Redlining your Home Finances

Have you ever revved up your car in first gear (or 1 on automatic) until the rpm gauge went all the way to the red? It was fun wasn't it? You probably experienced great acceleration and the thrill of the engine noise, even though you weren't really going that fast. Revving your car all the way to the red produces tremendous acceleration and it is at that point that your engine produces its maximum horsepower. However, you can't hold that for long because the engine will wear out and it will overheat or blow up.

Well I bet that you're probably doing the same thing to your finances. If we call your take home pay 100% then your financial gauge is probably all the way in the red at 90, 95 or even 105%! If you were saving 50 to 60% of your take home pay then your financial gauge would be running at a nice and sustainable 40 to 50%. But you're not aren't you?

My friend you are probably overheating your financial engine. When you were single you had one income and you managed fine. Then you got a married and became DINKs (dual income no kids). Your financial engine got about twice its horsepower over night. However, within a few months you revved your lifestyle from 50% to probably 80%. Then came the kids and now you really put the pedal to the metal at 90+. The last time you got a raise you just stepped on the accelerator to maintain your neckbreaking 90+% pace.

If you save 50% of your income every year or even 15% you would have no choice but to be wealthy. Lets assume on average you make $60,000 a year and you save 15% or $9,000 a year, $750 a month. In 10 years you should have at least $90,000 in the bank. Actually with compound interest assuming a 10% return you should really have close to $154,000. Did you do it? Do you have it? I don't want to give you the 20 years figure because I'll depress you.

You'll come up with a thousand excuses of why your situation is different and why you have no choice. Think again. It took you many years to get up to your current lifestyle speed so don't expect to brake on a dime. However you can slow down considerably and not notice much of a difference. That 3,000 sq. ft. house might seem like a necesity but many families manage to get by on 1,200 sq. ft.. Some families with two kids can actually fit inside of a Toyota Corolla so don't think that huge $40,000 SUV in your driveway is a necessity either.

If you have saved at least 15% and your rate of return is at least 10% annually congratulations, you are the very small minority. The rest of us have been driving an overheated financial car.