More money is NOT a Solution to Poor Financial Management

Poor John

Meet poor John. He earns RM 3k/month and he has a long list of financial burdens on his shoulders. In order to get to work, he needs a car and that’s high maintenance! He not only needs to pay the car loan, but after paying tolls and petrol, his monthly cost comes up to RM1.5K a month! That’s more than 1/3rd his income! Oh, but wait, there’s more!

We all need certain luxuries in life besides just food and clothing. In John’s case, he needs to pay the internet and Astro bill, take out his girlfriend or buy her gifts, take occasional vacations, and upgrade his gadgets. All of these expenditures have left him with little money to spend and with a high outstanding credit card bill. It balloons to a major personal financial crisis when he can afford no more than the minimum 5% a month to pay the bank.

Average Joe

So you might think, a little more money should solve his problems. Well then, let’s look at ‘Average Joe’ who earns RM10k/month. A higher monthly salary means he is not going to go for the same things as Poor John. So for instance, instead of buying a cheap Perodua Axia, Average Joe can buy a nicer car, such as a Toyota Camry or BMW 3 series.

So that means his loan is bigger and still cuts a large portion from his salary. Moreover, his expenditure on a bigger house, vacation or cruises overseas, and his gadgets, would also be higher. This is because he has a higher credit, and thus, more leeway for expenses. Joe can still get by, but what happens when Average Joe suddenly gets retrenched? Everything would grind to a halt and the situation is worsened since he barely has any savings.

Top Athlete

So what about even MORE money? Ok, let’s look at a professional athlete who earns millions of dollars a year! So much, in fact, that he earned $400 million in just 20 years! So he couldn’t possibly have any problems, right?

He wasted away most of his wealth on women and drugs. He was so proud of his wealth and so careless that he once lost a suitcase containing $1 million, saying “I forgot where I left it”! By now you might be wondering ‘this story is absurd! A real individual would never do this!’ Well, this is actually the true story of the professional athlete named Mike Tyson! He was declared bankrupt in 2003 with over $23 million in debt! So yes, it can happen to the best of us.

Now here is a story we hear almost every day. Millions of people all over the world play the lottery even if there is a minuscule chance they’re going to win it. When someone is lucky enough to win, they manage to spend it all overnight and go broke! In fact, there have been several psychological studies done around this phenomenon. In one case, a homeless person is given $100,000 to spend in whatever way he desired. Perhaps unsurprisingly, he managed to bankrupt himself and get back to being homeless within a short amount of time. He spent most of the money on his family, friends, booze, and even on getting married! Soon, he drove himself to debt and lost everything again.

So what is the moral of all these stories? Does more money equal a smaller debt or a bigger debt? Does simply throwing money at a problem, solve it? If you can’t live on RM5k a month, you won’t be able to live on RM50k a month. It’s as simple as that. What do the previous three stories have in common? One frets about RM3k monthly mortgage while another frets about the RM30k monthly mortgage with an additional RM10k per month car loan on a Ferrari! No matter how much you have, it is simply not enough.

It is hard to make sacrifices now so it can be better in the long term. Our brains are hardwired to seek instant gratification and that’s why we spend billions of dollars on Black Friday, for instance. It’s not because of the discounts or the sales, but it is because of our own cravings!

So the main problem lies in our mindset and the only solution is to change it. To start off, you have to stop thinking that more money will solve your problems and the rich have it good. Financial literacy is the key. And I am providing financial education in the most convenient way for you, as long as you want to learn and practise it!