The Cup Analogy

[Felix]

A group of alumni, highly established in their careers, got together to visit their old university lecturer. Conversation soon turned into complaints about stress in work and life.
Offering his guests coffee, the lecturer went to the kitchen and returned with a large pot of coffee and an assortment of cups: porcelain, plastic, glass, some plain-looking and some expensive and exquisite, telling them to help themselves to hot coffee.
When all the students had a cup of coffee in hand, the lecturer said: “If you noticed, all the nice-looking, expensive cups were taken up, leaving behind the plain and cheap ones. While it is normal for you to want only the best for yourselves, that is the source of your problems and stress. What all of you really wanted was coffee, not the cup, but you consciously went for the better cups and are eyeing each other’s cups.”
“Now, if Life is coffee, then the jobs, money and position in society are the cups. They are just tools to hold and contain Life, but the quality of Life doesn’t change. Sometimes, by concentrating only on the cup, we fail to enjoy the coffee in it.”
So please, don’t let the cups drive you…enjoy the coffee instead.
-- Found this through StumbleUpon

[Cashflow]

A related concept is learned by playing the Cashflow 101 game and drawing the "occupation card" at the beginning of each game (which determines your initial income, expense, debt, and savings levels).
The first few times I played the game, I wanted to draw the "doctor" or "airline pilot" card because the income is at a much higher level. But then I realized the secret to getting out of the rat race sooner rather than later was to draw a "janitor" or "school teacher" card because the income is a lot lower.
Why? Most people are not taught financial literacy. As a result, their lifestyle expenses rise to their takehome pay. Making more income means having more living expenses (for most people).
But it's a lot easier to develop USD 2,000 a month passive income when your expenses are also only USD 2,000 a month (for the janitor or school teacher). The doctor or airline pilot needs upwards of USD 6,000 to 10,000 a month of passive income because your initial expenses are also at a comparable level.
For Cashflow 101, you qualify to get out of the rat race when your passive income exceeds your living expenses. For Cashflow 202, your passive income must be more than twice your living expenses to qualify for getting out of the rat race.
In real world terms, the Cashflow 202 standard is a better one to use for personal planning (in my opinion) because as we saw in the 2008 global meltdown, passive incomes sometimes decline unexpectedly and living expenses sometimes rise unexpectedly. One needs a margin of safety for these turbulent times to stay ERE.

[il-besa]

Very nice Felix
I love also the uber-famous story of the american tourist and the fisherman (that I reposted here:

http://www.danielebesana.com/blog/lang/ ... isherman-2)
Ciao

D

[RightClawSouth]

How do people spend $6K - $10K a month?!?! I don't understand... Are they setting fire to hundred dollar bills?

[AlexOliver]

@Cashflow: Airplane pilots don't make that much money, more like $40-60k/year. Doctors only start making that after 8-10 years in the field, and only if they're in private practice. They start around $35k.

[Cashflow]

My knowledge of what various professions make is what I recall being on the occupation cards of the Cashflow board games. I'm told the Cashflow games are now available free online, so anyone can go there and give them a whirl. You will see the income and expense numbers the inventors of the games created for the various occupations.
As far as how realistic these income and expense numbers are, you will have to be the judge. A key takeaway I learned from the games is that lower-paid professions have an easier time achieving financial freedom because they have to keep their living expenses low (and thus, need much less passive income to achieve their financial freedom).

[AlexOliver]

The games don't provide use of credit?

[Cashflow]

Wealth building to achieve financial freedom is a mindset. The Cashflow Game 101 is greatly simplified on purpose in order to teach the concepts.
You can search Meetup.com to find a Cashflow game near you. Here is the gist of the game: Cashflow Board Game - Rich Dad Poor Dad Game
I'm still learning ERE and have concluded so far that it's a lifestyle choice that can help people achieve financial freedom more quickly than they otherwise might.
You might want to flip through the following book to understand better the wealth building mindset: The Top 10 Distinctions Between Millionaires and the Middle Class

[Mo]

@RightClawSouth: If you buy a $450,000 house with 5% down, and a couple of BMWs, it's pretty easy. You don't think it will happen to you-- the mortgage is "only" $2500 per month, and the cars are leased for $460 per month. But wait, the taxes, insurance, HOA, utilities, and maintenance on your house bring it to $4k per month, easy. Then you forgot to factor in the tax, insurance, premium gas, and expensive tires that wear out far too quickly. If you're earning enough to have nice BMWs and a nice house, you ought to be able to save for your kids college, and take trips to Europe, etc...
Also, when you live your life like this, you're surrounded by two types of people: 1) those who are doing exactly what you are-- stretching their incomes too far and 2) those who are living an ERE type lifestyle on a larger scale, that is they're earning $50-$60k per month, but only spending $10k. So your neighbor is either a financial fool like you, or is far wealthier than you and isn't an appropriate peer model.

[photoguy]

"How do people spend $6K - $10K a month?!?! I don't understand... Are they setting fire to hundred dollar bills?"
It's not hard to hit the low end of the scale in many areas of the U.S. Even if you are not buying expensive luxuries. E.g., rent (or mortgage for starter home) + daycare for 1 child + living expenses will easily be 4-5k in silicon valley.
Now consider if you have multiple children, college education costs to save for, student debt, health issues and it's not hard to see it getting closer to middle or upper end of the range.

[akratic]

I've played the free version of the cashflow game online, it's pretty fun actually: Ca$hflow: the web game (I recommend playing against the computer opponents. It takes forever to get a game going with humans, and they're slow to make decisions.)
I drew a different conclusion about how to win the game though: almost all that matters is being lucky enough to be allowed to acquire the ridiculously high ROI investments.
@AlexOliver, in the game you can use the bank to provide credit for yourself. It only makes sense to do this when you can use the bank credit to purchase an invesment with an even higher ROI than the bank is charging. Then you pay the bank off ASAP. I think this is actually a pretty good model for real life... it's just that real life isn't filled with investment opportunities paying orders of magnitude more than bank rates.
In fact, you even start with various forms of credit against you: credit card debt, student debt, etc., each at different rates. I typically pay off the credit card debt early (it's an exorbitant rate), but let the student debt ride until I have tons of cash.
In general I think this game actually does accomplish its goal of trying to provide a fun way to learn about the Rich Dad, Poor Dad version of financial literacy and cashflow. It's just too bad investment opportunities like exist in the board game aren't so easy to find in real life.
PS: Great story, Felix! Thanks for sharing

[Kevin M]

Love the story Felix, thanks for sharing.