To understand how money works for a typical American these days try looking back to Victorian England, when an oddball mathematician under the pen name Lewis Carroll wrote two hallucinatory storybooks: Alice's Adventures in Wonderland and Through the Looking-Glass and What Alice Found There.
One scene in Looking-Glass describes Alice attempting to run a race with the Red Queen: Alice ran constantly, yet instead of moving she somehow always remained in the same spot.
"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else—if you run very fast for a long time, as we've been doing."
"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
If you can't visit the Red Queen's country you can have a similar experience at your local gym, by climbing on a treadmill: you can't stand still on a treadmill, or else you'll only move backwards. You must move at a certain speed just to stay in place, and move even faster if you want to get ahead.
And so it goes with money, too: you'll always need some money just to stay where you are, financially speaking, and extra money to get to a better place.
Bills, bills, bills
I still remember the faint feeling of shock my young-teenage self felt the first time she seriously digested the thought, “One day I will move away from my parents, and handle 'the bills' and all that other grown-uppy stuff by myself” and realized adults spend their whole lives running in the Red Queen's race. There will always be “bills” to handle, because it's not possible to live an ordinary mainstream American life without spending money.
For starters, you need to pay for shelter. Even if you own a mortgage-free house, it takes money to cover the property taxes in addition to basic maintenance. It costs money to buy clothes, and money to keep them clean and presentable. Food, water, transportation and winter heat — money, money, money and money.
Not that this is necessarily a bad thing. In most ways, life in our modern technological money-based society is infinitely easier and richer than life in the wild: to offer just one example, acquiring the money to buy bread, even if you only earn money at minimum wage, is far easier and faster than growing, harvesting, milling and baking your own grain flour.
Still, for as long as you live you can never climb down off that money treadmill, and never stop it from moving, either – but with the right frugal mindset you can slow it down, so that you need less effort to stay in place and less effort to move forward, too.
Look at your bills and other expenditures – what's the bare minimum amount you need to meet your basic financial obligations every month? The higher the number, the faster the treadmill.
Of course, that question about monthly financial obligations isn't the only one you must ask. Indeed, too much focus on monthly payments can be downright harmful: one of the most common, and costly, financial mistakes people make is that when they buy something on an installment plan, they only look at the size of their weekly or monthly payment, rather than calculate the total cost.
Recipe for happiness
Charles Dickens, another writer from Victorian England, invented a character named Mr. Micawber who is best remembered today thanks to his famous “recipe for happiness”:
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
In other words, spend less money than you make and you'll do all right; spend more money than you make and you won't. That's more of a Captain Obvious observation than Einstein-genius insight — yet people forgot it in Dickens' time and still forget it in ours.
Every time you pay off a debt or reduce a regular cost, your treadmill slows down a little. When I first graduated college and entered the professional working world, I was in miserable financial shape because not only was I making low entry-level wages, I had high debts to pay off. I went from collecting student loan payments to paying them back, and had credit cards and a car payment, too. I had to run a lot faster then than I do now, just to stay in place — and getting into debt was easier (and a lot more fun) than paying it off.
I paid off the credit card first, since it had the highest interest rates. Once I'd wiped out that debt, I could take the money I'd previously sent to the credit card company each month, and use that to pay off my car loan instead. Each debt I paid off made the next one even easier to abolish.
Once again channeling Captain Obvious: all else being equal, somebody with a paid-off car will have more money each month than someone with a monthly car payment. Pay off your house, and your costs for shelter will be far lower than someone paying rent or a mortgage.
The Red Queen said you have to run fast to stay where you are, and run twice as fast to get ahead. But she was the extravagant type; if you handle your finances right, you can slow down the money-treadmill enough that a comfortable stroll will be enough for you to stay in place, and even move ahead.