One Crazy Budget

I know of a family who has the following budget.

  • Income: $21,700
  • Expenses: $38,200
  • New Credit Card Debt from 2011: $16,500
  • Total Credit Card Debt: $142,710
Included in their expenses is $394 to charity and $7,930 in medical expenses.  They also support both sets of grandparents which costs approximately $7,010 per year.  Both sets of grandparents helped out a great deal financially in the past and did so expecting to be taken care of in their old age.  One set is wealthy and one set couldn’t survive without the extra income.  Another large expense is security since there isn’t a city police force where they live.  They are responsible for keeping themselves safe and have taken on the role for their friends as well.  They spend about $6,890 per year on security for themselves and their neighbors.
They had a big time budget meeting recently.  They had run out of available credit and couldn’t decide what to do.  Should they open another credit card? Should they default on their loans?  Should they make some tough budget cuts?  They decided to take out a new line of credit and cut their budget by $385 per year.

What do you think about that?  Do you think they are pretty bad shape?  I’d say so!  What should they do?  Should they stop taking care of their friends?  Should they stop supporting their grandparents?  Should they increase their income?  Should they look into cutting those medical expenses?

What about their debt?  How on earth are they ever going to pay that off?  It sure doesn’t seem like they are taking the situation very seriously does it?

Stop and take a moment to think about what you would do if this were your budget.  Seriously… take a minute.  I’ll wait.

What would I tell them to do?  I’m glad you asked.  Well… I’d want them to start looking into ways to make more money, stat. Their income is too low, barely half of their current expenses.  They also need to stop taking care of the neighbors for the time being.  Their neighbors need to start taking care of themselves.  What about grandpa?  Tough one.  One set of grandparents could survive without their assistance, one could not.  I’d say stop supporting the set that can survive without the extra money.  That’s a tough call to make but I think it has to be done.  The medical expenses are also a large expense that they could possibly cut.  They would have to look closer at exactly where that money is going.  Cut out non-essentials and shop around for cheaper insurance and care.  And of course, take a detailed look at all the rest of their spending too, line by line.  Dollar by dollar.  What can be cut?

No matter what though, they need to start spending less than they earn!  It’s a sinking ship.

Ok, now what if I told you the above family isn’t a family but our federal government?  Does that change things?  Put 8 zeros on the end of all those numbers and you have the federal budget.  (Some numbers are from 2010, some are from 2011, and some are probably 2012 projections.  I’ll freely admit it’s not a perfect representation but it gets my point across without me having to read  400 pages of confusing and boring pdfs.)

Does it change what your proposed solution would be?  It sure does mine.  Off the cuff, I think “whoa whoa, don’t increase your income!  That means higher taxes and I’ll fight higher taxes all day long.  I also pause at cutting off well-to-do grandma.  She paid into Social Security, why shouldn’t she get her payments?  I still stand by reducing the care of our neighbors (military spending) and the medical expenses (medicare).  Those are both large expenses that I think have room for cuts.

Should our answers change just because it’s the government and not a family?  I don’t know.  Isn’t the way to wealth the same no matter what?  Spend less than you earn.  Live debt free.  Save. Invest.  That’s not what our government is doing.  Quite the opposite.  I don’t expect you to change your political stance based on one random article, but it’s certainly something to think about.  If we really want to fix our nation’s financial situation we are all going to have to make some tough choices and compromises.  Even me.

Inspiration for this article came from here and here.

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16 Responses to “One Crazy Budget”

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  1. Sun says:

    Can we pass a constitutional law that says the us government can never go in debt? Pay trillion off each year and we could be debt free in ten years.

    • KD says:

      That would be awesome but we need to stop the 1 trillion deficit spending each year first. If we pay off 1 trillion each year for 10 years we’ll still be 10 trillion in debt.

      • Sun says:

        Hi, it seems I forgot my “three trillion” in there. Assuming we have a debt of $15 trillion with a $1.5 trillion deficit each year. Across ten years, we’d have to pay down $3 trillion per year to be debt free. I know the math is oversimplified and details to execute even more so, but that seems to be the gist of it.

        I just witness this zoo called government on TV (pick your channel) and all I see are people exploiting the existing system. I don’t fault anyone for doing it… I feel like you have to fight a dysfunction in the system with a change in the system such as a law to not allow government to go into debt.

  2. Ok, my mind can stop racing…..I was so full of questions before I clicked on the links at the bottom. I couldn’t figure out what creditor in their right mind would give someone with that level of income credit in that amount. It’s bat shit crazy that our government can get away with it. The problem is, nobody is willing to give up their “pet project” right the financial ship. There’s always logic as to why a particular program should be kept. It’s no different for households too…I justified keeping a budget busting hot tub well past even when we started our debt management program.

