Just Like the Government

What if you managed your personal, family or business budget the same way that the Federal Government does?

You may have heard of this analogy before. Being in the accounting business, we find it to be a fascinating idea! By scaling down the finances of the Federal Government to the level of the typical middle class family, our perspective changes. Have a look at these numbers and consider what YOU would do if you found yourself in this situation.

The 2012 Federal Budget

Here are the basic numbers we are dealing with. (from the FY 2013 Budget)

  • Income = $2,469,000,000,000 ($2.5 Trillion)
  • Expenses = $3,796,000,000,000 ($3.8 Trillion)
  • Deficit = $1,327,000,000,000 ($1.3 Trillion)
  • Debt = $11,578,000,000,000 ($11.5 Trillion)
  • Interest = $225,000,000,000 ($0.2 Trillion) (included in deficit)

Let’s Scale It Down

The numbers above are so large as to be nearly incomprehensible as “dollars”. Most of us won’t earn more than a few million dollars TOTAL over the course of our entire lives, so a trillion or even a billion dollars is difficult to comprehend. The average household income for 2012 is said to be $50,964, so we’ll use that as a basis to adjust the numbers. If you were the federal government, this is what your budget would look like:

  • Income = $50,964
  • Expenses = $78,355
  • Deficit = $27,391
  • Debt = $238,988

Now think about that. How can you spend $27,000 more than you earn in a year? Borrow money. So, you’re borrowing (or putting on your charge cards) more than half of what you earn in a year, and stacking that on top of the debt that you already owe.

Let’s take it a step further. Most of us pay our bills monthly, not annually. So, let’s look at it that way:

  • Income = $4,247
  • Expenses = $6,530
  • Deficit = $2,283

If that doesn’t drive it home for you, nothing will! You’re over $2,000 short of making your expenses every month! What would you do? The answer is simple and clear, you would increase income and/or reduce expenses. You’d do it drastically, and you’d do it NOW.

What if you can’t reduce expenses?

You need that new shotgun to protect you from the McCoy’s up the road (military spending). You’ve got to have that dog around to alert you when someone is trying to break into your house. (homeland security) You have to make your house payment and feed your kids (social programs). You have to help your Mom make her house payment and buy groceries and take her to the doctor because you promised you would. (Social Security & Medicare) You have to make your car payment and buy gas so that you can get to work. (DOT) And the list goes on. Yeah, you might be able to knock out 10% on average and still take care of business, but that’s clearly not enough. It only removes 29% of your monthly budget deficit, leaving you $1630 short every month. Your ship is still sinking!

You need more income, plain and simple.

38% more income, to be more precise! On the personal level, that can be a hard pill to swallow. It usually means taking on a second job, or pursuing a career change, or some other drastic measures. Guess what, for the Federal Government to come up with 38% more income is no easy feat, either! The only way they have to generate income is by taxation. So, if you hear any politician promising tax cuts and promising to balance the budget and reduce the deficit all at the same time… you really need to wonder about their motives.

From a pure accounting perspective, tax cuts (a reduction in income) should not come until/unless we have a budget surplus (more income than expenses) and are making clear progress at reducing our debt!

Contact Fredrick James Today to learn more about how you can manage YOUR budget in the face of federal taxes that are surely on the rise.

Visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

 

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