Financial illiteracy is the root of financial struggles. The lack of understanding (not just knowledge) of what is truly an asset or liability can make you spend money to acquire liabilities, thinking they are assets. You may find yourself in a position whereby you are ‘asset’ rich but cash poor. When more cash is leaving than coming in, you are in trouble financially. You have more expenses than income. If you are a business, your days are numbered if you don’t turn things around. If you are an individual, you have to borrow to make ends meet, and many have landed in the bosom of moneylenders, further compounding their problems.
In the context of personal financial literacy, an asset is anything that puts money in your pocket, while a liability is anything that takes away money from your pocket. It is all about cash flow. The main issue is not what the item is, but in what direction the cash is flowing. For most people, the only thing that puts money in their pocket is their job or business. They don’t spend to acquire more assets. They spend to acquire more liabilities. It is this one source of income that funds their lifestyle; including luxury items like expensive private schools, highbrow neighbourhoods, luxury cars, exotic vacations, etc.
Life is beautiful and is meant to be enjoyed. We have one life to live after all. The issue is – who is paying for those nice things? Is it you or your assets? Imagine not having to pay for things through your sweat and blood anymore.
Rather than tell yourself ‘I cannot afford it’, you ask yourself how you can afford it without having to pay for it. In essence, you have to figure out how to pay for it with your profit rather than your capital.
Chike’s car factory
I like using the example of buying a car as an illustration. Let us assume you have gathered together money to buy a car (either by saving – gathering everything you have home and abroad or by getting a car loan from your employer interest-free). By way of illustration, let’s assume Kemi and Chike are colleagues in the same office and both have put together N1.5m to buy a car of their choice. While Kemi goes ahead to buy the car immediately, Chike has second thoughts. He decides he wants the car for free – buy the car and still keep the money.
He decides to practise delayed gratification, convert the money into an asset and wait for the cash flow from the asset to pay for the car. He has many investment options with different rates of return. Since Chike did not want to risk his money in a business he has no experience in, he decided to invest in the money market. He opts for 364 days tenor treasury bills, which he got for 13 per cent. He projected that if he left the money there at an average interest rate of 12 per cent, he will double his money in six years.
There is one problem though. Can he wait for six years? Will he be able to cope with being the butt of jokes in his office, especially from Kemi?
Fast-forward six years. Kemi needs another car and she is putting together money again (loans and savings) to replace her car. Chike has doubled his money and draws down his profit to buy the car. Fast-forward another six years, Kemi’s second car is due for replacement and she goes through her normal route to buy another car. Chike simply calls his account officer to drop his profit so that he can replace his car. Chike is paying for his car with his asset while Kemi is gathering her sweat and blood to put in the car.
Kemi has to keep borrowing and wiping out her savings to finance her car while Chike has a ‘car factory’ churning out cars whenever he wants to change his car. Kemi is going round in circles, buying and replacing cars while Chike can move on to do other things with his salary – acquire more assets to fund other things he wants to do. When they both retire, Kemi’s ability to keep replacing her car in retirement is much in doubt. Few people will know that Chike has retired because he keeps doing things he used to do while in employment.
Working for money is not sustainable
Working for money is a lot of hard work and is not sustainable. There is a limit to how hard you can work as there are only 24 hours in a day. Your active years are not infinite. If you are in sports, you start to retire in your mid-30s. For deskbound workers, they sing for you when you turn 60. In the olden days, a 60-year-old man was an old man. Today, he is a vibrant young man looking for more from life. Many still run marathons. When you are forced to hang your boots at age 60, it finally dawns on you that you should have been acquiring assets to do the hard work for you instead of working alone.
When you acquire assets, you lower your expenses, multiply your sources of income and put yourself in a position whereby you can afford what you really want. Life is truly beautiful and those liabilities make life much more fun. Paying for it with your primary source of income is not sustainable and unwise. Have someone else pay for it – assets that are under your control. Next time before you spend your hard-earned money, ask yourself if it is an asset or a liability if your money is coming back or gone for good.
We create our individual realities. If you want something badly enough, if you have enough hunger for it and are willing to pay the price long enough, you will surely get it if it is yours. It is only a matter of time. How many assets do you have? Focus on acquiring more instead of liabilities. When you get the hang of it, you will no longer have to wear yourself out working for money. Your money will work for you.
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