WHO TOOK MY HARD-EARNED MONEY?

WHO TOOK MY HARD-EARNED MONEY?

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ave you ever withdrawn money from the bank (in the days before cash-less Lagos), stopped over at the mall, taken the remaining cash home, and  taken a bit from it and then the envelope or bag was virtually empty, and you wondered ‘who took my money?’ You look at your receipts, the stuff you bought, trying to piece together the forensics, but it does not seem to add up. Have you ever assumed someone took your money, only to realize later on that you are the one who took it, rather, spent it?

ALL WORK AND LITTLE ASSETS

How come that our money seems to disappear without trace over the years? We work for ten years and there is precious little to show for it, maybe a plot of land in Ogun State, pictures of cars and holidays and a rented apartment full of electronics and gizmos, items that are here today, gone tomorrow. If you add your income in the past ten years, you will be amazed at the amount of money that has passed through your hands – without trace. It seems like magic.

Some families, the in-laws blame the wife for being overly extravagant, or diverting the husband’s money to her family and not allowing the husband to accumulate wealth.

There are many variants of fantastic tales and excuses as to why we have nothing to show for years of working hard. Some even believe the man (or woman) is under some form of African ‘remote control’. He is working while someone else far away is receiving the money. We look for reasons everywhere to explain this phenomenon but conveniently neglect to look inside.

AN UNEXPECTED CULPRIT

If you were to set a trap and lay in wait for who took your money, guess that the trap will catch? You! You are the man (or woman). When your cash flow pattern is like a one-way traffic – income comes through salary and leaves through expenses (spending) – money will leave your hands and leave your life, never to return.

What that means is that you are busy accumulating liabilities thinking they are assets. This is an acute case of financial illiteracy. If you don’t know what an asset is, you will keep buying liabilities thinking they are assets. Money coming towards you will obey one way traffic – come in, loiter around for a little bit and keep moving, never to return (no parking, no waiting, keep moving)

A DEFINITION THAT LEAVES YOU BROKE

In school, we were taught that an asset is anything (we own) of value that can be converted into cash. Following this definition will leave you broke, even if you look rich on the outside. There is a definition that can make you cash rich if you follow it. An asset is anything that puts money in your pocket. A liability is anything that takes money out of your pocket.

Your pocket (or bank account) is where the action is, not a piece of paper. Is the item putting money into your pocket while you still get to keep the item? In other words, is the item generating income? That is an asset. Is the item taking money away from your pocket while you are in possession of the item? In other words, is the item generating expense? Then you have a liability. Net cash inflow equals an asset while net cash outflow equals a liability.

What this means is that what determines whether an item is an asset or liability is the direction of cash flow, not the item itself. Item ‘A’ can be an asset in Ada’s hands but a liability in Ronke’s hands. It depends on the financial acumen of the person managing the item

HARD PILL TO SWALLOW

A business can make money in Ada’s hands and lose money in Ronke’s hands. Ronke owns a car which she uses strictly as a private car while Ada uses her car both as private and commercial, making additional income in the process (for example picking passengers to and from work). Ada’s car is thus an asset while Ronke’s car is a liability. Ronke built a duplex where she lives with her siblings while Ada built a twin duplex where she lives with her siblings in one wing and rents out the other wing. Ronke’s home is a liability while Ada’s home is an asset.

The issue of your home as an asset or liability is a very hard pill to swallow and many will argue vehemently in favour of a house being an asset. There are not right and wrong answers. It depends on your school of thought. We are looking at cash flow.

Wait till you lose your job and cannot afford to pay your land use charges, tenement rates etc; and the government seals your use property, then it will dawn on you that the home you live in does not put money in your pocket, put food on the table or pay your bills.

In the West, the government will sell your house to recover the taxes. If you have an outstanding mortgage on the house, the bank will get to you first before the government odes. In the financial meltdown of 2007/8, millions lost their homes in these countries.

A FINANCIALLY RESPONSBILE APPROACH

The financially literate owns an asset that pays for the house, usually a business or in investment portfolio. They build their houses from their profits, not from their wages. They pay for the good things of life from proceeds of their investment, not their salary. They use their salary to acquire assets, while the asset then puts money in their pocket. At the end of the day, they have the asset and the cash flow plus their salary.

If you look at folks who have nothing to show for working for donkey years, you will discover most of their expenses are on liabilities. Some even built mansions in the village for relatives, rats and lizards to occupy while they manage a 3-bedroom apartment in Lagos, and by the time they retire, they realize they can no longer fit into the village life.

Apart from building a house, most of our money goes into cars, house hold items and electronics, mobile phones and other electronic toys. These are all items that are here today, gone tomorrow. Most of them go out with the trash. What this means is that years down the road, both your money and the items you used your money to buy are gone with the wind. Are you still wondering who took you money?

When you spend in acquiring assets, your money comes back to you through return on investment. When the asset reaches the end of its useful life, it has paid for itself many times over, possible making you rich in the process.

When you spend in acquiring liabilities, your money is on a one way street. It leaves and never comes back. You may manage to recoup some by selling off the liability, but you may not be able to get the purchase price back. You keep spending but having nothing to show for it, except to keep wondering ‘who took my money?”