There are five concepts to learn from this story that are not taught in school, and that’s why the majority of people, when they reach their 40s or 50s, understand these concepts, but by that time, it’s already too late, and they regret that they have wasted their important years.
If you are in your 20s, then it is very important to know these 5 rules.
So, with the help of a story, we will learn them today.
Let’s take the example of Rocky and Jack, who are both college friends. Both of them are 21 years old and study at a good university. As soon as they complete their degrees, they get jobs in a big company with monthly salary of $3000 per month.
The Dreams and Choices:
Jack’s ultimate dream was to own a house and a car, and this job made it a reality. He wasted no time in buying a splendid 3-bedroom apartment in a prime location and a car through loans. After seeing this, his family and friends were very impressed because his father bought his house in his 40s, but here Jack bought a house in his 20s.
However, with his monthly EMI for house is $1200 for the 20-year loan and an additional $600 for the car loan, expenses were piling up. Alongside utility bills, petrol, and groceries, Jack’s total monthly expenses soared to nearly $800.
His newfound financial freedom also tempted him to indulge in lavish hotels, clubs, and parties. He started getting offers from many banks to take credit cards. So, he took some credit cards and started shopping because he didn’t need to worry; after all, he had a safe job at a multinational company.
So, he was living a good life. He used to party every weekend or go out somewhere, but there was a small problem: as soon as the month ended, he didn’t have any money left in his bank account.
On the other hand, his friend Rocky didn’t believe in taking a loan. Even after Jack took a home loan, Rocky controlled himself because he had read many books on personal finance and he remembered one line: that spending money to show people how much money you have is the fastest way to have less money. That’s why he rents an apartment in an average building with one bedroom, a hall, kitchen, and that too in a building which is a little far from the city.
To keep his rent affordable, Rocky chose an apartment in a less expensive area near his office, which cost him $500 per month. Since he rented the place, he didn’t have to worry about paying high maintenance fees. His monthly utility bills for electricity, gas, and water amounted to $800.
Instead of buying a car, Rocky believed that cars lose value over time, so he preferred to travel by the office bus. Even though Rocky enjoyed traveling, he always created a budget for himself. He understood that without planning ahead, expenses could easily exceed his expectations.
So, Rocky used to bring his own homemade lunch to the office in a tiffin box. He decided to only spend $300 on entertainment and shopping. Sometimes he would go watch a movie or save up for 2-3 months to take a trip to a hill station, all within a budget of $1500. He saved the remaining $1500.
Rocky led a simple and humble lifestyle, and it reminds me of a quote from the psychology of money that says
savings is the difference between your ego and your income.
He had a plan to invest his savings in mutual funds and stocks. Firstly, he set up a Systematic Investment Plan (SIP) for $500. This meant that as soon as he received his salary, $500 would automatically be invested from his bank account.
He would then research and buy stocks of a good company with the remaining $1000. Even after all these expenses, he would still have extra money left at the end of the month.
Rocky would also advise Jack to save and invest, but Jack used to make fun of him, saying, “Rocky, you should enjoy your life. If you don’t enjoy it in your youth, when will you? You’re so stingy. Look, I have a car and a house; what do you have?”
So, because of their different beliefs, one day Jack and Rocky had a big argument, and they stopped talking to each other after that. Jack was transferred to a different department, and they never crossed paths again. Many years went by like this.
On one side, Jack made new friends, went to clubs, and had parties on weekends at home. On the other side, Rocky started investing his saved money in good stocks for the long term. He also started an online business and hired an employee to help him.
At the beginning, Rocky faced some challenges in setting up his online business, but he gradually overcame them. After paying his employee’s salary, he started making profits ranging from $1000 to $1500, and the profits slowly grew over time. His income was increasing, and money was coming from different sources, but he didn’t increase his expenses.
Rocky continued to bring his own lunch to the office and traveled by bus. Whenever he considered increasing his expenses, he reminded himself that if he kept on spending more, he would be trapped in a never-ending competition. He wanted to break free from this rat race as soon as possible.
