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Do you find yourself constantly working but making little financial progress?
Do you belong to the 76% of the population that lives paycheck to paycheck and will face serious problems if they suddenly lose their jobs?
Do you feel like you are progressing in your career, but at the same time you get more and more bills coming at you?
If you answered with a YES to one or more of these questions, then you might be fighting a losing battle and struggling with what is called the “Rat Race”.
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What exactly is the Rat Race?
The “Rat Race” refers to a disheartening financial lifestyle that the majority of the population lives and is difficult to break away from. Most of the times the people that live it are oblivious to it and fail to recognize the fact even if it is explicitly pointed at them.
A person entrenched into the “Rat Race” is the “proud” owner of a time consuming job which he desperately needs in order to be able to pay mortgage, rent, bills, credit card debt and all kind of liabilities.
Increasing one’s income and getting more money will not solve the problem, because those in the “Rat Race” have a flawed money mindset and will immediately increase their expenses in a proportionate way so that there is no tangible financial progress.
Unfortunately, being in the “Rat Race” is a money perception issue, so it is very difficult for someone to recognize it and break away from it in order to achieve Financial Freedom.
The term was popularized by famous author Robert Kiyosaki. In his best-selling book, “Rich Dad Poor Dad”, Kiyosaki talks in detail about it. Here is what it looks like:
- Study hard at school and get good grades
- Go to college and earn a degree
- Send out resumes and look for job opportunities
- Land a (corporate) job and work as an employee
- Find yourself with more disposable income
- Upgrade your lifestyle and consume more
- Fund your lifestyle with debt (mortgage, credit cards etc.)
- Stay put at your job because you cannot fund your debt without it
- Rinse and repeat until you retire at an old age
- Die full of regrets that you did not live a more fulfilling life
Does this sound familiar? I would bet that, for the majority of the working class, it does.
This is the default path that people follow and it is considered to be the “safe approach”. People will gladly participate in this vicious loop, unaware of its implications and consequences.
In fact, the whole “system” is structured in a way that this is the “normal” path to follow. If you choose it and walk through it, you are celebrated. If you deviate from it, you are challenged and questioned for your choices.
Does it also sound sad? I certainly hope it does.
Unfortunately, this is the sad reality for millions of people around the world, especially in the western countries where consumer buying is funded mainly by credit.
What does the Rat Race look like?
Let’s have a closer look at how the Rat Race looks like and how magnificently it has been engineered in modern society over the years.
For this purpose, let’s consider John, a new member of society. We will follow John during his life, explaining what is really going on in the background, even though he cannot notice it.
“Study hard at school and get good grades”
It all starts during John’s most tender and malleable age. While he is at school, he is indoctrinated in a very specific way of thinking.
He learns that he must wake up early in order to go to school, that he should stay there for a specified amount of hours performing predefined tasks, that he should be obedient to his masters (teachers) and that if does well at all the above, he will get his reward (good grades).
Does this sound like a precursor to employee life or is it my idea?
John learns to obey authority unquestionably and to depend on it in order to get a reward. John also learns that cooperation, a potent catalyst to achieve success in life, is prohibited and that he is on his own, competing with his peers.
The schooling system has been heavily criticized over the past decades, but sadly, little has been done towards its improvement.
Keep in mind that it was devised after the Prussian system with one major objective: to create obedient and efficient workers.
The current social and economic status of the majority of the population proves that it was successful towards that goal but not much else.
“Go to college and earn a degree”
The next logical step for John is to attend a college or university in order to continue his education and earn a degree that proves that he is skilled enough to practice a certain profession.
This is what thousands of young people do each and every year hoping for a better financial future.
And here comes the question: Is it really worth it?
Undoubtedly, employees with a degree earn more on an average basis from those that don’t have any.
But is that causation or just correlation?
Many have argued that college does not contribute much to an individual’s success and that the particular college graduates that made it in college were actually so bright that they would have been successful in life even without their formal education.
When evaluating whether or not you should go to college, your thought process should be like this:
“I am making a huge capital and time investment into studying for a degree. Shall this degree yield an adequate return on my investment?”
