Debt and Taxes - Part 1

What is a person supposed to do to be financially prepared for unknown future events? In my opinion, a lot of the pain being experienced today is the result of too much debt. With a so-called credit crunch existing, banks are unwilling to loan to those who have less desirable credit scores. With the Federal Reserve lowering interest rates, how is this going to help? While I certainly don't have all the answers to this macroeconomic problem, I can see how to housecleaning at the microeconomic level is in order. A special thanks to Ken Z., a friend of mine for some of these insights. Let's face it, as a consumer, fixed expenses are bad. Companies can use leverage (debt) to accelerate earnings in good times. For consumers, this simply doesn't work. If you have fixed bills that include mortgage/rent, car payment(s), utility bills and insurance plus minimum payments on your credit card, your bills could very quickly equal your take home pay. What happens if that take home pay is suddenly gone through a lay off or job switch or a wage-earner injury? The best advice is to reduce debt and do it as quickly as possible. Living within one's means can improve your outlook on life, your health and especially your flexibility in the case of unforeseen economic events. First, you have to change your way of thinking. Employees in their 20s and 30s these days seem to have what is called an 'entitlement' mentality. This means they think they are owed something. Many folks in this age group grew up with unprecendented wealth in their parents' homes. Those in the younger portion of that range may have thought they were wealthy, but it was truly debt driven. We have to learn (notice I included myself there) that if we take home $1000 per check twice per month, then we have only $2000 to spend for the month on everything. If you can't pay cash for it, don't buy it. If you and a spouse both happen to be working, you should not be spending all of that cash. You should be living on one of the incomes and using the other to either pay off debt, or create a savings account for that unexpected rainy day. In the next installment of this blog, I will cover strategies for paying off debt that you have. Now if only this worked for the federal government as well...