Usiere Uko: Give me my money back

Author of Practical Steps to Financial Independence and personal finance coach, Usiere Uko, writes on building wealth through getting one’s money back

The cash flow pattern for most individuals is one-way traffic –

it comes one way and leaves many ways. Hardly any comes back. It reminds me of the lyrics of a song by Don Williams, one of my favourite country musicians back in the day:

‘Where the Arkansas River leaves Oklahoma, it’s gone forever and never looks back’

Your wealth ratio is an indicator of how much wealth you have accumulated over time. The most common definition is how much of your income you have retained (net worth / total income). The version I prefer is how much of your income comes back. In essence, it is a measure of what percentage of your earned income you have transformed to passive income. Another way to look at it is how much of the money you have worked for that has started working for you. If you are not making your money work for you, then you are sleeping on duty and setting yourself up for a lifetime of working for money.

Money, like a current is constantly on the move. You cannot hold it down. Even when you save, your bank keeps it moving by making use of it and paying some interest. You may stop the flow temporarily if you hide it under your mattress, but the day it is discovered or stolen, it resumes its motion. Money is always coming and going. The challenge is; how much of the money that leaves your hands ever come back to you?

If you come across someone who has worked for many years and has no savings and investment, you see someone whose cash flow is one way (traffic) and wealth ratio is zero. In my village, the person would be said to be pouring water into a basket. There might be suspicion that the wicked stepmother has put him under a spell or ‘witch rats’ are stealing away his money. The individual is suffering from the twin malady of financial illiteracy and inability to delay gratification. Money burns holes in his hands.

The Indian giver

According to Wikipedia, ‘Indian giver is an American expression to describe a person who gives a gift and later wants it back, or something equivalent in return. It is based on the experiences of early European settlers and pioneers when they traded with Native Americans. It was custom among some groups of Native Americans that when a gift was given, something of equal value was given by the receiver of the gift.’

For the ‘Indian giver’, nothing goes for nothing. Something of equal value must be given back in return. While this is not a model for interpersonal relationships, you need to be an Indian giver when it comes to spending your hard earned money. If most of what you spend your money on eventually ends in the thrash, it is not a fair exchange. You are exchanging what lasts for what does not. If you fast forward five to10 years, how much of what you spent your money on will remain? Virtually all of them are gone with the wind while the money that used to be yours is still in circulation.

You want some of your money back but you cannot have all of it back because you need to feed and pay your bills. However, if that is all you do, then in ten years time, there is no sign that someone was working hard. There is nothing left to show.

Good expenses, bad expenses

Since the money that comes in is going to get spent anyway, what should you spend your money on? In the context of cash flow, there are two types of expenses – good expenses and bad expenses.  Good expenses make you richer while bad expenses make you poorer.  With good expenses, you get your money back with profit. With bad expenses, your money and its potential profit are gone forever and never come back.

Good expenses are expenses incurred in acquiring assets while bad expenses are expenses incurred in acquiring liabilities. The interplay between good expenses and bad expenses determines if you are making progress financially, at a spot or sliding backwards.

During economic downturn, many managers become ‘accountants’ and start slashing costs. While there is nothing wrong with cutting costs, especially if you are reducing waste, you are shooting yourself in the foot if you cut good expenses that would have brought growth. This is not the time to cut back on good expenses but rather spend more.  Many people are afraid to invest. They are holding onto their precious cash and running for away from assets on sale. The prices are too low for their comfort. They prefer the prices to go up, so that they can enter with the comfort that it will keep up rising. It looks rather strange that someone would wait for prices to go up rather than wait for it to go down before buying.

House money

One fun part in being an Indian giver is that you get to take out your money and still own the asset.  This means that your money is back in your pocket while the asset belongs to you. This is also known as playing with house money. The money belongs to the house. If you take a risk with it and lose it, you have lost nothing, as your money is back safe and sound.

This means you can put your money in an asset, get your money back over time (while you still own the asset), move your money into another asset and repeat the same process. The speed at which you do this is known as the velocity of money. The faster you can get your money out and move into something else, the faster you become rich.

Is your money coming back or is gone for good? Are you focussing on good expenses to grow your wealth or piling up bad expenses to look good?

I am often asked if it makes sense to invest at a rate lower than inflation. My answer is often a question – does it make sense to have zero savings and investment at the current inflation rate? Inflation will always be there no matter what you do. Inflation should not be an excuse to do nothing. There are investments that beat inflation but to get there, you need to start from where you are – learn to crawl. If you attempt to run because you want to beat inflation, you may crash land and inflation will beat you blue black.  

Leave inflation alone and do first things first. By the time you have gathered enough momentum, inflation will leave you alone.

Do you want your money back?