Why We’re Broke (And How to Fix It)

According to a new report by the Federal Reserve Bank of New York, total debt reached a new peak of $12.96 trillion in 2017’s third quarter — $280 billion above the previous 2008 high (and we all know what transpired around that time, almost 10 years ago). And with that, credit card debt also went up another 3.1%. Eek!

I don’t need to tell you that many of us aren’t doing all that great with our personal finances. In fact, many of us are just flat broke (no investments, no savings, no assets).

I think some of this is due to our dollar not being worth as much as it once was – as well as wages generally being stagnant. Add to that, there are more things to spend our money on. There’s cable, internet, streaming services and cell phones – which were never a part of everyday expenses years ago.

Still, there’s an important piece we are missing.

Why are some broke and others rich?

While thinking about all this – and realizing that I’ve had my own struggles with money in the past – I started watching some financial education videos online to discover why we’re (as a nation) always struggling so.

I came across this older presentation that Robert Kiyosaki (Rich Dad, Poor Dad) gave that really got me thinking about this whole problem in a new light. Around 4:30 of this video, Kiyosaki goes into what distinguishes broke people from rich people (the video’s quality is a little rough):

Charlie has more to say about Kiyosaki in previous posts on buying silver.

After watching this, I started to think about my own situation and how I am not as focused on creating those assets that keep putting money in my pocket every month. Charlie stresses this a lot in his monthly passive income reports, but this illustration really helped drive home the importance.

I’m a visual guy – so perhaps that is why it has taken me years to really grasp this concept – but I wanted to show you in my own interpretation on why we are so broke as American’s and how we can start to change this.

Taking a look a the following illustration, this is typically how the average “broke” person operates. All their income just goes in and then out. Nothing is saved, invested or put to work (essentially, everything “goes out the window”):

Does it look familiar? I know that I’ve been there too.

Going from broke to stoked

So, while the broke person has income that is coming in – but going right out, the wealthy or financially free (which I believe should be the ultimate aim) has assets that are generating income.

As Kiyosaki pointed out, assets are things that put money in your pocket every month. Many would say their homes are assets – but when was the last time it put money in your pocket every month? (Unless of course, you are Airbnb’ing it or renting a part of it out, etc)

Here’s a look at that visually with some of their income creating assets, which in turn perpetuate additional income (hopefully indefinitely).

The ideal situation is where your assets are generating enough income for you every month that cover all your expenses and leave you some “leftovers” (to put back into investments, savings, assets).

There is no magical number here. In essence, you can be financially free when you get “there”.

How to get there

This is all going to sound elementary to many of you who are already financial free or on your way – but there are many ways we can develop assets. Here’s a few:

  • Stocks / investments
  • Own a business
  • Real estate
  • Etc

What do you think? How are you avoiding the broke life and what assets do you maintain?

Update 1/30/18: This infographic at Visual Capitalist is pretty revealing and further illustrates the point about where the wealthy put their funds.

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2 comments

  1. I think broke-ness is also the result of debt normalization. The economy is doing well right now, so people are spending more and increasing debt loads. It doesn’t seem like we collectively remember that debt is bad until the economy has a downturn.

    • Aaron says:

      Hm, good point MPP. Debt always seems to heat up when we get more confident about things. I can’t help but think about Kiyosaki in the above video, “anyone who thinks debt is bad, is a moron.” Haha. Well, I guess we’d have to say that there is crummy debt (credit card, car loans, etc) and then there is okay-if-I-can’t-find-a-better-way debt (biz loans, ie).

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