I have a friend named Sam. Right now, Sam’s finances are in big trouble. He’s buried in debt, and wondering how to get out of it. I’m hoping all of you can help him when it comes to managing debt with some practical advice.
Sam’s done the math, and expects to make about $29,000 this year. He’s also taken a good, long look at his expenses, and expects to spend about $34,600. That’s a deficit of $5,600 for 2013 alone, but it’s only the tip of the iceberg when it comes to his debt; right now, Sam owes about $167,000 on various accounts, like his student loans, mortgage, and credit card.
He’s not even thinking ahead at investments or annuities.
In talking to Sam, it’s pretty clear he thinks he can get rid of all his debt simply by cutting costs. I’m not sure that’s really all that feasible. Looking at Sam’s income, his annual expenses, and his debts, cutting costs would be like robbing Peter to pay Paul: ineffective. So much of his income goes immediately to paying down debt that he really doesn’t have all that much wiggle room in his budget in the first place – there’s basically no discretionary spending he could trim at this point.
I think Sam needs to take a different approach. If he could get a second job and bring in some more money, he’d be able to stop running his household each year at a deficit, plus he’d have extra money to put toward paying down debt. I think that would be the most effective use of Sam’s time and money.
Of Course, This Is An Analogy…
If you haven’t figured it out by now, I’m not talking about my “friend” Sam, but about my “Uncle Sam” – aka, the Federal Government – and its current debate over deficit reduction. You have those on the right who think cutting costs is going to get us where we need to be in terms of managing debt; then there are those on the left who want to eliminate our debt by simply increasing revenue. Most Americans – myself included – think we need to do both:
“Overall, what do you think is the best way to reduce the federal budget deficit — by cutting federal spending, by increasing taxes, or by a combination of both?”
(Source: CBS News, courtesy of Polling Report)
I used this analogy – using the same ratio of revenues to expenses to debt currently estimated for FY 2013 by the Federal Government – to take the politics out of the equation. If your family was in a similar situation to Sam’s, how would you handle it? Would you cut costs and call it a day? Or would you try to find a way to bring in more money at the same time that you trimmed our budget? And would you want the government to do the same?