Chapter 1: Money Really Matters

For any normal adult living in America today money ranks right up there next to oxygen. Without money you cannot eat. You have no place to sleep. You cannot drive. You have no freedom. If you don’t have money, you are forced to live in a homeless shelter or on the street. If you have ever been to a homeless shelter, you can understand why that is not an appetizing option. It is this simple reality that causes adults to be so concerned about money.

Most teenagers do not understand the importance of money. They also do not understand the amount of money that is required to live a normal life. This occurs for a very simple reason—parents provide teenagers with everything. Teenagers, therefore, live in a dream world. The moment you exit this dream world and have to live life yourself, your opinions about money will change dramatically. What I would like to do in this chapter is show you how much money it takes to live a normal life in America. Once you understand that, adults and everything about them begin to make a lot more sense.

Let’s say that you were to get totally fed up with your parents. In a fit of passion you decide at age 16 to run away from home. You hop a freight train and you end up in Raleigh, North Carolina to begin your new life. Your goal is to live a normal life—not an extravagant life, just a normal life.

So, you are standing on a street corner in Raleigh, NC. What is your first step? First, you need an apartment. You stop by a local convenience store and find a copy of the apartment locator magazine. Every major city in America has apartment locator magazines, and you can find racks of them at grocery stores, convenience stores and so on. Pick one up some time. What you quickly find is that any "nice" apartment costs about $600 for a one-bedroom unit. A "nice" apartment has a pool, probably a club house, well-kept buildings, nice landscaping and so on.

Running Away from Home When teenagers decide to "run away from home" they aren't thinking about the financial implications of what they are doing. They just want out. They aren't thinking, "Let's see, to live a minimal American life the cost of entry is $5,000, so I need to raise that money prior to departure and then…" Instead they take off, end up in a city, and immediately are destitute. They have no money, no food, and no place to stay. There is no way to get a job and no other way to make money. Someone eventually suggests or forces drugs or prostitution. And there it is.

You realize that $600 a month is impossible. Where are you going to get $600 every month as a runaway? So you get a copy of the paper to look in the classified ads. What you find is that the cheapest apartment available is a "student" unit near the university. You go to take a look. It is really just half of the upstairs of an old house. It is a dump. No air conditioning, for example. Peeling paint. The carpeting is dirty and worn down. The toilet won’t flush, but the man showing you the apartment says he will fix that. You can see all the pipes and they are all rusty. It is $350 a month. You also have to put down the last month’s rent and a security deposit of $300. Just to move in you need $1,000. Then you need $350 per month, every month.

Now you need power for the apartment. You call the power company. They want $17 to turn on the power. Since you have no credit history, they also want a $200 security deposit. You ask the landlord for an estimate, and he says that the power bill will run about $250 per month in the winter because the apartment is heated with electric baseboard heaters, but it drops to $40 per month in the summer. The average is about $150 a month.

You would also like to have a phone and cable TV. Cable is $50 a month and $70 to install it. The phone is $40 to install, $100 for a deposit and about $25 per month if you make no long distance calls.

Now you need some furniture for the apartment. You need a sofa, a chair, a living room table, a shelf, a TV, a table for the TV, a kitchen table and chairs, pots and pans, silverware, plates, utensils, a bed, a dresser, a night stand, several lamps, several phones and so on. Forget luxuries like a stereo, computer, VCR, Nintendo, etc. You have no money for those. You also need sheets, towels and blankets. If you were going to go out and buy nice stuff, and buy it all new, this would all cost thousands of dollars. You look in the classified ads and manage to find used stuff that is pretty beat up but serviceable and it all costs about $1,000. You end up renting a truck to pick it all up; that costs $100 for two days. The sheets, towels and blankets you get cheap at K-Mart for $70. You also spend $100 on paper towels, toilet paper, cleaning supplies, soap, toothpaste, shampoo, toothbrush, garbage bags, aluminum foil and so on. All of this is "stuff," but it is kind of hard to make it past the first day without toilet paper.

Now you need a car. The average price for a new car in America is over $20,000 in 1997, and the cheapest new car you can buy is about $8,000, so that’s out. You start looking for a used one. You know what you want—a hot, red, two-seat sports car.

Unfortunately, you find that there are two kinds of used cars: nice ones and junkers. You can’t afford the nice ones. The junkers look like crap and feel like they are going to fall apart any minute. You keep hunting until you find a 1986 Plymouth Horizon. It looks like hell because all the paint is peeling off and the seats are torn, but it seems to run well and the guy only wants $800. To buy it you need to transfer the title and get a license plate. The Department of Motor Vehicles wants $35 for the title, $25 for the plate, $24 in taxes and $2 to notarize everything. However, they won’t give you the plate because you must have insurance and the car needs to be inspected. The inspection costs $25. The inspection station tells you that you must buy new tires, and they end up costing $250. The first insurance agent you call won’t even talk to you because you are under 20. Neither will the second. Neither will the third. You eventually find an agent who will get you insurance, but it costs $1,800 per year. You have to pay the first $900 up front to activate the insurance.

