This week I was teaching Junior Achievement at a local high school. Junior Achievement, if you haven't heard of it is a program that helps “prepare kids to succeed in a global economy”. (I borrowed that right from their home page). When I teach Junior Achievement, I teach the class on *ding ding ding* you guessed it: Personal Finance.
I love to teach for JA. The kids always come up with really good questions and I help them get a head start on being smart with their money.
The first lesson in the class takes a really broad perspective. We look at income potential over a lifetime versus their desired expenses. We compare their expected total earnings to their total life expenses, like weddings, houses, cars, college, kids and retirement.
First we need to explore this concept of income vs expenses a little more. And we need to stop putting a fixed limit on income and expenses.
Think About Income Differently
I've started thinking in terms of those of us who are already pulling down a steady income. How did you get there?
I was told to go to college, get a job with a great training program, and work my way up the corporate ladder. I took every pay raise that was thrown at me. Some I worked hard for, some I didn't. I just kept pushing on knowing “more is better” with every promotion. This lead me to desperate lifestyle creep where I spent as my income grew, regardless of how happy I was before the raise. I asked myself in every job, “How can I make more money?”
We need to ask ourselves a very different question regarding our financial situation:
How much money do I need to make?
In other words, “Does my income allow me to afford the life I want?”
This question frames the problem a little different, and a little better. Instead of an cancerous growth of endless unhappiness, it's a simple math equation. (You've seen it before.)
Income = Expenses
If you get it out of balance where income is greater than expenses, you leave a legacy (a financial one at least). If you get the equation out of balance where expenses are greater than income, you have debt (and most people fall into the debt category).
If you are in the group of people whose expenses are greater than your income, ask yourself if there are things you can do to lower the expenses side of the equation without lowering your happiness. If not, there is only one thing you need to do. The number one thing that will impact your finances for the good.
Raise your income.
This question, “how much money do I need to make?” requires you to do two things which I will follow up with posts with later this week:
- First you have to figure out how much you're going to spend. That's not the same answer as how much do I currently spend. Instead it's: How much am I going to spend on the life I want? I am going to walk you through it on a macro level, looking at a full lifetime. You'll see why. Let's do it together.
- You have to figure out how you are going to pay for that life. If your current income potential doesn't let you do that, you need to add to your current income potential. You'll need to figure out how to scratch and claw your way to earn all of the dollars they you want to spend, but it won't be that hard.
How are you working on your financial situation? Income or Expenses?