The financial system is designed to keep you ignorant and poor. It has no interest in you becoming financially free. It is the same as the pharmaceutical industry which has no interest in you eating well, exercising, and drinking plenty of water. It wants to keep you overweight and hooked on junk food and coca cola. In this way, you remain unwell which means you will be a repeat customer that comes back for more medicine. The financial industry wants to keep you financially illiterate so you will keep coming back to buy their shit products. They will keep selling their credit cards, home mortgages, auto loans, revolving credit facilities, and low-interest saving accounts because that is how they make their money. If banks told you to spend less than you earn, get out of debt, and learn how to invest they would lose the majority of their customers. This is not a conspiracy theory - these are the facts and this is what you need to do today to break out of this exploitative system and be financially free.
Your first step to financial freedom is understanding what money is. Money has evolved over thousands of years. Today it exists in two forms. The first is in the form of paper and cash which is what most people first think about. About 8% of the world's money is in physical cash. The other 92% can be found in the second form which is digital and I am not talking about cryptocurrencies. I am talking about those numbers on your bank account balance. This money is simply a journal entry and for obvious reasons, you are more than happy to keep that money where it is. You have faith that the bank will look after it for you. Some countries have more than 8% in physical cash and some have less. Sweden is predicted to become the world's first cashless society in March 2023 - 6 months from now. How would you feel about living in a cashless society?
So money is either a piece of paper or a number on your bank balance. How does that make you feel? Hopefully a little nervous because money is not backed by anything. Before 1973 all money in the world was backed by gold but we have moved off this system which means that money is now backed by governments. Now you should be more nervous because now you need to ask the question, do you trust the government? The role of governments is to provide leadership, maintain order, provide public services, and provide national security and economic assistance. If your government does a great job in all these areas, you can jump ahead to the next section. If not, keep reading this section.
What is the risk of having too much money? The biggest risk is that it gets eaten by inflation. Inflation is the rate of increase in prices over a given period of time. One thing that tends to cause prices to rise is an increase in oil prices. Oil is used to produce petrol and diesel which is used to power trucks that move goods from producers to consumers. In the middle of 2020, oil prices were around 40 dollars per barrel. In two years they had tripled to 120 dollars per barrel because of the Russian war in Ukraine. Since then they have come down to about 90 but they are more than double from 40. If inflation is 10% - meaning that prices in general increase 10% over a year - it means your money can buy 10% less. Inflation eats your money.
When money was backed by gold, inflation was not much of an issue because gold is a physical asset and its price tends to go up with inflation. Do you now understand the vulnerability of money against this silent killer of inflation? Another risk is that your money gets stolen by the government which you hope never happens. More probable, however, is that governments print too much money like what happened in post-World War I Germany. The risk of printing too much money is that it generates hyperinflation and renders money worthless.
This second point is essential. I have already said that 92% of all money is digital. So governments do not actually physically print money - they simply add a bunch of zeros into the database. Can you see how this is potentially more inflationary than high oil prices? Governments are inflating the money supply without producing anything. This means the value of money goes down and the price of goods goes up. This makes money in your bank account worth less.
What does this mean for ordinary people? We have always been taught to save money because this is a lie that has been propagated by the financial industry. Savings accounts are great business for banks. In the same way that drug companies tell diabetics to take medication instead of eating healthy, banks make money off you holding money in savings accounts. They can lend your money at a high-interest rate. They may pay you a few percent, but when they lend it out on credit cards they get 20, 30, or sometimes even 40% interest!! How sweet is that- for the banks!
What happens when inflation increases as is currently the case? The rich get richer, the poor get poorer and the middle class gets wiped out. The rich are financially educated and they understand all these points I am mentioning. They do not have their money in savings accounts. They are investors. They use their money to acquire assets. An asset is something that provides you with a flow of future cash flow or economic benefits - like a share portfolio, a business, a rental property, a fleet of vehicles, an item of heavy machinery like a bulldozer or excavator, a portfolio of vending machines that you have installed on third party premises, a chain of laundromats, etc. Rich people know the difference between an asset and a liability.
Most people think they can tell the difference between an asset and a liability. I would argue that most people use the accounting definition and not the financial one. This can have a very negative outcome because accounting and finance are two very different disciplines. Accounting tells you a car, a house and a motorcycle are financial assets. However, the definition of a financial asset is something that provides you with a flow of future cash flow or economic benefits. A simpler way to look at this is to ask the following question - does this "thing" put money in my pocket or take money out of my pocket? An asset puts money in while a liability takes money out.
If you own a car and you use that car for your personal use, is it putting money in or taking money out? You pay insurance, petrol or diesel, tax, parking, maintenance, and fines and it depreciates. If you financed the car, you are also paying installments. I am not seeking much money going into your pocket. The same is true for a motorcycle and to a lesser extent a house (although a house has a greater chance of appreciating than a car does). Does that mean that these things are ALWAYS liabilities because they are taking money out of your pocket? The answer is NO. If you buy a car and put it to work in Uber, and if you do it right, you will have more money coming into your pocket than going out. If you buy a house and rent it out, the same will happen. Rich people know this and there buy high-quality assets whose returns are higher than inflation. Rich people are not immune to inflation. The difference between them and poor people is they take the time to get educated and they spend time finding investments that outstrip inflation.
What does it mean to outstrip inflation? This is very simple maths. If you put your money into a savings account that earns 2% and inflation is 8%, you are 6% poorer every year. Let's say you want to buy a pair of sneakers that cost 1,000 bucks today but you don't have the cash. Let's say I want to give these sneakers to you as a gift but I also want to teach you about money, so I open a savings account in your name and deposit 1,000 bucks but say you can only touch that money in 12 months. The savings account pays 2% interest. After 12 months, will you have enough money to buy the sneakers? Your savings account would have grown 2% to 1,020. However, because inflation is 8%, those sneakers now cost 1,080. Those sneakers are 6% too expensive.
Rich people understand how inflation works so they will approach this from a different angle. They will do their research and find a friend who wants to open a laundromat. He needs 12 month loan to buy a washing machine and you agree to lend him the money at 14%. You know the guy is solid and is unlikely not to pay you. Again, what happens after 12 months? Your friend pays you 1,140 and you go out and buy your sneakers and you have 60 bucks left over for your next project.
Inflation hits the middle class far harder than it does the rich and the poor. The middle class spends a larger portion of their salaries on rent, car payments, gasoline, and groceries. This puts a massive squeeze on their monthly budgets while the value of their savings is eroded. Inflation also leads to a deterioration in the economy which means that employees are more concerned about their job security and therefore are less likely to demand inflation-linked adjustments in their salaries.
So what must you do with this information? You want to be on the right side of this inflationary scenario. This is what you want to do today.
1) If you have any savings, do not leave them in the bank. You want to do your homework and find inflation-beating investments.
2) You want to stop buying stupid shit and start saving more, and investing that surplus.
3) If you have debt linked to a variable interest rate (check your loans to see if your interest rate is fixed or variable), you want to do your best to pay down that debt. When inflation rears its ugly head, interest rates tend to go up. If you have borrowed money at a variable rate, your monthly payments are going to increase. If you cannot pay off this debt, try and negotiate with your debt counterparty to convert that loan to a fixed rate.
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