The Cambridge dictionary defines rat race as “a way of life in modern society, in which people compete with each other for power and money.”
The term rat race was used as a colloquial in Robert T. Kiyosaki’s book, Rich Dad, Poor Dad to describe a cycle in which an individual spends his disposable income paying bills and purchasing liabilities. He or she is basically working to be able to pay the next set of bills, when this goal is met, the cycle starts again. This seems to be a never-ending cycle because the disposable income is at the same level as the individual’s expenses. The lack of savings and investment fuels this cycle.
This seems to be the way of life of a large percentage of the middle- and low-income earners in the society. The reality is that people who fall within this category fail or find it difficult to budget adequately and invest in assets that generate passive income. The key to avoiding the rat race is wealth generation, this can only be achieved with financial literacy and adequate planning.
A statement from Robert Kiyosaki’s book that encapsulate this is, “Rich people acquire asset. The poor and middle class acquire liabilities that they think are assets.” An example of this is the purchase of a car which is a necessity in most societies. Tom is a rich person and wants to buy a car. Tom would invest in businesses and other assets which will generate income for him, Tom will subsequently use the proceeds from his investment to purchase the car, the beautiful thing about what Tom did is that his investment is intact and will continue to generate income for him.
Now let’s look at the scenario from Rick’s perspective. Rick is an accountant is a medium sized company, he earns good money but belongs to the mid income strata of the society. Rick also needs a car. However, Rick saved up to buy the car. He got a fair deal for the car and was happy, six months later, the car broke down, Rick has no investments, his sole source of income is his job, he will need to take out of his savings to fix his car. He is reducing his savings. If this continues, the car will become a liability to Rick. The reality is that a lot of us fall into Rick’s category.
It is important to know the difference between assets and liabilities and ensure you buy assets. Assets put money in your pockets and liabilities take money out of your pocket.
It is also paramount that you budget adequately. The key to wealth generation is investing, however you can only invest if you have a surplus reserve, and the prerequisite to building a reserve is having an adequate level of savings. This can only happen if you have an excess of income over your expenses. You can only achieve this by efficiently planning your finances and keeping your expenses below your income level.
In the coming weeks we will delve into the world budgeting and investments in more details.
Join us as we embark on the journey to financial freedom.
Thank you for reading.
Stay tuned.
Sources
Cambridge Dictionary. (2020, September 30). the rat race definition: 1. a way of life in modern society, in which people compete with each other for power and money…. Learn more. https://dictionary.cambridge.org/dictionary/english/rat-race
Kiyosaki, R. T. (2011). Rich Dad Poor Dad: What The Rich Teach Their Kids About Money – That The Poor And Middle Class Do Not! (2nd ed.). Plata Publishing.
Broadstreet Financial Review 