Are your finances unhealthy?
by Peter Anderson
BrokeSucks.com Editor
The typical young American's financial situation can be described as paycheck to paycheck. This means that if you get fired from your job you are in big trouble.
Unhealthy Money Flow leads to a fast financial death
I've created an illustration below showing how an unhealthy financial situation looks from a money flow perspective. Your income comes from an employee paycheck and goes to debt payments, taxes, and living expenses. New debt may temporarily inject new cash to you in the form of a payday loan or mortgage refinancing. Unfortunately that money goes right back to paying off other debts and bill.
From this perspective you are treading water financially. The only way you can increase your standard of living is through a raise. The only way you can retire is through the lottery.
Since your entire financial well being relies on that paycheck, work adds an extra uneeded level of stress to your life. "Will I get that raise this year?" "Will I even have a job next year?"
This is a very, very difficult cycle to break out of both psychologically and practically. I'm going to show you how.
Healthy Money Flow leads to Prosperity and Wealth
The illustration below shows the alternative, healthy finances. Income comes in both through a paycheck (possibly) and asset income (in the forms of dividends, interest payments, etc.) Rather than going to debt payments excess income go to investments. This results in exponential growth turning in to wealth.
An added bonus is taxes. Despite a progressive income tax, the wealthy often actualy pay a smaller percentage of income in taxes than the poor. The basic concept involves business tax write offs and how taxes are paid to begin with. This does not necessarily involve anything illegal.
Since the US Tax code is so complex there are all kinds of ins and outs to how and why money is paid in taxes. These complications require expert tax professionals, accountants, and lawyers to deal with -- money the poor simply does not have.
While the system may be unfair, its the way it is. Don't get too jealous, a six to seven figure paycheck to the IRS is not fun even if it represents 25% of one's income instead of 50%.
Even if your not chasing wealth -- a healthy money flow is worth having
Having a healthy flow of money is great. When you have $10,000, $20,000 or more in the bank you don't have to be obsessed with your job or how you are going to make your debt payments.
This reduces your stress and lets you look to ways to increase your income doing something you love. Struggling to "own" things that rapidly hit the law of diminishing returns is no way to live ($1,000 junker vs $6,000 used car vs $20,000 New Ford vs $37,000 new BMW, vs $70,000 nicer new BMW.. you get the picture.) Suprise, its the people that master that healthy cash flow who are able to buy a new BMW in cash.
Managing your flow of money is all about habits. I don't think there is anything wrong with spending your money on things you enjoy -- as long as those expenses don't lock you in to a financial prison.
In a quest to have the best we get stuck with the not so great. Does it really make sense to spend as much money as your monthly paychecks allow to get in to a new car or home? To other people you might look like you are doing ok, but the reality is you aren't so happy or comfortable.
I created BrokeSucks.com to show average people all over the world how to eliminate their money problems. Being broke does suck and if you are living paycheck to paycheck you are just weeks away from being there.
Just how do you make you financial situation look more like picture number two than number one? First, figure out how you can spend less. Next look for ways to maximize your income both as an employee and by owning your own business.
Being in position number 2 from the get go is the best. Sadly, we are pushed in to debt right from an early age through forced college loans and credit card bills. If you are already $40,000 in debt, whats another $10,000? Its a slippery slope that few manage to escape.
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