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Saturday, January 28, 2012

New Year's Resolution - Better Budgeting

Happy New Year!  I hope this year brings you much joy, peace and happiness!

I also know many of you are putting together your New Year's Resolutions or perhaps you already have.  Now that the holidays are behind us, many folks will be trying to figure out how to pay for all those gifts they bought so I thought I'd add some more information about budgeting.  

In my first budgeting post I talked about how to develop a budget and use it to determine your Discretionary Spending to maximize the money you have and avoid over spending and going into debt.  The budget developed was on a monthly basis and helped you develop a number for your entire month's "allowance."  For a lot of folks, this can still create some problems for a very simple reason and it has to do with the way our brains are "wired."

As it turns out, some people think better in smaller increments either week to week or day to day.  There nothing wrong with that as I've often said we each have a method that works best for us.  For some it's using credit cards and paying off the balance each month.  For others it's using cash.  What ever you method, you have to figure out a way to "keep score" and track your spending and budgeting in smaller increments is one way to do that.

Once good example of breaking down a budget into smaller chunks is thinking about how you buy groceries.  We all have to go to the grocery store.  How often do you go?  Each week?  Once a month?  Some combination of the two?  Let's talk for a minute about someone who goes once a month.  If they buy everything they need for the month at one time, how big is the grocery bill?  How much extra storage space would they need at home?  Maybe they would even need more than one refrigerator?  All that space for extra groceries and buying the extra refrigerator and the additional power it consumes costs more money.  Also, some stuff may spoil before you're able to use it which wastes the money you spent on those items plus costs more to replace them.

Now how does that compare to going once a week?  If you get what you need for just one week at a time, you spend less money at the store and you don't need a whole lot of space for all the "extra" stuff.  You are more conscious of exactly how much you are eating week to week and can more easily identify the "essentials" you really need.  If you plan your meals for the week, it becomes even easier to figure out exactly what the essentials are for you and you are less likely to buy something on a whim thinking you will need it "sometime" during the month.  Finally, there is less chance that the things you bought will spoil before you use them.

When I lived alone one thing I used was a standard grocery list.  I would list all the items I normally purchased in various categories on a sheet of paper.  For example, under cleaners I would have glass cleaner, toilet cleaner, dishwasher soap, laundry detergent, and etc.  I would keep 2 containers of each.  When I opened the "new" container of dishwasher soap, I would circle it on the list so I would know to get it the next time I went to the store.  This way I never ran out of anything I needed and only bought what I knew I had to have.

Sometimes there are specials on items in the store and that can save you some money.  If your dishwasher soap is on sale buy one get one free, it doesn't hurt to pick up one extra and save some money.  However, going to the warehouse store and buying a 50lb bag of dishwasher soap may be cheaper per pound but cost MORE CASH out of your pocket and not fit under the sink in the kitchen!  Do you get the idea?  Managing a budget is about making a plan and sticking to that plan so that you insure at the end of the month you have some money left over.

The only way you will be successful is to change your mindset.  You can do it; it just takes discipline and determination.  What I mean is if you have $200 budgeted for food then that's ALL YOU HAVE.  Break it down into weekly (divide by 4 or $50 a week) or daily chunks (divide by 30 or  ~$6.50 a day) if that's what YOU need to do to manage it.

Another example I use often is going out to eat for lunch.  If lunch cost you $5 a day, you'll spend $100 a month just for lunch!  Wouldn't it make more sense to "treat" yourself to one or two lunches out a month and and save that $90 for groceries?  You will get a lot more food at the grocery store for $90 than you will at a restaurant.

Once again the point of a budget is to make choices that are not for the short term or for what you want "right now" but for your long term financial health.  If you need to put $50 cash in your pocket at the beginning of each week for four weeks to make sure you don't spend more than your $200 during the month, then that's what you need to do.  If you have to place a certain amount of cash in your "secret hiding place" at home for things you may "want" during the month and only put that money in your pocket when you're ready to purchase them, then that's what you have to do.

Another thing to consider is your tax refund.  How will that affect your budget?  Do you plan to use it to pay down your holiday bills or will you spend it on that new "thing" you just have to have?  Which decision is best for your long term financial future?  Also, if you're getting a big refund that means you are giving the government an interest free loan.  Ever notice that, if you underpay your taxes, they charge you a penalty but if THEY owe YOU money, they don't pay an interest?