In most cases, you will find that the massive investment that is required is not worth it.
If you are adamant on getting a degree, then please do it in a technical field that provides a solid chance to actually have some significant return on your investment.
The fields boil down to pretty much the following:
- Computer Science / IT
- Finance / Economics
- Medicine / Nursing / Pharmacy
- Mathematics / Physics / Statistics
Yeap. That would be all. And if I had to push it, I would say that only the holy trinity of Engineering, Computer Science and Finance is worth your time.
Sorry, but your “Literary Arts” degree won’t cut it in the real world. Why? Because society as a whole has deemed that there is not much value in that. That is the cold hard truth.
Would you like to make $10,000 in a month? Then find out what society considers valuable and worth $10K, and do that. Society provides many hints on how it values skills, so you should really pay attention.
“Send out resumes and look for job opportunities”
After finishing college, the default path dictates that John should get a job. So there he goes, sending out resumes and looking for job openings.
The problem? Having a job is certainly the least efficient way to make money.
Surely, there are times that having a job totally makes sense. When you are young and start on your own, you will need the cashflow to cover your expenses. Getting a job is the most immediate way to get some cash.
The thing is that most people adopt this as a lifetime strategy for income generation, without realizing the risks involved.
John’s resume and credentials land him an entry level job at a Fortune 5000 company where the CEO makes 350x the average employee there, but, hey, you got to start from somewhere.
“Land a (corporate) job and work as an employee”
John starts working for the company. At first, things are going fine, but after a while he notices that his freedom is severely limited by outside factors. He has no saying over his job, his payment, his work hours, his work environment and so on.
Sorry to crack the news to John, but being an employee is the closest you can get to being a slave.
Employees get into a contract where they relinquish a big part of their freedom in return for a petty income. In a company, they are the last wheel. They get screwed when things go bad in the business, and sometimes even when things go well.
They have limited upside (their income is capped unless it is performance based), while their downside is bigger than they imagine (losing their “safe” income).
In short, having a job sucks. But as we said, this is so ingrained in our society that John goes with it without challenging it.
“Find yourself with more disposable income”
Even though John understands that part of his freedom will be limited from now on, he accepts the new status quo because he gets something novel for him: a steady paycheck.
When you are young and without many financial obligations (except perhaps a student loan, see above), then a steady monthly paycheck seems invaluable. It provides disposable income and there is a vast array of options to allocate that.
So what do the majority of people do when their income is increased?
They increase their expenses so that they match their newly increased income!
Instead, of saving their monthly surplus (Income – Expenses) and investing some of that money, they increase their expenses to a level as high as their new income. These people are then left wondering:
“Where did all my money go?”
John follows the same pattern. Mesmerized by the money that is coming at him, he is ready to splurge.
“Upgrade your lifestyle and consume more”
John upgrades his lifestyle. He rents a new apartment and purchases the latest gadgets. He also buys a new fancy car.
Our modern society is structured around consumerism. Consuming is the main driver of growth in modern economies, so governments support it (they collect more tax revenue). Corporations also love it because these are the organizations that directly benefit from it (they collect more revenue), they are the producers.
Influenced by advertising and peer pressure, John joins the crowded club of consumers.
“Fund your lifestyle with debt (mortgage, credit cards etc.)”
Even though he has a decent income, John cannot afford to buy his car directly, so he finances it with credit.
Credit sounds a bit risky, but everybody is doing it, so it should be fine. After all, he now has a steady paycheck he can count on.
Today the world runs on credit. Actually, the amount of credit is much larger than the amount of money in circulation.
We say that we buy things on credit, but as soon as the transaction materializes, another word enters the equation and is more appropriate: Debt.
Want a surefire way to spend the rest of your life on the Rat Race? Pile up on debt.
Debt is not evil on its own, it is just a tool. The problem is that people have never been taught how to use it (schooling system, anyone?). They misuse it and find themselves in a trapping situation.
“Stay put at your job because you cannot fund your debt without it”
John looks at his income statements and sees that between his take-home money and the total amount of his expenses (including interest payments), not much is left. He realizes that he cannot afford to lose his job.
