Back in 80s and the first half on 90s, people were loaded with money. Younger generations might not recall this, but money was everywhere. Nobody, at least on the northwestern hemisphere, had difficulties surviving through the month, even though many were paying back mortgages for their new 2-story homes in suburban areas.
But then something happened, which will trigger the downtrend in net worth of almost every person in that same area of the world and wider.
The dawn of personal electronic devices and improved communications
Even before the revolutionary 80s of the last millennium, ever more people decided to leave the countryside and go seek for their luck elsewhere, by selling their labor and not the produces. Already in 2006, 51% of the entire human population have permanent residences in urban areas, all seeking for the job, nobody producing anything edible!
It sounds irrelevant, but you have to think about basic human needs. Those are:
Everything else, including shelters, is secondary, tertiary and even a problem as we’ll soon learn.
With the emergence of the new technologies, banks were the first entities who adopted to the situation since they had difficulties spreading all that money they had, to keep the system alive and well fed. They started to increasingly issue “consumer loans”, where you’ll borrow the rather expensive money, just to possess some cool gadget like an advanced smartphone these days. Unlike the old days, where you actually had to go to the bank and ask for the loan, nowadays, there’s a credit card. A fully automated system of plunging into the debt – if you are not careful!
More and more devices got connected to a home electrical grid, which, slowly but surely, kept rising the monthly energy consumption and subsequently – the bills. But all those devices required (and still do) additional monthly investments to be operative. Only a decade ago, the only “communication” bill was a standard landline for the home phone. Nowadays, the average western household has 1 landline and 4 mobile accesses – each costing money!
Add car industry who tagged along and, in alliance with banks, made possible to change personal vehicles every 2-3 years, and you have successfully accumulated an immense pressure on your home budget.
That same home budget mostly depended (unfortunately it still depends) on 1-2 paychecks, received 1-2 times per month.
Even combined, those paychecks were insufficient to answer the challenge – fast growing expenses!
To make things even more worse, young generation fully detached from the past and start thinking CEO rather than being a member of a low level workforce. That meant — and still means — expensive high education, where people, again, borrow money to pay for the kid’s tuition. As kid acquires diploma, parents simply transfer all those loans, they were picking each year, and our young future CEO starts with anywhere between $25K and $100+ key of a direct debt!
But it wasn’t always like that…
Only a few decades or perhaps a century ago, we had a society with extremely low monthly expenses. In some parts of the world, there weren’t even any form of electrification! Sadly, this is still the case.
Those were the people who produced their own food and were selling the surplus to ever growing urban population, who used the bigger part of their monthly income to purchase the same food their ancestors once produced on their own, with minimal costs.
Of course, only a small portion of the entire population is using this ancient business model to make money. The rest are living in the cities, trying to cope with increasing monthly expenses – the expenses they brought to themselves, under their own free will!
By itself, it isn’t the problem. Only…it’s not that simple, right?
The problem is: the bulk of everything we purchase today, is acquired with the BORROWED MONEY!
Credit cards with revolving credits, expensive consumers loans, mortgages – everything is here for you to acquire everything you lay your eyes on, fast!
Of course, this is something you know all too well. It went so far that you’re thinking about the banks as the most corrupted form of institution known to man. Only, you’re deliberately forgetting one thing: nobody forced you to even step into the bank, let alone to borrow money!
So now, you’re despising banks, loans and everything connected, trying to make your way out of that mess with only your paycheck and some bonus money you make by additionally selling your labor for yet another paycheck.
Contrary to yours, or general belief for that matter, bank loans are here for the precise purpose and yes, you are supposed to use them.
Only, you need to know under what circumstances and in what purposes!
Banks were forced to adopt and it’s the people who forced them
Sounds ridiculous, right? But when you understand the nature and the purpose of monetary-market system, you come to realize that the only way for you to possess some high-end electronic device or some hot rod, is that same monetary-market system. Rewind only 150 years back, in times of kings and other autocrats, and you’ll see how technological progress, that allows you to read these lines on your device, is nowhere to be seen.
And it’s the monetary-market system that made that happen. It allows people like you and me to fund our, more or less, brilliant ideas – something that didn’t exist only a hundred years ago. You were either the part of royal family or you were sentenced to life in misery from the moment you were born!
New system, changed all that!
Yet, people were reluctant to use that money for that purpose. Apparently, only a small number of people had (have) capacities and essential determination to live synced with the system. In other words, only a handful of people were able to think innovative and dare to start the business. The rest were seeking for the employment at those same entrepreneurs.
In no time, one thing became clear – system will dry out. There will be no money left in it. And money is the bloodline of that same system. Lose the money, chaos will spread and autocrats will reign again!
But who supplied folks with that money?
BANKS! As the lower, executive instances of Central Banks.
So, they were forced to adjust their strategy. If you don’t want to use the money for the business, you’ll use it to buy something way above your true buying power. Ergo, the dawn of consumer loans! They knew that people, under the constant pressure of time and distinct self-awareness of mortality, will try to get as much as they can, as fastest as they can.
