If you are like most people today, you have debt payments challenging your future and creating a drag on your ability to invest. In addition to the financial issues debt creates, it also affects how we feel about ourselves and how we look at the world around us.
We may think to ourselves, “what’s wrong with me?” or “where did I go wrong?” To move past these feelings, it might be helpful to consider where it might have all started.
Let’s stroll back in time and answer a few easy questions to help discover the disconnect that, in my opinion, causes many people to borrow in order to spend more than they make.
When you got your first job you probably were very excited!
What was your starting salary (or hourly pay)? ______________
What do you make now? _______________
Your brain is faster than any computer, so it might be helpful if you write down the answer to both questions before reading further. The goal is to capture the first thing that pops into your mind.
OK, if I answered the question for my first real job, my starting salary would be $18,000. I remember the offer letter and the sense of pride that someone thought I was worth hiring into the bank management training program. The year was 1989. I had done odd jobs, substitute teaching, and a few years as an insurance agent working purely on commission after college. Those were jobs, but getting a salary felt like a real accomplishment.
Regardless of our grades in math, we all can quickly calculate what our salary represents per pay period. Bet you just did yours in your head! So my $18,000 annual salary was $1,500 per month or $750 per pay period. Go ahead and write your monthly and per pay period amounts.
Without a calculator, computer, or any help, we believe we are making our salary. Our brains lock onto this number and we know how much we can spend each month. This is the point where our debt begins. When you got your first job you weren’t making your salary and neither was I. We still aren’t! We thought we were back then and this thought continues throughout our career. I thought I was making $1,500 per month but my take-home pay was substantially less. Social Security and FICA reduced the salary by 7.625%. Health insurance, 401k, United Way contribution, and income tax with-holding reduced it even more. My $750 paycheck was actually $528, a difference of $222 per paycheck or $444 per month. I don’t know about you, but I would need a calculator to figure out my annual net take home pay.
In my case, my brain locked into $750 per paycheck and I was already short $222 every two weeks. No problem, with credit cards I could still spend what I thought I was making! Hey, it’s just a couple hundred bucks, right? Back then you could always do a debt consolidation loan to avoid reducing spending. All of this occurring naturally in our subconscious. By the time you become aware of your own salary disconnect, and the spending habits and debt it creates, the problem is usually not easily addressed.
No time like now! Go back to your answer to the question, what do you make now. Get out a paycheck and convert your take home pay to a monthly and an annual number. Memorize both numbers because that’s really what you make. Forget your gross salary, it has nothing to do with how much you have to save, invest, and spend.
End the disconnect! Then take the advice of Brad and the other writers here at Enemy of Debt to address your total debt picture.
Photo courtesy of Thad Westhusing