Now you have a place to stay and a car. Certainly this is not a luxury situation. You are living in a dump with beat up furniture and a junky car. But you now have the essentials. So far it has cost you this much to get situated:

When you ran away from home, you probably didn’t happen to stick nearly $5,000 in your pocket. Where would you get that kind of money to begin with? What this shows you is the "cost of entry" into an American lifestyle is high. Very high. Keep in mind that the example presented here is the absolute bottom of the barrel. It gets no cheaper than this and it gets significantly more expensive for anything nicer.

Now that you are on your own you have monthly expenses. Some we talked about above. Several we have not discussed yet, like food, gasoline, car repairs, clothes, property taxes, etc. They are summarized below:

The car maintenance category includes gasoline and regular maintenance like oil changes, new tires, repairs, etc. The random category handles all the random unexpected things that crop up without warning. Property taxes are a good example. Parking tickets. Drivers license renewal. Money you lose. Things like that.

Note that this monthly budget includes no luxuries or entertainment: no dinners out, movies, dates, videos, CDs, tapes, books, magazines, trips, vacations, air conditioning, cell phones, beer, cigarettes and so on. If you smoke, that simple fact alone can add up to $100 a month to your monthly expenses. Beer could add $50. Note again that this is a bottom of the barrel existence. You can double this number if you want to live in a nice place, drive a nice car, have some normal luxuries and so on.

At the same time you were forgetting to grab $5,000 as you walked out your parents’ door, you probably also forgot to grab the $1,300 you need for this month. Or the $1,300 you need for next month. Or… Therefore, you need a job.

So far we have ignored the income side of all of this. You should keep in mind that none of the above could have happened if you did not have a job first. You could not get an apartment without a job. Or a phone. Or power. Or car insurance. You must have the job first. Every single place you go to will ask for your job history and credit references. You have none. We have ignored that fact for the sake of the example. What you know is that you need $5,000 to get started and $1,300 per month to live your life.

Since you dropped out of high school to run away, you don’t have a high school diploma. Therefore, the only place you can get a job is at a fast food place. It pays $5.00 an hour. You do some quick math. If you work 10 hours a day, 6 days a week, you can make $300 a week. Of course, no place will let you work more than 40 hours a week because of overtime restrictions. So you work at one restaurant 40 hours per week and another restaurant 20 hours per week. That earns you just about exactly $1,300 a month in a 31-day month. Just enough to squeeze by.

Who wants to work 10 hours a day, 6 days a week scrubbing toilets and flipping burgers? The problem is, what choice do you have? If you want to live in this trashy apartment, you have to make money. If you want to drive this trashy car, you have to make money. If you want to eat, you have to make money. You have no choice. With this job you can at least break even on monthly expenses. Maybe once you get situated for a month or two you can figure something else out.

Unfortunately, you have miscalculated. You have forgotten about taxes. When you get your first pay check you are stunned to find that the federal government has erased 15% of your check. The state of North Carolina has taken another 7%. The social security administration and Medicare has lifted 7.5%. Your monthly income actually looks like this:

You are nowhere close to breaking even. So what are you going to cut? Medical insurance is probably the first thing to go, but that is extremely, incredibly risky. Even the simplest illness can cost several hundred dollars by the time you cover the office visit to the doctor and the cost of prescription drugs; if you get in a car wreck you will be in debt for life. Now you have to cut another $200. So you cut cable. What else, exactly, are you going to cut? Food? Phone? Clothes? You can’t move to a cheaper apartment. You can’t get a cheaper car. You are already at the bottom.

So, you are working 10 hours a day, 6 days a week. You live in a dump with junky furniture and a trashy car. You have no health insurance, no cable TV, no phone, no clothes, and you are eating what you can at work and going hungry on Sunday.

Now what?

Are you starting to get the picture? This, by the way, is the definition of poverty. When you hear about "Americans living in poverty," this is what they are talking about: this sort of crappy, 60-hours a week, no way out, can’t make ends meet sort of existence. You are scraping by at the absolute bottom on the barrel, and if anything goes wrong you are dead. If your car blows its engine, or you get a speeding ticket and your insurance goes up, or you get sick one week, or…you are out on the street. There is absolutely no slack in your budget. Once you are out on the street, it will cost you another $4,000 or $5,000 to get back on your feet again. So you are permanently stuck.

