Chapter 3 - Spending Is The Problem

By Richard Valentine Reily, author of Gregory's Hero.


Earning is seldom the problem.

Spending is almost always the problem. Most of us can live on what we earn if we make the effort to do so. Almost comes in when there are no earnings at all – and you have tapped out all your friends and relatives.

Spending is a habit just as brushing your teeth, cursing or driving fast are habits. If you have poor spending habits you know it. If you want to change those habits you can do it. Like changing any habit it takes work and commitment, though first it takes a plan.

I have a friend who is well overweight though he jokingly says he is not overweight he is under tall. There is rationalization available for every failing, and typically rationalization brings more of the behaviors you are rationalizing. There are only two ways out of overspending. Spend less, or earn more. Sorry those are the only options. Well, short of turning to crime, winning the lottery or finding out a distant uncle died rich and left you everything. Let’s leave out crime for this discussion since we are talking about bettering ourselves and that won’t happen much in jail.

Statistically none of the other options will open up for you. Also, statistically, if they did and you won the lottery or inherited from the distant rich uncle you would again be overspent, (ok broke) in about five years. And it would not matter how much you initially won or inherited. Because, earning is not the problem, spending is the problem.

Remember that irritably polite and well mannered boy with the neat clothes who always stopped the ice cream truck in the same spot? He had lessons in spending. With time he came to understand he could only consume what he had money to acquire. In addition he came to understand that he could keep some of his money for something else another day. He was not allowed to develop bad spending habits.

Unlike him, you have come to a place where you have decided that overspending is not an activity you any longer enjoy. When you make the decision to no longer do it, you are halfway home. A problem understood is half solved. A problem accepted is mostly solved.

Like I said before, there are two options for solving the immediate overspending problem. Spend less, or earn more. Wow, that’s simple enough. Just earn more. Hey you’re due for a raise anyhow, and furthermore you are bored most evenings and weekends since you are always broke anyhow. Get a part time job. Good idea, a raise and a part time job. Earn a lot more and the spending problem will take care of itself. Gottcha. Sorry there is only one option. Here’s why.

I hired a sales type guy years ago who not longer after he started work confided in me that he had about $30,000 in credit card debt. He also had a car loan of about $20,000 for a car that was worth at best $8,000. We’ll get into who would allow him to get involved in such a transaction later, but for now simply suffice it to say that most businesses do not have your best interest at heart and simply play on your emotions of fear or greed to satisfy their own goals. So he had this huge car loan on this junker car.

With my being a bit pushy in the money information department he and I spent lots of time talking about money. Over the course of several years he moved up in pay from the original $35,000 per year we hired him at to over $70,000 per year. Four years later, after earning over $200,000 from the company over the years, his car was repossessed and he owed $40,000 in credit card debt. Earning is never the problem, spending is always the problem. Believe this, and you will succeed.

There was another guy who came to work for us some years later who also was saddled with a load of credit card debt and was upside down in his car. He still lived at home with his parents because he could not afford to move out on his own. This was a single guy who we paid about $40,000 a year. As you might be beginning to realize, I talk about money a lot, especially when it is being misused, and his guy got a consistent earful also. Recently he said to me, to my utter surprise, that he was moving out of his parent’s house to a condominium he had just purchased with a twenty percent down payment, specifically to avoid the principal mortgage insurance I caution against. He had no credit card debt and his car was paid off. In my astonishment I blurted out something like ‘did you rob a bank?’

“No.” he replied. “I listened to you and turned my spending into savings.”

Hah! I got one! A real live convert; gonna have to get me a church!

Getting control of your spending is the only answer to building wealth. You can not earn your way out of debt because your spending will only grow even faster than your earnings and get you deeper into debt.

Getting control of spending can be tough especially because most of us don’t even know that we spend.

What? Don’t know that we spend? That’s ridiculous; of course I know when I spend.

Yeah, right.

I’d be willing to bet that you have purchased a car in your life. When you made that deal you probably traded a car and financed the new car. Sound about right? Did you make a deal? No. You made three deals. You bought a car, you sold a car and you financed a car. Each of those deals had costs attached. Do you know what they were? Do you know how much of your car payment pays for the new car? How much pays for the old car? How much pays for the financing?

Pays for the old car? That was paid off in the trade.

Was it now? Did you sell the car for more than you owed on it? Maybe not; perhaps the balance was rolled into the new car loan. Was the old car financed under the rule of 78’s? You know the rule of 78’s right? That’s were you pay the majority of the interest on the full loan early in the loan. When you traded that car in before the loan was paid off you had prepaid most or all of the interest. The rule of 78’s is a primary reason you end up upside down in your car when you went to trade it.

Back to the new car for a moment, did you look at the sales order? Did you pay unknown or unspecified fees listed as ‘dealer profit’ or ‘delivery fee’ or any other nebulous name that means you overpaid? Did you shop around to different dealers and get three different deals on the same car to compare?

What is the interest rate on your new car loan? Is it simple interest? If you will simply multiply your car payment amount by the number of payments on your loan I think you will be at least surprised and probably disgusted to find what you are really paying for the new car.

Like I said getting control of spending can be especially tough because most of us don’t even know that we spend.

Let’s begin by understanding how money is spent. Obviously if you hand someone a dollar you have spent it. Each time you swipe you credit or debit card you have spent; simply because you have not transferred a paper dollar does not remove that spending has occurred. Even if you have not intention of paying for the credit card purchase at the end of the month you have spent your wealth. Driving you car, cooling your food in the refrigerator, heating water for your shower, eating breakfast, feeding the dog, wearing clothes and going to the doctor are all forms of spending. You can spend with cash, credit or on going expenses including interest, taxes and insurance.