Monday, November 5, 2012

Which class of a person are you?

Guest post by Samuel G. Njenga

Are you always struggling to meet your expenses and constantly in debt? Does your expenses rise with more income? Do you realize that more money won’t help you? Sorry, you are on the wrong track (rat race) and it is time things must change.


Do you endeavour to minimize your expenses column and built your assets column. Do you constantly ensure that you are acquiring more money-generating assets? Then you are on the right track (fast track). Sooner or later, money will work for you if at all it is not currently doing so.

When we say asset the number one thing that comes to most peoples' minds are personal 'assets' e.g. Household items. So, what is an asset? 

By definition, assets are economic resources (tangible or intangible) that are capable of being owned or controlled to produce value and that are held to have positive economic value. Simply stated, assets represent ownership of value that can be converted into cash (although cash itself is also considered an asset).

Examples of intangible assets: copyrights, goodwill, , trademarks, software, patents etc.

Financial assets: stocks, accounts receivable, bonds etc.

Current assets: liquid cash and its equivalents (currency, deposit accounts, and negotiable instruments like money orders, cheque, bank drafts), receivables, pre-paid expenses, inventory etc.

Fixed assets: land, buildings, machinery, furniture, tools, equipment.

Now to the contentious issue: Your own house and the households therein are not for sale. And whenever you sell any of these, you'll most likely replace them with another. In essence you'll always have a house and household items all the time and they are not held for sale and they never generate income. Look at the house you live in, it actually consumes money to maintain and it does not generate money at all, and whenever you'll sell it, unless you plan to stay homeless you'll most likely acquire one at market value then. This is very different from a unit you built for rental purposes.

In a nutshell, an asset generates income periodically and / or will generate positive economic value at the point of disposal. So it could have the two attributes or at least one of them.

A common question, what, in your own opinion and even in general would be classified as luxuries?

This gets tricky my friend because by definition luxuries are products and services that are not considered essential and are associated with affluence. This definition is very general and in most cases subjective because, what you may consider a luxury maybe considered essential to somebody else. But let's understand luxury from the economics perspective. Economically where you are, there is what we'd consider a luxury, and that is basically something you can do without. Take for example, a guy who works in a mjengo (construction) site cannot afford to buy meat daily. At his level of income meat is a luxury which he can do without because if he insists on having it daily then, he'll do so at the expense of paying rent. Fast forward, the same guy gets a better job and can thus afford himself meat daily but he cannot be able to buy three beers for himself on a daily basis with the new income, at that point daily drinking becomes a luxury.

So, other than the generally accepted luxuries like Zanzibar holidays and the like, luxuries shift with economic levels. The big deal is being unable to analyse luxuries at your current economic level.

Next lesson will be on simple and practical things that can help the fellow in the rat race. You can never invest if you are in the rat race because all your money will always be taken up by the ever rising expenses.

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