MONEY MANAGEMENT SKILLS

For you to be a good investor, you must learn first how to manage your income. This refers to how you allocate your income to bring to you maximum productivity and satisfaction. Money management is all about risk management. The essence of it is to make a logical decision on where and how you spend or invest your income. It is this decision that determines the risk of the investment you want to go in to. When you have a good knowledge of money management, you will be able to analyze an investment if it is a profit making venture or a money taking venture. Proper money management is a function of finding the point that yields maximum returns on investments within acceptable risk parameters. Improving your money management skills involves;

1. KNOW WHAT KIND OF INCOME YOU ARE WORKING FOR.
There are four types of income that you can potentially earn. The first is from being an employee; the second is from being a self-employed individual. The third is from being a business owner and the revenues that owning a business would generate. The fourth is from being an investor, generating income from investments of all kinds.

The categories are self explanatory. You obviously know which category you fit into at the moment by the type of income that you receive. However, the reason for sharing this is to bring to your attention not only which category you are in, but to think about which category you should be in, the goal is to try and get you from being an employee or self-employed to that of an investor.
Doctors, lawyers are self-employed, but if they don’t go to work that week or month, they typically will not receive their pay check. Unless, they have a system in place that allows them to continue earning money without having to do much work in exchange for it, they have to show up and perform some task.

You must understand that there are 3 basic kinds of income. Earned income which is an income derived from a job or some form of labour. It is the highest taxed income and also the hardest you can use to accumulate wealth. Your salary is an example of earned income. Portfolio income is an income derived from paper assets. It is the most popular form of investment income and it is easier to manage and maintain than other investment portfolios. Examples include stocks, bonds mutual funds etc.

Passive income is an income derived from real estate, royalties from license agreements. For instance, if you write a book to be published, after the first publication, the money you receive from subsequent publication of that book is a passive income or income you receive from properties you have sold or rented. However, most passive incomes are earned from real estate.

An employee works for money, a self-employed works for money even though he owns his job. A business owner owns a system and has people work for him. An investor has money working for him. The goal is to become an investor and a business owner and have money work for you instead of working for money.

It’s not something that can happen overnight. It’s a progression and it takes some time, some commitment and a little skill. But ultimately this is where you want to; own your own business or investing or both. The main aim of this book is to show you why you must be an investor and how you can start.

Thus, with these differences, if you want to accumulate wealth you must work to earn mostly portfolio and passive income and not earned income. The major difference between portfolio and passive income with earned income is that the former have more tax break advantages than earned income. i.e. in portfolio and passive income, you pay your tax after spending while in earned income, you pay before spending.

2. KNOW HOW TO SECURE YOUR SAVINGS/INCOME
Secure your savings/income by purchasing or investing in a security. Before you put in your money into any investment, study and carefully carry out an extensive analysis on the investment you want to go into. You can attain training classes on it if necessary. Better still, you can seek for advice from a trained and experienced professional in that field of investment you want to go into.

Convert your earned income into portfolio and passive income
Why you must do this is because income from portfolio or passive is not based on your effort. You only leverage your effort by allowing your money work for you, and the returns on investment will be far better than that received from earned income. Also, income from passive or portfolio income is not a fixed income, as such cannot be completely taxed compared to earned income which is always fixed. Moreover, you cannot work for money all your life because you will one day get to a point where you are no longer strong to work for money, so you must start now to convert your earned income into passive or portfolio income so that your money will start now to work for you thus, taking care of your future.

Another reason you should convert your earned income into passive or portfolio income is because, passive and portfolio incomes are relative incomes while your earned income is an absolute income. Relative Income is more important than Absolute Income. The difference between absolute income and relative income is that, absolute income is measured using one only and unalterable variable, money while relative income uses two variables, time and money. Let’s consider these two hardworking gentlemen. Man A works for 80hrs per week while Man B works for 10hrs per week, both make a total $50,000 annually. Who will be richer when they pass in the middle of the night? If you say Man B, you would be correct. When you invest, you are not just earning money but also time. It is this time that separates the rich from the poor because the rich create time for themselves while to the poor there is always no time.

How to convert your earned income into passive or portfolio income
You can only convert your earned income to passive or portfolio income by purchasing a security. Your money will be of no use if it cannot be exchanged for something. Buying a security help secure your money from inflation, but not all securities do protect your income from inflation. The two kinds of securities which are; an asset and a liability. From rich dad definition of asset as a security that puts money in your pocket and liability as a security that takes away money from your pocket.

A security is something you hope will keep your money safe and secure. The safety measures of these securities are tightly regulated by the government. A very clear example is the organization that watches over much of the world of investing called Securities and Exchange Commission (SEC). The main reason a security is not basically an asset is because it only secures your money but does not guarantee that you will make money.

Let’s consider a security like shares. A share is a unit value of a company which the public can buy. When you buy a share from a company, you become a shareholder in that company such that when the company declares its dividend, they pay you also. Now, when you buy shares, you have actually secured your money. The shares you bought can become an asset if it brings in more money into your pocket (when the dividend is paid to you) and can also become a liability if it takes money away from your pocket (when it value price fall below the price you bought). Hence, this is why securities are not necessarily assets. Therefore, for you to secure your earned income by purchasing a security, you must know which securities are assets and liabilities.