MoneySkills with Nelson Letshwene

Money & the psychology of money

The Rule book | Be your own guide

Finance

Finance (Photo credit: Tax Credits)

“The Stone Age came to an end not for lack of stones; the oil age will end but not for lack of oil.”

Sheik Yamani (Former oil minister of Saudi Arabia)

One of the ways to guide yourself to a successful financial management system is to create a rulebook or a guiding system. Let us look at a few rules you might want to include in your rulebook.

The first rule, of course, is the pay yourself first rule. According to George Clason who wrote the 1926 classic, The Richest Man in Babylon, this is the rule responsible for building wealth. Anyone who does not apply this rule in their financial game will not build wealth. You dedicate a percentage of your income and you consistently and religiously put it away.

It is not saving for saving’ sake. As Loral Langemeier, author of The Millionaire Maker puts it, you save this in your “Wealth Account”.  You will use this money to invest in projects that will build your wealth. As Robert Kiyosaki, author of Rich Dad Poor Dad says, you don’t have to have a million bucks to buy a million bucks property, all you need is the deposit and transaction fees, and the bank will finance the rest. While you are saving this money, you are constantly looking for wealth building projects.

You must have the Debt Management rule. This rule helps you to work with debt, or other people’s money. You set your own boundaries. How much short term, medium term, or long term debt do you want to be exposed to.

What should your exposure be to credit cards and overdraft facilities? How much personal loans do you want to have? Set a limit based on your earnings and objectives, not based on what the lenders say you qualify for. What about other credit facilities like hire-purchase contracts and medium term asset finance facilities? How much mortgaged finance do you want? Remember, your house is not an ATM, so don’t be constantly withdrawing money from the equity; unless it’s in line with your objectives that will increase your wealth. Always make sure that all your borrowings are in line with your set holistic objectives, and that you are building wealth.

You create these debt policies so that you know whether you’re on track or have exceeded your limits, and by how much. If you are overexposed, what is your plan for getting back on track?

You categorize debt this way because some categories of debt like consumer debt, as financed by credit cards, and personal loans can leave you in a spiral; while certain project and asset finance can help you grow. Is your debt consuming you or is it stepping stone to growth? It is only when you have a debt policy to guide you that you can evaluate all such murky waters.

What is your investment policy? What is your protection and insurance policy? What is your income earnings policy? How many avenues have you set up for multiple streams of income?

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