WEALTH CAPSULE 11
(SESSION 11)
I am concerned that too many people are focused too much on money and not on their greatest wealth, which is their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve the problems, I am afraid those people will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone-Robert Kiyosaki
Wisdom is the principal thing; therefore, get wisdom: and with all thy getting get understanding-Prov 4: 7
My Billionaire Friend requested I see him earlier than our usual arrangements. And this was because he intended to travel and could not guarantee he would be back within the week.
I was at his place at the appointed time. He had already instructed his executive gardener to bring me to his sitting room. Met my Billionaire Friend seated already, enjoying some music oozing forth from some amplified speakers placed in different corners of parlour. We chatted a bit, but without wasting time, he hit the ground running with our next conversation, still on the need for an aspiring wealth builder to take time to acquire some basic financial knowledge if he hopes to build enduring wealth.
“My boss, welcome!”.
I returned the compliments, and the conversation started in earnest.
“Let me share this story of a protégé of mine to explain why the acquisition of financial intelligence is critical to successful wealth building endeavours. Several years ago, a business executive approached me to be his mentor on wealth building. I agreed. The two times he had visited me, I had assumed that he must have acquired some level of financial literacy, but I became curious after we started to discuss some financial stuff. I was surprised by his responses to some of the basic questions I posed to him. Just to be sure, I asked that he arrange for me to pay a visit to his house one evening and what I found out confirmed my suspicion”.
“My friend was gracious enough to conduct me around his place. In the sitting room alone, I could see three giant television sets. In the adjoining rooms, I could see some sophisticated toys which I rightly suspected were for the children”.
“I asked a few questions as we went round, and what I saw all the way; in the rooms, in the compound, in the sitting room are signs of acute financial illiteracy that need to be tackled frontally. Just like many people I see around, my friend had spent a lot of money to buy home theatres. Yet, I could not trace at least a book on money or personal finance anywhere in his room. And guess what? He bought most of it on credit!”
I could trace every problem I had noticed around him to my friend’s failure to sharpen his financial intelligence. Here are the questions: How much money are the home theatres bringing to his pocket every month? How much was he generating from the toys he had stored in the room and from the cars he had packed in his garages. Of course, it was obvious that those things he considered assets were the ones drawing money out of his pocket”.
“If he had read even the most elementary books on personal finance, he would have learnt that his salvation lies in understanding the difference between an accountant’s definition of assets and liabilities and rich people’s definition of the same terms”.
“My friend had thought, as many others I have encountered erroneously do, that his cars, toys, home theatres were assets. But that is misleading. An informed wealth builder would classify the same items as liabilities. You can only consider an item an asset if it brings to the pocket money that you can spend or save. Once the item is drawing money out of your pocket, as Robert Kiyosaki has explained in his book, Rich Dad, Poor Dad, either for maintenance or servicing, it makes sense to classify such items as a liabilities. But don’t get me wrong, the home theatres are assets to the company that sold them to you on credit. Every time you make your monthly payment to the company, the company is smiling to the bank, but you cannot do that.”
“If he had also read a good book on personal finance, he would have discovered the folly of borrowing money to buy consumer items like the home theatres. It is a sign of financial intelligence to borrow to purchase assets that can generate cash. It is from the proceed of the items you bought that you should be repaying the interest, with still enough left to take care of other things. When a bank advertises that it wants to assist you to buy television, chairs, refrigerators and you jump at the offer, it is a sign that you don’t have financial intelligence. The question I expect people to ask any time you buy an item is:” Will this bring money to my pocket? If you cannot answer in the affirmative, you should walk away from the transaction unless it is essential. Borrowing money to acquire liabilities can only lead you to multiple financial crises and frustrations. Financial knowledge brings stability to your wealth acquisition endeavours”.
That is serious, I said, as my Billionaire Friend continued his conversation on the need to acquire financial intelligence.
“Here, we are going further to discuss why an aspiring wealth builder must, as a priority, acquire some basic financial knowledge. As we discussed in the first part, acquiring financial knowledge opens up a wealth builder to more options that would otherwise not have been obvious.
