Wednesday, March 4, 2015

MONEY IS NOT FOR SPENDING

Last week former professional boxer John "The Beast" Mugabi flew in town, the first time he has been back to the country in 26 years.

Mugabi at his peak fought for the middle weight tile against Marvin Hagler in a fight that earned him the equivalent today of $1.6m (sh4.5b).

However mismanagement of his money and spending spree for which the phrase "a rural approach to urban excitement" was coined, blew this and all his prior earnings and today has little or nothing to show for it.

He is not the first and will not be the last professional athlete to squander his earnings.

Other athletes have had better guidance. Former professional tennis Andre Agassi made millions of dollars in prize money in his two decade long career. However, his manager, put him on an annual salary, which was fraction of his annual earnings while the difference was invested in businesses and real estate. Agassi who retired about a decade ago now lives off the proceeds of his investments, which have since grown to be many times larger than the total earnings of his career.

One may argue that Mugabi's earnings pale in comparison to Agassi's and therefore his is less likely to have blown it all even if he tried, but there is no fortune that can't be blown.

Former undisputed heavyweight boxing champion Mike Tyson who once made a $20m in one fight in the 1990s but now lives on the edge of bankruptcy. His career earnings were many times over what Agassi made.

"The difference between Agassi and the two boxers -- it's coincidental that they are both black, is their respective attitudes to money. Agassi's actions were dictated by the attitude that money is not for spending but for making more money unlike his boxer colleagues for whom money was for eating...

This is the same reason why fishing communities around the world are poorer than other agricultural communities.

Fishermen consume all their catch and when they do they just push their boats to go and catch more fish. A maize farmer on the other hand keeps some of his harvest aside to plant the next crop. This ability to delay gratification is at the bottom of determining the relative wealth of individuals or communities.

Poorer individuals are quick to wolf down their earnings or any windfall that comes their well, wealthier people on the contrary invest or save some money before consuming what's left.

About fifteen years ago one wealth Asian told the Financial Times of London, when asked about his he accumulated his millions, and his answer was, "It's an old Indian trick. For every ten shillings I made I ate one shilling and reinvested the other nine. I repeated until I was rich"

Given the experience of financially illiterate boxers its clear that money does not make money its how we think that makes -- and ultimately ensures that we keep, the money.

Said differently there are only two ways To spend money -- to consume it or invest it, the wealthier members of our society, those who have grown genuine wealth not those who have made a profession of dipping their fingers in the state coffers, is that their spending habits are biased towards investment and not consumption.

An 1980s survey reported in the book "Millionaire next door" that the average US millionaire owned a car that was on average not more expensive than seven percent of his net worth -- the difference between the value of your assets and liabilities. So in today's Uganda if you bought a $48,000 4WD your net worth would be at least $700,000(sh2b). If your networth is higher you are in illustrious company if not you have a good chance of following Tyson and Mugabi down the slippery slope to poverty.

"Networth however is not a practical indicator of wealth. You may be asset rich ---have square miles of land to your name, but still be cash poor...

On the scale of financial well being you have poverty at the bottom, a situation where a person can not sustain himself either for lack of income or very low income. Then you have financial independence, where a person earns enough to sustain himself but is often a paycheck away from falling into poverty. The there are those who are financially independent, they have accumulated income earning assets that can sustain them even if they don't earn a paycheck. And then of course there are the wealthy whose assets throw off so much more income than they can consume that they nor generations to come may ever need to work another day in their lives.

So what Mugabe and Tyson need to hear twenty years ago is that money is not for eating but for making more money and secondly, invest or save first and consume the rest and not the other way around.

And you need not wait for the windfall money, in fact it would do you a lot of good if you can shift your mentality before the windfall comes.

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