“The cost of a thing is the amount of what I call life, which is required to be exchanged for it immediately or in the long run.” — Henry Thoreau

The medium of trade in a modern economy is overwhelmingly currency.  In the U.S. it is U.S. dollars.  We use terms like “spending money” and “making money”, but that isn’t really what we are doing.  What the overwhelming number of us are actually doing is trading our time for goods or services now or in the future (by saving).  Some of us trade a lot of time for a small amount of stuff and some of us trade a little time for a lot of stuff.  What you are really giving up in return for that stuff is a part of your life, which you can measure in time.

A typical person probably does not have an accurate picture their real earnings or their real spending in those terms.  If you are thinking of buying a $1,000 large flat-screen TV, it might be good to know how much of your life it will cost you, and as you will see below you can’t just use your alleged hourly rate and do the math.  It’s more complicated.

Aside from not really knowing how much we earn and spend in terms of our time, earning and spending hardly seem real anymore.  It’s become very abstract.  You can get your paycheck direct deposited and pay your bills automatically.  We don’t actually see money coming in and money going out.  I work and my money automatically goes into my bank account.  I don’t ever see it.  I call my debit card my “magic” card.  I give people my magic card and they give me stuff.

Calculate Your Real Earnings

I’m going to use round numbers for simplicity.  If you make $50,000 a year and work a 40-hour week, then your hourly rate is approximately $25 per hour.  You might think that $1,000 TV will cost you 40 hours of your life and you can pay for it in a week.  Actually no.  Let’s look at things a bit closer.  Please don’t be tempted to quibble over the numbers; they are just there to illustrate the point.  You can do your own calculations.

You probably spend more than 40 hours a week working because you have other time invested in your work week like commuting and getting ready.  If you spend 1.5 hour per day on your commute and 0.5 hours per day getting ready for work, you are actually spending 50 hours a week getting paid for 40 hours a week.  That drops your hourly rate from $25 to $20 ($1,000 per week / 50 hours).

Nobody I know keeps all their money away from the government.  Let’s say in total your payroll taxes (income, Social Security, Medicare) take 15% of your income.  Your hourly rate is now $17 per hour ($850 per week / 50 hours).

If you spend $200 a week on child-care that you wouldn’t have to spend if you didn’t work, your hourly rate is now $13 ($650 per week / 50 hours).  If you drive 150 miles a week and it costs a total of $0.40 per mile in total vehicle costs, that is another $60 per week.  It costs an average of about $30 dollars a week extra in food to eat at work and on the run.  Your are now down to about $11 an hour.  There could be other costs.  You may be paying for house and lawn care that you would do yourself if you didn’t work.  This could easily chew up another $1 per hour and bring you down to $10.

Whatever your income and your time, it’s well worth the effort and probably will be quite an eye-opening to actually sit down and calculate your true hourly earnings.  Gross dollars per month or year are just too abstract and don’t give you a useful picture for the purpose suggested here.

Calculate Your True Costs

So that $1,000 TV that you thought would you 40 hours of life actually would consume 100 hours of your life. (at $10 per hour).  That’s 100 hours of your life, not some bits stored on a computer somewhere.

What about that $25,000 car that will likely cost $30,000 when you add interest and payments?  That requires 3,000 hours of your life.  If you have to have a car and can choose between the $15,000 model and the $25,000 model, keep in mind that more expensive model will require 1,000 extra hours of your life.   That’s a better way to decide than the difference in monthly payments made in magic money.  That 1,000 hours isn’t going to just take 5 months either.  That would assume you were only paying for the extra nice part of the car and nothing else.  Most of your life is already being consumed by shelter, food, clothing, and everything else.  That nice car is going to slice parts of your life away for many years to come.  Is it worth it?

When you buy that $100,000 home that will really cost you $175,000 over the life of the mortgage, you can now see that it will consume 17,500 hours of your precious life. That’s not even the true cost because taxes, insurance, and maintenance add a lot more.  If you rent and your share is $500 a month, then you know that you are spending 50 hours a month out of your life just to pay the rent.

How You Spend Your Life

None of this leads to any particular conclusion as to what you should or should not do.  Everyone’s situation, needs, and desires are different.  I do think a good use of a small part of your life would be to go through this exercise to find out how much of your life is required to obtain various goods and services.  You should be making informed decisions about how you use your most precious resource.  When you commit to an expense, big or small, you are trading part of your life for it.  You will never get that life back so don’t trade it casually.

