Saturday, May 10, 2014

Financial Literacy

Money is one form of power. But what is more powerful is financial education. Money comes and goes, but if you have the education about how money works, you gain power over it and can begin building wealth. Most people fail to realize that in life, it’s not how much money you make; it is how much money you keep. We have all heard stories of lottery winners who are poor, then suddenly rich, then poor again, of professional athletes/actors/actresses who were earning millions, who are, today, now poor and work for minimum wages. The lesson is: “If you want to be rich, you need to be financially literate.” What is missing from their education is not how much to make money, but how to spend money – what to do after you make it. It is called financial aptitude – what you do with the money once you make it, how to keep people from taking it from you, how long you keep it, and how hard that money works for you.

        You must know the difference between an asset and a liability. Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets. An asset is something that puts money in my pocket. A liability is something that takes money out of my pocket. If you want to be rich, simply spend your life buying assets. If you want to be poor or middle class, spend you life buying liabilities. If your pattern is to spend everything you get, most likely, an increase in cash will results in an increase in spending. The poor and middle class all too often allow the power of money to control them.  

        A review of the rich financial statement reveals the asset column generates more then enough income to cover expenses, with the balance reinvested into the asset column. The asset column continues to grow and, therefore, the income it produces grows with it. The middle class finds itself in a constant state of financial struggle. Their primary income is through wages, and as their wages increase, so do their taxes. Their expenses tend to increase in equal increments as their wages increase; hence the phrase “the rat race.”

They treat their home as their primary asset, instead of investing in income-producing assets. This pattern of treating your home as an investment and the philosophy that a pay raise means you can buy a larger home or spend more is the foundation of today’s debt-ridden society. Thus, concentrate your efforts on only buying income-generating assets. That’s the best way to get started on a path to becoming rich. Keep doing that, and your asset column will grow. Focus on keeping liabilities and expenses down. This will make more money available to continue pouring into the asset column.

        Rich people buy luxuries last, while the poor and middle class tend to buy luxuries first. The poor and the middle class often buy luxury items such as big houses, diamonds or jewelry because they want to look rich. They look rich, but in reality they just get deeper in debt on credit. The old-money people, the long-term rich, built their asset column first. Then, the income generated from the asset column bought their luxuries. A true luxury is a reward for investing in and developing a real asset. Buying a luxury on credit often causes a person to sooner or later actually resent the luxury because the debt on the luxury becomes a financial burden. Too often today, we focus on borrowing money to get the things we want instead of focusing on creating money.

        Every self-made person started small with an idea then turned it into something big. The same applies with investing. It takes only a few pesos to start and grow it into something big. You must take action before you can receive the financial rewards. Act now! The key to becoming wealthy is the ability to convert earned income into passive income and/or portfolio income as quickly as possible.

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