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Common wealth and income management mistakes Common wealth and income management mistakes
by Joseph Gatt
2020-07-20 09:47:07
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Bottom line: money and money management is complex. Main mistake a lot of people make: dealing with money as if money management were simple.

Mistake number 1: spending all your income on wealth

To understand this one: let's first define income. Income is your source of finance, and usually comes in the following forms:

inco001_400-Your salary

-Any interest rates you gain from previous wealth

-Additional income, such as being paid for other services (some soccer players can get paid to use their image in advertising, some teachers can get paid to tutor etc.)

-Gifts you receive, inheritance

-Dividends from financial services

Wealth is usually defined as your money + everything you own (car, house, belongings etc.)

Problem is, people around you (family, friends) can not see what's inside your bank account. So quite a few people want family and friends to view them as rich. So they will spend all their income on expensive stuff, hoping to build their image as a “rich” person.

Why this? Some professions are labeled as “rich people's jobs” (when they often are not). Examples of jobs that have the reputation of being “rich people's jobs”: professional athletes (a vast majority of which are very poor), business owners (a vast majority of which struggle financially), “immigrants” or people who move from third world countries to wealthy countries, entertainers, people who work for the government, diplomats, artists, people who graduate from elite universities etc.

So here's an example to get a general idea. N. went to an elite school and landed a job as a diplomat, and makes around 60,000 dollars a year. N. does not discuss his/her pay with family and friends, but spends all his/her income (and borrows money) to purchase expensive cars, an expensive home, to go on expensive vacations and so on. All this because his/her friends and family think that diplomats who are elite school graduates are “rich.”

Here's another one. K. immigrates from Italistan to the US. In Italistan, people who immigrate to the US tend to be labeled as “rich.” K. gets a job at a factory making 28,000 a year. K. spends all his/her income, and borrows money, to send money back home and make a few expensive purchases that K. likes to show off on social media.

Mistake number 2: investing all your income

There's this think people like to call “passive income” but I don't believe that exists. There is no “passive income.”

So in the financial world, there are brokers who like to sell you the idea of “passive income” and who like to make you believe that there are some investments that derive income without making effort.

The most commonly cited example of “passive income” is investing in real estate, or on the financial market. But that's not “passive income.” 

In real estate, you have to find tenants (which is sometimes a “full time job”) and you also have to make all kinds of fixing and construction work, not to mention all the paperwork and taxes and so on.

In the financial market, you have to check almost every couple of hours how your financial investments are doing, whether you should sell your shares, whether you should purchase other financial products.

Here's an example of this mistake:

-L. worked for 10 years as a software engineer and made 80,000 a year for 10 years, saved his/her money wisely. Then L. had his/her big break by getting a large company hiring him/her to design special software, and pays him/her a million dollars to build and design that software.

L.    builds and designs the software, client is very satisfied. But then L. does not know what to do with the million dollars, and (mistake!) consults with a financial adviser to check what to do with the million dollars. Financial adviser convinces L. to purchase real estate and financial products, calling that “passive income.”

L.    knows nothing about the real estate and financial markets, and ends up with a couple of (inflated price) buildings and invests in hedge funds. Building prices deflate very quickly, hedge fund goes out of business.

L.    loses his/her hard earned million bucks.

Mistake 3: Being addicted to income and wealth

My advice to most people would be to engage in any activity (or activities) that can get your mind off income and wealth. Focus on family (good) or focus on health and fitness (good) or focus on cultural activities (good) or focus on faith-related activities (good). Anything that keeps your mind off wealth and income.

Some people are addicted to income and wealth a spend day in and day out thinking about creating new income streams and investing them in wealth streams. Here's an example.

S. owns a small liberal arts university. He started off as a language school, the language school eventually grew into a full-sized, licensed, non-for-profit university.

The university is small, and there are around 5,000 tuition-paying students at any given moment. But rather than make life easy for the 5,000 tuition-paying students, S. is addicted to wealth and income, and wants more and more students. And invests in a medical school, in a business school, not realizing that such for medical and business schools the brand of the university is rather important.

The university builds new buildings for medical, business and law schools, new gyms, new restaurants, hoping that income from student tuition will rise. The problem is the student stream remains steady, and actually declines as the years go by.

So S. Really should have focused on his steady student tuition-revenue stream, and engaged in some kind of activity that would keep his mind away from trying to imagine new ways to bring more income.

Mistake 4: investing in wealth to become “marriage material.”

In many cultures, you need to possess “wealth” to get married. Most cultures will demand home ownership, perhaps car ownership, and perhaps business ownership to be allowed to be “marriage material” (especially for men).

Those men borrow huge sums of money to purchase that home, car or business. No amount of income could be enough to be able to repay the huge loans.

Such men usually have something like a million dollars in debt, but the income they derive from their business is usually something like 50,000 dollars a year or less (a lot of times they lose money).

Rather than give examples, I'll discuss the popular saying “never work for a Korean company” or “never work for a Japanese company” or “don't ever get a job at a company owned by a Middle Easterner.”

Why would people say that? Not that there is anything wrong working for the Japanese or Koreans or the Arabs or Indians or whatever.

BUT, when those guy owe a million bucks in dowry money, and that they're only making so much income, those business owners start developing weird (delusional) theories about how to “get rich quick.”

So indeed, those guys get irritable when their employees are not working, treat their employees like slave robots they want to see constantly working, are very opaque in their decision-making, sometimes pay their employees late, and impose impossible missions on their employees (I used to work for a Korean company making 20,000 dollars a year, and my boss told me my mission was to get the company a 10 million dollar deal, just like that. And I had no idea what the company was actually selling.).

In sum, finance is complicated. If anyone tells you it's simple, it's not. The more you read about it, the better. But if you're smart enough about your finances, and work hard for your money, you should be wealthy. Good luck!

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