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Money Changes Everything

January 21, 2009

Let’s say you enter the workforce at age 19, and you retire at 65. That’s 46 years to earn a living. How much do you actually make?

Let’s set some arbitrary numbers, and not adjust for inflation.

Let’s assume that your gross take-home salary, averaged across 46 years, is about $45,000/year. Your taxes work out to 30% of your annual income. You spend $150/month on utilities (electricity, water, phone), $200/month groceries, $100/month transportation, $700/month rent. You have no credit cards, no savings…you don’t spend your discretionary earnings. You’re a Proletarian Machine…you eat, work, and sleep.

Here’s how things work out:

  • Your gross pay: $2,070,000 (46 years x $45,000)
  • Deduct taxes: $621,000 (46 years x $45,000 – 30%)
  • Deduct utilities: $82,800 (552 months x $150)
  • Deduct groceries: $110,400 (552 months x $200)
  • Deduct transportation: $55,200 (552 months x $100)
  • Deduct rent: $386,400 (552 months x $700)

You grossed over $2 million bucks. Your deductions are $1,255,800.

You’re left with: $814,200.

That sounds like a real windfall…until you factor in buying a house, car, insurance for both, interest payments, vices (booze, smokes, caffeine, comic books), health care, education, and children. It also assumes you end your working life making twice as much as when you started (the $46,000 is an average, remember?). And we just conveniently ignored inflation, too.

Even if the numbers above were real, we’re also assuming you never spent a dime of your discretionary income…which means you waited till 65 to buy a beer, own a computer, watch a movie, play a sport, travel, and have sex.

It also assumes you never put a dime in savings, either…you earned what you earned, and that $814,200 is sitting under your mattress in unmarked small bills, not earning interest. By the way, where do you live, cuz I may be coming over later wearing a ski mask and holding a tire iron…

The absurdity of savings is a little unreal…you’re being offered (in most basic savings accounts) 3-3.5%, but the inflation rate over the last 10 years has been hovering around 4-5%. You’re actually losing money in a traditional savings account. And all the other options require you to be a total finance brainer to sort out. In the meantime, interest rates (and the availability of credit) have been soaring.

I’m a victim of that. Victim is a harsh word, and I’m not kidding anyone. I chose to have a credit card, and did nothing to curtail my limit. And I also did nothing to actually save money. But, let’s be honest, here. I’m a credit junkie. Who’s supplying my junk? That’s right…the banks and credit card companies.

The current legislation being (or about to be) passed into law in the U.S. will help to greatly limit the amount of credit available to individuals, and that’s a good thing.

The interesting thing about this exercise is actually the gross pay figure. Most average (lower middle to ‘middle’ middle class) people are actually millionaires…it just takes 46 years to get to that number. Even if your average pay over 46 years is $30,000, you still retire having earned $1,380,000. Drop the number even lower to $22,000: you still make the club at $1,012,000.

I have every pay stub I’ve ever earned, every interest payment I’ve ever made, and every bill I’ve ever payed in a huge pile in a box. I’ve begun to think about taking them out and actually plotting them on a spreadsheet.

I’d like to know where I fit in.

Ways to save

I’m not going to reveal any grand secrets of the universe here. And the standard disclaimers apply: I’m not a financial advisor of CA, so use at your own risk. This is stuff I’ve found is starting to work for me as I claw my way back into the black.

  • Figure out how much money you need for a single 24-hour cycle. Calculate how much money you’ll need for every day before the next payday. For example, if you get paid every 14 days, and you think you need $20/day, then $280 is spoken for. Withdraw that money once a day, from a machine or bank branch that doesn’t charge a service fee. You’re not allowed any more money for the day…make it last.
  • Whatever remains from your daily allotment goes into a jar. At the end of the month, roll the coins. Semi-annually or quarterly, haul it in and apply to your debts first, then savings accounts. You’ll be surprised at how quickly this adds up.
  • For discretionary income, decide on a figure you can afford each week. Add this number to your daily allotment. For example, if you feel you’ll need $50 a week for beer, movies, and the like, you’ll $100 per check…add this to the $280 and you get $380 bucks spoken for.
  • You need to calculate the above after you’ve calculated the following: rent, transportation, groceries, bills. This stuff doesn’t go away. You get penalized when you don’t pay on time with higher interest rates or interruption of service. Once you’ve calculated this, you can go back to the first tip and start over.
  • Sell shit you don’t need. It’s great to have 3 bookshelves full of books, but if you’re not gonna read them all, get rid of it. Apply all the earnings to your debt. This will actually make space and remove distractions in your life, which are nice pluses.
  • Buy a bike. Use it.
  • Live as close as you can to where you work. This helps with the bike tip above.
  • Consolidate by transferring as much debt as you can to a lower rate of interest. Pay off your lowest debt first, and use the money you would have paid to that for the next lowest debt. Repeat until you are paying only one debt. Pay it off.
  • Make a will. It will cost, at minimum, $7,000 to bury your ass in Canada. Almost all of this are fees the government levies to handle your remains. A will ensures that you take care of this first, and that any money left over goes where you want it to go.
  • Stocks are for long-term (read: decades) planners. Mutual funds are for chumps. If you’re starting out, save your 6 months ‘if I lose my job and it all goes to shit’ money first, then put the rest in a nice, safe TFSA or RRSP until you have a plan.
  • Get a plan.
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