Isn’t that a better way to look at spending?  You waste a $1,000 on something you didn’t use and you think so what, I can afford it.  When you realize you wasted part of your life on it, it takes on a different meaning.  Even if you love what you do and you don’t consider it work, you still must choose how to spend or save it.  Why would you casually waste it?  Don’t lock yourself into the Golden Handcuffs.  It really sucks to get 30 or 40 years down the road and realize you traded your life for a bunch of stuff or experiences you didn’t enjoy.  You don’t get to go back and do it over.

My attitude about how I spend has definitely changed.  Realizing when you give someone a dollar you are giving them some of your life is a big step towards more awareness.  It’s truly a different way to look at it.  When you are young, it can seems like you have an eternity to figure things out and get it right.  You don’t and it will go by faster than you would ever imagine.  Spend wisely my friend and thanks for spending a small part of your life on my blog.

What do YOU think?  Leave a comment and join the conversation.

Get Free Updates to The Rat Race Trap by Email here or via a reader in the top left sidebar.  I would love to have you on board.

The term “golden handcuffs” typically means some lucrative financial incentive to keep an executive or manager from leaving a company.  Financial compensation is arranged in such a way to “handcuff” them to their particular job or company.  I want to expand this idea to anyone who has a traditional job.  Whether we like to admit it or not, most people in traditional jobs are also locked tight by the golden handcuffs.  We have, by our own behavior, handcuffed ourselves to our jobs.

In my experience the #1 reason why people just don’t leave the jobs they are fed up with, is due to the fact that they believe they simply cannot survive, or are not willing to pay the price, to be without their job for any length of time.  It is a frightening thing for long-time prisoner to be let loose from his cell.  The pressure of responsibility feels like it is going to crush him.

The main underlying cause for this problem is that most of us are simply living at, nearly at, or often even above our means.  I exclude those who through no fault of their own can barely feed themselves, but I suspect there are very few people in that category reading this blog.

When someone at a buffet line piles their plate with more food than they can eat, we say “their eyes were bigger than their stomach”.  We could also say that most people’s eyes are bigger than their paycheck.  We go into debt to buy homes, cars, clothes, electronics, and all sorts of other stuff that we do not need to live well or to be happy.  We get used to living at our means and buying all kinds of material things.  We do not need these large homes, expensive cars, electronic toys, closets full of clothes, or the myriad of other things we get used to living with.

What we are doing is guaranteeing that we will be locked to the rat race by the golden handcuffs for many years to come.  Traditional retirement plans, restricted stock options, vesting of savings plans, health insurance and many other benefits provided to employees by many companies lock the golden cuffs even tighter.

Locking yourself into your job is very easy to do.  Almost everyone does it.  It often occurs gradually.  You get married and buy a big house.  You have kids and the mother might choose to stay home to raise them.  You need to save for your children’s college funds, your family needs insurance, private schools, the best clothes, all the activities, etc.  Without even realizing it you have locked yourself into the rat race of your job with a massive pair of golden handcuffs.

If you want freedom from the rat race, you need to think very carefully about how you live.  The freedom you lose by snapping on the cuffs may seem insignificant and worth it when that sexy new car is calling your name, but that sexiness will wear off just as fast as the satisfaction with your job.

Beware of the golden handcuffs.  They sure look good at first, but they lock tight and are very difficult to remove.

What do you think? Leave a comment below.

Get Free Updates to The Rat Race Trap by Email here or via a reader in the top left sidebar.  I would love to have you on board.

Note from Stephen:  This is a guest post by Marj over at the way of money.  I am a huge fan of Marj, Clément, and their blog.  Please go check it out and read the archives.  The content is excellent and very relevant to readers of The Rat Race Trap.

by Marj Galangco of www.thewayofmoney.com

In order to get out of the rat race, we must be financially literate. Ironically, financial literacy is not even taught in schools, that’s why many of us – including the “highly-educated” ones – actually know very little about money.

The problem is further compounded by financial miseducation. How many of us are taught to study well and go to college, get a JOB and exchange our time for money, save our money, don’t invest because it’s risky, just buy a house and pay the mortgage for the rest of our life?

The fact is that many people who followed this formula are now people in their 60s-70s who are struggling because their pensions or savings are barely enough to provide for their basic needs. Meanwhile, there is a growing number of billionaires/millionaires age between 20s-40s precisely because they did NOT follow the prescribed formula.

In this post, I’ll be discussing the main concepts we must grasp in order to achieve financial freedom. I know finance can be the most boring subject in the world, but luckily for us, we can learn this via the Cashflow® 101 board game.

Cashflow® 101 is created by Robert Kiyosaki, the world-reknowned author of the Rich Dad Poor Dad book series. It’s an educational tool that teaches players the fundamental concepts they need to understand to get out of the rat race and make their money work for them instead of the other way around. The game simulates real-world scenarios, thus allowing the players to practice real world investing without any risks. It’s a brilliant and effective educational tool because Cashflow® 101 allows players to learn about accounting, finance, and investing while having fun at the same time.