So, Rocky was silently working on his plans without letting anyone know. He had all the calculations in his mind, and that’s why no one could figure out what he was doing in his free time. People thought he spent his free time playing video games or reading boring books because his lifestyle seemed unexciting from a distance. No one saw him as a role model, and instead, they looked up to Jack and tried to imitate his life. This went on for about 7-8 years.
The Impact of the Pandemic:
Then, one day, a pandemic struck the country, causing a recession that affected the entire nation. People stopped shopping, and the company where Rocky and Jack worked went through tough times as well. In fact, all companies in the country struggled to survive. Unfortunately, Rocky and Jack were among the 500 employees who were laid off. This came as a shock to both of them because nobody likes losing their job.
However, Rocky remained calm because he always planned ahead. He had emergency funds, received dividends from various companies as passive income, and ran an online business.
On the other hand, Jack was devastated by the news of his layoff. He had never considered such a situation before. He had always believed that job security was guaranteed because that’s what he had heard throughout his life. But as soon as he lost his job, the bank’s home loan and car loan departments started to chase after Jack. He still had half of his 20-year home loan remaining and two more years to pay off his car loan. Many friends whom he considered his own began to see his reality in this difficult situation.
The truth is, everyone was going through a tough time. Jack found himself in a difficult situation and had to borrow money from his parents. But he knew he couldn’t rely on them forever, So, he made the tough decision to sell his car. However, due to the recession, the market wasn’t favorable, and he had to sell his car at a very low price. He used the money from the car sale to immediately pay off his home loan EMI.
Just when he thought things couldn’t get any worse, he lost his job. With no income and mounting financial responsibilities, he received news that a family member had contracted the coronavirus. Jack had insurance, but it was provided through his former company, and since he was no longer employed there, he didn’t have coverage. In desperation, he had to sell his wife’s jewelry and exhaust his meager savings to pay for medical expenses. This left Jack completely broke and in a dire situation. He still had to pay his home loan EMI every month, but he couldn’t find a job because companies were laying off employees and not hiring anyone.
Every day was a struggle for Jack, and he fell into depression. He even contemplated suicide and began to blame his life for all the misfortunes he experienced.
Reunion and Redemption:
During this difficult time, Rocky reached out to Jack and invited him to his new house. Despite their past fight, they were old friends, and Rocky had learned about Jack’s situation. When they met, they had a heartfelt conversation. Jack first apologized to Rocky for their fight, admitting that he had let his emotions and ego take over. He then shared the hardships he was facing and how no one was willing to help him.
So, my friends, here’s an important lesson for all of you: There are many people out there who may be poor in their pockets but rich in their ego. It’s not worth your time seeking revenge against such individuals. Life has a way of teaching them humility and giving them the lessons, they need. Instead, focus on striving to become wealthy and humble, rather than being poor and arrogant.
Rocky then shares his plans with Jack. He tells him that he is considering retiring soon and embarking on a world trip with his wife. However, he needs someone trustworthy to take care of his online business. Knowing Jack’s dedication and hard work, Rocky offers him the position with a salary of $1500. Jack is thrilled to hear this. He wonders how Rocky can retire at such a young age of 28.
It’s hard for him to believe that just eight years ago, they started from the same point, yet their financial situations are vastly different.
So now, we will discuss some interesting lessons from their lives.
If you paid attention to this story, you’ll see that the main reason Jack’s financial situation got worse was because of his loans.
In school, we learn how to get good jobs, build careers, and do well in interviews. But we’re not taught how to manage loans. Because of this, many people struggle with loans, making financial freedom seem like an impossible dream.
1. Managing Debt:
When we start working in our early 20s, banks often tell us to get credit cards. They do this because, at that age, we will be learning how to spend money, and those habits can stay with us for a long time.
If we get used to buying expensive things, it can be hard to change our spending habits later on. This is an important time when we have strong desires, but we may not fully understand the risks of borrowing money.
As a result, many people start thinking that taking loans is normal at a young age.
If we take loans at young age, throughout our lives, we not only work for our employers but also owe money to banks. This cycle is encouraged by society, the government, and others because it benefits them.
When we have a lot of debt or rely too much on loans, we end up working more, which is good for the economy. It helps companies make more sales and gives more money to the banks.
