When it comes to personal finance, knowledge is power. Knowledge is the power to make the money you want and live the life you desire. This is the entire premise of Robert Kiyosaki’s Rich Dad, Poor Dad. Financial literacy sets apart the rich from the poor. Well then, one would ask, why aren’t accountants and business studies teachers all millionaires? Robert Kiyosaki’s answer is that the education system prepared them to manage other people’s money, not their own. Here are some simple financial concepts that you must know if you want to master your money.
Your income is the total amount of money you get at the end of a set time period, monthly, weekly, annually. It could be from your job, business, investments, alimony, creditors or all the above. Financial stability is measured using your income. A person is said to be financially stable if their income covers their expenses and will continue to do so in the foreseeable future.
It is advisable to have multiple sources of income to be on the safe side. Diversification is another financial concept that simply put means not putting all your eggs in one basket. At the very least have a job and a side hustle or have a job and some shares in a Sacco growing you dividends.
Secondly, your income is your biggest tool for paying expenses, for paying off debts and for generating wealth. Dave Ramsey of the Total Money Make Over preaches a philosophy of freeing up your income by paying off all debts in order to use your income to build wealth.
Expenses is the amount of money you spend paying off bills like rent, school fees, water, electricity and making other payments like grocery, entertainment etc. Taxes, debt repayments, court mandated payments like alimony and child support, insurance, club memberships all fall under expenses.
The rule of the thumb is to always keep your expenses well below your income. They can never even out. And you know you’re in hot soup when you are spending more than you are making. To make sure you are in safe waters, create financial goals and stick to a budget.
Your bank statement should reflect a mature adult who knows what they cannot have right at the moment and is content with what they do have. It should reflect a person working towards purchasing what they want and not a person struggling to repay loans for things they could have bought for cash with a little sacrifice and patience.
Back to Robert Kiyosaki, “The rich know the difference between assets and liabilities. They stack up more of the former than the latter. The middle class buys liabilities thinking they are buying assets. Your house and your car are liabilities, not assets.” Kiyosaaki has the most simplified and accurate definition of a liability. If it takes money from your pocket, it is a liability. If it puts money in your pocket, it is an asset.
More often than not, the things we want to enjoy are liabilities. That new car, that new home, that trip to Zanzibar, a new TV, even a diamond engagement ring. It is not a bad thing to purchase any of these items as long as you are not confused about their place in your balance sheet. You need to spend on these things knowing fully well that they are taking money from your pocket and not putting any money back, and you have to be sure that you can afford it without denting your income.
The same thing can be an asset in one situation and a liability in another. Take for example, a student that takes a loan to buy a laptop. They now have a laptop plus monthly loan repayments. This student uses this laptop for watching movies and maybe sometimes school work that he could easily do in the school library, this student has a liability. Say the student uses the laptop to do some online job and quickly repays the loan and continues to make some extra money from it. This student has an asset.
Every piece of literature claiming to be a financial book or article worth its salt will tell you this, less liabilities and less expenses equals more assets which equals more income. The acquisition of assets is more important than buying things just to look rich or just to indulge. Assets secure your future as much as humanly possible. The earlier you start collecting assets, the better.
Assets are things that put money in your pocket. Real estate you intend to resell, shares in a company or a Sacco, starting a business, collectors’ items etc.
In conclusion make sure you remember these two cardinal principles. Expenses must always be less than income. Collect more assets than liabilities.