Thursday, January 15, 2015

HOW THE RICH SAVE



At the end of last year the Wall Street Journal reported on a research on wealth distribution in the US by economist Edward Wolff at New York University.

The research among other things, illustrated how various strata of American society hold their wealth.

The top one percent – net worth of more than $7.8m (sh21b) have almost half their net worth invested in their business and other real estate outside their principal residence and only nine percent in their homes. 

The upper middle class, the next 19% -- those with more than $400,000 in assets had the largest percentage – 28, in their homes, 24% in their businesses and 22% in their pension accounts.

The middle class have about six in every ten dollars of their net worth invested in their homes and less than ten percent in business. They however have 16% in their pension accounts.

The proportions may differ in the detail but generally would mirror what is happening in Uganda and around the world. It’s in this breakdown too, that you can see why the rich get richer and the rest, well they eat crow.


"If there is one lesson from Capital, the runaway success of 2014 by Thomas Picketty, it’s that as long as the return of capital outstrips the rate of inflation, owners of capital will experience greater wealth increases than the workers whose wages often rise with inflation...


The survey also showed – in case one had their doubts, that the key to financial security and eventual wealth is to own a business. It’s all very nice after years of blood, sweat and tears you build a palatial mansion to which you retire but you are better off expending your energy and resources into building a business.

A successful business is useful, and desirable, because it serves as a money multiplication machine – you put in money at one end and it is returned and with interest down the other end. And if managed well these returns go on well into the future.

So the sooner one begins to build this machine the better. And secondly watch out you wish for in terms of big pay checks because it will take that much more time and energy to build a machine with comparable earning power.

Say you earn a million a month or sh12m a year, to get such a return from the 364-day treasury bill you would need at least sh84m using the effective yield from last week’s 364-day treasury be which came it at about 14.2%. Profit margins maybe considerably less in a business so you might need a business with a higher net worth than sh100m.

In theory the short cut would be to steal, beg or borrow the sh100m and start a business but it does not quite work that way.  Just because you have money will not make you a business success. 


"The most successful enterprises started small learning as they went before they burst into our collective consciousness. That took time. There is no escaping the fact that it will take time to make the mistakes, learn the right way and even close shop altogether, before you can enjoy business success...


The trick with building this machine especially for salaried employees is the extent to which one can do without a salary or at least a salary as big as we currently earn, to plough back any returns to build the company’s earning power. This may often mean having workers you pay a salary while you go without. 

It’s the way things are the business is paid before the owner.

It may not be easy but it is actually simple to build this kind of money making machine. Ask yourself what it is you currently do to earn money then build the systems around it and voila you have a business!

I simplify of course but that is what it boils down to. 

Maybe that is why we are so corrupt. Regardless of the bounty that awaits us on the other side of the rainbows, there is just too much pain we are unwilling to bear – especially now that our cost of living is too high.

But the world’s largest economy shows us there are no short cuts. It is unlikely that if we live to old age we will sustain the wages we are paid for our labour. No one can save enough to tide them through the evening of their lives.

So we need to get with it and work on our businesses!

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