Many people experience financial stress. But interestingly this can have very little correlation with the amount of money the person earns.
I've met doctors and dentists and other professional people on high incomes who nevertheless are financially stressed. People who live in multimillion dollar houses and who drive flash cars, to people of lesser means all pressured financially. Why is this so?
Well the biggest reason these people are stressed is because no matter how high their income they spend up to their limit. It seems there is something in people's psychology that encourages them to continue to spend no matter the level of their earnings. Meaning a constant financial struggle and stress especially when surprise bills come in.
People tend to live up to their incomes and so many people end up in a first world poverty trap. How does this work?
Basically, income leads to full consumption, leads to no savings, leads to no excess to invest. This sees people simply cycle around on the spot financially and this can go on for decades.
Short of marrying or inheriting money the only legal way money is accumulated is by working for it and also by investing a proportion so that the money works to make more money.
So why do people not save and invest a proportion of their income, it is certainly not rocket science?
Let's look at how most working people can easily extract themselves from the poverty trap by implementing a few basic strategies.
I have found that a number of things cause people to maintain the poverty trap cycle.
People can lack financial discipline and become caught up in advertising and the consumer race. People put off getting their finances in order because they believe there will be a better time in the future, which never comes. People believe when they get their next pay rise or pull off that big contract then they will be better off. People think it is too difficult and could not possibly spend less.
In the vast majority of cases these beliefs are wrong.
What do people need to do to get out of the poverty cycle trap?
First and foremost they need to follow one small rule.
The rule says 10% of everything I make will be diverted towards saving and then investment.
I always get a number of reactions to this including:
"I can't do that I'm broke already and could not afford 10%."
"10% is too little, it's not worth bothering about."
"Alright, I'll try to remember to do that."
"I’ll start when my pet bird dies and so my expenses reduce", or similar excuses.
Now remember, if you do not start some type of very basic financial plan like this chances are you will still be under financial stress for years to come, and this will happen no matter what income level you achieve.
Basically, I have found over the years that the biggest obstacle to implementing this very basic stress relief financial plan is lack of discipline, so what I recommend is not to rely on your discipline.
That’s right, do not rely on your discipline, instead set up a structure that forces discipline upon you for your own good.
What I recommend people do is set up two bank accounts. One their income flows into, the other receives an automatic monthly transfer of funds to the value of 10% of your income and this money is initially allowed to accumulate in the second account.
At this point the objection is usually, "10% is too little it is going to take me a year to get any money together." I just persist, because in almost every case I have found that the people who have done this after a year are much more happy and relaxed people financially.
But more than this, often something clicks in their minds, they suddenly get it and want to do more with their money and invest. No longer are they stressed when the car breaks down, but interestingly I have also found people do not like to touch the second account because they now understand how it is reducing stress in their lives.
Finally there are rules for the second account.
They include that this money can only be used in extreme financial stress if at all, and I have found even in these circumstances that most people would rather leave the money in the account and work harder to pay unexpected bills from their first account.
But the primary purpose of the second account is to accumulate sufficient funds to eventually start to invest this money to make more money. This is the key to the very start of wealth accumulation by investment, the first step.
This breaks the poverty trap cycle for people and quickly reduces their financial stress. Begin this system today, do not put it off till tomorrow because it is unlikely to be any easier to implement in the future. Good luck!
A book highlighting some of these basic concepts, it really should be given to all children at school is The Richest Man in Babylon: George S. Clason's Bestselling Guide to Financial Success: Saving Money and Putting It to Work for You
If you found this information interesting or helpful others may too, please feel free to forward the article or make a comment below.
By Andrew Quin
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