Happy Saturday! Today, I am going to go over why 47% of Americans can’t pay an emergency expense of $400. Take a look at this classic equation.
Savings = Income – Expenses
That’s a simple equation that anyone can memorize! When Income is greater than expenses, then a wonderful life event (so wonderful that writing in one’s personal journey about this fantastic life event is encouraged!) called savings occur. Fantastic things are happening but it’s important to stress that just one of this joyous occasion is not enough to bring you to the magical and phenomenal place called financial independence.
Multiple and frequent quantities of this life event will propel you to reach that magical place and once you reach it, your frugal and parsimonious habits that you’ve accumulated will make sure that you stay there! Hurray!
When expenses are more than income, then a horrific event in life called a savings deficit occurs. This horrific event is solved by taking out a loan, using credit cards, taking money from family, selling that beloved Harry Potter series book, or even worse, selling your free time to employers for money out of necessity, not want! Gasp!
When more of this life event happens than the savings life event, then you will reach an un-magical and un-phenomenal place called financial DEpendence, not INdependence. The two front letters that are missing from that word is a very small change that has very big repercussions, and it’s not just aesthetics of the word but much bigger.
Financial dependence? What’s that?!
Financial dependence is when you start working because you have to work, not because you want to work. When you have to work, you give all of your power away to your source of income and your ability to live depends on one client of your time. Whether the source of income comes from employers, business, family, credit cards, or government, your future depends solely on them. This is a very big risk.
You have one chance to make a great impression, if you don’t, you could be fired, go bankrupt, or stop being supported by good ol’ Uncle Sam. No matter how cool of an uncle he might be, he doesn’t have money in his pockets to give, no money will be transferred to you. Darn! Now, if you get fired or go bankrupt, it’s not the end of the world! You can always find another job or start another business or do any number of other things to will yourself out of the hole.
However, why would you want to go through with that stress when you could have simply made different choices to reach the magical place that I just talked about! Why be dependent on something or someone that might cut you off when you can be independent and know that you will never cut yourself out! The power of you is amazing and there’s nothing that you can’t accomplish!
What You Can do to Not Get There
By now, I know what you are thinking. “No! I don’t want to travel to this horrific place! How do I avoid it?!”. Fear not! There’s an answer to this problem and there have been a fantastic number of human examples to learn from! You have to think of it as a long drawn out process. As Warren Buffet says, (paraphrased) getting rich slowly is easy, getting rich fast is hard. Why pick the harder choice when you get do the easy choice?
Sure, getting rich fast would be fantastic but there are a lot of risks involved with this choice. Why not go for the sure path where you won’t ever regret being in no matter what the alternatives (the alternative is being even richer by the end, but after having a lot of money for a while, having more money will add very marginal increases to your happiness or well-being) instead of the path that sounds better but also has the risk of leaving you either very poor or full of regrets if things don’t work out.
That’s an important theme that I want you to consider. One thing that I do want to emphasize is that the path to financial freedom is done by consistently, even if by a little, employing habits that add up to huge amounts in the end. This goal isn’t a week, month, or even 1-year goal. This goal is more realistically 5 – 35 year goal depending on your start and habits throughout the goal period.
These are critical habits which will take you to the un-magical place of financial dependence:
- Spending more than you earn
- Not investing
Whew! That long and exhaustive list nearly took my breath out. Now, there are infinitely more reasons that could bring you to the place called financially dependence such as being a terrible person at work, not taking the time to work out, taking on excessive and unnecessary risk, etc. However, those 2 are the most important reasons why someone will not reach financial independence.
If the two factors mentioned above are exercised and executed correctly, almost anyone with any income or age can reach their financial goals. Let’s say instead of spending more than you earn, you spend less than you earn through effective budgeting and managing expenses. Instead of not investing, you invest by setting up an automatic 33% withdrawal from your paycheck that goes into your 401k. This sounds simple doesn’t it? It is.
The beauty of money is that it’s very simple. The more beautiful thing is that the majority of the people do not do the two essential habits that I’ve outlined (evidenced by the article cited above, 47% might be a minority but if 47% can’t afford an emergency 400$ bill, then the majority of the people certainly won’t have over a million dollars for retirement). This gives you more opportunity to separate yourself from the pack and follow through with 2-step the plan. Acquiring wealth is possible with almost a 100% probability!
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
Read more about me here.