Good Morning this wonderful Monday! Another opportunity to get to those targets set again. Today I want to talk about financial literacy. Financial literacy simply put is understanding how money works. I believe financial illiteracy is the reason behind many enterprises destruction, as the owners in the good times never prepare for bad times resulting in the death of the business at its first real stress.
I have been following presentations by many entrepreneurs in Zambia, Zimbabwe and SA. In those presentations, what they have in common, they highlight financial indiscipline and failure to understand money as a key destroyer of not only businesses but also individual wealth. How many stories have you heard of that guy who used to be rich and fell on hard times and never got back? In Africa, I belive financial intelligence and literacy is much more important than the rest of the world as we don't have the support institutions that incubate support and assist wealth creation. Actually wealth is decimated if you are not aware of the pitfalls out there.
1.Succession
Succession is a major factor that must be thought about when one does create a nest egg or any investments worth anything. Succession planning has to be your biggest focus when thinking of making money. Remember when someone dies one is punished for having funds and assets to give to a beneficiary. So while alive, make sure you have kept enough liquidity to cover any estate duties and costs. We have seen a number of families become poor once the breadwinner dies as they haven't invested correctly. Property is sold off just to meet estate duties, or are consumed by beneficiaries instead of added to.
So look to firstly defend your life's work by ensuring you estate adds value to following generation by doing the following:
a. At the very least have a will in place. Be very specific in terms of who will get what, so that the assets are not dissolved because beneficiaries are not able to agree a way forward. A relative of mine left a viable company on his death. He never detailed how his estate was to be handled, and how the assets were to be shared. He had more than one wife and family. Over a period of ten years they fought over the remaining assets to the point the company could not operate. They sold off assets individually until most of the beneficiaries had no capital left. IF they had kept the company together and sold it as a going concern they would have kept more.
b. Save or invest in some liquid assets- these are important to cover estate duties so no less liquid asset is sold on at a loss. If you have ten properties left to your children and you know they don't have the money to cover the Tax when you die, it would be ideal to ensure you have some liquidity available in way of a savings, pension or insurance in place so the executor doesn't sell property or fixed assets for a song due to tax pressures.
c. While one is alive teach beneficiaries about money and what is requirement to grow it. Jewish societies are excellent at this process. A child is taught financial intelligence from as soon as they are taught how to count. As a child grows they must learn the family business (or at least how to generate income themselves) and taught how to branch out on their own. So when a parent leaves an asset, in the majority of cases the next generation adds to it. Capital growth through inheritance is the most common route to wealth creation. Self made billionaires are very few. Most wealthy people have some base to start from and use skill to exponentially grow their wealth. Read the stories of Bill Gates, Aliko Dangote and even Warren Buffet. In Zimbabwe I read too many stories of kids left a healthy inheritance squandering it away and leaving nothing for the next generation.
d. Plan for descendants. The only way for true wealth to be created in Africa is for opportunities to be created for the next generation. Unfortunately, we have to many "isms" (racism, sexism, tribalism, classism etc) that prevent our current culture to reward excellence, so we have to create that culture when we deal with succession. DO not leave poverty for your lineage, leave a base and leave the most to those you will see will do most with it. Even the bible preaches this. In the parable of the talents, Jesus highlights that with those that use their talents more should be given.
2. Savings and Investment -Learn to understand the difference between a cash store, or a savings plan and an Investment. This is the main focus of being financially literate. When you are able to distinguish the difference you will not lose money the way generations around the world have..
a. Cash store/savings- The process of savings is the process putting funds away for use at a later date. this is through discipline of cash accumulation. Please note that while a lot of us save, very few of us invest... this is the reason why many people remain poor. Text books often define savings as a means of storing value and creating wealth... I beg to differ. Savings must only be encouraged as a means of creating a safety net for some rainy day event as most savings schemes end up costing money to maintain, especially in our erratic high inflation economies.
AS an example, Lets say I save $1000 over the year in Zimbabwe. most savings accounts offer around 2% per annum. At the most I will earn from Saving this amount will be $20. but the carrying cost of holding the funds will be much higher. From that $1000, if we use an inflation rate of 0.3% we will lose $3 per year from the interest. meaning the savings in play equal $17 in real terms. then if you add bank charges you are actually not gaining much.
I only advise saving to meet a certain goal or to create a cash buffer in the event of an emergency.MY standard Rule is that I should only save enough money to carry me over basic expenses for six months while the rest must be invested away (unless I am accumulating cash to put into an investment). My investment appetite is a bit more aggressive right now but it can change and so your savings rule can change to that. We will look at this in greater detail in future blogs.
3. Investment - One must look at an investment as anything that puts money in your pocket by way of actual cash or added value (appreciation of an asset). So if one starts a project it can only be seen as an investment when is value exceeds its cost. So in Zimbabwe, if you are going into farming for example, this can only be seen as an investment when the effort and funds put in are exceeded by the output. IF not you are wasting time.
If you look at the formula for growth in capital as the following: OUTPUT > INPUT X TIME
This will see you looking at growth in all aspects. so if you look at what people usually call an investment some stuff is not really qualifying for the same. Lets look at pension. if one looks at a number of pension processes in Zimbabwe they cannot be looked at as investments but just saving products.. can you imagine that most pensioners now in Zimbabwe actually have less to show for this "investment" than if they had put money aside to buy cattle in 1980. while the fund managers may give you good explanations as to why this is the case, if you are financially literate you must see through these lies.
This subject matter is so broad, I cannot do justice to it in this one blog so I will look at it over a number entries in the future. I always advocate that before putting money into anything, first differentiate if it is a savings plan or an investment. if it is an investment understand what you are investing in and what is supposed to come out of it. If you cannot understand the investment, then it is not for you...Remember the biblical verse "My people perish for a lack of knowledge" Hosea 4v6. Lets be knowledgeable.... Financially knowledgeable. Till next time lets keep it real.