When you complete your 2010 tax return review it with this calculator and make any adjustments you need to your withholding so that you get more money in your pocket each month.  The biggest challenge for most is to have the discipline to save it rather than spend it.  Just pretend like you didn't get that money.  Set up for your bank to transfer that exact amount into a separate savings account each month so you don't "see" it.  In fact you might even be able to save all you need for the holidays this year and not have any holiday bills going into 2012! 

I'd love to hear about the methods you use to manage your budget so be sure to add some comments here or on the Facebook Page.  

Who knows, you may provide the "system" that someone has been struggling to develop for themselves that will make all the difference in their financial life.

Sunday, November 27, 2011

Black Friday - Was it for you too?

Well, we are now into the holiday shopping season.  Black Friday was just two days ago and now Cyber Monday is tomorrow.  Do you know why that day is called Black Friday?  Supposedly, the retailers have been operating at a "loss" (i.e. in the Red) all year and this one day is supposed to give them some profits (i.e. put them back in the Black).  Hard for me to believe so many companies are able to survive the rest of the year operating at a loss especially when they are selling things on Black Friday at such "huge" discounts.  By the way, if you believe them, please contact me so I can sell you my ocean front property in Arizona (LOL!).

All the marketing hype over the last few days got me thinking about how so many folks will be out fighting each other for these deals, using their credit cards to pay for all this stuff and will most likely have to make several payments to pay off this new debt at 14-20% interest!  Is that crazy or what? 
 

It reminded me of a recent survey conducted by the National Center for Credit Counseling that had some very surprising information about how people manage their personal finances.  One of the findings was that 63% of adults have no idea what their Credit Score is.  That was amazing to me.  How could someone walk around and not know their credit score?  I have that number in my head.  Then I realized something;  so many people don't know simply because "they don't know what they don't know!"  So let me explain to you in a little more detail what a Credit Score is and why it is important.

Simply put your Credit Score, also called your FICO score, is a financial report card about you.  The values of the score range from 300 (worst) to 850 (best) and provide and indication of how well you handle the credit you have been given through bank loans (such as for homes and automobiles), lines of credit (such as a credit card) and other credit extended to you by service providers (such as the power company, water company, etc.).  The score is calculated by applying values to several factors that describe your individual, unique credit situation:
  • 35% - Payment History - Have you made your payments on time?
  • 30% - Amount Owed - How much do you owe or the total of all your loans?
  • 15% - Length of History - How long have you maintained credit accounts?
  • 10% - New Credit - How many new credit accounts have you opened recently?
  • 10% - Credit Types - How many different types of credit to you use?
You can see much more about the items that make up each of these categories on the FICO Website as well as learn a lot more about what the score means.  By the way, it is called a FICO score because it was developed by the Fair Isaac Corporation.

There are three credit reporting agencies that "track" your credit:  Transunion, Equifax and Experian.  Each company uses the FICO system for measurement and each one will provide you with a slightly different number.  For example, Transunion may give you a 650, Equifax a 646 and Experian a 648.  The scores may not be exactly identical but they should be within 10 points of each other.  If they are not, there may be an error in your credit report OR you may have been a victim of fraud.  You need to obtain your credit report regularly to insure it is an accurate reflection of your financial management capability and so that you are certain no one has stolen your identity.

So how do you get a copy of your credit report?  How do you make sure you get one from EACH of the three agencies?  Well, there was a federal law passed on December 4, 2003 called the  Fair and Accurate Credit Transactions Act (FACTA) as an amendment to the Fair Credit Reporting Act (FCRA).  The FCRA was originally passed in 1970 to regulate the three reporting agencies and activities related to credit reporting.  The FACTA added a clause that requires that EACH one of the agencies provide you a FREE copy of your report every 12 months.  You can read some more details about obtaining your free report at the Federal Trade Commissions website.  You will also find a link there to the ONLY website that provides you with the FREE report from all three agencies.

You may have seen the ads on TV for FreeCreditReport.com but don't confuse that with the REAL free credit reports you are guaranteed by the FACTA.  FreeCreditReport.com will ask you for a credit card number to "sign up" for their "free" service which means, you guessed it, it isn't really free.  So be sure to follow the links I've provided to get your free reports.

This is really EASY to do.  In fact, as I was typing this blog entry, I realized it had been just over a year since I pulled my reports so I went to the free website and pulled and saved all mine in PDF format in less than 15 minutes.  If you don't have software to save your files in PDF format, here's some free software to do it.  If you don't want to do that you should at least print them out and save them somewhere safe.