Having invested in it 4 years ago, I thought it would be great to play it again and share everything I have learned here. But first, if you’re not already familiar with the game, here’s a quick introductory video:

Video Robert Kiyosaki – The CASHFLOW Game

Briefly, here are the basic mechanics of the game: in order to get out of the Rat Race and onto the Fast Track, you must acquire assets that will generate enough passive income to cover all your expenses. This can be done by purchasing properties, businesses, mutual funds, land, and stocks. As we work our way around the board, we land on different squares:

• “Paycheck” (your monthly paycheck, depending on your profession)
• “Opportunity” – investment opportunities
• “Doodads” – these are liabilities, or expenses that are often unnecessary
• “Market” – opportunities to make (or lose) money from your accumulated assets

Things I learned from playing the Cashflow Board Game

#1: “In order to get out of the rat race, I must learn to think like the Rich”

This is a lesson that we will keep hearing. Our success is going to be determined by our mindset.

I have played the board game with many people, with varying levels of financial literacy. Some of them were open-minded and eager to learn, while others were stuck in their conditioned paradigms. It was easy to tell which players were consciously adopting the mindsets and habits of the rich while playing the game.

On one occasion I heard someone joking (I hope), “you may get out of the Rat Race, but you’re still a rat!”. So let’s look at the difference between the Rich Rat and Poor Rat mentality:

Poor Rat: How can I work harder so I can buy more toys and keep up with the Joneses? What shall I spend on today? I know – shoes! Jewelry! Oh wait my mobile phone is now 3 months old, I need a new one or my friends will think I’m so out of season… Oh no! I dont have money in the bank! I’ll just charge it on my credit cards then…

Rich Rat: If I think like the rich, I’ll be able to recognize the opportunities (they abound all around me and can appear every day) that will make me rich. I must learn how to tell the difference between assets and liabilities: Assets are those that put money in my pocket, while liabilities are things that take money out of my pocket. So by this definition my house, car, vacations, toys, clothes, are all liabilities! (gasp)

It doesn’t mean we shouldn’t spend on doodads, because these liabilities give us the experiences we want out of life. Personally, I prefer to live a rich lifestyle, not one that is limited! I don’t want to constantly scrimp just to save money. I prefer to create the money I need so I can then buy whatever I like.

The key is that if I want something I must learn how to delay gratification, but instead of depriving myself, I can ask a more empowering question: “How can I acquire assets that will then pay for the toys I want?”

Kiyosaki stresses that the Rich buy assets first, liabilities second. The poor normally just buy liabilities. It reminds me of someone I used to know. She bought a coat from Prada even though she already had over £12,000 in debt. I was educating her about her credit card debt and she said, “Assets? What assets? And how do interest rates work anyway?” I am dreading to think where she is now and how much her debt is.

How about you – do you think like Poor Rat, or do you think like Rich Rat?

#2: “Not all debts are equal.”

It is from Kiyosaki that I learned all about ‘good debt’ and ‘bad debt’. Kiyosaki defines good debt as those that makes your rich, bad debt are those that makes you poor.

For example, the house that you live in is a liability if you’re paying the mortgage and it’s not putting money in your pocket. However, if you took out a mortgage to buy a house and then rented it out – and it’s providing a positive cashflow of $500 every month – it’s an asset. It’s very important to know the difference.

The rich have more good debts than bad, and that’s why they are rich.

The poor have more bad debts than good, and that’s why they are poor.

Which type of debts do YOU have more of? Do you have existing bad debts that you can start to slowly pay off? Are you willing to cut back on your doodads in order to get out of your bad debts?

#3. “I can be anywhere, have any income level, be of any (legal) age and still get out of the rat race if I’m willing to act and establish sources of passive income”

At the start of the game each player is given a profession, which then dictates their monthly income and expenses level. We all started with jobs – today, Clément and I played the game. I started as a teacher and Clément as a janitor. My monthly salary was $3,300 and my expenses $2,190, leaving a cashflow of $1,110.

Clément earned $1,600 a month as a Janitor but he got out of the rat race first, onto the fast track, bought his “dream” house and continued to win the game (I could have carried on regardless, working on getting myself out of the rat race, but since it there was only two of us we decided to pack up).

Clément won because he did 2 key things:

• He invested in lucrative deals – stocks that had positive potential ROIs, 10 acres of raw land which produced a 3000% ROI, a 3bed/2bed house which he rented out, etc.
• As soon as he was able to, he got rid of all his bad debts, thereby reducing his monthly expenses, which then increased his monthly cashflow.