I have been following presentations by many entrepreneurs in Zambia, Zimbabwe and SA. In those presentations, what they have in common, they highlight financial indiscipline and failure to understand money as a key destroyer of not only businesses but also individual wealth. How many stories have you heard of that guy who used to be rich and fell on hard times and never got back? In Africa, I belive financial intelligence and literacy is much more important than the rest of the world as we don't have the support institutions that incubate support and assist wealth creation. Actually wealth is decimated if you are not aware of the pitfalls out there.
1.Succession
Succession is a major factor that must be thought about when one does create a nest egg or any investments worth anything. Succession planning has to be your biggest focus when thinking of making money. Remember when someone dies one is punished for having funds and assets to give to a beneficiary. So while alive, make sure you have kept enough liquidity to cover any estate duties and costs. We have seen a number of families become poor once the breadwinner dies as they haven't invested correctly. Property is sold off just to meet estate duties, or are consumed by beneficiaries instead of added to.
So look to firstly defend your life's work by ensuring you estate adds value to following generation by doing the following:
a. At the very least have a will in place. Be very specific in terms of who will get what, so that the assets are not dissolved because beneficiaries are not able to agree a way forward. A relative of mine left a viable company on his death. He never detailed how his estate was to be handled, and how the assets were to be shared. He had more than one wife and family. Over a period of ten years they fought over the remaining assets to the point the company could not operate. They sold off assets individually until most of the beneficiaries had no capital left. IF they had kept the company together and sold it as a going concern they would have kept more.
b. Save or invest in some liquid assets- these are important to cover estate duties so no less liquid asset is sold on at a loss. If you have ten properties left to your children and you know they don't have the money to cover the Tax when you die, it would be ideal to ensure you have some liquidity available in way of a savings, pension or insurance in place so the executor doesn't sell property or fixed assets for a song due to tax pressures.
c. While one is alive teach beneficiaries about money and what is requirement to grow it. Jewish societies are excellent at this process. A child is taught financial intelligence from as soon as they are taught how to count. As a child grows they must learn the family business (or at least how to generate income themselves) and taught how to branch out on their own. So when a parent leaves an asset, in the majority of cases the next generation adds to it. Capital growth through inheritance is the most common route to wealth creation. Self made billionaires are very few. Most wealthy people have some base to start from and use skill to exponentially grow their wealth. Read the stories of Bill Gates, Aliko Dangote and even Warren Buffet. In Zimbabwe I read too many stories of kids left a healthy inheritance squandering it away and leaving nothing for the next generation.
d. Plan for descendants. The only way for true wealth to be created in Africa is for opportunities to be created for the next generation. Unfortunately, we have to many "isms" (racism, sexism, tribalism, classism etc) that prevent our current culture to reward excellence, so we have to create that culture when we deal with succession. DO not leave poverty for your lineage, leave a base and leave the most to those you will see will do most with it. Even the bible preaches this. In the parable of the talents, Jesus highlights that with those that use their talents more should be given.
2. Savings and Investment -Learn to understand the difference between a cash store, or a savings plan and an Investment. This is the main focus of being financially literate. When you are able to distinguish the difference you will not lose money the way generations around the world have..
a. Cash store/savings- The process of savings is the process putting funds away for use at a later date. this is through discipline of cash accumulation. Please note that while a lot of us save, very few of us invest... this is the reason why many people remain poor. Text books often define savings as a means of storing value and creating wealth... I beg to differ. Savings must only be encouraged as a means of creating a safety net for some rainy day event as most savings schemes end up costing money to maintain, especially in our erratic high inflation economies.
AS an example, Lets say I save $1000 over the year in Zimbabwe. most savings accounts offer around 2% per annum. At the most I will earn from Saving this amount will be $20. but the carrying cost of holding the funds will be much higher. From that $1000, if we use an inflation rate of 0.3% we will lose $3 per year from the interest. meaning the savings in play equal $17 in real terms. then if you add bank charges you are actually not gaining much.
I only advise saving to meet a certain goal or to create a cash buffer in the event of an emergency.MY standard Rule is that I should only save enough money to carry me over basic expenses for six months while the rest must be invested away (unless I am accumulating cash to put into an investment). My investment appetite is a bit more aggressive right now but it can change and so your savings rule can change to that. We will look at this in greater detail in future blogs.
3. Investment - One must look at an investment as anything that puts money in your pocket by way of actual cash or added value (appreciation of an asset). So if one starts a project it can only be seen as an investment when is value exceeds its cost. So in Zimbabwe, if you are going into farming for example, this can only be seen as an investment when the effort and funds put in are exceeded by the output. IF not you are wasting time.
If you look at the formula for growth in capital as the following: OUTPUT > INPUT X TIME
This will see you looking at growth in all aspects. so if you look at what people usually call an investment some stuff is not really qualifying for the same. Lets look at pension. if one looks at a number of pension processes in Zimbabwe they cannot be looked at as investments but just saving products.. can you imagine that most pensioners now in Zimbabwe actually have less to show for this "investment" than if they had put money aside to buy cattle in 1980. while the fund managers may give you good explanations as to why this is the case, if you are financially literate you must see through these lies.
This subject matter is so broad, I cannot do justice to it in this one blog so I will look at it over a number entries in the future. I always advocate that before putting money into anything, first differentiate if it is a savings plan or an investment. if it is an investment understand what you are investing in and what is supposed to come out of it. If you cannot understand the investment, then it is not for you...Remember the biblical verse "My people perish for a lack of knowledge" Hosea 4v6. Lets be knowledgeable.... Financially knowledgeable. Till next time lets keep it real.
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