The report from each agency will be formatted a little different but each one will list your name, most recent address, 2 previous addresses and all the credit accounts you have had within the last 10 or so years.  Each account will have details such as the name of the lender (for example, Wells Fargo Bank), the amount of credit granted (i.e. the amount of money you borrowed), the status of the account (i.e. open or closed) and highest balance and your payment history for the account.  You should get these reports every year and look them over to make sure the information is accurate, meaning, all the accounts you see are in fact yours either now or at one time and that the amounts and payment histories are correct.  If not, there are details at the bottom of the  Federal Trade Commissions website
that explain what you have to do to contact the particular reporting agency and get the information corrected.

Why is the score so important?  Well creditors review you scores to see how well you have managed the credit you have been given in the past.  For example, when you decide to buy a new car and need a loan, they look up your credit score.  If you have a poor rating, you will have a more difficult time obtaining new loans, credit cards, etc. AND the interest rate you are charged on your loans and credit cards will be higher.   Why?  A low score means you haven't managed your credit well therefore you will be charged higher interest so the lender gets their money back sooner from you.  The higher the interest, the more money the lender gets for the life of the loan.  For ANY loan, in the beginning, the  payment (made up of interest and principle) that you make is made up of more interest than the principle.  As you pay down the loan, the interest portion of the payment gets smaller and the principle portion gets bigger.  Again, the higher your interest rate, the greater the amount of money the lender is getting from you in each payment as interest until you get "closer" to paying off your loan.

Now if you find yourself in trouble with a bad credit score it's not the end of the world.  You can fix it with patience and dedication.  First, you've got to make your payments on time and keep from going further into debt.  You can get started by developing a budget as I discussed in a previous post.  You should also probably get some Free Credit Counseling.  The National Foundation for Credit Counseling is a non profit organization that helps people straighten out their credit.   You can learn more about what the NFCC has to offer here.  You could also use Google to find FREE credit counseling.  You may want to go to your local bank and ask if they have any recommendations.  There is help out there for you so don't lose hope - you have the control to fix it and you can.

One last thing.  I talked about your Credit Score and obtaining your Free Credit Report but you need to understand that those are NOT the same thing.  The Credit Report you can get for free once a year by law, however, there is nothing that says they have to give you your Credit Score for free.  In spite of this, I have never paid to get my score and it's a simple little secret.  The next time you apply for a loan or ANYTIME someone says asks you "May I pull your credit report?" just wait.   When they have done that and they say "Ok, based upon your report, we can offer you XX% interest rate on your loan" simply ask "Would you mind telling me what my three credit scores were?"  I have NEVER had anyone not tell me what the numbers were and so I've never paid to find out.  That's just one of the "little secrets" I've learned to save myself some money while I manage my finances.

I hope you see now that understanding your Credit Score and reviewing your Credit Report ANNUALLY are two important items you must have in your overall financial management plan.  Don't be intimidated.  You can do it.  Anyone can.  It just takes patience, discipline and some awareness of where to look for information and what to do with it.

So now you "know" and YOU too can stay "in the Black."

Sunday, October 30, 2011

Turning Your Money Blues Back To Green

There have been many stories in the news recently about the financial crisis in Greece that is causing problems with the world financial markets.  Four months ago there was great chaos caused by the "debate" of our own government about raising the US Debt Ceiling (see previous post).  What these"events" have in common is very simple - a lack of proper budgeting.  

The financial problems in Greece and the United States are not because those governments did not create a budget;  they have occurred  because their budgets have not been balanced  - both countries have been spending more money than they had available.  To manage money properly a budget must be developed as well as methods to monitor progress towards the budget.

A budget is defined as "An itemized summary of estimated or intended expenditures for a given period along with proposals for financing them."  Many organizations develop a budget to manage their money.  They "forecast" the amount of money they will receive  (called Revenue), how much money they will spend (called Expenses) and how much profit they will earn (Revenue - Expenses).  Generally on a monthly basis financial statements are created to report how the organization is performing compared to the budget as a sort of financial report card.  Managers in the organization review these reports to determine if changes to their current plans are needed to keep on track to meet the budget.

Using a budget is also the best way for you to manage your own personal finances.  Again,  you not only have to develop a budget but you have to have the discipline to monitor and manage it.  How do you do that?  First, let's talk about how you create the budget.