Even if his working conditions get bad or he hates his new boss, he has to shut his mouth and swim along. He has no other option. Losing his job would be devastating.
Sometimes though, things do not go as expected. In the recent financial crisis, more than 2.6 million Americans lost their jobs. Yet people failed to learn from that harsh lesson and the “job security” myth still prevails.
“Rinse and repeat until you retire at an old age”
John grows older and he soon gets married. He does not think strategically about this, nor does he plan it. He just “follows his heart”.
His wife, Elen, also works for a corporation, so there are now two monthly paychecks coming in. The total household income increases.
So what does our lovely couple do?
They again increase their expenses! They buy a second car, they get a bigger house and they decorate it with expensive items.
It just never ends.
After a while, kids enter the picture and it is pretty much settled for John. He will have to work for the rest of his life in order to cover the family’s expenses, pay for the kids’ college tuition and so on. His kids will follow the same path, continuing the cycle.
John is trapped in a frustrating lifestyle unable to build wealth. The only thing he can do is run as fast as he can on the rat wheel, only to stay at the same place.
“Die full of regrets that you did not live a more fulfilling life”
John reads the news and occasionally spots some “overnight success story” of young people who have made millions by building online companies. He wishes he could do the same, but sadly it is not possible.
He does not have the time. He works until late for the corporation and he returns home pretty exhausted. He definitely cannot leave his job; he needs the monthly income in order to cover the massive amount of expenses.
Years go by like this until John finds himself on his deathbed wondering where all the good years went. He leaves this world full of regrets, contemplating a life he never got to live.
“Most men die at 25; they just don’t bury them until they are 70.”
– Benjamin Franklin
How to escape this vicious cycle?
I hope by now it is painfully obvious that the Rat Race is not a situation you want to be in. As much as society implicitly promotes it, it is something you should stay away from.
And that begs the question:
How to avoid getting trapped into the Rat Race?
Or an even more difficult one:
How to escape the Rat Race when you are already in it?
These are definitely tough questions to tackle, but there are things to do.
The first step is awareness. To actually understand what the danger is. Most people do not even notice they are trapped in this; they are too close to the problem to notice. Actually, they are the problem.
Awareness can be achieved by acquiring knowledge. Reading articles, studying books and staying informed.
The next step is to cut down on your expenses and build some financial discipline. As I mentioned in the beginning, this is not a problem that can be solved just by getting more money.
People that lack financial discipline will have their expenses rise the moment that their income will increase. It is imperative to run a tight budget until you truly can afford the things you wish to enjoy.
Next comes acquiring some high income. Ideally, you do that by building a scalable business that will provide you with exploding cashflow. If not, try getting a career in a field that will provide high income, like the ones we mentioned above (engineering, finance, computer science).
The surplus between income and expenses should be diligently saved.
The popular personal finance advice on saving is that you should save 10% of your income. That is laughable.
Let me repeat that. By saving 10% of your income, you are going nowhere, especially if your income is low.
As weird as it might sound, you should strive to save at least 80% of your (after tax) income.
But how can you save 80% of your income? This sounds impossible!
Do you make $20K per month? It would be quite easy in that case!
If you make $2K per month, then saving $1.6K of it is really not possible. But what if you made $20K? In that case, saving $16K and living on the rest of $4K would be totally feasible.
And that is exactly the point. It is not so much about saving, as about earning more. That is one of the reasons why you should make “More Money” your mantra.
Now, don’t get me wrong. I do not mean “More Money at any cost”, but rather, “More Money by providing more Value”.
The bottom line is that you should focus on increasing your income and try to keep your expenses flat. Your expenses should not increase until you can confidently hit the 80% savings mark.
Of course the majority of the population is unable to even save a few dollars per month, that is where the 10% rule comes from. Saving 10% is surely better than 0%, but again, it will not take you very far.
On the topic of expenses, you should be very vigilant and focused when it comes to the decisions that will have the most impact on your budget.
Want some quick and dirty math to guide your big decisions? Here you go:
- Don’t buy a gadget/device that is worth more than what you make in 1 or max 2 days.
