The classic story of hardworking people has a set pattern. Recently married, the happy, highly educated young couple moves into one of their cramped rented apartments. Immediately, they realize that they are saving money because two can live as cheaply as one.
The problem is the apartment is cramped. They decide to save
money to buy their dream home so they can have kids. They now have two incomes,
and they begin to focus on their careers. Their incomes begin to increase.
As their incomes go up, their expenses go up as well.
The number-one expense for most people is taxes. Many people think it’s income tax, but for most Americans, their highest tax is Social Security. As an employee, it appears as if the Social Security tax combined with the Medicare tax rate is roughly 7.5 percent, but it’s really 15 percent since the employer must match the Social Security amount. In essence, it is money the employer can’t pay you. On top of that, you still have to pay income tax on the amount deducted from your wages for Social Security tax, income you never received because it went directly to Social Security through withholding.
Going back to the young couple, as a result of their incomes increasing, they decide to buy the house of their dreams. Once in their house, they have a new tax, called property tax. Then they buy a new car, new furniture, and new appliances to match their new house. All of a sudden, they wake up and their liabilities column is full of mortgage and credit-card debt. Their liabilities go up.
They’re now trapped in the Rat Race. Pretty soon a baby comes
along and they work harder. The process repeats itself: Higher incomes cause
higher taxes, also called “bracket creep.” A credit card comes in the mail.
They use it and max it out. A loan company calls and says their greatest
“asset,” their home, has appreciated in value.
Because their credit is so good, the company offers a bill consolidation loan and tells them the intelligent thing to do is
clear off the high-interest consumer debt by paying off their credit card. And
besides, interest on their home is a tax deduction. They go for it, and pay off
those high-interest credit cards. They breathe a sigh of relief. Their credit cards
are paid off. They’ve now folded their consumer debt into their home mortgage.
Their payments go down because they extend their debt over 30 years. It is the smart
thing to do.
Their neighbor calls to invite them to go shopping. The Memorial
Day sale is on. They promise themselves they’ll just window shop, but they take
a credit card, just in case. I run into this young couple all the time. Their
names change, but their financial dilemma is the same. They come to one of my
talks to hear what I have to say. They ask me, “Can you tell us how to make
more money?”
They don’t understand that their trouble is really how they
choose to spend the money they do have. It is caused by financial illiteracy
and not understanding the difference between an asset and a liability.
More money seldom solves someone’s money problems. Intelligence
solves problems. There is a saying a friend of mine says over and over to
people in debt: “If you find you have dug yourself into a hole… stop digging.”
As a child, my dad often told us that the Japanese were aware
of three powers: the power of the sword, the jewel, and the mirror.
The sword symbolizes the power of weapons. America has spent
trillions of dollars on weapons and, because of this, is a powerful military
presence in the world.
The jewel symbolizes the power of money. There is some degree
of truth to the saying, “Remember the golden rule. He who has the gold makes
the rules.”
The mirror symbolizes the power of self-knowledge. This self-knowledge,
according to Japanese legend, was the most treasured of the three.
All too often, the poor and middle class allow the power of
money to control them. By simply getting up and working harder, failing to ask
themselves if what they do makes sense, they shoot themselves in the foot as
they leave for work every morning. By not fully understanding money, the vast
majority of people allow its awesome power to control them.
If they used the power of the mirror, they would have asked
themselves, “Does this make sense?” All too often, instead of trusting their
inner wisdom, that genius inside, most people follow the crowd. They do things
because everybody else does them. They conform, rather than question. Often,
they mindlessly repeat what they have been told: “Diversify.” “Your home is an
asset.” “Your home is your biggest investment.” “You get a tax break for going into
greater debt.” “Get a safe job.” “Don’t make mistakes.” “Don’t take risks.”
It is said that the fear of public speaking is a fear
greater than death for most people. According to psychiatrists, the fear of
public speaking is caused by the fear of ostracism, the fear of standing out,
the fear of criticism, the fear of ridicule, and the fear of being an outcast.
The fear of being different prevents most people from seeking new ways to solve
their problems.
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