Read time: Approx 6-8 minutes / 3-4 Minutes Highlighted but important. If you don’t read anything else on this site read this. It will make you rich.

Football Superstar Ronaldo and balding Mark from finance are both in the same financial situation. As they are both living by the same financial equation and they will both reap the benefits or suffer the consequences of that equation.

Why Read

This is the second installment of my “How to be Rich” Trilogy. If you have not read the first one “ How to be Rich: First Understand What it Means To Be Truly Rich” then I highly reccomend you read it before moving on to this one.

This second installment looks at the three core financial equations that everyone will fall into and outlines the benefits and the consequences of each on personal wealth and happiness. You should read this article because it highlights just how important it is to live by the right equation for a rich and happy life and will help you Understand The CORE Financial Equation For Super Wealthy Living.

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We are all similar

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Everyone on earth, no matter whether they are Tom Cruise or balding Mark from the finance department, have only two commodities to sell: Our time and our abilities.

This is how it works when you are in a job; there is a certain hourly price on your “abilities” commodity and you “sell” you time to your employer at this price. A yearly wage or an an hourly rate. A basis of the footballers wage for playing football is no different from Marks wage for running the companies finance, only that it is larger. He is still being paid for his time.

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The only difference is that the footballers “ability” commodity is valued at a much higher rate, however unfair that may seem.

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The footballer is still selling his time, as is Mark. They are both still stuck in what some aptly refer to as the “rat race.” If either of them stop selling their time to their employer then the money stops coming in and this puts them both in a difficult situation due to the fact that it will always keep flowing out.

Football Superstar Ronaldo and balding Mark from finance are both in the same financial situation. They are both living by the same financial equation and will both reap the benefits or suffer the consequences of that equation. They are both either a happy fish, an unhappy fish or a dead fish. You are too.

Some may think that Ronaldo is better off, even if he loses his job and is not selling his time any more due to the fact that he is “richer” than Mark, but this is a misunderstanding of the financial equations. Ronaldo, with all his millions, is still financially in the same situation as Mark from an mathematical equation point of view and it is this that is important, not the numbers (the size of his bank account)

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Just like in maths, the numbers may vary but the equation stays the same and thus the outcome is also the same.

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It is the equation, and not the numbers that is important. Regardless of how high your “abilities” commodity is and thus how much you get paid, you are still only selling your time and your time is finite. You have to be living by the right financial equations or you will get into financial difficulties.

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The three financial equations that you need to be aware of are the “Within Means”(Happy Fish), the “On means” (Unhappy Fish) and the “Outside of means.” (Dead Fish) I guarantee you will fall into one of these three.

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The “Within Means” equation – Happy Fish Living

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Living within your means makes you a Happy Fish.

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Lets presume Mark has an income of 20k a year (we will ignore tax or currency for this example). If Mark is sensible he will be living on less than this and his lifestyle may cost him 15k a year leaving him with 5k of savings every 12 months. Let’s also presume Mark has been working for 5 years at this wage and under this equation and has thus saved 25k.

In this situation, should the worst happen and Mark gets laid off or he wants to take some time off to try his own ideas or start a business then Mark (and his family should he have one) can live comfortably at his current level of living for around 18 months without any income before he runs out of money. In this scenario Mark has the freedom to take a year out or, given the loss of a job, a fairly stressless 18 months to find another one. In this situation mark is living below his means.

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Living below your means is the single most important financial decision you can make in order to live relatively stress-free and give you a degree of freedom.

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This equation applies to all people who sell their time.

Superstar Ronaldo can be inexactly the same position. He can earn £1million a year and have a lifestyle that costs him 800k a year. If he has, like Mark, worked for 5 years and stops playing football he will still only have 18 months before he runs out of money because he is living a significantly more costly lifestyle. You may think he can down grade easily but this is not usually the case. Just as someone living on £15K would struggle to downgrade to £7.5K, someone else living on 500K would struggle to downgrade to £250K. There are mortgages to pay, loans to honor, a level of comfort you are used to to maintain etc.

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The key is that it is not the numbers that are key, but the formula that is important and almost always the deciding factor.

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The “On Means” equation – Unhappy Fish Living

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Living on your means keeps you alive but makes you an Unhappy Fish

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Ok, Now what if Mark was living just on his means. He is earning 25k and living a lifestyle that is costing him 25k. As before he has been working for 5 years but now decides he wants to take a year off to start a business. Mark has a problem, as soon as he stops selling his time the money stops coming in and he has no savings. He needs that 25K a year to support his lifestyle and so he cannot afford to stop. He is forced to keep selling his time to his employer. His freedom has been completely taken away.

