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Does your household make more than ~$40,000 per year? If so, congratulations, you’re above the median income in the United States. Now, if you do make this much, let me ask this. Why do you still have bills??
I make well above the median, and I’m still up to my eyeballs in bills, just as is most of my friends and acquaintances, and it struck me as really strange. "If I supposedly make MORE than most people in the U.S. why am I still in the same boat debt-wise as everyone else?" It seems that over my lifetime (pre-PF focused) that every time I got an increase in pay, I also ’somehow’ managed to get an increase in bills that ate up that increase. I call this the Theory of a Monetary Vacuum
The Theory of a Monetary Vacuum
The action of unconsciously acquiring more bills that use up any surplus income that a family has. For each increase in income, there is an equal-or-higher increase in bills to compensate for it.
Equilibrium (and seeming happiness) is reached when there is no additional income available at the end of the paycheck. This prevents the ‘Fear of Money’ response; "What do I do with this extra money?!?? I don’t know how to invest! But I’ve GOT to do something with it, it can’t just STAY there.!!"
I look back on my career and it makes my head spin how much I’ve made, but how little I have to show for it. In my career so far I’ve probably grossed close to $1 MILLION dollars, but my bank account barely has a couple of hundred in it, and my retirement funds, while healthy, are way behind where they need to be for a person my age. 
It’s also not like I live in a mansion either. I have a median sized three-bedroom home in a relatively low cost of living area in the Midwest. It isn’t Bill Gates house, but it also isn’t a cardboard shack out by the railroad either.
I don’t have the huge plasma TV, or the marble bathrooms. The two cars are nice, AND PAID FOR, but they aren’t Ferraris or Lambourghinis. So where did all my money go??
I don’t know.
The Fear of Money
All my life it’s been a strange experience when I have money left over after bills. It hasn’t happened that often, but when it does, I have this perplexed feeling like I’ve perpetually forgotten to do something. Even worse, I get a guilty feeling when I see some kind of balance in the account and have ANY bills that need to be paid. I realize that I and my family need an emergency fund for unexpected events, but having the money there and not using it instinctively rubs me the wrong way.
I wasn’t raised by a family that ‘invested’. My family’s ‘investments’ came in the form of keeping food on the table and a roof over our heads. If there was any extra money, it went in a can on the shelf and was gone by the end of the week. There was no IRA, 401(k), Mutual Funds, ETFs, Stock Arbitrage, or any of those financial terms. Balancing the checkbook was the most math my parents did, and for a long time, it was the same for me.
I’m getting over my fear of money, and having some sitting around isn’t the headache it used to be, but it’s not an easy thing. If you haven’t handled large amounts of money and you receive a lot all of a sudden it can be overwhelming to the point of making your life worse, not better. (see "Why do so many lottery winners complain that having all that money has ruined their lives?")
The more opportunity you have to handle money, the more you learn about it. The problem is, by the time you get the money to handle, you should already know how to handle it, otherwise there’s a tendency to let it slip through your fingers.
Take a Lottery Vacation
One of the things I do as a mental exercise is to take a ‘Lottery Vacation’. Whenever the lottery gets above about $200 million, the wife usually gets a ticket. (Never know, SOMEONE’S got to win, sometime). I then let my mind wander and think about what I would do to keep the money after I got it.
What I would pay off, what I would buy, how I would save, all of these things percolate in my head. And once I do that, I compare what I dreamed about with what I’m doing now. Sometimes I alter my real-life plans to coincide with my dream plans. Sometimes the other way around.
The important thing, I think about my future and the money that will be coming in, either from my job/investments, or from the lottery commission. The money is the same color, only the amount and speeds are different. Having a plan in place makes sure it doesn’t just ‘trickle away’.
Do you know what to do with your ‘extra’ money? Have you thought about what you’d do with an increase or windfall of money? Let us know by leaving a comment or question.
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January 28th, 2008 at 9:46 am
We’ve been above, below, and right at the median income. And you’re right….when we were above, we couldn’t really see a difference from when we were right at the median income.
I love the idea of dreaming about what you’d do to keep your money if you won the lottery! My husband and I came into a not huge, but not small amount of money last year, and instead of blowing it on stupid things, we bought a much needed replacement car with cash and used the rest to pay down debt. It was a great feeling!
