I rarely get into political discussions because of how they tend to polarize people. Most of these conversations seem to skew far from a moderate position where you could expect to have a reasonable debate; too quickly they devolve into irrational defenses of positions that are extreme to either the right or the left.
There’s not much middle ground left, which makes it difficult to bring up politics -- but sometimes, regardless of where you find yourself on the spectrum, we run across an issue that affects everyone.
One major financial issue we currently face certainly impacts you right now. It’s our level of federal spending and the current deficit, and whatever your politics, the issue does affect you.
Here’s what you need to know (and how to sift through all the noise you might be getting from sensationalized headlines in the news about this topic).
The Importance of Cash Flow
Cash flow is one of the first things I work on with my clients. It’s a simple concept, but most people find working with it in the real world is challenging.
We all have certain amount of money that comes in every month (from our income sources like our paychecks or profit generated from investments), and a certain amount that goes out because we spent it (these are our expenses).
When you spend more than you bring in on a consistent basis, you will never build wealth. You will rack up debt that multiplies via compounding interest owed on the balance, which depletes your savings and prevents you from using your money coming in to invest.
Like I said, cash flow is simple to understand: it’s money in and money out. But it’s hard to manage, as many people who struggle to spend less than they earn can attest.
Putting Our Current Federal Cash Flow Problem Into Perspective
This doesn’t just happen with people. It happens with our government, too.
In the US, the federal budget deficit is projected to be $985 billion for 2019. That means the government is spending $985 billion more than it earns. (The United States’ projected spending is $4.407 trillion. The U.S. government estimates it will receive $3.422 trillion in revenue. That creates a $985 billion deficit.)
Let that sink in. That’s the equivalent of a family who brings in $150,000 per year (after taxes), or $12,500 a month, who spends $193,000 a year or $16,098 per month!
Right now, the government funds its deficit by financing. If we continue our family analogy, that’s like if they put all of that extra spending ($43k a year) on a credit card.
Why You Should Worry About Federal Spending - and How It Impacts You
We all have months where we spend more than we make. Things happen, both within and out of our control that can contribute to this -- and it’s okay if it happens every once in a while.
But we know that, over the long-term, overspending is not sustainable.
At some point, we go through our emergency account or deplete our savings, we run out of room on our credit cards, or the bank doesn’t lend us anymore money.
Spending more than you make, when you don’t have savings to draw from, just grows your debts (credit card, home equity or personal loan) and that’s exactly what’s happening with the government.
In addition to putting roughly 22% of our yearly spending on a “credit card”, 10% of our spending goes to paying off our already accumulated debt. Unfortunately, last month our total federal debt hit an all-time record of $22 trillion. At this pace it will only get bigger.
Inevitably it will become more expensive for the US to borrow, which will further exacerbate the issue. While this may not be a major concern now, surely our children and grandchildren will be dealing with a major problem if we don’t change.
What Can You Do Now?
Although this might sound daunting, there is good news. We’ve had spending deficits before and we’ve been able to work our way out of those holes -- even coming up with a surplus in the early 2000’s.
We haven’t seen a drastic rise in the cost for the US to borrow yet, either (in other words, interest rates aren’t rising dramatically). Our economy is strong and its growth and expansion could provide us the revenue to start paying down our debt if we decide to focus on it.
What can you do? Educate yourself and press your government representatives for fiscal responsibility. This should be a priority on a local, state, and federal level. Let your vote speak to the importance of this.