Reexamining the Income-Expense Ratio

Would you like to correct your mistakes? Fix your errors? Make yourself a better person? Have more success? Find love, happiness and money in 2011?

You need a resolution!

Fortunately, most people’s lives are easy to improve. They don’t have to do anything. They just have to stop doing things that are stupid.

Let’s talk a little about fat people. What’s the solution to fatness? Easy peasy. Nothing. Just don’t eat so much. Don’t fix a big meal. Don’t go out to a restaurant. Don’t have a second helping. Just don’t do it. We guarantee it will work.

The same could be said of most people’s financial problems. The average lumpenproletarian can’t easily increase his income. He has a job. He earns a limited amount of money. Or he has a fixed retirement income. Unless he is young enough to still have career choices in front of him, his income is already effectively set. His choices have already been made.

So if he wants to improve his financial circumstances, all he can do is to work on the expense side of the ledger, not the income side. And while the income side is helped by “commission” – that is, by doing things…the expense side is helped by “omission” – that is, by not doing things.

Want the secret to financial success? Make sure the expense number is lower than the income number. How complicated is that?

Yesterday, we were in the Miami airport reading in the newspaper about people who are facing severe financial stress. In some cases, they have lost jobs and income. In other cases, they have not saved enough for retirement. Still others simply have let their spending get away from them.

What’s the solution? The most obvious solution for all is: stop doing it. Don’t spend. See something you want? Don’t buy it. See something you need? Think again; you probably don’t really need it.

As we reported yesterday, 10,000 people will turn 65 every day for the next 19 years. Most of these baby boomer retirees are financially unprepared. They don’t have enough money saved to live the way they expect to live.

But that’s just the beginning of the story. If we’re right about the Great Correction, standards of living in the US are falling. Jobs will be scarce. Incomes – in real terms – will go down.

This leaves almost everyone with a tight budget.

What to do about it? Nothing! Cut spending by not doing anything!

But what about those poor people in the newspaper? They have to pay for housing. Food. Gasoline. Insurance. Health care. All the usual stuff. After they pay the basics, they don’t have anything left. In fact, an article in The New York Times two weeks ago showed how a couple with even $250,000 of income still had almost no free cash.

How can you cut discretionary spending if you don’t have any discretionary spending to cut? What if you’re already down to the essentials?

This is where it gets interesting. At a certain point, you have to stop doing nothing and begin to do something radical.

We were just down in Nicaragua. On the beach, we met a Dear Reader.

“That guy really has it figured out,” said Elizabeth. “He has a beautiful house right on the beach. No heating bills. Property taxes are almost nothing around here. And you can’t spend much money; there’s nothing to buy. But it’s a very high quality of life. If you don’t miss shopping malls and movie theatres.”

Of course, you don’t have to move to Nicaragua to live cheaply. Many places in America are even cheaper. Small towns in Texas. Arkansas. Tennessee.

You can get a enough land to plant a garden. And heat your house with wood. Throw away your credit cards.

Heck, it could be fun.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning