Welcome to the latest series at the wildly popular JosephSangl.com: “5 Things That Will Help Fix The Economy” In this series, I will be sharing some principles I believe will help fix the economy long term.
The economy has been stuck for some time. The words “Great Recession,” “Fiscal Cliff,” “Sequestration,” “Stagnant,” and “Jobless Recovery” have become common everyday language.
Number 2: Require a balanced budget.
In all of my personal finance books, events, and teaching, I share a fundamental and foundational financial truth that the following formula applies to one and all if we truly want to prosper:
INCOME – OUTGO = EXACTLY ZERO
If “Outgo” continually exceeds “Income”, then the formula won’t equal “Exactly Zero” (EZ tm!) Instead, it will be a negative number. This can go on for awhile through the use of debt and creditors, but eventually the game will come to an end and the creditor will shut off future funding.
Balancing a nation’s budget requires the same process you and I put into place at our kitchen table. When faced with a negative number instead of “Exactly Zero,” there are two ways to balance the budget:
- Increase INCOME
- Decrease OUTGO
1. Increase INCOME
How does a government increase income? Generate more tax revenue! This can be achieved two ways: (i) Increase taxes or (ii) Economic improvement (which will yield more taxes as profits and payrolls increase). While most of us are not terribly excited about paying taxes, I am more than happy to pay them to enjoy the good benefits that government provides. I would be even happier to pay taxes if I knew that the government was required to have a balanced budget!
There’s actually a third way to increase income, and it’s my least favorite: (iii) Borrow money. Borrowed money generates money for now, but creates a future liability that adds to future “OUTGO.” A good way to comprehend this is a credit card. You could use your credit card right now to generate income. You could purchase items and “stimulate your economy” right now because it would add to the “INCOME” side of the equation. However, the bill would come due soon and cause the “OUTGO” side to increase. Seems very counter-productive to me! I’ve yet to meet anyone who told me that borrowing a ton of money on their credit card was a great decision that helped them prosper!
2. Decrease OUTGO
This is the unpopular and unsavory part of budgeting. No one wants to reduce spending because that’s our favorite part! We all want to be able to shop, subscribe to cable and Internet service, drive a great car, and have the best of everything, but decisions must be made when faced with substantial budget issues. Using the credit card to fund these items during a slump in income will only work for awhile and then the bill will come due – larger now because of failing to make key decisions and using the credit card instead.
Sometimes in our personal budgets, we must even reduce and potentially eliminate good things and fun activities. We don’t WANT to, but we MUST if we really want to position ourselves to prosper long term. The same is true for governments. When faced with tremendous INCOME challenges, we must reduce and eliminate OUTGO – even for great programs and organizations! It is awful and no fun, but it is NECESSARY if there is to be any fundamental financial and economic improvement!
Let’s look at the United States Budget (see it all HERE). According to the non-partisan Congressional Budget Office, the U.S. collected $886 billion in INCOME during the first four months of Fiscal Year 2013 (FY2013). However, the country spent $1,181 billion in OUTGO during the same period. Our key equation “INCOME – OUTGO” definitely is not EZ! Instead, there is a deficit of $295 billion. Put simply, for every $1.00 the country collected, the government spent $1.33.
To better comprehend these huge numbers, let’s put this in terms of your personal household income. Suppose you earned $4,000 this month. To match the deficit achieved in the first four months by the government, you would need to have spent $5,331 or $1,331 more than you earned. How long could YOU sustain that type of deficit spending?!?!
A vigorous debate must be done with the vision of a great economic future as the main goal – instead of a “I need to win this argument at all costs” posturing and positioning. There will be tough decisions that will impact people, services, and the global economy. It is a huge and complicated task (so is balancing our own budget!), but it must be done to fix the economy long-term.
Read the entire series (available after 3/14/2013)