Making money - lesson 1

An education in terms of a making money perspective is unique.

When it comes to making money you have to ask yourself just one question. Whose money is it?

The government like to think that it's theirs. And, if truth be known, most of it is! You just don't know it. By the time you shuffle off this mortal coil, the government will have sucked up close on 96% of every rand dollar or pound you have ever earned throughout your life.

And most of this money ends up being concentrated in the hands of the extremely wealthy - not the poor which is the age old moral debate about taxation that I am not going to get into here.

YOU are the one responsible for your money. But too many people believe that money is complicated - that investing is 'risky' and that better qualified people than you should be paid, handsomely, to look after YOUR money because THEY know what they are doing...

It is of course complete rubbish of the highest order.

You will be bamboozled. You will be cajoled, begged and threatened by qualified 'financial advisors'. Stick true to yourself. They will state blatant mistruths because it is LEGAL for them to do so - like my favourite one - 'your investment is guaranteed'.

Ask yourself: Whose money is it?

Now, if your investment is guaranteed, is it an investment or is it savings?

Let us pause to consider this for a moment. An investment, by DEFINITION is money that YOU take and INVEST into something. This something can be a business, a property (and Dawie is THE most honest guy I have met when it comes to property investments - he KNOWS what he is talking about - and he has NO 'investment; in this site!) shares, unit trusts (my favourite pet hate) or even gold.

An investment is something that cannot be guaranteed. There has to be some risk in the investment. If there is no risk it cannot be an investment - it really is that simple. So if there is a no risk investment that you are being offered that is genuinely NO RISK, it CANNOT be matched and it CANNOT out perform putting our money into the bank!

Capital protection is 'capital erosion'. Many of these 'Guaranteed Investments' carry a Capital Protection plan in place which means that no matter how much you 'invest', the initial 'investment' is guaranteed.

Consider a period of five year with inflation running at 8% - and I use inflation as defined by me - NOT government's completely skewed and out of touch with reality inflation figure - what happens to an investment of say $100 000.

Let's say that you can get 5% at a bank - because interest rates paid by banks are generally a little lower than inflation - and are generally more accurate as to real inflation. The more you can SAVE with a bank, the higher your interest rate. After 5 years compounded assuming no taxation (hey government WANTS and DOES tax you on the interest YOU earn with YOUR after tax income!!) you will have $127 628. But with inflation running at 8%, you actually need $146 932! You are DOWN $19 304 by doing nothing AND assuming no tax!

Frightening isn't it?

Now consider your guaranteed investment. IF, the investment goes up by say 10% a year compounded over the five years you would have $161 051. Congratulations! You're a winner!

Except, what were your fees and commissions that were taken from you over this period of time? Let's see now - these would range between 3.5 and as much as 8% of the total. Imagine you had gotten 18% over this time? You would have $228 775!

Which means that your 'Investment' made the brokers $67 724 - using your money and with their GUARANTEED fees!

But they did make you money. 10% is great! So you won't mind too much by splitting it with them would you?

If so, then you have forgotten rule number 1. INVEST IN YOURSELF FIRST!

How did this investment make this kind of return?

By taking your money and investing badly in some poor underperforming mutual funds that still managed to deliver 18%. On other words, they made bad investment decisions that still managed to pay off. How do I know these decisions were bad?

Because by throwing a dart at a list of stocks YOU have a statistically FAR BETTER possibility of out performing any investment company, hands down!

Imagine if you had done this in a stock market that handed investment companies 18% over 5 years. What was the REAL return of the markets over this time? You will find that in actual case it was likely to be much higher, unless you just happened to accidentally stumble on the one investment company that out performed the stock market - good luck! Today's winner is tomorrow's loser... and today's loser is tomorrow's bigger loser...

Whose money is it? Whose RESPONSIBILITY is it? Who suffers when your investment don't perform? Who loses out when the market DOES hand out big gains? Who carries ALL the risk?

These are tough questions. And if YOU want to be rich YOU have to be able to answer them in your own mind. If you have to hand over control of your 'investments' to someone else that you pay any kind of fee to, any kind of commission or any kind of profit split/share, you will never, ever be rich. You will pay for the big over paid CEO's holiday house on the coast, his two Bentley's and his chauffeur.

Why? Because these guys are PAST masters at extracting your money at your risk for their profit. It's called life assurance, linked market investments, unit trusts, mutual funds - whatever. It is supremely well marketed to keep you feeling stupid because by not understanding you will place your faith, your money and your financial future into the hands of an organisation that has only one purpose on life - to make as much money as they possibly can.

YOU have to digest this and decide what it means for YOU. I cannot make that step for you. The responsibility for YOUR financial future is yours alone.