Take a moment to ponder on what ‘Financial Independence’ and Wealth means to you. If I'm to explain it to a six year old, I'd say “it's having enough resources to sustain yourself for a long time without depending on anybody else”
Your financial management blueprint is what you grow up to see that shapes your instinct on monetary issues.
"Money is only a tool, it will take you wherever you need but will never replace you as the driver"- Ayn Rand
Money is just a means to an end and not the end itself.
Some of the things you were likely not taught in school were how to love, how to be famous and how to be rich or poor. The primary objective of this article is for us to know how to keep what we earn and do more with what we've kept.
What is Your Money Style?
- Savers - those with the philosophy that money does not grow on trees, so they save.
- Spenders - they nurture the the belief that money is meant to be spent.
- Dodgers - they believe money comes with too much trouble.
- Dreamers - those who think money will always come from 'somewhere'.
Critical Question: if you were to stop your job today for any reason, how long could you survive at your present standard of living or better?
Let me give a basic definition of some terms that we'll repeatedly come across in our dealings with money, and if we attempt to act on what this article entails.
Inflow: Money that comes into the pocket: could be equity, liability, income.
Outflow: Money that goes out of the pocket: it could be purchase of asset, payment of liability, expenditure.
Cash flow: The sum of cash revenues and expenditure over a period of time. It sums up the Inflow and the Outflow.
Profit/Loss: The amount left after subtracting the cost price and expenditure from the sales price.
Income: The money we earn from anywhere.
Expenditure: The amount of money we spend on anything.
Asset: Whatever brings money into the pocket, example shares, real estate, investment.
Liability: Whatever takes money out of our pockets. Typical example are bills: phone, electricity, water, food, transport, rent etc.
Where Does our Money Come From?
There are four main sources of money:
- Working for people
- Working for oneself
- Running a business: Here you don't necessarily have to be the person doing all the work, you can delegate jobs to other people. That is the difference between doing a business and working for yourself.
- Making your money work for you: Going into a business and making your money work for you is known as a safe track.
The first two are what renowned author and finance expert Robert Kiyosaki called the "rat race". The moment you stop working, the money stops coming.
While working for someone else, you should be investing. When working for yourself, try to expand your investment-base.
Where Does our Money Go?
The primary things we all spend money on are savings, rent, fees, household expenses, insurance premiums, support for family and friends.
Advisable Finance Format
Work hard and earn your income, pay your bills (most people at this point have nothing left anymore). After bill payment, what do you do with what's left? Do you spend it on assets or liabilities?
If on liabilities, you may likely be left with nothing, and if on assets, more money can be earned.
Your ultimate financial goal should be to accumulate much capital for your investments that'll help you achieve a reward more than you can earn on your job. In other words, your goal should be to attain a height where you stop working and your money will be working for you.
How to Achieve That
Rule 1. Pay yourself first. Save.
Savings must be defined as an expense. It is an expense that buys you the future you want and it should be a deliberate and consistent act.
Wealth Equation: subtract your savings from your income, then spend what is left.
Poverty Equation: subtract your expenditure from your income, then save the remaining.
Rule 2. Define your financial target at each phase of life.
Set goals, put it into writing, state it in positive terms, set specific time frame for each goal and monitor the progress carefully.
Rule 3. Know the difference between assets and liabilities.
Precious and valuable items like gold, diamonds can be an asset though perceived as luxury and class. You should know the difference between your needs and wants.
Rule 4. Health is wealth.
You are your greatest income generating asset, you need a sound body and mind to function well. While pursuing your wealth, take care of your health, if not you may end up spending all your wealth pursuing a good health. Health and protection are interrelated, if you are not healthy or you do not take care of yourself, you may get sick or involved in an accident, get injured, become disabled or lose your life.
Rule 5. Grow with the economy and beat inflation.
Get an investment that will pay you higher than the inflation rate.
Rule 6. Trust the power of time and compounding.
Reinvest both the capital and the interest over a period of time, that is how to make money grow more.
Rule 7. Assess risk and return.
It is simply understood that in most cases, the higher the risk, the higher the rate of returns and the lower the risk, the lesser the rate of returns. But there is a good risk and a bad one.
Rule 8. Investment.
Invest your savings in money-generating assets, make your money work for you and try as much as possible to diversify (expand your investment base).
Rule 9. Make use of the power of one.
Strength in self, you can always make a difference.
Obstacles to Savings:
Everybody wishes to save for an unforeseen event and to secure their future but the discipline required to do as desired is extreme. The act of saving can be obstructed by factors like:
Procrastination - Delaying savings or putting it aside for another time.
Poor Spending Habit - Impulse buying, catching up with the latest trends, excessive entertainment.
Simple Ways To Invest
- Lending investment - lend money to an institution and not an individual.
- Equity - contribute money to run a businesses, it'll make you a beneficiary of its profit.
- Insurance and pension plans
- Real estate - the worth goes up most of the times, hardly comes down. When buying, be sure to follow the legal procedures.
- Stock Market - invest directly in the market and not with a stock broker.
- Mutual funds - a way of investing in the stock market collectively to ensure safety.
- Engage in trade/businesses - be a business-person (one with the intellectual capacity to safely run a business) before you venture into it.
- Reduce debt and gambling
Conclusion
Build wealth and control spending. These are what I believe to be the basics of personal financial management that we usually ignore. I charge us to get an indepth knowledge of our financial state and take the necessary steps to improve it.
We should realize the benefits of saving and how to save for a rainy day. To conclude, I would advise you stay determined, never give up. Discipline yourself and watch what you buy, learn to say no to yourself at some point.
Thank you.
Picture credit: Pixabay