique. You can begin conservatively or aggressively, you can select some priorities and wait on others, and you can (and should) adjust percentages over time. For example, you may actually desire to give more than 10 percent of your takehome pay (C). I’ve suggested the above percentage as a minimum to get you started giving first instead of last, to begin giving something if you’ve thought you couldn’t give at all. You may wish instead to designate 10 percent of taxable income (B) or even 10 percent of gross income (A) to charitable giving and adjust the other priority percentages accordingly. There’s an appropriate verse in the Scriptures to guide us: “Each [person] should give what he has decided in his heart to give, not reluctantly or under compulsion, for God loves a cheerful giver” (2 Corinthians 9:7 NIV).
And as you eliminate consumer debt, you can redirect those dollars to any of the other categories. If you don’t yet have three to six months’ expenses set aside for a major emergency, then building a contingency reserve may be your most urgent priority. In that case, you may need to make smaller contributions to company or personal-retirement programs until you’ve built that emergency reserve through more aggressive shortterm savings. Once that need is met, you can save more aggressively for other short- or medium-term needs so that, in the future, you can put cash on the barrel instead of debt on plastic. You can also increase your commitment to long-term savings until you’re able to take full advantage of tax-advantaged retirement programs. It’s your call.
A crucial element to this spending plan is that you learn to live on 70 percent of your take-home pay. If you cannot, your lifestyle may need the kind of honest self-assessment we’ve suggested in this chapter. Like Trent and Julie, maybe you have too much house for your income, too many toys in your garage, or too many gizmos in your briefcase. Living on 70 percent of your take-home pay may appear tough at first, but I know you can make the necessary adjustments.
If you’ve been feeding the monster, I encourage you to make him wait his turn by reordering and living by your priorities. Then, as you work to eliminate consumer debt and get living expenses in line, starve the monster to death and keep him away for good. You’ll discover the blessed joy of simplifying your financial life. And perhaps for the first time you’ll feel a sense of hope that you can indeed give and save and invest and enjoy life—controlling your finances instead of allowing your finances to control you.
* For the uninitiated, nut is slang for the total of your monthly financial obligations: housing, food, utilities, vehicle payments, debt service, and whatever else you’ve committed to that requires regular payments from your wallet to someone else’s. (It’s a derivative of the Latin term nutsalotimus, meaning “What were we thinking? We must have been nuts.”)