This is the most simple financial concept and most simply ignored. I have a theory that states: If a person receives a lump sum of money (inheritance, settlement, lottery, etc), that is more than that person could have earned with their own business potential, then they will lose ever penny. By lose, I don't just mean poor investing or gambling but rather I mean spending money on luxurious crap and depreciating goods. We've all heard of lottery winners that go broke, but believe me, they are no more pathetic than you, and you would probably do the same thing if you won the lottery.

Let me take a step back. People's overzealous spending habits drive up prices for everyone. The use of credit and leverage is at an all time high. Who pays cash for a new car anymore? List five friends, how many of them can afford to buy a home cash right now? Even when someone can afford a modest car with cash, they use that money as a down payment on a lease or purchase of a nicer vehicle. When artificial money (financing) is being used to purchase goods it inflates prices. The more eligible consumers with more spending power (bank lent money) increases demand and gives suppliers the opportunity to raise prices. The average budget of a consumer for a good that can be financed is higher therefore prices inflate. The more prices climb, the more people depend on credit to afford a standard living. It's a financial trap, a maze that few can find their way through. The real estate boom is a prime example of how this works:

Why was there a real estate boom? The real estate boom can be credited to an unprecedented flow of inexpensive bank money to buy homes. Everyone became an eligible buyer and that inflated prices like crazy. When an abundance of money is pumped somewhere rest assured prices inflate.

People are consumed with matching their monthly expenditures with their monthly income. I credit this to materialistic binges of consumerism and a need for instant gratification. Don't blame your income either. If you only make $30,000 a year, your doctor who makes $130,000 is broke at the end of the month just like you, the doctor just lives in a better neighborhood.

I once had an assignment in an accounting class about what we would spend $10 million cash on. Everyone I had the appalling pleasure to listen to assembled a luxury shopping list of exotic cars to extravagant mansions. Let me oversimplify the flaw in that type of thinking: If you bought a mansion on the beach for $10 million, where would the money for the yearly property taxes come from? The upkeep would financially bleed you and you no longer have a lump of money to throw at problems. Eventually, you'd be at square one with nothing but a story to tell. It's easy to see financial stupidity on a large scale example, but people that finance a Cadillac Escalade instead of purchasing a Toyota Corolla cash commit the same act.

If you stopped working today what would happen? Unless you have a fortune liquid in the bank you are about to enter a world of financial peril. All those recurring monthly bills would eat you alive, they are what owns you, you are their slave. If you are getting by comfortably at $40k a year and your boss suddenly upped you to $80k a year, would you research ways to invest that additional $40k a year to create an additional passive income source? Maybe, but I doubt it. 99+% of people would upgrade their lifestyle from a financial raise. They will still be a slave to their expenditures. The only difference is that the expenditures are nicer and costlier. Even when people save money they are wasting it just at a slower pace.

I have no problem with the finer things in life. Everyone should treat themself, as my etiquette role model George Hamilton says: "If I don't pamper myself, then who will?". My issue is where the money comes from to pamper oneself. One's monthly expenses should be a fraction of their non-passive income and even a smaller fraction of the net worth. I challenge any reader of this post to write out their monthly expenditures on paper, and their monthly passive income and see if the income covers the expenditures. What, no passive income? Well, then you are a slave to your possessions. You're working for your possessions, and they are your boss. Look for a future posting of passive income investing and breaking the shackles of financial slavery.

The only way to get rich (or stay rich) is to minimize your expenses and put as much money into investments that pay large returns with very small time requirements from you. Don't work for your money, make your money work for you...we've all heard it, but do you live it?