There are famous people we know, who vowed for bankruptcy with millions of dollars in debt even after earning a large sum during their career. This poses a question about money itself. The motivations and great deals of our actions in life have a basic desire or need to achieve. But what is the point of getting it, if the problem lies in our ability to manage it?
Americans have the highest credit card debt in history. And this debt is an invisible burden that is being carried by the country. For a moment consider your own attitude towards money. How does money exist in your life and what is money to you? Do your money enter your life and then exists immediately once you have it?
Has money ever placed you in a risky position? Have you been in a situation that made you close to a scheme to get rich quickly or someone telling you that you can get rich if you do what is right?
You will realize that our perceptions of money are sometimes more critical than our ability to generate it. This happens especially when our brains are wired in a way that prevents us from being financially sensible. Will it matter if you are earning more than six figures a year and if at the end of that year you have nothing left to show for it? Where is the disconnect? To know it we need to explore a better framework to understand the money which is commonly taught in personal finance but missed in formal education.
What is money?
When you make a purchase from Amazon or when you are paid for your time in your work, what does money represent? What does it signify?
In common money is defined as a medium of exchange, it is an instrument that will facilitate the purchase, sale, and trade of goods between the parties. But this definition does not say what money is actually representing. A better way to look at money is an expression of value you hand over a certain amount of money to purchase something because you perceive the value to be equal to the amount of money that you handed over.
As an individual, the price is not determined by you but by the market as a whole. But the point is that money equals value.
You may have heard that money is the root of our evil for us to look at someone who seems to have a large amount of wealth and think that they got lucky. To get to that position who did they take advantage of and for them to gain who had to lose? what was the value created to generate that money?
Money is not necessarily evil and it does not make a person evil like how scammers convince you that what they sell is worth the value. But money opens your options and broadens your horizons. The choice you make with the money you have everything to do with your own moral dispositions. So money is an expression of value.
Income vs expenses
But how does it change the reality of a person who is living paycheck to paycheck or someone who is consumed by credit card debt? Money equals make us see it in a different light. But what part of it is actionable?
The relationship between your income and your expenses is money will come into your life and will leave, simply known as production vs consumption. You have produced some form of value and so the money will enter your life and for most of us, it comes in the form of labor. It will leave when you consume something where for example is when you buy a new car. We can look at the net worth of an individual as a metric to determine the relationship between consumption and production.
What part of the consumption vs production relationship is at fault? When you think about all the money that has entered your life and left, how much of that do you still possess today or invest in some sort? Which part do you feel is unbalanced or needs to be improved? For most of us, the problem lies in consumption. In a study, it is found that one in ten workers who made a hundred thousand dollars or more a year are living paycheck.
Someone who is earning six figures a year may still like to earn but on the other hand, when you are paid a figure that is well above the average, you still find a way to spend it all. Therefore your relationship with consumption should be fixed even before you consider your relationship with production. Even a wealthy celebrity who has filed for bankruptcy can show that production means nothing when you have a problem with consumption.
The money trap
A rat race is an endless self-defeating or a pointless search. It combines with working a nine to five job and is used by certain individuals to guilt you into buying programs and books for them. This aims to villainize the job and it will exclude the fact that there are people who love or are fine with their jobs.
The real rat race is one that is living on the edge of finance being a paycheck away from broke constantly a feeling because the moment the money enters your life it immediately disappears. When you have more responsibilities this becomes more dangerous.
Your job became no longer an option but a necessity to keep funding your lifestyle or to pay off your debts. The first stepping stone in personal finance draws awareness to your relationship with money. You do this by noting your monthly expenses in categories like housing, food, entertainment, and utilities.
Understand yourself as a consumer. But this is tough as you do not want to have a negative feeling of your financial information where you refuse to look at your bank. But once you pass this stage you can take control of your behavior by budgeting and deciding each month on how much to spend and to stick to it. You can find ways to minimize to live a lifestyle that will leave you with enough money to save and invest.
Before deciding to invest, keep an emergency fund to hold on to fund in a case of an emergency which will hold 3 to 6 months’ worth of expenses.
You choose to buy a new pair of shoes instead of saving that money and you do this with the influence of others, to impress or keep up with others. We really care what others think about us. We are measuring our self-worth by how many people see us.
Consuming is not a bad thing but you need to know who you are as a consumer. Do you want to appear as if you have money or do you want to actually have money? It is not about working nine to five but living life on such an edge to achieve greater life goals.
A budget and account have proven to draw you out of this race instead of working all day.
It is easy to reduce expenses than increase your income. Saving a lot of money and investing in the long run as early as possible world for a wider range of people with different income levels.
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