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.

OR

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.

How To Prepare A Personal Balance Sheet (Networth Statement)

A Personal balance sheet, also called a net worth statement or statement of financial position, reports what you or reports what you or your family owns and owes. This statement provides a summary of assets and liabilities that one has at a particular time. So, whenever you want to find the state of your finances, this statement will give you an answer. It will tell you whether you are doing good or bad.

This is how you go about preparing a personal balance sheet:

Step 1: List What You Own (Assets)

Do you have anything of value? List it here. Cash (at hand and in the bank) combined with other items of value are the foundation of your current financial position. Assets can be grouped into four:

• Liquid assets

These are cash and items of value that can easily be converted to cash. Money in current and savings accounts is liquid and available for current spending. Surrender value of some insurance products such as endowment assurance policies can be borrowed if needed.

• Real Estate

Includes a home, rental buildings, or a piece of land that a person or family owns. The current value (also referred to as market value) of these properties needs to be determined by qualified Property Valuers or Appraisers.

• Investment assets

These include investments such as stocks, unit trusts, bonds, treasury bills, and any business you own. Since investment assets usually fluctuate in value, the amounts listed should reflect their value at the time the balance sheet is prepared.

• Personal possessions

Motor vehicles and other personal belongings such as furniture, home appliances are in this category. While these items have value, they may be difficult to convert to cash. They can be listed in the balance sheet at their original cost. However, their values need to be revised over time, since a three year old car, for example, is worth less now than when it was new. Some other personal items might increase in value such as rare jewelry thus you may wish to list such items at their current value.

Step 2: Determine Amounts Owed (Liabilities)

Liabilities are amounts owed to others but do not include items not yet due, such as next month’s rent. Liability is a debt you owe now, not something you may owe in the future. Liabilities fall into two categories:

• Current liabilities

These debts must be paid within a short time, usually less than a year and includes items such as utility bills, medical bills, insurance premiums, school fees arrears, cash loans and credit card payments.

• Long-term liabilities

These debts are usually paid in full until a year later. Common long-term liabilities include auto-loans, educational loans, and mortgage.

Step 3: Calculate Net Worth

A net worth is the difference between total assets and total liabilities and it provides a measurement of your current financial position. Net worth is the amount you would have if all assets were sold for the listed values and all debts were paid in full.

Two things you should know about Net worth:

1.     If the total value of assets is larger than the total value of liabilities, you will have a positive net worth. However, your net worth is not money available for use but an indication of your financial position on a given date.

You can increase your net worth by:

§  Increasing your savings.

§  Reducing your spending.

§  Increasing the value of investments and other possessions.

§  Reducing amounts you owe by paying off your debts.

Please do understand that you may have a positive net worth and still have financial difficulties. Having many assets with low liquidity means you do not having the cash available to pay current expenses.

2.     If the total value of liabilities is larger than the total value of assets, you will have negative net worth which means you are unable to pay your debts when they are due.

I believe you can now prepare your personal balance sheet. Most personal finance management software’s (e.g. budgetpulse.com) has an integrated net worth function. Make it fun to discover how much you are worth. If you find you are positive, great, focus to increase your net worth. If you find out you are under water, do not despair. Set a goal to get out of debt and improve your financial health.

Our next post will look at setting goals.

Personal Financial Management Part 2

Part 2 (Continued from Part 1)

More on passive income:

• Money working for you - Investment earnings from financial instruments (stocks, bonds, T-bills, money markets, mutual funds, owning mortgages and other assets that can be liquidated for cash
• Business working for you – Generating income from businesses where you do not have to be personally involved (rental real estate, network marketing (e.g. Forever Living Products among others), royalties (e.g. books and music), licensing your ideas, becoming a franchisor, owning storage units, coin operated machines i.e. any business that is systematized to work without you.

