The other day someone tapped me for financial advice. Whenever I hear such a request I am torn between rolling my eyes and running for the hills.
As it often turns out they want a quick fix solution, “By this time next week/month/year I don’t want to be poor like this. Banange!” Immediately you know that whatever you say will not be unlike throwing pearls to the swine.
But I am always thinking how can I give a distilled message that will lead to a deeper discussion about their finances or at the bare minimum send them off nodding knowingly, never to return.
I think I have I worked it out.
To begin with it starts in the mind.
"Thoughts lead to action, which lead to habit, which lead to the desired wealth or undesired poverty.... It is impossible to improve your financial situation without exercising your brain, and you don’t have to be a rocket scientist.
Sounds so mundane and cliché but you will be shocked how few appreciate this.
But that is not my “silver bullet” for financial literacy.
Here it is.
There are only two ways to spend money, you either consume it or you invest it. You are broke or rich because of the balance between consumption and investment in your financial habits.
For me I think if that is the first principle – at least until I think about something else.
Consumption is easy to understand, spending without promise of future return (there maybe immediate gratification but that is all and doesn’t last) and investment is the opposite – spending with a hope of future return.
The poorest among us consume all they earn. The lowest earners spend it all on the basic necessities – food, shelter, clothing. The highest earners spend it on keeping up with the Jones – high living and ostentatious consumption. At the end of the day they are all poor.
The latter group – the high spenders, do not realise that its not how much you spend but how much you keep that makes you rich. With their actions they have decided that they would rather look rich than be rich.
The wealthiest among us have their spending patterns shifted towards investment and away from consumption. The lowest earners in this group invest more than they spend on themselves.
They told me a story of the Asian accountant who only came to work with two bananas. He had them for lunch with water from the office fridge. He did this for close to near three decades of his career, with some variations of course.
At the end of his career he had not only put his children through school, paying for their university education in the finest institutions in the world but could retire to a life of leisure.
The challenge for
many people when they hear this story is they want to “eat’ (consumption) life now because tomorrow may not come. Then they live to the ripe old age of 85...
On the other side of the pendulum the wealthiest spend a fraction of a fraction of their income. Because their investments throw off so much income they can live, what seems, a life of luxury.
So for instance the wealthy man who gets a million dollars monthly from his real estate investments but barely spends $65,000 on himself and family a month. The surplus $935,000 is ploughed back into the businesses or packed in other investments that throw off more cashflow.
These alternative views of money apply whatever your station in life.
So if you want to understand why you are not climbing out of the rat race look at the balance of consumption to investment in your spending decisions...
Using this as the bedrock of your financial literature you can graduate to, what are the available investments, how can they be appraised and how you can finance their acquisition.
The turn off for most is that this discipline – of shifting the balance of your spending towards investment and away from consumption, has to be maintained for years. And in fact the day you cross over to financial freedom and wealth will not happen to you like a revelation on the road to Damascus.
Another reason why this method is a turn off, is because it can entail doing such mundane things as saving, investing in such things as one roomed apartments (mzigos) and not multi-storied apartments, growing mushrooms in your garage and not going to the farm every weekend.
We are forever seduced by the promise of quick money and an even faster life...these slow processes don’t work for us.
In 2021 let it be a resolution to change our minds and shift our spending more towards investment and away from consumption.
This goes to the parliament of Uganda too.
Happy New Year.
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