The income trap…when yesterday’s luxuries become today’s necessities

Not surprisingly, my financial therapy clients with low to moderate income and few assets often experience symptoms of financial stress such as anxiety and depression. Even though they juggle their funds by alternating which bills they pay each month, they still come up short. Interestingly, even clients with triple digit incomes and substantial assets report symptoms of financial stress such as panic attacks, mood swings, and a loss of interest in regular activities.

Paradoxically, the attainment of more income does little to alleviate financial hardship. Increases in salaries are expended on larger houses, finer wines and more frequent and extravagant vacations. Soon yesterday’s luxuries are today’s necessities. Too often, when a couple’s spending is disproportionate to their income, they contend with more than harassing calls from bill collectors. Financial pressures lead to arguments, especially as the pile of unopened and unpaid invoices fill the mailbox. Numerous research studies reveal that arguments about money are more likely to predict divorce than arguments about other topics. Utah State University researcher, Jeffrey Dew found that those couples who are burdened by higher debt argued more frequently about their finances and spent less time together. One reason couples may argue about money is they do not share a unified view of their family income, assets and liabilities. One study found that half of the couples surveyed reported significant differences in knowledge of family assets and liabilities.

Poet E. E. Cummings summed up the financial condition of these clients when he acknowledged,

I’m living so far beyond my income that we may almost be said to be living apart.”

Are you and your income “living apart”? Would you like to get your spending more in line with your income? Are your financial problems exacerbated by relationship tensions?

If so, you may benefit from reevaluating your spending priorities.  For many couples, spending creeps up each year until there is not enough money to pay for all those luxurious necessities. That is, until there is a financial crisis. A Pew Research found that many Americans changed their minds about which everyday goods and services they could live without when unemployment, foreclosures and personal bankruptcies were on the rise from 2006 to 2009. Over this period, a declining proportion of all the adults surveyed viewed the following items as necessities: microwave (-21%), clothes dryer (-17%), home air conditioning (-16%) and dishwasher (-14%). Looking more closely at the survey answers reveals that higher-income adults are more likely than lower-income adults to rate more of the items as necessities regardless of the prevailing economic conditions. It seems that as higher incomes are spent instead of saved, people become trapped into a more luxurious lifestyle.

Implementing spending cuts is never easy. Financial therapy may help you sort out what is really necessary for your financial wellness and relationship satisfaction.

 

Dr. Jean Theurer is a Certified Financial Planner® and a Registered Marriage and Family Intern.

Finances and Feelings

Finance Money

Number crunching. There is no doubt that managing your finances involves working with numbers. Tallying expenses, projecting income, calculating and comparing rates of return, balancing budgets, and analyzing cash flows are just some of the number crunching steps in the financial management process. However, if you are one of many Americans who reported experiencing anxiety when working with numbers, then managing your finances may be the chore that is perpetually at the bottom of your to-do list. Take heart, math phobics! You are not alone in your anxiety. Studies show that even those who are knowledgeable about financial matters and competent in math-related activities struggle to effectively manage their finances. Researchers have found that the connection between knowledge about finances and financial behavior is not as straightforward as it is often assumed.
 
So if knowledge isn’t the factor, what is?
 
Let’s get more to the heart of the issue. While the concept of budgeting is highly valued and promoted in our society, less than 1/3 of Americans prepare a detailed written or computerized household budget each month. The dollar amounts on a budget are not just numbers. They represent values, traditions, expectations and, sometimes, dreams. To create a balanced budget, number crunching is useful. But, to create a useable budget, feelings about each income and expense category must be considered. The loan from your relative may be smaller and at a lower interest rate than your other debts. However, feelings associated with that loan may lead you to incur higher costing debt in order to pay off your relative’s loan.

Similarly, if your feelings influence your spending (such as during a trip to the mall after a stressful day), then taking steps to reduce your debts may be like using an air freshener in a locker room; only the symptoms are temporarily treated. Being financially healthy may depend more on your feelings about money than your ability to calculate compound interest, differentiate between leasing and buying a car or create a diversified portfolio.

So whether you are a number cruncher or math phobic, take a moment to consider the following steps to getting in touch with your feelings about finances.

Step 1. Recognize your feelings about finances. Being able to identify your underlying feelings is a necessary step to making changes in your financial behavior. Which of the following words capture these feelings? How do these feelings contribute to patterns of behavior that you want to change or continue?
Worry Fear Jealousy Insecurity
Contentment Envy Panic Hope
Frustration Happiness Anger Disappointment

Step 2. Think about the feelings you learned about finances as a child. Was money a source of happiness or a cause of conflict within your family? Focus on your earliest memories of interactions with money. The influence our families have on our feelings about finances can be automatic and subconscious. However, since this finances/feelings connection is learned, you can choose to change it.

Step 3. Share your feelings and early memories about finances with a trusted friend, family member, partner or financial therapist. When you understand the underlying feelings that drive your financial decisions you can become empowered in the decision-making process.

 

Jean Theurer, CFP®, Registered Marriage and Family Therapist Intern