“Two roads diverge in a wood, and I – I took the one less traveled by.  And that has made all the difference.” – Robert Frost

The Lemming Syndrome

We are all in a race.  We may not know it.  But we are all contestants.  A few of us have figured it out.  And for those who have, and understand the benefits of getting to the finish line, we cannot help but want to sprint to get there as fast as we can.  Because finishing the race means becoming financially independent.  And there is no better place.

But for most people, they get stuck somewhere in the middle and never get to the finish line.  Despite having all the tools and resources to make it to the end, they get caught in what is called the rat race.  This race is an endless loop of inefficient marching.  With no real progress being made.  The players caught in this trap have the wrong goal in mind (or no goal at all), so they never make any meaningful progress towards finding the true pot of gold, their financial freedom.

Most Americans are stalled in the rat race.  These contestants are the average middle class people trying to live what they perceive as “the American dream”.  Let’s examine this typical “Average Joe” who falls victim to the rat race (and I am not referring to the millionaire Joe here).  The profile I am about to describe is not any actual person, but instead based on the story of many of the people I know, or grew up with.  So the Joe in our story exemplifies many of the average people that have all the resources to be successful, but end up struggling financially.

Joe is raised in a middle class working family.  His family is not rich, but since both parents have good jobs and make decent money, they are in a good position.  This family wants the best for their son Joe, so they do their best to set him up for what they believe to be a financially successful life.

Joe is reasonably smart guy who is raised with good common sense.  His parents raised him in the typical middle class house in a nice neighborhood.  As Joe grows into a teenager, his parents encourage him to get a part time job to learn responsibility and what hard work is all about.  The money he makes, he spends on normal stuff like going to the movies with his friends, playing video games, and perhaps going on a few dates with his girlfriends.  Joe’s expenses for the typical year he is in high school probably amount to a few thousand dollars including the food and clothing that his parents provide him.  Typically for anyone one that age.

As Joe gets ready for college, his parents encourage him to work hard in high school, and get good grades.  Just like they did.  They push him to get into a good college and eventually get a secure, good paying job.  With a stable, high income job, he would enjoy life to the fullest. 

So that too becomes average Joe’s focus.  After a bit of a slow start in school, he finally buckles down, studies hard and gets into a good local university.  Since his parents were not wealthy enough to pay his full way through college, he has to work some part time jobs to help pay his way through school.  This is not too difficult since although Joe’s living expenses are higher than they were when he lived at home, he still lives a pretty conservative lifestyle as a college student.  Perhaps his annual expenses are $10 -12k excluding his tuition, but with the money his parents help with, he is able to make ends meet and not accumulate much debt.  But being a college student with no real job, he certainly generates no savings.

Eventually Joe graduates.  He ends up taking the highest paying job he was offered out of school.  It pays well (about $70k which seems like windfall to Joe compared to the money his part time jobs paid).

Now, nothing in this story so far is crazy, or misguided.  But the problem is that all of average Joe’s focus to date, and all the pushing from his parents centered on the income side of life.  Make more money, and build your career to maximize your potential earnings power.  There was never any discussion about what to do with that money.  Or how to truly live a “good life”. 

So now that Joe is a real adult with a real job, he figures he has finally made it.  He is proud of himself, and his accomplishment, so it is time to start reaping the benefits of his hard earned lifestyle. 

So Joe decides to buy a new car.  He has always driven hand-me downs from his parents.  So now that he is making the big money, it is time to step up his ride.  He buys a brand new SUV.  Since he just started working, he has very little in savings so he finances the vehicle.

He also needs a place to live.  He spent the last several years living in an apartment with a few guys from school.  His share of the rent and utilities was very cheap, but now that he has a real job, he decides it’s time to get his own place.  Plus, he’s tired of “throwing his money away on rent”.  That’s what his parents always told him to avoid.  So he decides to buy his own house.  What’s more American than owning a home, he thinks to himself.