What’s worse is that if Mark gets laid off, he must find a job straight away otherwise he will be in debt very quickly and paying a substantial interest for the privilege. This is a hugely stressful time for Mark and he may well not be able to get a job for many months which will put him deeper and deeper in debt. Mark is now forced to work longer hours to live the same lifestyle he was previously because he now has all the debt interest to pay back as well.

Again, Ronaldo on a higher “abilities” wage is in exactly the same position, if he doesn’t get another contract worth what his current lifestyle is costing him, he will soon be in substantial debt and his repayments will be even higher. As you may be beginning to see, it is not about the amounts earned.

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The numbers are not important, mathematically the equation is the same and it is the equation that is important.

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The current equation is detrimental to Mark and to Ronaldo, and to anyone living by this equation no matter how much or how little they are earning.

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You can see real life examples of this with footballers such as Gazza or Popstars like Britney who all went bankrupt within a year even though they had previously been earning millions.

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The “Outside of Means” equation – Dead Fish

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Living outside of your means makes you a Dead Fish

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There is a third equation and unfortunately this is how a great many people have been living and is part of the reason for the unprecedented levels of stress in todays society.

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The third equation relates to living outside of your means.

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Ever since we moved away from the Gold Standard we have been a society based on credit. In this scenario Mark is still earning 25k but now he has a credit card and the bank was more than willing to lend him cash. Mark’s lifestyle over the last 5 years has been costing him 35k. This has meant that over the last 5 years he has had to borrow 50k to live his lifestyle, he now owes the bank 50k plus the cumulative interest that is owed on these debts.

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Cumulative interest is like a snowball rolling down a hill and gets exponentially larger the longer it rolls on.

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What Mark really owes could be closer to 80K depending on what his bank is charging him.

In addition, that is £80K if he pays it off right now, if not then he will continue to owe interest, he might even get into a position where he is paying more and more and still only paying off the interest on his loan. In this situation, Mark has absolutely no freedom and has to continue to sell more and more of his hours to keep up his lifestyle and repayments, he has become become a wage slave.

There is no option to take a year off or try his hand at business, he must keep working, and working hard, which brings stress and misery. What is worse is that if Mark ever loses his job he really is in massive trouble. He is already in debt and may not be able to lend more from the bank without a wage coming in, mortgage repayments will be missed, loans defaulted on and he could end up losing everything and having to file for bankruptcy.

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Applying this equation to the Ronaldo’s situation should he be living by this equation and he gets an injury that puts him out for life, has exactly the same outcome accept the numbers are bigger and the material loses are greater.

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The overall loss and the overall stress however remain the same.

Living outside of your means is not a right, much to the disagreement of advertisers everywhere who relentlessly promote that we are entitled to anything we want, and we can have it right now. Do not listen to them, the small pleasure of living outside of your means is not worth the complete destruction of your freedom and permanent slavery to the wage slip.

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Please, Think Of the Fish

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A good way of reminding yourself of the above is to think of the fish.

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Dead Fish Economics

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When in water (Within means) it is happy and relatively stress free. When on top of the water “On means” it can survive but is a quite stressful. When out of the water (Outside of means) it is in a lot of trouble and the longer out it is the worse off the fish is.

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Anyone who has to sell their time for income is in the rat race. For some this is what they want and it can be a viable option, but only if you live within you means.

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Living from paycheck to paycheck with the “On means” equation or worse, in debt through the “outside of means” equation is a destructive and stressful lifestyle.

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Don’t fall into the trap. If you are already there, seek financial advise to help you get out of the trap. It will be a long, painful process but it is possible to get back control of your finances and thus your freedom.

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The image I use for Dead Fish Economics is from a project I am working on called Pictomins – Little Pictorial Bites Of Wisdom For a Visual World. You can check out the site at http://pictomins.wordpress.com/ . I would love to hear what people think about the idea.

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An Apology

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I realise that this post was probably not as entertaining or humorous as usual but that is deliberate because of how important I believe the content is. However, I will end on a joke so you don’t feel too hard done by.

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Two men where walking out of a bar when they were held up at gun point. As they were handing over the cash from their wallets, one of the guys tuned to his mate and said, “Hey Dave, heres that twenty I owe you.”

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