Without savings, it impossible to invest, and opportunities come and pass (Ecc. 9:11). Even if you are going to leverage funds, most financiers require you first put down your commitment (e.g. 30 %) before they can lend to you. So, despite the amount involved, it is good to develop this habit. Open a separate bank account (Let's call it Purse Fattening Account (PFA) or Financial Freedom Account - FFA) and put there at least 10% of all money you receive (wage, gift or whatever income). This money can only be invested, never spent! For a Christian, it is good to tithe (also 10 %) as worship to God, for his work and to support the Great commission (Mal. 3:8), meaning you have only 80 % to live on. This means you have to simplify your life by living below your means. The more you can save in the PFA/FFA account e.g. 30 % instead of 10 %, the more funds you will have to invest (Ecc. 11:2). If you are in debt, 20 % should go to repaying debts, and never at the expense of the 10 % supposed to go to PFA/FFA. Getting out of debt is not easy and often requires a fight, but the freedom that comes with it is so worth it (Ps 37:21; Prov. 22:7). Mortgage payment should not exceed 35 % of your income. Budget Allocations – Depends on individual, it is up to you to customize to your situation. But do not compromise. Remember, the habit is more important than the amount.

How we have been Programmed/Conditioned in life about money determines how we think. How we Think, determines how we Feel, Act and thus the Results we get. In other words, the Roots determine the Fruits in a cause and effect relationship. The Fruits are the financial situations we find ourselves in.

God has given every one of us potential at birth in the mind to create, manage and grow things that you desire - including wealth. We exist in 3 forms [Spirit, Soul (mind) and Body]. Before you can achieve anything in the physical world, you have to design and create it in the mind. Spiritually speaking, God has already blessed us with all that we need to succeed in life in the Spirit, and it takes faith (James 2:17) to get these things to manifest in the physical, i.e. praying and acting in faith in God the Creator, The Master Designer, The Intelligent Being! But do not be cheated, God will not do things that man (yourself) are supposed to do. He (God) is rather waiting on you to change your attitude, think and act by faith in spite of fear or the appearance of the situation, and you will get the results you desire. But, if you keep mismanaging your finances with a Spenders motto of “It is only money” and “What goes round comes round”, choosing immediate gratification instead of long-term balance and same time keep on praying, trusting and waiting on God for financial breakthrough, I can tell you without a doubt, you will wait forever. This is where most Christians are mistaken and no wonder many are ignorant, because they lack understanding of God's principles (Hos. 4:6). God do not contradict his word. Miracles happen where the ability of man reaches limit. So do not sit and wait for God to budget your income, track your expenses and balance your books. You have to do it yourself. If you lack wisdom, ask him (James 1:5). Note that, wisdom is application of knowledge, with understanding (Prov. 4:4-9). 

We are creatures of habit. The habit of managing money is more important that the amount (Luke 16:10). So, one should be disciplined and persistent with the above plan and percentages despite the amount. Do not compromise even with 100 Euros/Shillings - put 10 Euros/Shillings to your PFA/FFA. If only you saved and invested at least 10% of all the money you received over the last 1 month? What of the past year, decade? Do the Maths yourself!

Nowadays we have technology like M-SHWARI (mobile saving and credit), M-PESA (mobile money transfer) and M-KESHO (mobile banking) in Kenya for example which we can utilise to make our financial management more efficient. We can also utilise free software like Excel templates, dsBudget and Budgetpulse.com among others.

Where attention goes, the energy flows and the results shows. Focus on the four factors of Net worth: Income, Savings, Investing, and Simplification. Learn, Act and you will get Results.

Do not risk your principal, invest it in secure places under the wise council of those who are wise in handling money (Prov. 21:5; 15:22), and not the allure of tricksters in get-rich quick schemes or establishing a business you are not skilled in.

Money is a big part of life, and when you learn how to get your finances under control, all areas of your life will soar - confidence, happiness, relationships and even health. Either you control money, or it will control you.