If you have taken the time to read through all of this and really think about it, you have discovered five things:

• You must do something with your life so you can make more than minimum wage. It is impossible to survive on minimum wage. When you hear adults constantly talking about a "good job" so they sound like a broken record, that’s why. It takes about $20,000 a year just to get by in this country (1997).
• You don’t mind making minimum wage when you are a teenager living with your parents because it is gravy. Your parents are paying the rent, buying food, covering all the bills, giving you clothes and loaning you a car. You should now see that minimum wage won’t cut it when you are out on your own.
• You really need your family to help you get started in "real life." How else can you handle that $5,000 start-up fee? There is no way to start a household for any less than $5,000. Your parents can help you with expenses, loan you furniture, and so on.
• If you were to actually find yourself in this position, it would be difficult to get out of it. When you are working 10 hours a day, 6 days a week, there isn’t a lot of time for anything else. The only way to get a better job is to get more education. But when, exactly, are you going to get it?
• A person in this position has no freedom. You are absolutely stuck in that rut and there is no way out. You get up every day and go to work, then you come home dead tired and feel like you are trapped in a prison cell. Money is freedom.

From the above discussion you should be able to see a fact of life that is important:

It turns out that this is the central reality from which adults derive all their decisions. Almost everything else adults do makes sense once you realize, understand and appreciate this fact of life. Right now you are oblivious to this fact of life because by living with your parents you are living in a dream world. Once you leave this dream world and start living on your own, you will be acutely aware of this particular fact of life.

Given that central reality, you can quickly derive a second fact of life:

No matter what you do, you need a place to live and you have to eat. Therefore, you must have a job. You have two choices when you look for jobs: good ones and all the rest. The time to start preparing yourself for a good job is during your time as a teenager when you can control things like finishing high school, going to college and so on.

Given the discussion we’ve just finished in this chapter, here is a third fact of life:

It may not stink the first month because you are happy to be "out on your own." However, it will begin to stink by the second month. By the third month it will REALLY STINK. There will come a day when your crappy car breaks down on a hot, hot summer afternoon. It will be about 110 degrees and 100% humidity. Since your car has no A/C, you will be hot and pissed and sweating like a pig. You will need a quarter for a phone call and you won’t have one. You will walk over to a guy in a parking lot who is sitting in his $40,000 Jeep Grand Cherokee. He will roll down his power window and out will come this breeze of delicious, cool, dry air and he will ask, "How can I help you?" He will be totally confident and happy to help you. And you will say pathetically, "My car broke down, but I don’t have a quarter for the phone. Do you have a quarter?" And he will say, "Here, use my cell phone." You will call a tow truck that you cannot possibly afford. As you walk away the question will flit through your head for the 600th time, "What the heck am I doing wrong?"

Which leads to a key fact of life for every teenager:

You might not care about jobs and money now, but that is only because you don’t have to. You are able to sponge off your parents as a teenager, so you don’t have a care in the world. A few minutes after leaving your parents’ house to start out on your own you will care about a job. You will care how much you make. You will care how much rent costs. You will suddenly care very deeply, because you will have no choice. That is a fact of life. If you are looking through magazines as a teenager thinking, "Wow, when I’m older I am going to drive a Corvette and live in a great big house," you need to start planning your life today. It turns out it is not as easy as you think. If it was, you would have a Corvette now.

Now let’s look at your parents. What is motivating them? They are faced with these same money concerns every day. The difference is that if they mess up it’s not one person who ends up on the street; it’s the whole family. Even if you live in what appears to be an extremely safe, suburban neighborhood, you might be surprised at how precarious things might be under the covers. It really depends on how good your parents are at managing their money.

Let’s say that your father has an extremely good engineering job. He is making $60,000 a year. His job covers his health insurance and gives him two weeks of paid vacation per year. You live in a nice, four-bed-room subur-ban home. You have two cars: your mother drives a nice, two-year-old mini-van and your father drives a 1978 Dodge Dart that you despise. You have a brother (also a teenager) and a sister (10 years old). Your mother stays at home.

Let’s look at a likely monthly budget for the household. Let’s say that the house cost $140,000 when your parents purchased it 5 years ago. They paid $10,000 down and locked in a fixed rate 30-year mortgage at 8.5%. That means the monthly mortgage payment on it is about $1,000 per month. They pay about $40 per month for homeowners insurance and about $100 per month in property taxes. The house also needs to be maintained at a rate of perhaps $50 per month. This covers things like a new furnace, water damage, roof repair, repainting, recarpeting, new appliances and so on. On the car side the monthly payment on the mini-van is about $400. Car insurance is about $100 per month. Car maintenance, gas, etc. on the two cars is about $200 per month. Food is running about $300 per month. Power/water/sewer/gas is about $200 on average per month. The phone plus long distance is running $80 per month. Cable is $50.

