Have you ever wondered how the rich keep getting richer, broke people stay broke, and the middle class seems to be dwindling? Well, this is not nearly mysterious as it may appear when you examine the specific differences in how broke people, the middle class and the rich spend their money. It is such a simple concept yet so profound it nearly knocked me out of my chair when I finally understood it. The analysis will help you do your financial planning.
Financial Planning: How do the broke people spend their money?
In this concept, broke people refers not to the penurious, but to the significant portion of the society that lives from paycheck to paycheck and never seem to have any money. On payday, broke people stuff – inexpensive things that people buy and don’t need to survive. When cash flow comes in, it goes straight to expenses to buy stuff. Studies show that broke people don’t educate themselves on assets and liabilities (things that cost you). They justify buying all this stuff by claiming it costs so little, but over the years, it’s all that they have. The problem is, their cash flow never produced nor created more cash flow.
Creating wealth is not a mystery it’s a formula. The only reason someone doesn’t create wealth is that they don’t know the method or how to apply it.
Financial Planning: How does the middle-class spend their money?
The middle class is the group that the society mistakenly thinks are rich, but they are not. Yes, they typically earn a six-figure income, and many of them appear rich, but it’s what they buy with their money that keeps them prisoners of the middle class. What they typically buy are liabilities; cars, houses.
By purchasing their liabilities, the money gets pushed up and out of their expense column. The middle class gets a nice paycheck, let’s say, Kes. 200,000 a month. They then split that down the middle and pay their monthly expenses by half and with the other half, they make a down payment on a new car. Let’s say the car cost Kes. 100,000 down and after adding on the insurance and the maintenance that liability now requires Kes. 15,000 every single month.
A few months go by, and they want a boat, then a vacation home, and before you know it, their labilities have raised their expense levels to near or above their income levels. They spend equal to or more than they make. Meaning that they have to go to work and make a certain amount of money just to cover their liabilities.
A mutual characteristic of both broke people and the middle class is that all their cash flow is dependent on their effort. Meaning that they educated themselves to exchange their knowledge and expertise for someone’s money. The money they earn is the highest taxed form of income.
For example, a lawyer knows about the law, so people pay him or her in exchange for that knowledge on an hourly basis. The problem here is that if the lawyer is not sharing that knowledge with the client, then he or she does not make any money.
On the surface, life is pretty good. The reality is a roller coaster ride. That’s the middle class.
Financial Planning: How do the rich people spend their money?
Rich people buy assets (something that pays you). If you want to become rich, buy assets that earn you more money. The money cycle: acquire assets which produce cash flow, invest the profit to attain more assets which yield more cash flow.
The rich spend their money and acquire things that produce more wealth. For example, investments, stocks, real estate, education and cash generating opportunities especially which can create a passive cash flow. Once you build it up, money continues to flow whether you’re still building it or not. The rich are incredibly eager to find those passive cash generating opportunities because they continue to pay them month after month, year after year, long after they’ve stopped working on the chance. This is a common trait in successful entrepreneurs.
In conclusion, you can’t find these passive cash generating opportunities unless you are open to hearing about them. Then, once you find them, you must be willing to see what fits you and then act. You may know the importance of saving, but it’s no good without financial planning. Remember, the broke people buy stuff, the middle class acquires liabilities and the rich buy assets.