Start by determining you total take home pay for a month.  You may be paid each week (multiply by 4) or twice a week (multiply by 2) or only once a month.  That monthly total is your Revenue number.  Next, you need to determine your Total Fixed Expenses for each month.  These are the bills you have each month that do not change or are "fixed".  Examples are your rent or mortgage payment, car payment, child support, annual memberships (broken down into a monthly amount) cable bill, phone bill, electricity, water, and insurance.  Even though some of these bills like phone, electricity and water may vary slightly, you still have to pay them every month and that's why I categorize them as "fixed".  You will not get through a month without receiving a bill for these items.  You can estimate the monthly amount for them by calculating an average amount and then add a little to it to use in the budget for that item.

Now if you do not keep copies of your monthly bills, this may be a bit difficult.  If that's the case, just get an envelope, label it "Bills" and start collecting them.  After about 45 days you should have all your bills in that envelope at least once and possibly twice.  Once you do, sit down at a table and take them all out and make sure you have everything.  If you have any payments made automatically (like phone bill charged to a credit card and no paper bill sent) you have to determine those amounts by reviewing your email or on-line statements and include them.

You also use these bills to calculate the averages for the bills that vary slightly.  For example, look at your electric bill.  Let's say it's $130.  Well it may be a little more in the summer ($165) when the air conditioning is working.  If you live in an apartment with electric heat, it may be even more in the winter ($185) .  So perhaps you add another 10% to that number so that average is equal to the sum of all your electric bills divided by 12.

This brings me to another very important point: you need to start keeping copies of your bills each month.  Review these bills against your budget every month and make sure all the amounts you have been using in your budget for "fixed" expenses are correct.  If not, you make adjustments to your budget.  After 6 months, review all your bills for those 6 months again to be sure your estimates are correct and make any adjustments necessary.

Now that you  have all your information for Total Fixed Expense and your Total Revenue you subtract the Expenses from the Revenue  and you get your Discretionary Spending.  This is the money you can totally control each month.  This is the money you use for groceries, going out to eat, clothes, electronics, and all the other "stuff" you purchase.  You also take your "savings" from this money.  You should target to set aside 10% of your Discretionary Spending and "pay yourself first" this way before you spend money on other things.  Why should you do this?  You need to plan for the unexpected.  The doctor visit you had to have.  The flat tire that had to be replaced.  The unexpected expense for the field trip at school.  If you don't pay yourself first, these things can wreck havoc on your finances when they just "pop up."

Some people have asked me "Why is food discretionary?"  Well, you can control what you eat, how much you eat and how often you go "out" to eat.  No one is forcing you to eat out every day at lunch or go by Starbucks every morning on your way to work.  When I lived alone, my grocery bill was around $125 a month.  I planned my meals, bought the same things each time I went to the grocery store and I ate simply.  I didn't starve, ate "good" food and was in very good health.  I still brew coffee at home every morning.  I don't go "out" for lunch.  I live close enough to work to come home for lunch and when I worked further away I packed a simple lunch.  If you eat out every day and spend $7 on lunch that is $45 a week and almost $100 a month!!  If you packed a lunch you could "save" at least half that amount if not more.

If you're having trouble figuring out how to calculate all this, here's a useful tool you can use. Just fill out all the items in the GREEN boxes with your numbers.

Once you have developed your budget and you know how much you have available to spend each month, you need to develop a method to manage your budget day to day, week to week, month to month.  In other words, using some round numbers, let's say you have $500 of Discretionary Spending each month.  First deduct 10% for savings and you're left with $450.  How are you going to track your spending to make sure you don't spend more than that $450?

Well, one way is to use a credit card for all your purchases.  Many times, a credit card has some type of rewards system for using it either cash back like with the Discover Card or points you can use for other discounts or airline travel or whatever.  The credit card usually has a way you can monitor your spending activity on line so you can check anytime to see how much you have spent so far for the month.  Another advantage to credit cards is they have a little better fraud protection than using a debit card as I discussed in this post.  The risk with the credit card is it is VERY easy to go over budget since you can charge easily and you don't "see" anything leaving your wallet.  You can find yourself in over your head with debt very quickly so you have to have a lot of personal discipline to use this method.

Another way is to use a debit card in the same manner as the credit card.  You can still track your transactions on line to manage your budget.  With this method, the money comes out of your account immediately and the fraud protection is not quite as good as the credit card and it still requires discipline to not spend more than you have available.  If you do overspend, instead of adding debt like you would on the credit card you may wind up paying fees for over-drafting your account and possibly reducing your savings if you have your savings set up to cover your checking account for overdraft protection.

The final method is to use cash.  You do not have to keep up with any receipts or look on line to see how you're doing;  you just have to look in your wallet to see how much money you have left.  Now, I personally would not walk around with $450 cash.  I would take some like perhaps $60 and leave the rest in a "safe" place and refill my wallet as necessary.  For some people this is the best method because it requires less discipline since you have a finite amount of money and you "see" it leaving your wallet.

