61 – What happens if your paycheck stops?

This episode is actually out of the request from a couple of people, having to do with debt and finances. It turns out that in the United States, very few people really are prepared for retirement or getting themselves prepared for retirement. How important is that?

Let me go backwards a little bit, because most people are well before the age of retirement, and they live paycheck to paycheck. Actually, 61% of the American public live paycheck to paycheck. 63% don’t have $500 for an emergency. Given that, what happens if the paycheck stops? This could be retirement; it could be some other emergency, or you were just laid off. You’re working paycheck to paycheck, and all of a sudden it stops.

Some people living paycheck to paycheck are actually doing that because they’re thinking through and thoroughly on a real budget, and they are allocating some money into different pockets.  That’s fine, because they are saving. Those are not the people I’m talking about.

The problem is almost always on the spending side; not on the income side. It’s not that you don’t have enough income, it’s that you spend too much. What do I mean by that? Think in terms of the last time you got a pay raise, or the last time you got a promotion, or the last time you got a new job with a higher pay. What happened to that increase? Think in terms of what will happen. Over the next two years, almost everybody will have some sort of an emergency, whether it be a car repair that they didn’t count on, or an appliance breakdown, or roof that starts leaking. Something will happen, and it will be an emergency. What has been set aside, and what will people do in preparation or at that time? Too many people are worrying and hoping that they’ll somehow, someday hit that lottery, which is a ridiculous thing to be investing your money into, putting your money into, wasting your money into.

I’ve often heard and I see people that are always out, and there’s actually peer pressure to go out to do things to get the latest car, to get the latest little toy. People will say, and I’m sure you’ve heard this expression: “Live for today.” Or as a couple of people have asked me over time: “Why are you saving? You might die tomorrow.” My reaction and response to that is: “Yes, but what happens if I live?”

Remember that if you don’t retire until 65 or 66 years of age, you’ll have 25+ years in all probability that you’ll be living beyond that. There’s no chance to play catchup when you get close to retirement. There’s actually very little chance when you start hitting your 60s. You have to have and save from as early as you possibly can, and to be putting money aside both for your emergencies and for your future.

This is partially motivated at this time because somebody had sent me a note, a very nice note, about how the episode on reverse compound interest (see LifeUnsettled.com episode 56) rung home to them, that they had just received a bonus and where they had ordinarily been thinking of they would get something with it, they went and paid off the credit card, and how the elimination of that debt will actually be a large increase over time of their actual income. That’s all explained in that episode, so I won’t go back to it here.

It’s the same thing right now, because we’re on the verge of a lot of people getting their tax refunds. What are you getting with those tax refunds? Are you getting out of debt, or are you getting the new latest toy? What would happen if instead of getting a new car, you took that car payment and just put it away?