“At this stage of our discussion, I am reminded of the contribution of USA Senator Elizabeth Warren’s popular 50/30/20 financial planning rule. This rule is cited in her book, titled: “All your worth; the ultimate lifetime money plan”, which is useful to successfully build and sustain wealth, particularly with employees and self-employed wealth builders. Elizabeth Warren’s rule is about dividing one’s income after tax deductions and allocating it to spend 50% on one’s needs, 30% on one’s wants, and 20% on savings. This rule is very important in financial planning and budgeting, to successfully build wealth”.
WHY YOU NEED A BUDGET
“Some may ask; why budgeting? The need for budgeting, fowas discussed in our previous series when we emphasised that you do not go into building wealth without making adequate plans of your intentions and working towards their actualisation. Wealth builders need to constantly bear in mind that as their wealth grows, they must manage it better and ensure that their intention and the actualisation of their set sub-goals are properly monitored and guided for effective wealth building.”
“As an example, I have always made it a rule to consider my wealth-building goals at the beginning of every year and use those goals as the path to guide me as I progress in my set goal every year and in taking decisions towards building my wealth. This annual financial planning, budgeting and goal-setting behaviour of mine come highly recommended to wealth-builders and sustainers”.
CREDIT MANAGEMENT
“Another area that demonstrates the need for the acquisition of basic financial knowledge for wealth builders is credit management. Credit management here refers to the use of credit for enhancing turnover and increasing profitability towards growing the wealth for wealth builders. Credit management is what is generally given by multinational companies and is also successfully used by wealth builders for getting their agent wholesalers to constantly offload their factories of excess production inventories and avoid high overheads, marketing and administrative costs that would have cost them in direct retail sales from their factories. This is a basic principle of financial management that is recommended to wealth builders in their investments, production and distribution of finished products. I have successfully used this principle in my working life as a technocrat and as one of the founders/owners of a billion naira food processing company in Nigeria. The principle is a very important and basic skill of financial management, for successfully building and sustaining wealth”.
SHOULD YOU TAKE CREDIT OR NOT?
“Wealth builders who may want to improve their turnover in the process of building their wealth/business may obtain credits from banks and other financial institutions. But this advice goes with the provision that such wealth builders must as precedence, acquire the basic skills of financial prudence and business profitability decision making. It is necessary for wealth builders to be knowledgeable about basic credit management skills, so as to better manage the various associated risks with managing wealth that arise while building and sustaining wealth.”
.
“Wealth builders have to keenly and constantly monitor the ever-present and all-pervading need to minimise the exposure of their wealth to avoidable and manageable risks and dangers of possible loss of their wealth. Hence, wealth-builders must acquire basic financial knowledge to protect their wealth against the risk of fire via fire insurance, risk of theft, burglary and fidelity insurance, and the very many associated risks. Wealth builders, therefore, require some good basic understanding and knowledge of the use of insurance packages for such purposes. As of habit, I take up fire insurance to protect my residences and investment buildings against possible fire and special perils.
I have also had to take up medical insurance for years. Indeed, as wealth builders grow in their wealth, they must take up medical insurance, which should include evacuation insurance, with the full awareness of Nigeria’s poor medical facilities. This is more so given that there could be an unanticipated unfortunate occurrence of a health complication, which cannot be handled adequately in Nigeria. Basic knowledge about the use of insurance to mitigate possible losses is, therefore, a very important area of financial knowledge that wealth builders should acquaint themselves with so as to adequately protect their wealth against measurable risks”.
WEALTH BUILDERS MUST DEVELOP THE ABILITY TO PREDICT HOW FUTURE EVENTS COULD AFFECT THEIR WEALTH CREATION ABILITY.
“Another element of basic financial knowledge necessary for wealth builders is forecasting. Wealth builders must have basic knowledge of business forecasting to succeed. Business forecasting refers to the ability to successfully prognosticate and take advantage of the various different opportunities that could arise while overcoming possible adverse events that may possibly hinder the attainment of wealth builders’ future goals. Forecasting as a skill of financial knowledge is therefore very important for wealth builders in order to optimise their wealth building”.
BELOW ARE FUNDAMENTAL FINANCIAL KNOWLEDGE AND PRINCIPLES THAT WEALTH BUILDERS SHOULD MASTER.
“It is very important at this stage to list for discussion some basic principles of financial knowledge under the following subheadings, for wealth building and sustenance.
TIME- VALUE OF MONEY.