- Don’t buy a car that is worth more than what you make in 1 or max 2 months.
- Don’t purchase a house that is worth more than what you make in 1 or max 1.5 years.
This is purely empirical. But follow these rough guidelines and you will be on the safe side.
So, do you make $5k in a month? Awesome! You are entitled to a car that costs at maximum $10K.
Guess what most people do instead? They borrow money to buy a car and then pay interest for it for years!
To demonstrate how irrational people are when it comes to money, consider this. In my country, people buy iPhones even when the cost of the device is higher than their monthly salary!
Essentially, they spend more than one month of their lives working in order to buy a glamorous device they cannot really afford. They then go out and give missed calls to signal to the other person to call them back. This phenomenon is so often here, that there is a joke about it. This whole thinking is insane.
Having talked about earning more, cutting down expenses and saving a huge portion of your income, we are now ready for the last piece of the puzzle: Investing.
Before you start investing, you should have accumulated an amount of money as an emergency fund (savings buffer). This could be anything from 3 to 12 months of expenses, depending on your profile and life situation.
After that amount is reached, any money that comes from the surplus of income minus expenses should be plowed to investments, instead of letting it sit on a bank account. In essence, your high savings will fund your investments.
By investing you will be able to grow your Net Worth much faster and you will also protect your money from the force of inflation. Additionally, you will be able to generate passive income which will eventually cover your lifestyle expenses.
This is how you break away from the “Rat Race”. When your total life expenses can be covered by the passive income that your investments provide, you can consider yourself Financially Free.
For example, let’s assume you have accumulated $1M in liquid assets. In the market, you can find financial investments that will provide an annual yield of 5% in a moderately safe way.
This means that each and every year, you can enjoy $50,000 in passive income (before taxes), without consuming the original principal. Assuming that your annual expenses are less than $50K, then you can live the rest of your life without having to get an active job.
The high-level investing strategy to employ has two phases:
This is the phase where you are actively working in order to generate income. Ideally, you work in a high-income job or on building a scalable company that will offer you explosive cashflow.
During this period, you use your savings to acquire high quality assets that are focused on growth. The best growth oriented assets are stocks of quality companies.
In general, avoid complicating things, just invest in the stock market index. Do it unemotionally like a robot. Every month, no matter where the index is, allocate a specific amount of money and purchase the index. In the long run, you will get some nice returns with this approach.
After you have accumulated a significant amount of assets, you are ready to switch to the next phase.
This is the phase where you are leveraging the Net Worth you have built in the Accumulation phase. You now focus on getting the required passive income that will cover your lifestyle expenses.
In this phase, you gradually shift from the growth assets to income oriented ones. You liquidate the former and start purchasing the latter. Income oriented assets could be dividend stocks, bonds, or any other financial asset which provides a recurring distribution (monthly, quarterly or annually).
By following this strategy, you will be able to break away from the “Rat Race” and enjoy Financial Freedom. This will mainly depend on how high your income will be during the accumulation phase and how much of it you will be able to save (again, target for at least 80%).
The “Rat Race” is an insidious financial lifestyle that traps you in a vicious cycle of working a job, paying bills and repeating until you are old.
The “Rat Race” is dangerous, because it can lure you in without realizing it and can be extremely difficult to break away from.
Unfortunately, our society is structured in a way that tacitly promotes this kind of lifestyle and as a result the majority of the population is already trapped in it.
Unless you are aware of its existence and implications, and you have built the proper money mindset, you cannot escape it.
In order to break free from it, you need a solid strategy that consists of achieving high income, saving a huge portion of that by minimizing expenses, and investing the surplus in order to grow your Net Worth.
Sadly, if you don’t embrace this approach, you will be forced to work until a very old age in order to survive. You should not expect that the government will take care of you. Social security is broken and the long term trends do not look good.
Ideally, you should start early in your 20s, hit $1M in Net Worth before you are thirty and then go auto-pilot from there.
The only way to escape the “Rat Race” is by being financially literate and disciplined.
“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
– Will Smith