Your parents also have other goals. If they are smart, they are saving between $6,000 and $9,000 per year for retirement. They are also putting something aside to cover future college costs. They also have some kind of life and disability insurance. Plus… Let’s look at the numbers:

You can learn a tremendous amount from this worksheet. For example, even though your father has an exceptionally good job at $60,000 per year, barely half of it ($35,000) actually makes it home. You can see that taxes take a gigantic bite out of his paycheck. That is why your parents may often rant about taxes and politicians, by the way. Anytime you have someone taking $20,000 a year out of your pocket you are going to complain.

Your parents do not have an extravagant lifestyle. They live in a respectable but certainly not elaborate home in an inexpensive part of the country (the house would cost twice as much in California, for example). They have two cars, but neither is a show-stopper. They have no luxury items like a boat or an RV or a $10,000 home theater system or a cell phone. And yet, monthly expenses almost exactly match monthly income.

Adults and Financial Privacy For all adults the topics of money, salary, home prices, etc. are fairly sensitive topics. That is a fact of life. No adult goes around saying, "Yeah, I pull in $60,000 a year." The fact that you have been alive 16 or 18 years and have no clue what your parents make, how much your house is worth, etc. tells you how sensitive this information is. You might be able to go to your parents and have an honest, open conversation about these topics. If so, that is great. But if not, it is not unexpected. Also, if you do have an open conversation with your parents about money, it should be understood that the information is highly confidential. "Why," you might ask, "is this information so sensitive?" For most people, it occurs because they perceive salary to be a measure of their worth. Is that a good thing? Who knows? It is simply a fact and it is true, at least in the business sense. If you have two people in a business and their salaries are different, then one is more valuable to the business than the other for whatever reason. In any company salary rates are incredibly competitive. Therefore, for an adult to say to another adult, "I make $40,000 a year" gives the other adult an incredible amount of information. Understand and respect this sensitivity—you will likely feel exactly the same way once you have a job.

What this budget does not include are things like Christmas, birthdays, family vacations, dining out, movies, newspapers and magazines, ballet lessons for little Suzy, soccer equipment, school pictures, yearbooks and on and on and on. You can see exactly why your father drives a 1978 Dodge Dart. What choice does he have? Sure, he’d like a fancy car, but it’s impossible. You can also see why your parents are fairly tight when you ask for anything. Where, exactly, is the money going to come from? If you want a $100 pair of sneakers, that blows the clothing budget for the month. If anything goes wrong it is a big problem. If a major expense pops up unexpectedly (for example, braces or eyeglasses for one of the kids), then your parents have to borrow the money for it, and they are going to have to cut back somewhere else to pay back the loan. The most likely thing they will cut is the retirement withholding. This explains why an extremely large percentage of adults in America (more than half) have inadequate retirement plans. The next thing they will cut is the college fund.

Why is your mother working or thinking about getting a job? To earn some extra money to cover things like Christmas and birthdays and family vacations. Why does your father sometimes complain about work but still go in every day? Because if he doesn’t the whole family is in a very bad place. Note that there is no line item in the budget for "emergency savings." If your father loses his job, it is going to cause a tremendous amount of difficulty and there will not be a lot of good options.

Remember that at one point in their lives your parents were teenagers. They had all of the dreams you have now—nice cars, fancy trips, expensive stereos and so on. They wanted it all, just like you. All of it has been put aside so that the family budget will balance. Whenever you ask for an expensive Christmas gift and get it, that is a gift that your parents cannot give to themselves.

It is when you begin to realize the level of sacrifice your parents made to raise you and the amount of financial juggling they did to give you what you wanted that you begin to truly respect and appreciate them. That process starts perhaps at age 20 or 25, but doesn’t really hit you until you are into your 30s and raising your own family. It is not something you, nor your peers, ever realize or appreciate as a teenager.

The title of this chapter is "Money Really Matters." Hopefully, the examples in this chapter help you to understand why money is so important. Most teenagers live in a protected dream world that totally isolates them from the realities of financial life, and that isolation can make it extremely hard to understand why adults are so preoccupied with money, taxes, their jobs, etc. The sooner you realize how important finances and jobs are to your future well-being, the sooner you can begin planning and preparing for your own financial independence.

Please do not get the impression that money is the only thing there is to life (in particular, see Chapter 41). However, it is a fact that without a money you starve. Chapter 0 talks about designing your life. After you design it you will want to build your life, and you cannot build without money. That is what makes money important to you. You get a good job (see Part 2) so that you have the freedom to do the things you enjoy.

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