“Wealth builders must always be conscious of the time-value of money for successfully building wealth. The time value of money here not only refers to using time adequately but also to avoiding time wastage and recognising the value of time for taking advantage of available opportunities and managing the risks and returns in wealth building and sustenance. It also covers the attainment of a long-term forecast of returns that are expected from investments in the financial market, with a view to optimising expected returns that may be accruable to wealth builders. Time value of money refers to always weighing one’s cost vis-à-vis possible investment outcomes.
This basic knowledge is necessary for successful wealth building. The basic understanding of net present value, compounding of returns, and cost/ interest rate effects on wealth are covered here. However, successful wealth-builders only need some basic understanding of these skills. They do not need to go deep into their acquisition of financial knowledge in this area. They only need to be aware and understand their uses when utilised by their finance technocrats. Wealth builders’ basic knowledge in this area would assist them to make sound management decisions about the importance of time value of money for their successful wealth-building goals.”
RETURNS VERSUS RISKS
Another principle of finance that is important for successful wealth building is the element of higher returns expected from higher risks. A basic principle in financial management has it that the higher the risk, the higher the expected return. It explains why in the financial world, countries with higher risks have to pay higher interest rates on loans obtained from international financial agencies, institutions, and the world bank. This principle of finance is also important for wealth builders for running their wealth-building businesses. Businesses that require higher risks must be compensated with higher returns, in order to ensure that such risks are adequately covered to give good net returns”.
INVESTMENT DIVERSIFICATION
“The third basic principle of finance for use by wealth builders is the need for diversification of investments towards reducing their risk exposures. The basic knowledge about this is for wealth builders to investigate and satisfy themselves with the different risks associated with each wealth-building opportunity that would arise from time to time. Such risks include systemic risk, operations risks, economic risk, liquidity risk, interest rate risk, marketing risk and exchange rate risk. Successful wealth builders must have basic knowledge about these risk elements to which their wealth is exposed, closely and consistently manage them in building their investment and business portfolios, with the risks compensating each other towards optimising wealth builders’ returns.
In the process of building my wealth, I took advantage of this basic financial knowledge by ensuring that my investments in equity, with its high combination of interest rate and economic risks, were balanced by some investments in money market principal guaranteed investments while at the same time being aware that investment in property and land have very high liquidity and market risks. I always ensured that my economic risks were covered by investments in dollar-based instruments, especially with Nigeria’s very volatile exchange rate risk. This is a critical area of financial knowledge that wealth builders need to be adequately informed about, in order to better manage and sustain their wealth building”.
REPUTATION AND INTEGRITY
“A prevailing problem that greatly and adversely affects wealth builders in Nigeria is the generally poor level of trust, integrity, and reputation in Nigerians. A basic requirement for success in building and sustaining wealth is the existence of trust, reputation and integrity in business and investment interactions and transactions. As a principle, wealth building and sustenance can only be built with reputation and integrity. To make wealth-building worthwhile and meaningful for living, we require these three ingredients.
The wealth associated with integrity and reputation allows others to deal with such wealth owners with respect and assurance that such wealth owners are dependable, reliable and reputable. Reputation is very important to man. Integrity is also significantly crucial. Without these, wealth is worthless. International organisations and firms would not be attracted to deal with wealth-builders with poor reputation and integrity. Wealth builders with reputation and integrity are also always able to attract and retain not only other reputable investors but also the best quality of available employees. Indeed best quality personnel, always look out and look forward to working with reputable wealth builders”.
“My boss, I should think I have delivered for this week; so please let us stop here”, my Billionaire Friend, as he wound to a close”.
We both treated ourselves to some sips of water and we bade each other bye.
I am eager to catch up with you next week.
Yours Moneywisely
ayo.arowolo@thisdaylive.com
Tel: 08086447494
QUOTE 1
“My friend had thought, as many others I have encountered erroneously do, that his cars, toys, home theatres were assets. But that is misleading. An informed wealth builder would classify the same items as liabilities. You can only consider an item an asset if it brings to the pocket money that you can spend or save”.
QUOTE 2
“I asked a few questions as we went round, and what I saw all the way; in the rooms, in the compound, in the sitting room are signs of acute financial illiteracy that need to be tackled frontally. Just like many people I see around, my friend had spent a lot of money to buy home theatres. Yet, I could not trace at least a book on money or personal finance anywhere in his room. And guess what? He bought most of it on credit!”