January 28th, 2008 at 10:10 am
@Lynnae
Great work there. It’s too easy to blow ‘found’ money. I’ve done it multiple times. I also got a lot more satisfaction using it to kill a debt or two, and it lasted longer than the ‘trinket’ I blew previous amounts of money on.
January 28th, 2008 at 11:08 am
Hay Randall.
I find it very interesting to hear different people’s views on money. I think much like many things in life, many of your attitude towards money comes from your upbringing.
The more I think about it, the more I think it’s an essential part of the parenting process.
Enjoyed the lottery vacation… used to do that with my friends all the time when the lottery swelled to a large number.
January 28th, 2008 at 11:30 am
Interesting idea. One we are working on as well, reducing our expenses and investing the balance, instead of buying.
I just finished reading “The Millionare Next Door” and this is exactly why the wealthy are wealthy, they live well below their means, don’t compete with others over “things” and invest invest invest.
January 28th, 2008 at 11:54 am
I have done this exercise with one of my employee before — i.e., calculate your life time income and then see how much of that you have saved over the years. It’s both an eyes-opener and a shocker.
January 28th, 2008 at 12:01 pm
My wife and I are over the median but are certainly not living like we’d like to yet. Not sure if we’re afraid of money. We love having a surplus. I think that the more you make the more you end up buying. It may be small things but your lifestyle creeps up. I remember going to Old Navy for clothes. Now it would be Banana Republic which is more expensive. Little upgrades like that eat up additional income over time. The trick I guess is keeping track of those things and deciding whether you need them or not!
January 28th, 2008 at 12:15 pm
Well, if I won a BIG windfall, I’d payoff all my debt, buy some close friends of ours a nice house and then I would build the nicest orphanage in Guatemala. Adopting our daughter and visiting that country really weighed heavily on my heart.
I would want to leave a legacy and would do so in my kids and that orphanage.
Ok, ok, and I would probably buy a BMW
January 28th, 2008 at 12:33 pm
It’s a good point, Randall, we’re all sort-of millionaires. We’ll probably handle at least a million bucks over the course of our lives. The key is handling it well.
January 28th, 2008 at 12:33 pm
@All,
The ‘coolest’ thing I’ve read about was one of the winners that set up a ‘family fund’. It gave out $12k/year to every member of the family. $12k isn’t enough to impact your life very much, but it is enough to make sure you don’t starve. That sounded very neat to me. Help, but don’t OVERhelp.
January 28th, 2008 at 5:13 pm
I don’t think that I have a fear of money, but I absolutely notice how my expenses rapidly climb to meet my income. In the last 36 months I went from making $8k per year to making almost 10x that amount, but I still have the same weekly allocation of spending money I did before ($200 a week for food, gas, and fun). Of course before, I had virtually no expenses and now I have my own household and a wife to keep up. The biggest changes are $12k /year for a 401(k)/Roth IRA, $12k /year for a mortgage, about $20k for taxes too.
I have very little use for money for money’s sake but I sure can think of a few great ways I would spend a few million. One of my favorite time wasters is to sit down and fantasize about my future house. I nearly went into architecture (except that I can’t draw to save my life) so I love the idea of making a building that matches your lifestyle and includes a bit of art and luxury. Who can argue with a massive oversize shower with a dozen jets or a dedicated home theater with a 100″ screen. My dream house gets built over and over in my head. It would only cost about 4-5 times my current livings arrangements so I aspire to own it lottery or no.
January 29th, 2008 at 2:01 pm
I’ve thought before about what I’d do with a windfall. It involves finishing off improving my house, and travelling (preferably on the Trans-Siberian Express). So, with my extra cash, I’m going to do exactly those things, just a little more slowly - the Trans-Sib might have to wait for another year though.
February 6th, 2008 at 5:04 pm
I can’t get over how appropriate this post is for me and my family. My husband and I make more than the median income and yet we’re in debt. We don’t live large, but we have a comfortable home, transportation, and of course food and clothing. But up until now, it seems that if there was “extra money” it had to be spent.
Like you, I’m just starting to have a more positive relationship with my money. I do have to keep reminding myself that money in the emergency fund is for emergencies.
If I won the lotto, I would abandon my job and head for Hawaii!