Which method is the best?  Well, that depends on you.  Each one has advantages and disadvantages.  What's important is that you choose the one that is most likely to work best for YOU to help you manage your money the most effectively.  You may try one method and find out it doesn't work well for you and switch to another.  There's nothing wrong with that at all.  Each of us is different and we each have to develop our own unique methods to manage our money successfully.  Whatever method you choose, be sure you are conscious of your budget each time you spend money.  That way you will be prepared for the unexpected expenses that happen to all of us and you'll have the peace of mind knowing you were prepared.

Tuesday, August 16, 2011

Take the Time...Your Kids Will Thank You for It

I was recently reviewing some of my notes and research and was a bit disappointed to realize that kids in this country still aren't receiving the information they need to properly manage their own personal finances.

The first item I ran across was a survey conducted of 18-22 year-olds and their parents by Wells Fargo back in the summer of 2009.  You can see the survey here but these are the key highlights:
  • 95% were not confident about reaching their finance goals (parents, 5%);
  • 92% think a budget is not important (parents, 8%)
  • 41% know what a credit score is (parents, 75%);
  • 28% understand annual percentage rates (parents, 73%);
  • 23% understand a 401(K) (parents, 73%);
  • 31% understand compound interest (parents, 64%).
The thing to keep in mind here is that this was a survey by a bank of their customers.  Imagine what those numbers would look like for those without any bank accounts whatsoever who live paycheck to paycheck and only pay cash!

Over two years later, we have not made much progress improving our kids financial education.  And it should not be surprising that they are so confused.  If our own government doesn't understand how to properly manage it's money (see previous blog post) and it is educating our children through the public school system, why should we expect kids to have a good sense of money management?  Without any financial guidance, these kids are left to the vast marketing machine that tells them frequently how much and what kind of "stuff" they must have to be "cool."   

I've gotten to the point in my life where I don't watch much TV.  There are a few shows a week that I watch so I get maybe 30-45 minutes of commercials a week?  When I grew up, TV and radio were the main source of advertising.  Since I watched more TV then, my mind was bombarded with images and slogans to encourage me to want certain "stuff."

Our kids are exposed to much more advertising than we were.  Now there are pop-up ads on websites, banner ads on your email and "focused" ads on Facebook.  The marketing folks have really spent a lot of time figuring out how to capture the dollars from the teen market.  Here's one report that outlines all the methods teens use to get information, where they shop, the amount of money they have "available" and on and on.  Most interesting to me is that in spite of all the electronic advertising today, the study determined that teenagers trust the advertisements in magazines more than any other advertising media; and companies use that information to target products to teens.  This is serious business and a lot of money is spent each year to "capture" more of the teen market.  The only way that we will help our children to avoid being sucked into this huge marketing machine is to help them learn to manage money early in their life.  And I have first hand experience.

My wife and I have taught our children the importance of managing their money wisely.  As is the case with most kids, sometimes they listen and sometimes they don't.  They have all had times where they have made great decisions and other times where they have made silly mistakes.  That is expected anytime you are learning something new;  you will not master it overnight.  The way that you are successful with personal financial management is to be patient, carefully consider the various choices and take action when you're sure you have identified the best option.  I'll write some more in coming posts about some of the new methods we've been developing to help our kids master these skills.

Each of our kids will have a unique experience with personal finance.  And so will you.  Each one of us learns differently.  There is nothing wrong with making mistakes so don't be too hard on yourself when you do.  The important thing is that we learn from those mistakes and continue seeking information that helps us learn in the ways that are best suited for our own individual personalities.

One valuable tool that any of us can use was developed by a good friend of mine, Sara J. Thompson.  It is called Life with Bills.  It is an on-line life simulation that allows kids to obtain a "job", "earn" money, and "spend" it on various things.  The system provides feedback about how they are "performing" as managers of their own finances.  The best part about the simulation is that the financial "mistakes" made in the software do not have the real "pain" that are associated with those same mistakes in the "real world."  It is an excellent companion to my book and I highly recommend trying it.

Now, before I finish this post, I want to be sure I'm not giving you wrong idea.  I'm not saying that wanting "things" and then buying them is bad.  We all have our toys and gadgets that we have acquired regardless of our age.  What is important is to have the ability to distinguish between needs and wants.  You need to pay your water bill so you have water in your home.  You may want a new iPhone but you should not skip paying your water bill because of that want. 