However, this situation is not good for our personal lives or our goal of achieving financial freedom. It benefits everyone else except us.
Taking loans also goes against the idea of compounding, which is an important concept in finance.
Many people justify taking loans by saying it helps them control their expenses. For example, if someone earns $3000 per month and has to pay $1400 as an EMI, they believe that they can only spend the remaining $1600 wisely. They think that without the loan, they would spend the entire $3000. They see taking a loan as a good choice, but in reality, it is not wise.
2. Budgeting Rule
Controlling your expenses through loans is not a good way to manage your money. The best way to control your expenses is by being disciplined. Let me share a simple formula with you called the 70-20-10 Budgeting Rule for beginners.
According to this rule, you should spend 70% of your income on household expenses, save 20% for investments like the stock market or mutual funds, and keep 10% for entertainment purposes. As time goes on, you can gradually increase the amount you save and invest.
In our example, Rocky saved 50% of his salary and invested it, following the 50-40-10 rule. This rule is even better than the 70-20-10 rule because a larger portion goes into investments. People who follow the 50-40-10 rule can achieve financial freedom within 10 years, according to this guideline.
3. Investing in Stocks
Most middle-class people think that investing in stocks is risky and doesn’t offer stable returns. However, the truth is that when a middle-class person works for a company like APPLE or Microsoft, they find their monthly salary stable, but the dividends from the same company’s stocks are considered risky.
Interestingly, during a recession, companies often lay off employees and cut costs, but they don’t usually reduce the dividends paid to their shareholders. For instance, during the COVID-19 pandemic, Microsoft let go of employees, yet they increased their dividends by 10%.
So, imagine Jack receiving a salary from one company while Rocky receives dividends from 10-15 different companies. Which one do you think is more financially secure? This is why job security isn’t real, but financial security is real, and it’s something you can control.
4. Compounding
One who truly understands the power of compounding will invest in the first opportunity and avoid debt. Financially smart people invest in the first opportunity and avoid taking loans.
The one who really knows about the power of compounding will invest in the first opportunity and will avoid debt.
But financially poor people do the opposite of this, they delay the investment and take the loan as soon as possible.
Also Read: How Compounding works
5. Concept of Early Financial Freedom.
Money can buy many things, but there’s something very important that it can’t buy: financial freedom.
It’s interesting to note that it’s easy to notice when someone buys a new car and tries to copy them. However, it’s much harder to recognize someone who is financially free because they don’t have a visible sign on their head saying so.
So, in this situation, who do you think most people would want to be like? Surprisingly, achieving financial freedom is not a common goal and only about 1% of people in the world manage to accomplish it.
We can’t blame the school or education system for this situation because if everyone became financially free, there would be a lack of people willing to work. That’s why schools and governments focus on teaching us to be good employees and stay trapped in the cycle of working for money.
In the job market, there are far more job seekers than investors or business owners. This means that only a small percentage, around 1%, of the world’s population are investors or business owners, while the remaining 99% are employees. The choice is up to you: Do you want to aim for financial freedom and join that small group?
Note: –
If you aspire to achieve financial freedom and be part of that 1%, it’s important to follow the guidance provided on this website. We will explore other important topics related to financial freedom in the future. For example, understanding taxes is crucial for wealthy individuals, as they can legally minimize the amount of tax they pay even if they earn a lot of money.
For instance, Elon Musk, one of the richest people in the world, managed to avoid paying any taxes in 2018. On the other hand, individuals with lower salaries often end up paying a higher percentage of their income in taxes. We will also discuss failed investment strategies that people sometimes use in an attempt to save on taxes.
Moral: –
The story of Rocky and Jack teaches us the importance of financial education and discipline. It shows us that with the right mindset and knowledge, anyone can achieve financial freedom and lead a fulfilling life.
So, my friends, let this story be a lesson to all of us. Let’s strive to become financially responsible, make prudent financial decisions, and invest wisely. By doing so, we can create a better future for ourselves and our loved ones, free from the burden of financial insecurity.
Remember, the path to financial freedom may not be easy, but it is attainable with dedication, perseverance, and the right financial knowledge. Let’s embark on this journey together and pave the way to a more secure and prosperous future.
