Money Matters
From Pay Check to Pay Check
by
Randall Bingham

NOTE: Every organization that hires employees to complete the task the organization was created to perform is subject to the problems that the employees carry in their daily personal life. Financial problems are recognized as the #1 destroyer of the marriage relationship, so we must assume that it is also affecting the job relationship. The education of children is one of the most important tasks any organization can undertake. It is in the best interest of your organization, the children who are taught and the employees for the organization to pay attention to the employee’s need for information about correct principles of money management. Each organization should align themselves with benefit providers that are at least as interested in financial education as they are financial products. The following article, and others in a series of articles, have been written with the goal of educating educators about specific principles, financial tools and processes that are available in the educator’s financial world, not some world apart.

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Living a financial life style of “pay check to pay check” is actually a plan that could be called “six weeks to bankruptcy”. Apparently, there are more than a few who are working that plan. Perhaps you know a household or two. Bankruptcy cases are continuing to increase. According to the statistical report from the US Bankruptcy Court, a decade ago each judgeship was responsible for about 2800 applications a year, whereas today (latest data is from 2001) the count is closer to 4700 applications. For chapter 7 filings, 70% are individuals seeking relief from primarily consumer debt. Debt is a common solution path for an ailment that the Japanese call “Kin Ketsu Bio” or the sickness of the lack of gold. Consumer debt payments, with its tag along high rates of interest, are taking a bigger and bigger chunk of the pay check. In our area, pay day advance business are becoming more plentiful than banks.

Teaching is a profession that is a career choice, but there are still many who begin their career later in life, at the empty nest phase. The thought is usually that more money will resolve the problems of living from “pay check to pay check”. A survey was taken by Working Woman Magazine, with some interesting results. “One troubling finding [of the survey] [brackets added] is the anxiety women display about making ends meet. The vast majority say their most pressing concern is that they can't save… 72% of women earning $35,000 to $75,000 cite living paycheck to paycheck as their greatest concern, as do 69% of women with household incomes of $25,000 to $35,000.” The survey information shows that the common assumption that MO MONEY leads to less financial pressures is not necessarily true.

Without implying that there is not a threshold where the income is so low that all the bills can’t be paid, let me state that debt is just as the Japanese say, a disease that can be cured by having gold, or resources. But you must be patient. Buying and satisfying cravings for better things prior to earning the money is destructive to your net worth.

Principle #1 Learn Financial Patience
Learning financial patience is an exercise of distinguishing between wants and needs. If you need a crash course on the difference, take a sabbatical leave and visit a third world country. Go somewhere that the people are poor by our standards, yet somehow live a happy life. Watch the movie “The Gods Must be Crazy”. My point is that you will not die if your front room has no furniture, the dishes and silverware don’t match and the car needs a paint job, etc. Learning financial patience is a lifestyle change that focuses on your current reality. Stop focusing on the desire to impress everyone around you if you want to stop living pay check to pay check. It is just an attitude and a habit that you can decide today, here, and now, to change.

The purpose of this code section was to allow a teacher, (any employee of a 501(c) (3) organization) to defer income by electing to participate in an individually owned retirement account. A few years later, the tax law was amended to allow loans from the account prior to retirement. It is the loan provision that will assist the average household to increase the rate of savings. The loan provision makes money available for major purchases that require financing and for refinancing debt at a lower cost of interest.

Above I’ve described the circumstances that are created by borrowing and spending to a point that there is no more monthly income available to save or defer. Let me give you an example of a common situation I encounter. A math teacher began our conversation about the need to begin saving for retirement with the statement that he had just gone over his budget and he was $25 a paycheck short of paying his bills. He saw additional income as his only option and was just beginning to work a second job in commission sales to try and make up the difference. I reviewed his budget and found he was over paying on certain debts to reduce them, he was over withholding on his income taxes, giving him large refunds and he was putting a small amount into a savings account for emergencies as well as a small amount into an IRA. I asked him to combine all those over budgeted items into a 403(b) deduction. I asked him to change his 403(b) deduction when he does make commissions to avoid the tax on that income. He has started out by saving $2000 a year into the 403(b) whereas before he was only saving about $600 a year. As for the debt he was trying to pay down, the account will be large enough to refinance his other debt within six months and he will be free of debt sooner with a much lower cost of interest. The lower payments on the refinanced loan from the 403(b) account will allow him to increase his savings to $4300 a year. What about his budget, you might be asking? He moved to a positive $15 per paycheck

While it is true that a retirement account that is encumbered by a loan may not earn as much as the fully invested account, the true benefit of using the loan provision for my math teacher client was in his ability to increase the rate of savings. He is moving from $600 to the ability to save $4300 and even more when he earns additional commission income. What rate of return would a person have to earn on $600 to make it grow to $2000 or $4300 in a couple of years? Obviously, if a person knows how to do that, I want to read that article. Until a person is consistently deferring $14,000 a year (the current basic IRS maximum contribution level) the rate of savings is much more of a concern than the rate of return on the investment. I’ll discuss more about the loan provision in a future article.

Randall Bingham of PRO Financial Group helps educators improve their financial situation.