Learn how to budget your income and track your expenses. This is fun for an individual and for a couple. Discussing finances openly as couples, making it fun tracking your net worth and strategising on how to minimise expenses, increase savings, where to invest so as to maximise your passive income enhances your communication and your relationship flourish. Many marriages are breaking because of financial disagreements. Two cannot walk together unless they agree (Amos 3:3). Harmonise your goals and strategise how to achieve them. Be accountable to each other. You will be surprised how much you can achieve in one year together (Ecc. 4:9) when you start doing things following these principles. 

Above all, put your trust in God who gave you life, health and strength, and trust him to supply all your needs (Phil. 4:19; Matt. 6:33). Do your part, prepare your land for the rain and plant your seeds on time, then leave the rest to him!

In the next post, we shall look at the three important tools of personal finance. 

Personal Financial Management Part 1

Part 1: 

The other day (Sunday, 26^th August 2012) my husband was speaking at church here in Gent about 'Financial Stewardship'. His key scripture was Matt 25:14-30 NIV, The parable of the Talents. This is deep in our hearts, to see people manage their finances properly. He was telling the listeners, 'Our money is really not our own. We are merely stewards of what we have been given by God. We have the priveledge of being stewards, like for all other resources we have received (time, relationships, health, intellect etc), which calls for responsibility. When you are slack or wasteful with your money, it is not your money you are wasting, but Gods. In so doing, you waste your life. Why work so hard, sweat your strength out, earn, only to spend the income (the seeds) buying liabilities and luxuries (riches): Bigger TVs, Smarter mobile phones, better cars etc, chasing the tech-wind?’ These only impoverish you, so you become poorer and have to keep on working. BTW the moment you touch it, it is used (second-hand) so the resale value plummets!

Instead, one should buy assets - things that makes you wealthy like real estate (land, own house, rental houses), commodities (Gold, Silver and Oil), stocks, money market, mutual funds, shares in OTC market etc, and generate passive income (that is money working hard for you to get you more money). One can then spend the earnings (the fruits) from the assets (the tree) to buy luxuries and riches, for charity and enjoying life. This way of thinking and doing things is never taught in school! No wonder many people including graduates have little or no practical knowledge on managing their finances well. We share this secret with you, whether you do it or not that is a personal decision. Most Youth would you rather have a smart phone worth 600 EUR, and sneer at the proposal of buying an acre of bush land (with Title!) or a high-yielding Dividend stock somewhere in Africa worth about the same amount. Five years down the line, what is the scenario? Smart phone, kaput! Became too old with technology changing by the hour. The acre of land, always appreciating, and stock paying you dividends plus bonuses. We yearn that you can learn the difference and practice it in your life, then teach others.

It starts with learning by reading books (starting with the Book of Proverbs in the Bible) and practicing what one learns (Prov. 19:8). It is important to invest time and energy to learn to be a good investor. Saving alone is not enough! Save and invest in assets, period! Learn the difference between Assets and Liabilities. Assets bring money to your pocket while liabilities impoverish you. Buy assets (Fig. 1) while you are younger in order to live richer lives when you will become older  (Prov. 23:21).

Fig. 1

Fig. 2

Fig. 3

Then, track your Net worth (All what you own minus all that you owe) (Prov. 27.23) (Fig. 2). This is your Balance Sheet.

The more income you have they more your net worth can grow. Sources of money (Fig. 3) include:

• Employment – You trade time and skill for money.
• Self-employment – Profits from his own effort but is limited to only his personal effort.
• Business owner – combine his effort with effort of others and that of his money. Management issues.
• Investor – Works hard and smart, saves, invests and re-invests and uses it to work for him (He saves & invests in assets; and re-invests the gains to get more income).

Aim to increase both your working and passive income so that even when you are not able to work, loose your job or retire, the assets can still earn an income for you. Working income is money earned in active working or in business, while passive income is money earned without you working. Never have a ceiling to your income/how much you can earn. Think biggest when it comes to earning. This means you have to be smart and diligent in whatever you do in exchange of money. God honours diligence, and most people, employers and organisations do too! The more diligent you are in what you do, they more likely that you will keep your job or business, and the more you can earn (Prov. 12:11; 10:14).

We will pick up from here in the next post......