Think of how you too can start doing these things. As Clément demonstrated, it doesn’t matter at what stage you are in your life or what you do for a living. As long as you have the financial education, you can get out of the rat race.

Are you actively seeking investments? Have you educated yourself enough to be able to spot lucrative investments?

#4: “I must be smart with my investments.”

From time to time, the game presented investment opportunities that clearly stated either a negative or a very small ROI. I personally did not invest in them, but I have seen other players do so in the past. We see this happen in real life as well, don’t we? Some people buy a business or a property without first doing ther due dilligence or calculating their potential returns.

A fundamental lesson I learned was that I have to make my money work for me, not the other way around, and that I must learn to adjust my strategies as the market changes.

But let me identify why I think I lost the game. Some of the events that got me stuck in the rat race as a school teacher were:

1. I made a couple of fundamental miscalculations on my balance sheet.
2. My dice landed on several doodads, some of which really crippled me – like the home theatre and a boat.
3. My dice landed on “New baby – Congratulations!” three times, which increased my expenses by $540 a month (I didn’t even know who their father was!).
4. I got “downsized” twice – I had to pay a month’s worth of expenses and lose my next 2 turns
5. At one point, my ONLY source of passive income was a 3bed/2bath house which I rented out. My tenant did a runner on me and I had to compensate for some losses.
6. I wasn’t able to buy lucrative investments because my doodads increased my expenses, which then led to a negative cashflow.
7. I didn’t invest in certain opportunities because I didn’t want to take the risks involved.

From these, I learned the following:

1. While I rarely make such mistakes, it shows us that being financially illiterate is a truly expensive type of ignorance! But how many of us are investing in our continuing financial education? How many of us know how to invest? How many of us can read a balance sheet? How many of us are financially illiterate?
2. A boat, for Christ’s sake! I had to pay $4,000 and take out a loan of $17,000 just to be able to obtain these liabilities. While I personally will not do such a thing, you can imagine that there are real people out there who would. I had to pay the bank $340 a month just to repay this loan! Hey if I’m a school teacher and I’m behaving like this, no wonder financial literacy isn’t taught in schools!
   If you’re in the habit of spending on liabilities, take heed. From now on, learn to ask yourself this question whenever you are contemplating to buy something: “Is this an asset, or is this a liablity?” If it’s a liability, change your strategy and think of ways how you could obtain an asset first that will pay for the liability you want to have. Trust me – it’s so much more rewarding to acquire your doodad when you know it’s being paid for by an asset!
3. No, I’m not advocating looking at your kids as liabilities now – c’mon I’m not that bad… I’m just saying they could have at least mentioned to me who the father was.
4. Oh well. Shit happens. And when it does (and it most likely will), it’s best to have financial cushions. So the question is, do you have any? I didn’t, so I got stuck in the Rat Race. Don’t make the same mistake.
5. This shows us that we must establish multiple sources of passive income. These days, we can’t just rely on one or two anymore.
6. My doodads prevented me from being able to afford lucrative investment deals that came up. I may look good in my boat and be able to brag about my home theatre but by God they’re not just bleeding me dry, they’re robbing me of any hope to stop the bleeding!
7. (I had three kids to feed and the father wasn’t even mentioned so can you really blame me for being afraid of taking risks? heh) Seriously though, in the real world we all have our own barriers to investing, don’t we? We’re either too old or too young; we’re either too clever or too dumb; we use our children as excuses to NOT do something instead of using our children as our most compelling reasons to aim for even greater and higher goals! The fact remains that the more excuses we come up with, the more opportunities we will miss. Remember that in life, it’s the missed opportunities that make up our deepest regrets, and rarely the ones that we actually took advantage of.

Conclusion

Many of us may be in the Rat Race, but we won’t be there for long if we learn how to:

1. Adopt the mindset of the Rich and become financially literate.
2. Differentiate between assets and liabilities – and acquire the things that make us rich.
3. Be able to delay gratification and know how to buy the right things at the right time.
4. Know the difference between good debts and bad debts, and acquire the type that creates wealth.
5. Educate ourselves about the many ways of establishing passive income streams.
6. Invest our time, energy, health and money in the right investments at the right time, using the right strategies.

So there you go. These are the basics you need to know to start getting out of the Rat Race. Now, if you excuse me, I must go and play again and I’ll try to win this time…

The Cashflow 101 game is available in board game and electronic formats. You can get them here.

Think and Grow Rich

Think and Grow Rich by Napoleon Hill is one of the all time great self-help books.  It is a classic that I have never heard anyone who has read it say anything bad about.  It’s a wonderful book.  I’m providing a PDF copy here that you can download and read online or print off and read at your convenience.  Please do yourself a favor and read this book.  Let me know what you think about it.

Think and Grow Rich