Wednesday, December 7, 2011

“The love of Money is the root of all evil” Or “The lack of Money is the root of all evil”

"The love of Money is the root of all evil" Or "The lack of Money is the root of all evil"

I simply love this line from Rich dad, Poor dad by Robert Kiyosaki.

It's so true when Mr. Kiyosaki says that the subject of money is taught at home and not in schools. He really hit the hammer on the nail with this line.

My mom would always say don't spend all your pocket money. She would say if you have Rs. 100 only spend Rs. 75 and save the Rs. 25. I was young and I didn't really understand this concept but now I think it's an amazing way to save.

The subject of money is very simple and you have to understand how it works. Money makes the whole world go round and round. It's like the nursery rhyme that my son listens to, "The wheels of the bus go round and round".

It is very unfortunate that this whole debt system is the core engine of the global economy. If I had my way I would just stick with commodities and spend what I earn. Anyway, you already know that countries print their currencies on their gold reserves and total domestic debt. There is a ratio that needs to be maintained. Then it's the matter of imposing and implementing fiscal and monetary policies to maintain the value of the currency. Countries then concentrate on trade and investment volumes to build their foreign exchange reserves.

This is obviously all macro level let's try this in micro economics; where we try to make enough money to make ends meet. Now this point pertains to the people who are in the rat race called salary class. Their basic objective is to find a job. Work hard, get promotions and climb the corporate ladder. This is not a bad choice for those people who want to just stay in their comfort zone. Then they make the biggest mistake of their lives because they rush into a situation which tempts them to take out their credit card and get drunk in debt.

Now I have already spoken about the beauty of debt it always has two sides; one you can work for debt or let the debt work for you. Read one of my earlier posts to get an idea.

Imagine that you have a whole lot of debt around. You are working twice as hard to pay off your debt hence your focus is on money. You get obsessed, loose focus on your environment and act like a retard that has popped a pill with a bottle of whisky.

Let's turn it around; if you had a lot of debt working for you and had surplus of money then you would be in state of total bliss. The question is how to get to this situation. It's very easy, spend wisely and save every month.

You should follow this free five year plan. Every month you should save 25% of your salary, if you do this for a year you will end up having 3 salaries in your account. Then you should go and buy a government bond which is risk free. Now you have your first debt working for you.

The second year you again save 25% of your salary, which will result in 3 salaries at the end of second year and you should buy silver or gold coins. Rent a locker and lock them away. Be sure you are covered with insurance. Now you have commodities working for you.

In the third year repeat the process and save 3 salaries. Now you should invest in high dividend stocks. Look at the stock market and invest 75% of your third year savings in high dividend paying companies and the rest in high capital gain. Now you have the stock market and corporations working for you. (Don't pay attention to short term dividend and capital gains. We have to avoid that. You have to have a 5 to 10 year horizon when investing in the stock market)

Now in the fourth year you end up having another 3 salaries to spare. Most countries have REITs (Real Estate Investment Trust). Go and buy those units and put the papers in your locker. Now you have real estate working for you.

In the fifth and final year save another 3 salaries and have a business plan ready. Your business plan should be your ticket out of the rat race. For example you can have a business plan on how to get into the confectionery business if you have a sweet tooth. Now you have a business working for you.

By the beginning of your 6 year see how your wealth has accumulated. Trust me you are going to be so better off by a lot of people. You will have 5 years of fixed income saving which is compounded annually. Your commodities, stock market portfolio and real estate investment will yield you at least double digit returns.

Your objective should be to get a return on your portfolio equivalent to your current rat race salary in 5 years. Once this is achieved get rid of your job. Leave the rat race. Get into your business plan and work for yourself.

It's true business at times can be risky but no risk no gain and you should now have the comfort that your salary is hedge by the return of your portfolio. Now isn't that a fair deal?


Abdul Rahim said...

great article dude. just wanted to add one more thing to it and that is paying a fair value for all the assets you buy. this is important because your total return is determined by the price you pay. in case you pay a higher price for lets say a Walmart stock while your friend pays a lower price, both of you will have different returns despite both of you owning the same stock. so price is paramount. keep that in mind and try to learn how to value assets. it will help you achieve far greater wealth in a shorter time span. cheers!

Imad Ansari said...

Thank you Rahim for the comment. You are absolutely right. Cheers!