    You’re absolutely right though….tough choices have to be made. let’s hope we can find the right people to make it happen.

  3. Scraps says:

    Thank you for a very thought provoking article.

  4. Jai Catalano says:

    That’s crazy. No it changes nothing. It’s disgusting if a person spends like that and more so the gov.

  5. Yes, the answer is different if it is the government than if it is a family. Families can’t print money. Families don’t live forever. Individual families don’t control the productivity of the world via their tax and spending policies. The economics are different.

    Not to say we shouldn’t get Medicare/SS/Medicaid etc. under control– those debts could have seriously negative impacts in the future. But no, you can’t just say, “if it’s true for families then it’s true for government.” That simply isn’t the case, and thinking that it is is dangerous because it can lead to Hooverism and another Great Depression.

  6. Wow, what a great post! This is a topic I love, because we always hear people say “government should be run like a business.”

    They don’t really mean it…

    Because if they did, they would know that a business, if faced with that scenario, would probably raise their prices. Look at almost every company in the US. They increased their prices over the last five years.

    A company increasing the price of their goods is the same as a government raising taxes.

    It is amazing how someone would change their tune if talking about a family or a government.

    Keep up the great posts!

  7. Wow, seeing those numbers really drives home how much debt the federal government is in.

    Income: $21,700
    Expenses: $38,200

    Dear Government — please cut your expenses!!!!!

  8. Andy Hough says:

    When I read the part about the grandparents and the security I thought this sounded like the U.S. budget and I was right. Looking at the U.S. budget as a household budget does put a different perspective on things.

  9. krantcents says:

    Cutting spending is not the answer unless it could be done without politics. Cutting without increasing revenue is also bad choice. Life is much simpler if I cold control all the factors.

    • Brad Chaffee says:

      Unfortunately politics is a part of government spending. Can’t say I agree with the argument you can’t cut spending without increasing revenue though. As with personal finance I believe the principles are the same; cut spending where you can and increase revenue IF you can. Could you imagine people running around saying they couldn’t cut their budget because they can’t figure out how to increase their income?

      The problem with government spending isn’t that more revenue is needed it’s that the revenue that is coming in is being wasted. The reason I believe this problem continues is because of the politics game that plays on the emotions of the citizens to demonize anyone that wants to make the hard choices to make cuts to or reform programs that are an absolute failure.

      As a country we need to move away from the idea that Government’s responsibility is to provide services that we should be providing for ourselves. If the Government were capable of providing crutch programs to help people get on their feet it would be nice but the truth is they suck at it. Programs should be in place to help truly poor people but it should be run by private companies.

      No one wants to allow the government to cut programs that are bleeding the revenue dry all because someone might be effected. The bigger government gets the bigger this problem will be.

  10. I saw the numbers and knew where you were going with this (I’ve made pretty much the same comparison with friends.) Although I don’t think a family (or a business) can be run IDENTICALLY to a family budget I think the big principles and values hold true….so live on less than you make, get out of debt, if you can’t pay for it don’t buy it, think long term not short term for investing and for income.

    So raising income yes (by the way that doesn’t necessarily equate immediately to higher taxes, for example going to a flat tax or sales tax system that cuts overhead while keeping the income the same basically has the same effect, more income going to the bottom line).

    Cutting expenses you bet, including ones that will be HARD to cut. Basically if you don’t touch Social Security, Medicaid, Medicare and the Military I don’t think you CAN balance the budget. (at least I’ve yet to see a plan that made sense to me).

    Beyond that though we need a sea change in the way we look at wealth, until people stop electing politicians based on the politics of envy and the mindset of “I’m entitled to it” so just tax someone else (who, the “rich” of course) to give it to me….we won’t have success because the system and the mindset will both align to punish success (the income tax does that) and label anyone with wealth evil by default.

    Scott

  11. The situation isn’t as bad as it seems. First, the debt is being refinanced or issued at very low rates. Secondly, the grandparents and cousins, etc hold most of the debt so we our it to ourselves. Also, a large portion of the debt is owed to various trust funds, which makes the debt an accounting device not an actual debt contract (some may disagree with this – but the fact is social security isn’t a contract, you don’t have any legal claim against the debt held in the trust fund) . This debt is a fiction because the government essentially owes the money to itself.

    Even if I’m wrong, the federal government creates money – it can certainly print more as nicole pointed out.

  12. Very thought provoking. No, it doesn’t change the facts, but the fact is that it will impact all of us and not simply the immediate family involved. That is why we should all be prepared for the worst.

  13. 101 Centavos says:

    The federal government won’t change its spending ways because under the current financial system, it doesn’t have to.
    Other countries whose currencies don’t enjoy world reserve status (e.g. everyone else except the eurozone) are constrained by *external* forces to be a little more careful with public debts.

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