Who wants to be a billionaire? Obviously we all want to be rich. However this goal elude majority of the people because they carry wrong ideas about money in their mind. These wrong ideas keep most people from realizing the goal of becoming rich despite the fact that they pursue it all their lives. Since wrong ideas about money are the obstacle between people and their life goal of becoming wealthy, let us look at these ideas.
Wrong Ideas about money
- Wealth is money – this is a fallacy, wealth is not money. Rather wealth is value. You are only as wealthy as the value you possess or can render.
- The more money I earn the wealthier I become – this is equally wrong. Most people ignorantly equate wealth to the quantity of money they have access to or the size of their income. So they work very hard to earn more money. They believe wrongly that the more money they earn, the stronger their financial strength. This is a very wrong assumption. It is not how much you earn that matters but how much of it you are able to turn into assets that will work hard to bring money into your pocket. How much of your current income you can convert to value generating assets is what determine your financial strength. We all know of sport stars who were financially buoyant while they were playing but latter find it difficult to take care of themselves when they stop playing. Also, we have several people who won millions of dollars but became pauper just few years down the line.
- You need money to make money – this is not true, you don’t need money to create money, you only need an idea. If you have a very good value creating idea and package it well, you will attract all the money you need in the world.
- Money is root of evil – No, this incorrect money is not the root of all evil. It is the love of money that is the root evil. It is the lack of money, poverty that is the root of evil. Homelessness is the root of evil. Hunger is the root of evil.
The Big Lessons
It is very clear from the last section that:
- Money alone does not solve financial problem
- Hard work alone does not solve financial problem. There are several hardworking people who earn big money but are deep in debt
- Education does not solve financial problem
- Securing highly paying job does not solve financial problem
Then, what can solve peoples’ financial problem?
This is very simple, it is your financial knowledge. Most of us are educated but we don’t have the required financial intelligence to deal with our financial issues. Your financial intelligence will help you to address the root cause of whatever financial problem you encounter in life. It is pretty obvious now that the root cause of financial problem is the lack of financial education. So it is very important that this should be promptly addressed.
Types of Education
Academic education – This teaches us how to read, write and do addition and subtraction
Professional Education – This teaches us how to work for money. It equips people with skills to become more employable. It helps you to enjoy financial security.
Financial Education – This teaches us how to be financially free. It equips you with the skills you need to make your money work you rather than you working for money. This type of education is not covered in our school curriculums.
The first two types of education are appropriately covered in our school curriculums. Therefore, the rest of this course will focus on financial education. Let us start today our financial education by looking at the definitions of some important words in personal finance.
Money – Contrary to the wrong popular opinion, money is not wealth. Money is a measure of value as well as a means of exchanging value. The fact that money is just a measure of value was made clear to us in our O’ level economic class. There we learnt trade by barter, a system that was introduced before the advent of money. Then if you go to market you exchange anything of value you are holding with another item of value that you need. The same basic principle of exchange still applies today with the use of money. Money was introduced to make exchange of values less cumbersome and more convenient. During the era of barter trade if you go to market, and you don’t have anything of value to offer, you come back empty handed. The only other way you can get anything from the market is either by begging or stealing. Similarly, in this era of money, if you don’t have anything of value to offer, you cannot earn a kobo unless by begging or stealing.
Value – This is any item or resource which has economic benefit.
Asset – this is anything that put money into your pocket
Liability – Anything that takes money out of your pocket
Value Creation Strategies
We have seen that your ability to attract money depends solely on your capacity to create value. You capacity to create value is determined by the strategy you employ in creating value. There are four types of strategies which can be adopted in creating value. Let us look at them one by one:
Physical (Bodily) Technique – Another name for this method is work and eat. If you are an employee, you are in this category. If you are a business owner who must always be around for the business to function, you are in this category. The major issue with this approach is that as you grow older an older, you will get to a point where your capacity to create value begins to decline. So you will get to a point where you will no longer be able to meet your financial needs. A more serious scenario is where somebody is incapacitated by sickness or accident. Someone in this situation will have to rely on handouts to survive. This can be a very bitter experience.
Systemic (Pipeline) Technique – This is a very organized method that combines human, process and material to create value. This technique leads to transformation from someone who earn from his own labour to someone who draw dividend from earnings of his assets.
Intellectual Technique – This an method where intellectual assets are skillfully employed to create value. A good example of this is by writing a book.
Investment Technique – Here, you employ your money to buy assets which create value.
Eight Rules of Financial Success
- Be mindful of your Association
- Have a financial plan
- Live below your means to increase your means
- Pay yourself first
- Make your money work for you
- Let your asset pay for your liability
- Consistently increase your earning capacity
- Develop multiple Streams of income