It is a simple question, on the surface of it.
If I gave you sh100m right now and here, what would you do
with it?
The answers to the question would fall in two categories –
consumption or investment.
Consumption would be buying cloths, food, travel, cars -- things or
experiences with no financial return, while investments would include saving,
buying, government paper, shares, land or real estate.
"Given the distribution of wealth in the world, we can expect that 10 percent, or less, of responders will choose the investment route while the remaining 90 percent will choose the consumption route....
According to the World Economic Forum (WEF) 10 percent of
the global population own 76 percent of the world’s wealth, while the bottom 50
percent of the population only own two percent.
There are obviously many reasons why this is so, not least
of all because poverty can be passed down generations, but when you strip away
all the excuses, whether we become wealthy or not is down to our spending
decisions. More precisely the balance between consumption to investment in our
decisions over time.
It really is as simple as that.
When I get onto the financial literacy circuit my talks will
begin with that reality, that there are only two ways to spend your money –-
consumption or investment.
The trick is to reorient your thinking.
Easier said than done.
I used sh100m in the question above but what about if it was sh100,000 or
sh10,000 or sh1,000?
In school there was always this one kid who was a trader.
They often took all their pocket money at the beginning of the term, which in
those days may not have amounted to much, bought sweets or cigarettes or
whatever other small knick knacks to trade with other kids. I don’t remember
them being spectacularly rich, though maybe this was a defence mechanism to
guard against those who tended to reap where they did not sow, but also they
were never broke – especially if there was a good deal to be had.
I imagine as they grew and dealt with larger sums, they are
much richer today. But first they had to learn the discipline with small sums.
"Many of us think that we will really begin to make money when we have big monies. The truth is if you have bad financial habits – consuming rather than investing your small monies, you will carry this indiscipline when you have bigger sums....
If we operated in a vacuum it would be much easier to
acquire this discipline, but since the majority of us do not think like this –see
the WEF statistic above, most of us are doomed to a life of poverty or at least
living way below our financial potential.
The societal inertia, which urges us to consume rather than
invest is not easy to beat back. Because, think about it, what in practical
terms would this mean, investing instead of consuming.
You would have to forgo, for a while, new clothes and shoes,
eating out as often as you want (or eating altogether), riding in taxis to work
instead of buying a car or staying in amzigo instead of renting in a high maintenance area , which is adequate for your needs and only costs sh100,000 a month.
Sacrifice.
Not easy when everyone, or at least nine in ten people around
you is consuming not investing.
The interesting thing is, done of long enough, this
accumulation takes on a life of its on and begins to seem like magic. The magic
is called compounding, unfortunately few of us are in it long enough for compound interest to
take hold.
My favourite American, Warren Buffet turns 92 this year. He started investing at 11 but most of his wealth has been made after he was 50. And its not just because he was investing larger sums, but more because the compounding curve of his experience and knowledge went exponential after 50.
This is enough to discourage most. Who wants to wait so long
to become rich? What is the point of accumulation if you are not going to eat
your money (Buffett is notoriously frugal despite being worth more than $100b)?
"Whether you shift your spending habits or not, the time will still pass, so why not use the time effectively?...
But Buffett is oceans too far. In the late 1990 The Financial Times
interviewed local businessman Sudhir Ruparelia at the end of the interview they
asked him how he had accumulated so much wealth – I imagine they were wondering
how he did it in such a poverty-stricken country. Sudhir responded something to
the effect t, “It is an old Indian trick. Make ten shillings, eat one and reinvest
the remaining nine shillings in the business. Repeat until rich.”.
