August 7, 2022

Bucks: The New American Money Math

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site,

For a long time, the basic equation in personal finance has looked like this:

Income Expenses

Break this rule for very long and bad things happen. But despite this being a pretty basic concept, there seems to be a new American money equation that just won’t die, even though it simply doesn’t add up (pun intended).

I’m not sure when this happened, but somewhere along the way we started believing in this little fantasy of allowing our expenses to grow to match our income plus all the money we could borrow. At first this might not have been a big deal. Borrow a little for a car and a house, no problem.

But then we wanted more. Credit got easy and things got out of hand on both a personal and a public level. I had hoped that the meltdown we had in the credit markets a few years ago would lead to permanent scarring and get us all back to focusing on managing our expenses or growing our income in order to make the math work.

Unfortunately it doesn’t seem have had that effect. While some signs exist that we’re focused on paying down debt, there are also troubling signs that people feel more comfortable with consumer debt than ever.

This reminds me of the joke about “balancing” your checkbook based on how many checks you have left. As long as there are still checks, you must still have money!

So what does this look like in real life?

1) Shopping for a car based on the monthly payments. Buying a car will often involve borrowing money, and the monthly payment will be part of that equation. However, it should not be the starting point.

2) Shopping for a house based on the monthly payments. Most of us will have to borrow money if we decide to buy a house. But shopping for houses based on the monthly payment a mortgage broker says you can qualify for can lead to complex mortgage products that end up costing us far more than you thought.

3) Buying more stuff because you can afford the minimum payment on the credit card. I know this should be insanely obvious, but this is the kiss of death. While avoiding this trap should be important to all of us, it really hurts when this happens to people who are in college. I have a friend who is fond of telling the story of the time when he used a credit card in college to buy a backpacking tent. He made the minimum payments, and it ended up costing almost as much as the car he drove years after he graduated.

Rather than allowing our expenses to grow to match our income, plus any money we can borrow, maybe we should start using the old math: Income should always be greater than or equal to one’s expenses.

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