Chapter Two: Why Teach Financial Literacy?

“Life is not about how much money you make, it is about how much money you keep”

After the rich dad’s demise, Mike took over his father’s empire and run it even better than he had been groomed.

The meaning of retirement

True retirement means that with or without working, the money still streams in. A pension plan may be a good idea of a retirement plan but if you focus on building assets that grow, chances of a greater retirement package are at bay. Think of assets as trees. If you water them for years, they will grow and not need you anymore one day.

Broke Millionaires

How many times have you heard of someone who won the lottery but went broke after a few years? Or professional athletes who were earning millions but sleep under the bridge decades later? Robert narrates how a basketball player used to earn millions. At the age of 29, he blamed his lawyers, friends and attorneys for losing all his money. He took up a job at a car wash for minimum wage. He refused to remove his championship ring when washing cars, saying it was all he got. He eventually got fired.

Assets and liabilities

  • Rich people acquire assets
  • Poor people only have liabilities
  • The middle class acquire liabilities that they think are assets
  • Your net worth is the difference between your assets and liabilities

Assets bring you money but liabilities take money out of the pocket. There is a notion that ‘money solves all problems’. If it did, why do billionaires go broke after years? We all make money but have not learned how to manage our money, make it work for us. When we get a salary increment or land the lottery, our expenses shoot up abruptly. Suddenly we want the nicest house, the best car, the most beautiful yet high maintenance woman. We get stuck in the rat race even though we have these seemingly well-paying jobs.

Your house is not an asset

This one shocked me as well, made me question all real estate agents I have come across.

A typical household has construction costs and maintenance cost. When you rent your house, it is an automatic asset since cash is flowing to your pockets every month. The bone of contention here lies with people who believe their million dollar mansion is an asset. Let’s do the math:

I am using a well-to-do-Kenyan estimate so you can divide the numbers according to what you are worth at the moment.

  • Construction and furnishing costs: 10 Million
  • Mortgage/ Property Tax/ Insurance/ Maintenance :100,000 per month
  • Over five-year expense : 100,000 *12*5 =6,000,000
  • Total expense cost = 10,000,000 + 6,000,000=16 Million

Supposing after five years, this house is put up for sale for 20 million. What the owner will say is, ‘I bought my house for 10 million and sold it for 20 million.’ which sounds good when you say it. Let’s do the math again.

  • If we used a 1000 shilling note to buy the same five things every year for five years, chances are, the same things will cost you more by the fifth year.
  • If the prices shoot up to, say, 1200, we are looking at a 20% decrease on the value of the 1000 note.
  • Hypothetically speaking, 20 million may not be worth as much after a five year period, narrowing the profit gap, taking maintenance into consideration.

So, should we stop buying houses?

Heck no! I want to have an air conditioned gym in my house in the future myself. We should strive instead to acquire assets first, that outweigh our liabilities. That way, we can all have our range rover sports but fuel them till the end of the month. I hope that really sinks in. This was the revelation I needed on a personal note. Amazing!

The three powers of the Japanese

The Japanese believe in the power of the sword, the jewel and the mirror. The sword represents weapons and that is why most countries empower their military by investing in quality weapons. The jewel represents money. They believe in the golden rule: The one with the gold makes the rules. The mirror represents self-knowledge which is the most treasured power. One’s ability to understand themselves and not go with the crowd. The ability to be true to your beliefs, understand your weaknesses and work towards a better version of yourself is true power. It is hard to make sound financial decisions when you are not willing to accept yourself and work on your financial handicap.

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Not that they may see this but thank you so much Will Smith and Oprah for recommending this book. I am balancing my pocket money as we speak. I feel empowered!

 

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