make better financial decisions

How to make better financial decisions

Have you ever wondered why you’re struggling financially? Today, I’ll explain How to make better financial decisions and teach you how to change your financial status.

We all know that there is a big gap between the rich and the poor; it’s not something new because wealth inequality has always been around almost in every single Society throughout history.

Wealth distribution in the United States

Let’s take a look at the actual data of how wealth is distributed in the united states.

It might seem unbelievable but believe it or not more than 35% of America’s wealth is in the hands of only 1% of its citizens, not 10%, neither 5% or even three! It’s 1%!

The total wealth of the United States is estimated to be $85 trillion dollars which means that this 1% of the population literally owns almost $30 trillion

Amazing right?

Now, Before you make your conclusions of where the rest of the wealth goes to let me tell you about the rest of the statistics.

The next 4% of the population owns roughly around 28% ($24 T) of the total wealth which is less than the top one 1% by a significant amount. The next 5% they hold the other 14% ($12 T).

The next 10% of the population owns 12% ($10 T) of that wealth and what’s more fascinating is that the next 40% of the population owns the rest of the wealth (11%, $9 T).  

Now, you’re probably a little confused because that leaves us with another 40% of the population, what about them? They make up almost half the country.

The truth is that they don’t own anything of that wealth (0%).

Seriously!!! Yes seriously

If you are from outside the U.S. your country isn’t far away from these statistics.

make better financial decisions
wealth distribution in the U.S.

This chart might make you feel bad about what’s happening in the world but honestly it’s not a coincidence because people who ended up in each category, in most of the cases, made the choice to be there and yes, of course, there is little bit of luck here and there but mostly it’s about the different financial decisions they have made.

And the purpose of this post isn’t to make you feel about that wealth inequality but rather to teach you about the different financial decisions that people make and ended up in different categories in this chart.

So that you can make such financial decisions and end up in the 10% or at least in the 20%.

Understand the Cashflow Quadrant to make better financial decisions

What differentiates people on the top 1% from the bottom 40% is the way they think, the way they understand money, and all of this can be explained in a simple quadrant.

Employees

The first type of people are employees who make the majority of the bottom 40%. You might still be wondering how it is possible that they don’t own anything!!

Let me explain, most people graduate from college with a student loan to pay back. So their net worth is automatically negative because your net worth is all that you own minus your debts.

But that’s only a part of the problem because most of these people find a stable job and then buy a house and a car on debt which they will most probably pay for the rest of their life.

The bigger problem is that they cannot leave that job because they have to make periodic payments to cover their loans. So no wonder they are in the bottom 40% because they made the choice to be there (no one forced them to buy a new car or a house on debt) and if you’re one of those people just keep reading and you’ll know how to recover from that and start making better financial decisions from today.

We all know that the salary that most people are paid off isn’t enough to cover all the expenses so you have to live month-to-month.

Self-employed

Now, the second category of people that are a little bit better is self-employed.

They understand that with a job they cannot become financially free anytime soon so they started their own little business instead of working for someone else and now they work for themselves.

They’re way better than those in the bottom 40% but they’re not going to go that far because although that they’re their own boss they still cannot survive if they stopped working because their business is extremely dependent on them.

So, they created some sort of wealth throughout their life but not that much.

Business owner

The people who create real wealth move from being self-employed to becoming business owners. These are people who are in the top 20% of the population and owns almost %80 of the total wealth.

The difference between these two categories is that self-employed runes the business but business owners create a business that’s capable of running without him and he still takes the profit.

For instance, self-employed open a shop and start working there while business owner build the shop but hires someone else to run it and he takes the profit while he moves and builds another shop and so on.

What’s going to happen over time is that the more shops he builds the more money he will have to build even more shops.

In other words, he will keep getting richer, and that’s why the rich get richer, while people on the other side especially employees whose income is limited but they’re going to get another loan to buy the new iPhone.

In other words, they just keep getting poorer and it’s just a matter of time before the gap between these two is going to get even bigger.

Investors

Now, let’s move to the last category of people in this quadrant who are investors. These are the type of people who invest in other people’s businesses.

Usually, people who’re business owners, once they start making a lot of money, instead of starting another new business from scratch they simply invest in a ready business.

So without literally doing anything, these businesses share their profit with them because they’re investors in that business and the more money they make the more money they invest and the richer they get.

And that’s the reason why people on the top get richer while those who are in the bottom keep getting poorer.

cashflow quadrant financial decisions
This is the Cashflow Quadrant

The conclusion to make better financial decisions

Now that I explained the Cashflow Quadrant what you need to do to start making better financial decisions is:

First, figure out your place in the quadrant are you an employee or self-employed? And start planning how you can move to the next class.

Now, you have to understand that moving from class to another class isn’t easy and won’t happen overnight, it takes a lot of work and good financial decisions to move from class to class.

Second, after you figure out your place in the quadrant don’t try to change your financial status overnight just start by taking baby steps towards your goal.

If you’re an employee you can just start a side hustle (here are 10 Legit ways to earn money online and make a living from home) and maintain your day to day job until you feel comfortable to quit and become self-employed.

If you’re self-employed gradually start outsourcing the work and over time you can start a new business and become a business owner.

Most importantly, stay focused, keep moving toward your goals, and don’t get discouraged if you fail because you will fail a lot of times before you reach success. You can read “How to stay motivated to work hard” and “3 productivity improvement rules to properly plan your day” they will help stay focused and motivated to reach your goals.

Thanks for reading how to make better financial decisions

This post is based on the book Cashflow Quadrant by Robert T. Kiyosaki so if you want to learn more you should get the book and read it I really recommend it.

So where would you like to be? Are you ready to work your ass off to be in the top 10 or 20% or you’re comfortable with a stable job?

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