Five Hard Truths That I Learnt About Money
- Some truths about money are consistent no matter how much you earn or invest
- Here are five truths that I reflect upon about money as I grew older
No matter who you are, or how much money you make, or your philosophy and strategy on investing, a few truths apply to almost everyone and the way they manage their finances.
Here are some that I have arrived at:
- Spending money to show people how much money you have will cause you to have less of it
When someone pulls up into the carpark with a Ferrari, one can say that he knows nothing about the state of the driver’s personal finance except for the fact that he is a million dollars poorer right now as compared to before getting the car.
Rihanna earns tens of millions of dollars but found herself “effectively bankrupt” in 2009 after her lavish spending habits caught up with her. Her next course of action is to sue her financial advisor for not doing his job. However, he offered a response that reflected the cold, hard truth about money: “Was it really necessary to tell her that if you spend money on things you will end up with the things and not the money?”
Wealth is the stuff you don’t see. It is the cars not purchased, the expensive labels not bought, the fancy houses forgone. Ultimately, being rich is not about having things – it is about having assets.
- The main objective of why people should invest is to maximise returns. Nothing else.
Have you ever heard someone say the phase “play shares”? It sounds like these people are looking for a good time more than anything else.
To be a successful investor, one needs to acknowledge that the activity can be really boring at times. That’s because the main trait that will make you a successful investor is patience. But that’s too boring for people who insist on adjusting and tweaking their investments every now and then. If you aim to be above average at anything, you need to be able to do something that others are not able to. In the world of investing, it is the ability to put up with boredom for long stretches of time so that your good investments will have the chance to compound.
- Your most valuable asset when it comes to growing your wealth is time
The earlier you start saving and investing, the better your financial outcome at the end of your investing journey. We usually invest for a variety of reasons – to be able to afford a down payment for our homes, to purchase a car or maybe take care of our elderly parents. Whatever the reason, we need to recognise that time is a key factor in determining how far our investments can compound.
Warren Buffett once said that time is the friend of a wonderful business and an enemy of a mediocre one. The later you start, the less compound effect there is on your wealth.
- The larger your ego, the smaller your bank account
Getting rich has got very little to do with how much you earn but rather how much you save. In the book “Millionaire Next Door”, the author suggest that whatever we know about wealth has been misunderstood.
“Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”
Keep your ego in check and your bank account will start to grow.
- Expect the unexpected
The future is always uncertain and anything can happen. You might be laid off next week. You could win the lottery tomorrow or get a huge raise.
Many pundits have been predicting that stocks will crash almost every other day when the stock market climbs. Yet, very few people saw the disaster that was about to strike when stocks crashed back in 2007. If we are honest with ourselves, there is nothing much we can do about it other than prepare for a range of outcomes.
Research Analyst, Mind Kinesis Value Investing Academy
Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.