Being broke does not necessarily mean you’re poor.  Being broke is the situation you find yourself in, while being poor is the mentality in which you approach money management.  You can be both, if your mindset matches your situation.  However, with a reasonable success rate and the proper drive, a broke person with a “rich” mentality will notice a positive shift towards financial freedom.  Here is a breakdown of the mentality vs. situation:

situation-vs-mentality-table

Why strive to be wealthy with a rich mentality?

Money is a store of labor.  It frees up our time to do things we enjoy instead of slaving away at a 9am-5pm.  People who are wealthy have access to more options.  However, unless you stumbled upon a large windfall, or you have an extremely high salary, the chance of reaching this goal gets a little trickier.  View this short video for a visual explanation.

The Almighty Savings Rate

Having a high salary means nothing if you don’t save any part of it.  Savings rate is the number one indicator of someone retiring wealthy.   In the Savings Rate Crash Course, we learned how savings rates dictate the situation (broke or wealthy) a person will be in during retirement.  People who have the diligence and foresight to plan for later on will reap the benefits of compound interest, touted as the “most powerful force in the universe” by Albert Einstein.

Access to Easy Credit

The issue nowadays lies in the complexity of marketing and big data, coupled with the ease of access to credit.  As Dave Ramsey preaches, “you’re spending money you don’t have to buy things you don’t need to impress people you don’t like; STOP IT”.  Have you ever noticed how you’ll look at a pair of shoes, and then later on you’ll see shoe advertisements, potentially even for the same pair of shoes you added to your cart earlier?  This is no coincidence; this was planned via analytics software such as Google Analytics to try and convert a “view” into a “hit” (sale) since interest was previously expressed.

So… What Can I Do?

Now we know that being broke is merely a situation, and to attain wealth, financial freedom, and an abundance of choices, we must have a “rich” mentality.  So how do we go about attaining these goals?  A few steps below will help guide you towards financial freedom.

  1. Do a complete audit of your personal assets, liabilities, and cash flow – Software such as Mint/You Need a Budget / Personal Capital / Supply Chen Management’s Cash Flow Template may help track your progress!
  2. Uncover glaring debts, and find ways to re-negotiate lower rates, or consolidate debt
  3. Use this Personal Income Spending Flow Chart to detail your cash flow
  4. Trim fat by identifying your leaky buckets, and only purchasing items that bring value to your life.  If you have a lower household income, check out the Minimalism movement, as this will help boost your savings rate!
  5. Revisit your situation every few months to view progress- aforementioned software may help increase visibility
  6. INVEST!  Follow the Personal Income Spending Flow chart as a rule of thumb, and customize it to your own needs

For the average lay-person, the easiest way to save and make money on your money is to invest in paper assets.  However, picking individual stocks may be too risky.  ETFs, Index Funds, or Target Date funds usually will be the best options to diversify a portfolio.  If you have the time and patience, read How Millennials Can Get Rich Slowly, and check out Bogleheads, named after Jack Bogle, founder of Vanguard.

“It’s clear that the true problems of our Nation are much deeper – deeper than gasoline lines of energy shortages, deeper even than inflation or recession…In a nation that was proud of hard work, strong families, close-knit communities, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does, but by what one owns. But we’ve discovered that owning things and consuming things does not satisfy our longing for meaning. We’ve learned that piling up material goods cannot fill the emptiness of lives which have no confidence or purpose” – Jimmy Carter

DISCLAIMER: Please take all information with a grain of salt.  I am not a professional, merely an individual with a passion for sharing valuable information.

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