The problem with this thinking is that Joe is never going to get ahead.  $70k of income is lot of money.  You can get rich and retire early on $70k if you live the right way.  But not if you only focus on the income side of the equation.  By loading up on bunch of consumer spending, Joe has pissed away all his newly found earning power.  He has very little left at the end of each month to start creating his waterfall of passive income.  So what does Joe think to himself? 

“I just need to make more money.  I need to work harder.  I need to find the right connections in my chosen field.  Then I will get promoted and finally start making the money I need to get ahead.”  So that is what he does.  He stays late at work.  Volunteers for extra hours on the weekend.  And busts his butt to make more money.  Again, a noble goal. 

But what happens to the rest of Joe’s life during this process?  Even though Joe is now working a ton of hours, he still has time to date.  He meets a nice girl and decides it’s time to settle down.  So Joe and his fiancé start to play the wedding.  Both Joe and his wife come from big families, so they have a lot of people to invite.  Since Joe is working so hard, and making more money, he can afford a big wedding with a lot people, right?

Now that they are married, that starter house that Joe bought out of school is no longer big enough.  So he needs to trade up.  Plus, he and new wife want kids, so they need to live in a neighborhood with good schools.  Those houses are hard to find, and much more expensive.  Good thing Joe just got that new raise.  That should just about cover the down payment, higher property taxes and insurance for that new house.

Again, there is nothing wrong with wanting to work hard, and make more money.  It’s admirable, and our average Joe should be commended.  But you can see how his savings, or net worth has likely not grown much during Joe’s career.  The reason is Joe has consistently ratcheted up his life expenses right along with the extra money he continues to earn.  That is the rate race.  Like a dog chasing his tail.  Joe will never get ahead.  He will just continue to earn, spend and repeat.  Many of the average, hard working people I know and grew up with, have similar stories. 

For most people, we are told from day 1 by our parents, teachers, friends, popular culture and the media that we need to consume in order to be happy.  We need (and deserve) a nice, luxurious car.  We need to buy a big house.  Eating out is fun, and is how we socialize with friends and family.  So the average Joe will eat out several times a week.

But let’s take a look at what this does to Joe, and his finances relative to an Average Joe Millionaire.  The Millionaire Joe has a different perspective on life and how to handle his finances.  The Average Joe Millionaire prefers to live simply.  He drives a used vehicle and pays very little for insurance.  He lives in a modest home and limits his living costs.  These are simple things.  But one small money saving strategy, layered on top of another add up. 

As an example, just by doing a few simple things to cut the fat out of his living expenses, the Average Joe Millionaire can generate approximately significant savings.  For sake of our example, let’s say that our Average Joe Millionaire saves $20,000 more in savings than his ignorant counterpart (which is pretty easy to do).  If Average Joe Millionaire saves and invests that $20k at a conservative rate of 7.5%, he ends up with close to $370k more in net worth at the end of 12 years.  A damn strong foundation for his passive income generating nest egg.

But most people do not think this way.  Most only focus on maximizing their income, and letting their spending level follow along.  They think that life satisfaction comes from accumulating a bunch of “stuff”.  Even though that stuff rarely, if ever, creates any real happiness.

But as someone who has chosen a different path, seeing others foolishly march along in the rat race is ridiculous.  Almost comical.

For me, from an early age, I knew that I wanted to be different.  Growing up in the average middle class household, I saw first hands the struggles my parents went through to live in a nice house, drive nice cars and put two kids through college.  Despite both my parents working full time at very good jobs, my parents never got very far ahead.  And therefore dealt with much stress and financial anxiety along the way.

That is one of the make reasons I looked for a better way.  Life is hard enough without dealing with the self-inflicted frustrations of mis-handling one’s finances.  I wanted money to be tool to work for me, not a source of stress to take away from my life.  The American Dream I wanted to live involves controlling my financial future, and mastering it as soon as I could.  I wanted to free myself from the shackles of needing a job and the worries of needing more money.

That sounds great to most people too.  But it’s about how to get there that people don’t seem to get.  If you simply focus on making more money, then for most people, their spending grows right along with it.  So their net worth never grows.  And they never build that passive income engine that is the real goal that everyone should be working towards.