Three Reasons Why Employees Are So Stressed About Money
The difference between employees, investors, and business owners
When I was young, money was something you didn't talk about with your kids. My poor dad, my natural father, thought of money as a dirty subject. He avoided it. Rather, he talked with me about going to college and getting a good job.
The short hand of this conversation was that he wanted me to have a secure financial future. To him, there was nothing more secure than getting a high-paying job. This is because he grew up in an era that had different rules of money than the one I was growing up in.
Unfortunately, my poor dad put his trust in a system and a lifestyle that actually provided the least financial security-that of an employee. In fact, my father, a high-paid employee himself, never got ahead financially. Sadly, he died broke, and worse, lamenting the many dreams he didn't accomplish.
The bad advice is still alive and well
To this day, the wisdom of so-called "financial experts" is that being a high-paid employee is the securest place to be financially. There is no shortage of lists helping you to determine what those highest-paying jobs are. Coupled with this is the standard advice that in order to get a good job, you must get a college degree. "If you want a career path that is leading to high incomes and raises year after year, which psychologically really matters to people, that overwhelmingly requires a college degree," tells Indeed's chief economist, Tara Sinclair, to MarketWatch. And as MarketWatch points out, "A college degree is more expensive and more necessary than ever to earn a decent living."
The party line on all of this is that a college degree will net you a high-paying job, and a high-paying job will give you financial security. Yet, interestingly, according to PwC's "2016 Employee Financial Wellness Survey", as reported by U.S. News & World Report , "Among U.S. employees, 52 percent reported feeling stressed about their finances…among them, 28 percent reported that financial stress had impacted their health."
Why would this be?
Employees have no control
For starters, those who are employees have no control. It is the owner of the company and their boss who has all the control. Just ask anyone who has been unexpectedly laid off or fired how secure he or she felt after. Even if an employee feels like the business is making bad decisions, there is often little they can do about it. They are reliant on the owners to make sure they business succeeds, and that they do in turn.
What if you have stock options or stock in your company? This is a common question, and often it shows financial ignorance. It is important to understand that there are different types of stock. The stock options that most employees have may seem like a form of control because they are common stock. However, most companies have different classes of stock.
Take this example from Investopedia:
Suppose XYZ Corp. had two classes of common stock, Class A and Class B, and both types of shares carry equal claim to the firm's assets. In other words, if the firm has 100 common shares in total, 50 are Class A shares and 50 are Class B shares. Let's assume that the B shares entitle the shareholder to one vote, but the A shares entitle the shareholder to 10 votes. If you owned one Class A share, you would own 1% of the company's assets, but wield 10 votes at company meetings. An investor who owned one Class B share would have the same 1% claim to the firm's assets, but wield only one vote at company meetings.
And even if a company doesn't have different classes of stock, they will still make sure that the founders don't option out more than a controlling stake in the company to any one employee or block of employees. By doing this, they ensure a controlling stake in the company.
When it comes to setting up these classes of stock and determining the percentages of stock given out, who do you think has the control? The founders of the company. They do not set up their option plans to allow for losing control of the company. The only way that could happen is if a successful and wealthy investor was able to purchase a controlling share. No employee is going to do that.
At the end of the day, options are a forcing function to make an employee feel like he or she has ownership and control in a company when in fact they have none. This is reinforced by daily interactions at the company, and deep down all employees know this. It creates a low-lying sense of anxiety.
Employees pay the most in taxes
Additionally, employees pay the most in taxes of any income bracket. For employees, there is little-to-nothing they can do to reduce their tax burden. Come tax time, they have to pay up.
The business owner and investor, on the other hand, has the ability to expense many things and to use vehicles like depreciation to create "phantom income", that is income that looks like a loss and reduces tax burden. Many business owners and investors can severely reduce or even eliminate their tax burden through the tax law.
This is something illustrated by the CASHFLOW Quadrant.
Those on the left side of the quadrant, employees (E) and self-employed (S), pay the most in taxes because of the kind of income that they earn. This income is called earned income. It is a salary or a direct payment to the person. Basically it is recognized as income that is paid directly in connection to work that you do. And it is the highest-taxed form of income.
Those on the right side of the quadrant, business owners (B) and investors (I), pay the least in taxes because their income is considered passive income. Passive income is not tied to your direct work. Rather it is a result of having cash-flowing assets that generate wealth outside of your direct efforts.
A simple example is to look at each McDonald's hamburger as an asset that creates $1 for the owner of a franchise. The owner pays the employee earned income out of the hamburgers turned dollars, takes care of the costs to run the business, and then enjoys a dividend from the business with what is left that is considered passive income. It is the lowest-taxed income.
This comes back around to a form of control. Business owners and investors have all the control over how they can lower their tax burden. Employees do not. This too creates an underlying anxiety.
Employees have no safety net
As an employee, you effectively sell your time. If you are not working-or are not able to work-you do not get paid. This presents a real challenge for employees who become sick or have an injury. They usually have no safety net that protects them when they are not able to work.
This is usually brought home when I talk with an employee and ask them to list out their salary and then to list out their expenses for each month. Usually, that salary just covers those expenses, allowing them to live month to month. I then ask them to put their hand over the salary number. "Without that money each month, how long would you survive?" I ask. The look of panic in their eye tells me everything I need to know.
Successful business owners and investors, however, have passive income that comes from the products they sell or the income their investments generate. Even if they aren't working, they are making money. That is true financial security.
It's important to point out that this is different that savings, which dwindles each time you withdraw money. Successful business owners and investors create assets that generate income without them working. In fact, many times these assets grow.
Add up these three factors, and it becomes easy to see why employees, who are supposed to feel secure, have such high levels of stress when it comes to money. Conversely, many entrepreneurs and investors have low levels of stress about finances because they understand how to make money work for them, enjoy passive income that covers their expenses without them working, and have a safety net to protect them in the case of a tragic health issue.