What if they can’t pay it back? We’ll make some more of it (money)! After all, it’s our invention. We are just exploiting natural resources, that’s all. In the process, we even learned how to recreate those resources, through farming for example. There will always be money in the system because we simply got hooked on that virtual value, invented and managed by us humans!
What made that possible?
As we explained in more details in this blog, our advanced eye for beautiful and astonishing. It triggered something unseen in nature until then. One species managed to remove the primary notion of the Mother Nature – the survival of the fittest!
Yes, we have medicine and wealthcare now. That means, that in difference from, let’s say lions in savannah, we can survive even if there’s no available resources that we can acquire with our own hands, legs and teeth.
All thanks to the brilliant invention of two interconnected things: monetary-market system and debt!
The question is: how can you utilize debt in your advantage?
Two peers, same story, two opposite results
Two guys are walking into the bank. Both in their early 30s. Both with the same intention – to loan money from the bank!
One got his eyes on this beautiful piece of property, not far from the center of the town. The other is funding his startup.
Both are loaning exactly the same amount of money, $100,000, and ending up with same rates and same repayment program.
An hour later, they found themselves sitting at the bar, waiting for the bank staff to finalize the paperwork and release the money.
“Buying house?” Asks the guy who is loaning the money to move his family from a tight condo in the center, to more cosy place, at the quiet suburban area.
“No, funding a business idea that I have for a quite some time now.” Answers the future entrepreneur.
“Dude…that’s risky. Economy sucks these days.”
Now, let’s stop right here.
Can you identify with that response? Do you think, deep inside, that our future entrepreneur is taking too much risk?
Back to the beginning of our story. Two guys, same amount of money, identical repayment program. What exactly guarantees that the guy, who’s buying a real estate, will be able to fulfill his obligation and repay all the money he borrowed, with interests?
The purpose of the borrowed money, in case of our Guy #2, the future entrepreneur, is direct investment into the product or a service with at least some potential (possibility) to generate money. Our house-loving guy, on the other hand, will need to invest more money BEFORE his repayment program comes to an end because stuff will start breaking apart. In his scenario, absolutely NOTHING generates money. On contrary, it spends and demands even more.
Let’s not forget that the entire idea hangs on a highly relative thing we all know as the paycheck! It takes only a small disturbance on the global market for his company to cease to exist!
Yet, for some unknown reason, people are more fond to borrow money and purchase some item that demands more money while not generating any money, than INVESTING that money into something that at least has a chance to generate money. How do you reason that?
The most likely outcome is that the Guy #1 will struggle to repay that mortgage and even be forced to take the additional one to fix the obsolete stuff, while the Guy #2 will not only repay his debt but also acquire property – mortgage free!
Let’s move to a smaller scale, more common these days
Recently, I myself, has purchased the brand new smartphone. To be more exact, I got it from my GSM provider on account of extended 2-year contract I signed with them. At the end, it cost me $20 (retail price is around $520).
I friend of mine bought even more expensive piece, blasting his credit card for a total of — and watch this — $1,200! The phone is cool, no question about it. And, both of us, have around the same monthly expense on our mobile phones.
It’s clear that we both borrowed money. He ironed his card, borrowing money from the bank. I signed the contract that is very clear about what will happen if I don’t honor the agreement and fail to pay my bill every month – it will cost me 3x more!
But here’s the difference…
My phone is making money. His phone is spending money.
How’s that possible? Why can’t your smartphone make money?
According to whom? Who says that it cannot make money? Smartphones are brilliant devices. Other than just enabling you to communicate both vocally and visually, they provide you with yet another perk, depending on how you’re using the device.
My friend is using it to communicate over the GSM network, play games and buzz around on social networks. Guy’s phone is filled with gazillion apps; some of which cost money.
Unlike him, I have only 4: FXCM, Bloomberg, Investing, DailyFX Pro – all free! That’s it. Not even an FB app. Oh yes, I have Skype also, so that’s 5. No Viber, no Whatsapp, no games.
Now, you can call me boring, or a weirdo, or whatever you like, but while you’re checking your FB notifications, I’m making money. The time it takes you to scroll down and scan several dozens of different statuses, it’s quite enough for me to catch the trend and ride on it until I make couple of grands.
It’s just the matter of choice.
But that’s not the point here. The point is to demonstrate two very different mindsets.
One, who borrows the money in order to live way above his true buying power, not even trying to increase his buying power. On contrary, he is deliberately undermining every possibility for that to happen.
And the other, who borrows the money to increase his buying power – indefinitely!
Which one thinks more clearly?
If you want to learn what’s stopping you from investing your money – and there is, in fact, something that’s been blocking you – find out how to fix it HERE. It’s a concise explanation of something that’s been happening in your own brain, wreaking havoc on your financial plans.