Getting Out Of The Rat Race

The rat race is a term that is commonly used to describe the financial lifestyle that many of us get entrapped in. If you have ever seen or watched a video of a rat trying to chase its own tail you will get it.  The rat never catches that tail and hence goes on and on and on. In the same way, in a financial rat race the running around never stops.  Let’s look at this scenario.  Mark graduates from college and starts working as a lawyer. He is doing OK.  He is even saving some portion of his income.  He is not struggling month to month.  He later 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 one million shillings for his first car. This loan will be paid over five years and will only cost him Kshs 25, 000 per month.  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 ever elusive.  The car first of all has come with its own expenses. His social obligations have increased, he has moved to a bigger flat, and of course even day-to-day expenses are not at a standstill.  Fast forward seven years later.  His income has continued to grow together with all the expenses. He has also 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 are also required etc.  His lifestyle has increased and ever so often he finds himself pulling out his credit card rather than his debit card. He did not tell his family that the last holiday they had was financed with a personal loan. His career has continued to rise because he continues to work harder.  As his expenses grow so does his determination to keep working harder.  He wants to make partner at his firm. And so he will.  The day he does make partner a whole new set of expenses will also be waiting.  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. There is no exit for him. It can be covered up with fancy things but at the end of the day Mark is dependent on working to eat.  That is what the rat race is. So why does this happen and how do we prevent it or get out of it?

Savings or investments should not be compromised for expenditure.  The first sign that Mark had entered the rat race was when he swopped the 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 just continued consuming like many of us do. He had already been sucked in. and once this happened, saving became the option and consumption became the necessity instead of vice versa. To get out of the rate 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 the level of savings dependent on how expensive life is. When expenses increase reduce other 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.

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 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 actually 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 up on investments that can sustain his lifestyle when he is not working. The true way out of the financial rat race is having built assets that can sustain the lifestyle you choose to have. To achieve this you do have to prioritise building of the assets for some point in your life rather than consumption.