OUT WITH THE OLD AND IN WITH THE NEW

My friend is practically dancing in to the new year. In 2022 he had a eureka moment, which led him to track his financial progress.

My friend, lets call him Jack, had heard it all before, “What you focus on expands” , “You cannot manage what you do not track” etc etc. In fact he was guilty of giving other people advise on how to track their finances.

Jack in the evening of his working life, at the beginning of the year wondered what he had to show for all his “hard” work.

So, he put pen to paper and drew up a balance sheet of his life. At first it went beyond his finances, but the state of his finances stood out, among all the other things he was tracking. The others were his physical, mental and spiritual progress.

In the “Millionaire next door” authors Thomas Stanley and William Danko recommend a standard to determine whether you are doing well in how much you keep of what you earn – your wealth. Their formula – your net worth (assets – liabilities) should be more than your annual gross income multiplied by your age divide by ten, their measure of whether you have been an efficient accumulator of wealth or not...

Say you are 50 and have an annual income of sh100m you should have a net worth of 50 X 100/10 or sh500m. Your net worth is the sum of all you own, assets, minus what you owe, liabilities. So, if all Jack’s assets – house and other properties come to sh500m what he should owe no one anything. Of course, if he owes the bank some money it means his assets must be more than sh500m to qualify as doing well.

While at the beginning of the year Jack was comfortably over the mark – he had a net worth of just under sh800m, it was too soon to celebrate.

His salary constituted his major income and his assets were bringing in barely half of his annual income, so his assignment was to find ways to make his assets sweat more. This was the eye opener for him. That cut off from his job he wouldn’t get though half the year at his current lifestyle, despite a healthy net worth

He had always understood what asset rich and cash poor meant, but seeing himself as such drove the point home much better.

All along he had been walking around thinking he was successful but the reality on paper showed him he was a paycheck away from financial disaster.

Starting in the new year he started tracking his income and expenses, assets and liabilities and particularly trying to figure out how to earn from his assets and in he event he acquired more whether they made him money or not. He did this on a monthly basis.

His income from assets has not moved much but there has been an almost total shift in his mind set. He now has as his phone screen saver the saying “The goal is to be rich not to look rich” He has learnt that wealth is not loud. That the movements in his personal balance sheet will take a long time to be recognized by the general public.

"He has debunked the idea that you need to eat the sweat of your brow, that when you make money it is time to blow it. That was his previous mindset...

That, money is not for eating but for making more money. While he did not agree with that at the beginning of the year he has come around to that way of thinking more and more as the year comes to a close.

On the surface of it, it sounds like a miserly way to live, but he has since discovered that if he earns a thousand shillings and recommits sh700 to reinvestment and eats the rest his consumption is still sh300 more than it was the day before.

It doesn’t sound like much but if he maintains the discipline he will be eating sh3,000, the sh30,000, then sh300,000, then sh3m…. you get the drift. But before he can eat more he has to invest more.

By watching his numbers every month is much better able to make financial decisions than previously when he was guessing. He now knows how will allocate every shilling he gest to him the income from his assets rising throughout the year.

He now knows better, and wonders why he did not know this years ago. But he did, it was just not his time to appreciate it.

In the new year let us be like Jack lets track down our balance sheet, but more importantly how much money we are getting from our assets.

Merry Chirstmas and Happy New Year.