Get out of the rat race

The rat race is a term that is commonly used to describe the financial lifestyle that many of us find ourselves trapped in. If you have seen or watched a video of a rat trying to chase its own tail, you will get it.

In the same way, in the financial rat race, the running never stops. Let’s look at this scenario: Mark graduates from law school and starts work as a lawyer. He is doing OK.

He is even saving a portion of his income. He is not struggling month to month. He decides to buy a car. With what he has saved so far he could actually pay cash for a moderate car but working as a lawyer in a very prestigious firm, he is conscious about what the type of car he drives will say about him.

The bank comes to his rescue and tells him they will loan him Sh1 million for his first car. This loan will be paid over five years and will only cost him Sh25, 000 per month.

INCREASED OBLIGATIONS

Mark reasons that the money he could save monthly can now be used for car loan repayments, and when his salary is increased he will go back to saving.

However despite his good intentions and despite the salary increase that does come through, the saving is elusive.

First off, the car has come with its own expenses. His social obligations have increased. He has moved to a bigger flat. Now he has cable TV, and buys take-out food all the time. Fast-forward to seven years later.

His income has continued to grow – and so have his expenses. He has upgraded his car for the third time on yet another loan. He has also gotten married and intends to start a family.

A few years later there will be new expenses – medical care, school fees, more rent because a bigger house is now needed, bigger cars to carry everybody and so forth. Every so often he finds himself pulling out his credit card rather than his debit card. He did not tell his family that he took a loan to finance the last holiday they had.

His career has continued to rise because he continues to work hard. As his expenses grow, so does his determination to keep working harder. He wants to make partner at his firm. And so he will. And when that day comes, a whole new set of expenses will also be waiting. There will be a new mortgage that he can take out, better schools for his children, social clubs to align to his status, the right type of drink, a better car.

Fast-forward to the day he may want to retire. The answer is that he can’t. There is nothing that can sustain this life without him working. If he gets off the hamster wheel, he will die – literally – of starvation.

The first sign that Mark had entered the rat race was when he swapped savings for the car loan. Very few people are able to do what he intended to do i.e. resume savings when the increase comes.

At this point, Mark had already gotten a taste of what he could consume instead of saving. So he then continued consuming, like many of us do. He had already been sucked in.

Once this happened, saving became the option and consumption became the necessity instead of vice versa.

To get out of the rat race you have to realise that expenses will always increase. Inflation is not a surprise. In fact the more your so-called status climbs the more things are thrown at you to fund or buy.

Whatever life you decide to have, do not make how much you save dependent on how expensive life is. When expenses increase, reduce consumption. If the motive of working hard is to keep up with expenses, as Mark started doing, this will never end. Expenses will never stand still. There will always be new things to buy, new places to move to, new schools, etc.

COMMON TRAP

Mark also started off by borrowing for aspiration. He did not by buy a car he could afford; he instead bought the car he could afford loan repayments on.

Very often, we confuse the two. Just because we can take a loan to buy it does not mean we can afford it. If you doubt this, just ask anybody who handles car insurance how many people out there are driving luxury vehicles with third party insurance.

Mark should have bought the car he can afford and even if he had to take a loan, his first car did not have to be that expensive.

This trap of borrowing to maintain an aspirational lifestyle is very common. We swipe a credit card at a restaurant, we borrow for a holiday, and we borrow for school fees. Do not borrow to live a life you cannot afford. Because of all these reasons, at the end of the day Mark has not left himself with an exit. He cannot stop working because he never built investments that can sustain his lifestyle when he is not working.

The true way out of the financial rat race is having assets that can sustain the lifestyle you choose to have. To achieve this, you have to prioritise building of the assets for some point in your life rather than consumption.