Financial Challenges 2006


Here's the Ideal Situation:

  1. Start with wages providing the basis for your gross income
  2. Taxes are paid from your gross income, leaving net income.
  3. Expenses are paid from your net income, leaving money for savings.
  4. Savings are used to make investments.
  5. Over time, investments produce a financial return to add to income.
  6. Barring disruptions or imbalances in any of these elements, things run smoothly.

  1. Presumably, every person knows the source of their income: wages, pension, self-employment, moonlighting, allowance, social security, investments, annuity, etc.

    However, the income of some people is not steady, continuous, or even reliable.

    Here is where survival starts: you must know the source and amount of your income, averaged over time, so you can plan your financial life.


  2. To prepare even a rudimentary plan of action for financial survival, the reader might have to go back a year and document the source(s) of his/her income as the basis of a consumption plan, to cover taxes and expenses, and savings, if there is an indicated surplus.


  3. If income is steady and predictable, then the forward planning becomes easier.
  1. Unless a person has been working for a salary for an extended period and sees the taxes taken from his periodic paycheck, one of the most misunderstood areas in a person's financial life is the tax "bite" that Uncle Sam takes.


  2. There are three major segments of taxes: the payroll tax (social security), the Medicare tax, and then the income tax, commonly called "withholding". This latter means they take it away before the wage earner sees it.


  3. Depending upon a person's working status, active wage-earner, business owner (incorporated or sole proprietor), or retired, the taxes vary widely, as does the flexibility to affect his/her tax obligations. This will be studied and examined in some detail in other articles on this subject.


  4. The way a taxpayer controls and possibly minimizes through legal means the amount of taxes taken away during his/her working years, can dramatically affect the amount of money available for savings, and ultimately retirement.

  5. Because taxes can have such a large effect on what remains of Gross Income, there will be another entire section on this website dedicated to explaining what to look for in reducing taxes, thus freeing up funds to save.


    6. Saving money early in life, putting it aside to accumulate interest for many years (through the power of Compound Interest, which will be explained in another article on the website), can have an astounding effect upon the amount these savings produce many decades later at the time of retirement.
  1. Net income, also known as Disposable Income, is what is left after taxes have been paid out of all income.
  2. As will be seen below, this Net Income should not be considered money that is freely spendable each month. There are lots of things this money must cover.
  3. This is a critical milestone point in managing one's financial affairs.
  4. Both of the preceding factors, Income and Taxes, are under the control of the wage-earner/businessperson to a great extent.
  1. This is another critical view of the person's financial affairs, showing how money flows through the system.
  2. Wages or business earnings produce Income, out of which Taxes are paid, resulting in a Net Income.
  3. Net Income is used to pay all expenses, and surplus money flows to savings.
  4. All these elements must be in balance for the money to flow the correct way.
  1. If all goes well, we are back to the Ideal Situation, with surplus money after expenses are paid going to savings.
  2. Savings can then be used to make investments, which, applied correctly, produce more income to contribute to Gross Income, supplementing wages.
  3. So far, so good.
  1. Sound the alarm! Expenses have gone out of control and blocked the system.
  2. When expenses become larger than Net Income, the ideal situation is disrupted.
  1. Most people cover excess expenses by short-term use of credit cards, when Net Imcome in insufficient to cover all the expenses.
  2. Hopefully the out-of-balance situation is short-term, and expenses can be controlled enough to return to manageable levels.
  3. If not, the emergency moves into the next phase (below).
  1. If credit cards continue to be used to cover normal and extraordinary expenses, there are no funds remaining for savings/investments.
  2. If left uncontrolled the problem moves to crisis level (below).
  1. In the extreme case savings/investments must be liquidated to supplement the use of credit cards to cover expenses.
  2. The crisis can become catastrophic if any of the other elements get out of control, such as complete or partial loss of income, or savings are depleted to the point that expenses are not paid off each month.


    3. There are additional articles on this website which deal with problem areas in each of the elements that have been mentioned.

    Saving money early in life, putting it aside to accumulate interest for many years (through the power of Compound Interest, which will be explained in another article on the website), can have an astounding effect upon the amount these savings produce many decades later at the time of retirement (below).
  1. Hopefully, everything comes under control.
  2. At whatever period in life one chooses (or is forced to choose), the ideal situation will leave a person with another kind of financial balance:
  3. Social Security income, a generous Pension income, and money from lifelong savings/investments will produce enough income to cover all the financial needs of retirement.


    4. If not, continued employment may be the only solution for producing enough income to cover expenses. The other alternative is to reduce one's living expenses to be within whatever retirement income can sustain.

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