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- Understanding Finance
Broke, Struggling, Rich: What Are You?
Change Your Level of Prosperity
There are basically three levels of living from a financial standpoint, especially here in the United States. While I understand that we can break these down into more specific categories, in a general sense there are three general levels.
Without trying to be clever in my naming of them we can identify these three levels as:
- Lower Class
- Middle Class
- Upper Class
Most people look at these three levels of living from a financial standpoint, however there is something more than money that determines which class we live in. The way we think will determine where we spend our lives. Just take for instance the number of people that file bankruptcy after winning the Mega Lotteries? I don’t recall the exact number, but it is something like over 80% end up bankrupt within three years. It is also a known statistic that the majority of those who play the lottery are in the lower and middle levels. Therefore, these winners jump from “lower or middle” to “upper,” but then they fall back to where they came from or lower within just a few short months.
The reason for this is because it is not so much about the money as it is about the way that we think. The way we think determines what we live.
"Beliefs have the power to create and the power to destroy."
— Tony Robbins
Your Thinking Matters
Making the Move
There is also a very real aspect to these levels. For most it is difficult to move up to higher classes and be able to sustain it. In truth it is only hard to move up if your focus is on money. If you can get your focus moved from money to changing your thinking then it is easy to change your life.
There is a reason that Tony Robbins made the above quote. Your life is determined by your belief system which governs the way we think. I want to look at some specifics on how we think in each of these levels.
Let’s say that we took three people, one from each class, and gave them money to purchase a car that is representative of their class? How would each person handle the purchase of the car and what type of car would they end up with? (There will be a variation within each class, but I think you see the point I am trying to make):
To the lower class we are going to give $15,000 so that they can buy a lower end vehicle. The predominate thinking within this level is that they will be excited about the opportunity to get a new car. However, within this class life seems to dictate how they live their day. So while they will intend to go out and get a car they will have a hard time finding the time to do it.
What will they do? First of all, with all this new found cash, they will take the kids out to Chucky Cheese or the local fair that is in town. They will easily drop a few hundred dollars having fun with all this cash. Then they will realize that they can now get a new Plasma TV, an iphone, and how they should get some new clothes. Of course Uncle Pete has heard about their money and wants to borrow some so they give him what he needs.
The long and short of it is that within a very short period of time most of the money will be gone and they won’t have anything to show for it. If they do end up with a car it will be a used car that they probably spent less than $1,500.00 for that will also probably have multiple mechanical problems.
Lower class living requires a “right now” satisfaction thinking. Therefore, a lower class person operates on the premise of, “if I have money how can I use it to satisfy a desire that I have right now.”
Start Changing Now with These Helps
The middle class is the biggest class of people; it is these people that drive the American economy. Most have a stable job, make a decent living, and to varying degrees try to get ahead in this life by investing in their 401k, IRA, or something equivalent. Therefore, there is a wide variety of how these people would handle purchasing this car. However, as an overall basis you will find the following:
We will give this middle class person $35,000.00 to get a mid range vehicle. Most will get on the internet and look to see what kind of a car can be purchased for $35,000.00 car and also how much does the car of their dreams cost. No one said that they couldn’t use the $25K as a down payment. Maybe they can get a $45,000 car with a $35,000 (or less) down payment. You know there are other things we need also and financing on a car is cheaper then financing on a credit card.
Anyway within the range of the middle class you will see the handling of this money range from getting a car by paying for it outright so that they own a car that cost them nothing to using the money as a down payment and going into debt for the car that is the car of their dreams or at least a car that will impress the neighbors.
They will think that they have done really well if there is a “Cash Back” promotion going on because not only have they gotten the car they wanted, but they have also received $1,000 or $1,500 cash back.
In the end they will have, from a net worth standpoint, be somewhere between decreasing a little, breaking even, to increasing a little on the transaction. More than likely they will only keep the car a few years and then trade it in on another car that they will finance with a long term result of losing any increase they may have gained from the transaction.
The upper class will look at this prospect totally different. That’s why, as a percentage of the population, there are few within this category. When I refer to the upper class I’m not talking about the Hollywood type of rich because they are getting paid millions for every movie they make. Most of them end up penniless. I am talking about those who know how to amaze fortunes and keep it.
We are going to give this person $100,000.00 so that they can purchase a car that represents their economic class. This person will find a way to put the $100K to work in a method that can produce enough income to pay for a financed vehicle.
Consider the process. Purchasing a $100,000.00 vehicle at 3.5% interest for 48 months would result in a starting interest payment of $291.67 per month plus the principle reduction. If that same $100K was put into a secure investment earning 8% per year that would generate $667.00 interest per month. This would cover all the interest payment plus a chunk of the principle payment.
The total payment on the loan outlined above would be
$2,235.00 leaving a shortfall of $1,568.00.
If you took the shortfall each month from the $100,000.00 invested and
followed this system for 48 months, you would still have over $25,000.00 cash
at the end of the four years plus a vehicle that is paid in full is probably
still worth $50,000.00 or more. In other words they increased their net worth.
How the Lower and Middle Class Would Respond
The first response that the lower and middle class would argue in the above scenario is that you can’t get a secure 8% investment today. The banks are paying less than 2%!!!! The reason that they would argue this is because they are lower and middle class thinkers. They are right that banks aren’t paying 8%, but you have to stop and ask yourself, “Why do the banks own the biggest buildings in town?”
How To Change Economic Classes
In reality each person in my above scenario could have used the money given to them and either moved up a class or at least moved closer to the next class. Money is not the real issue. Money is only a tool and everyday we have money flowing to us and flowing away from us. The lower you go on the economic scale the more money flows from you. The higher you go the more money flows to you.
One of the hardest things in life is to change direction. It’s not because the change is hard it’s because of what I call the “Corridor of Transition.” Anytime you are going to change course there is going to be a lot of work in the transitional change, even though it may not take very long.
To change directions in your thinking you are going to have to identify where you currently are and where you want to go. You will probably end up reading some books, going to a seminar, or learning some new skills. You won’t wake up one morning in a higher economic level, but if you start living different you will end up living different.
"As a man thinketh in his heart so is he"