So think about how you can improve your financial education.  Ask your parents to show you the bills they pay each month to get an idea of how much all this "stuff" that seems "free" to you really costs.  Talk to your kids about personal finance and help them set savings goals so when something comes along that they want, they won't go broke trying to get it.   

As with all things in life, there has to be discipline and balance.  Each is equally important to achieve long term financial well being.

Tuesday, July 26, 2011

They want to do what!?!?!?

We've all been hearing (non stop) all the discussion and debate about the need for the U.S. to raise the debt ceiling. Negotiations continue and we are currently in "gridlock" over what to do. So I started thinking "I wonder if most Americans understand what is happening and how cold I help explain it?" Well, here goes.

As is usually the case in any argument, the debate is centered around the short term problem and the short term fix and ignores the two bigger and more obvious questions:

  1. How did we get in this mess?
  2. How do we keep it from happening again?
Well before we do that, let's look at some of the data from the Office of Management and Budget that has been compiled in this very cool webpage put together by Adeeb Karam. Click on the "Deficit" tab and you can clearly see the answer to #1 - We got in this mess because the U.S. Government is always spending more than it collects in taxes AND, incredibly, they develop the budget each year without concern of this fact!

For the rest of this article, to make the rest of this a bit easier to understand, I'm going to provide some analogies between the U.S. approach and and individual's personal finances.

Look carefully again at the graph. You can see that all the way through 2016, the "plan" is to spend more than is collected! In order to keep doing this, OUR elected officials want to INCREASE the U.S. debt limit. This would be same as if you went to your credit card company and asked them to raise your credit limit because your card is "maxed out" and you want to keep spending!

What happens when you don't pay back your debt and have to get more credit to have enough money to continue to pay your bills? Your credit score suffers and the interest charged to you for loans increases. This is exactly what is about to happen to the U.S. credit rating and will undoubtedly result in a rise in interest rates for all of us.

So, to answer #2, how do we keep this from ever happening again? The simple answer is we have to have a balanced budget which means Spending must equal Taxes collected. To accomplish this we have two choices: Raise Taxes or Cut Spending. While there are plenty of people on TV right now that are debating which course of action to follow, there is only ONE, course of action to take even though it will be very difficult: cut spending AND not "raise" taxes but rather adjust the tax code to collect more revenue.

Cutting spending will not be easy. There will be hard and difficult choices to be made but they must be made the same way you do when you have an unexpected medical bill arrive. Less going out to eat. Less shopping on Amazon. Focus on the necessities. The government routinely wastes our money and when you're in a financial crisis, you can't waste your money on silly things. That's how you do it and the government has to do the same.

You know that you can not spend more than you have, at least not for long. The government must have the same financial discipline. The simple way to do this is to budget for next year based on this year's taxes collected and not a penny more! If you have to balance your budget and every government institution from the U.S. Congress to the local public school should have to do the same.

So why not just raise taxes to balance the budget? If you are getting in over your head financially, you can not demand more pay from your boss. What would that conversation be like? "I need more money because I don't know how to manage it well." Have that conversation with your boss and you'll find yourself job hunting and your "economy" completely out of whack! The government needs to realize it can not do a similar thing and simply raise taxes without severe consequences to the U.S. economy.

We already work until April 12th to pay all our Federal, State and Local Taxes. That is 101 days or 27.6% of the year. So, almost 30% of your income is "collected" by government to pay some type of tax either on your income, or sales tax, or property tax or other fees, etc. That should be enough to run the government right? Well, everyone pays this amount except those at the extremes: the poor and the rich pay little or no tax. This is why the tax code needs to be changed and simplified.

The poor pay little or no tax because they don't have any money to tax! The rich pay little or no tax because they pay attorneys and accountants to help them "shelter" their income from taxation. That leaves the rest of us to carry the load.

We can revise the tax code to make the amount paid in taxes simplified so that it doesn't take two lawyers and an accountant to know what you have to pay. One suggestion is a Flat Tax coupled with a Negative Income Tax as outlined by Milton Friedman here (it's a lot to digest so read it carefully). This would be a "fair" way to help the less fortunate and still generate ample revenue for government to perform its functions.

To summarize, balancing the budget through a combination of elimination of waste, reducing spending, and simplifying the tax code will not be easy but is the only way to get us out of and keep us out of this mess. When you break through all the bickering, posturing, speech making and drama it is all very simple: the government has to do the same simple thing you do if it wants to be financially successful - "collect" a "decent" amount of money and spend less than what is collected.