Keep your wealth foundations

Actives and passives

The first reason so many people fail with finance is that finance education is not taught at the school, it’s tough at home. Because of this most of the people don’t understand how the system works and actually most of them are wrong!.

Middle class people thinks that buying a house is an investment, when most of the times owning a house is a passive that has taxes and cost money to maintain.

The first thing you must know if the difference between active and passive. We don’t want to bore you and to make things simple here are some definitions:

  • active: You buy something that makes you earn money and the maintain cost is almost zero including taxes.
  • passive: You buy something that loses value and in the worst case it costs you money to use it.

Example of passives.

Not doing anything: If you have money doing anything, you are actually losing value. In the short term it’s easy to not see it, but if you think in the long term you will see how much value the money loses.

  • Debt: Debt is the worst thing ever, it’s money that costs you money no more to say here, except if you really know what you are doing.

  • Cars: This is the best example of something that loses value through the time and also costs you a lot of money! You have to pay taxes, repair the car and also pay for the use over the time.
  • House: If you don’t have the money to buy the house, you have to pay the mortgage, taxes and the maintain cost. This could be a subcase of debt. Sometimes is better to rent than buying, it depends on the country you live. For first home a mortgage could be a good idea, but be very carefull.
  • Television: Television is an asset the is usually obsolete in two years and loses a lot of value.
  • Cell Phone: Costs you money for use it every month and also loses value very fast. Right now our society forces us to own one and have the latest model. I’m still using an old phone, don’t care about the latest model.

    Lottery: Chances of winning the lottery is so low that playing it makes no sense! some people call it the tax of the poor or ignorance. Some people can’t see how big is the space of possible outcomes and how small if your probability of winning.

Example of actives:

  • Bonds: When you buy a bond, you put money to get an interest.
  • Stocks: Companies (the good ones) pays you dividends through the time and in most of the cases the price goes up. Here you are taking a risk.
  • House: When you have the money to buy the house and the time is the correct one, you could buy a house to rent it and then sell it later at a higher price. This one is difficult since it requires having money.

The first thing you must do is to minimize your passives. In order to do it you need to have everything written, to keep track of your income and expenses.

Your beauvoir

If you draw a wealth distribution of the population you will see what it’s call the power law, in which the rich ones are in the 20% (green) and has a long tail that corresponds to the poor ones (yellow). If you zoom the graph, you will find that the inequality among the superrich is the same as the inequality among the simply rich.

THe long tail is in color yellow and can take more than in the current image

When you are trying to move from middle class to a rich one you are trying to break a law, which could be a difficult thing to do. You are trying to break the maths behinds how the systems works. But, don’t worry! people usually move from classes (usually to the poor one, but that’s not the idea).

Let’s see how we could try to do things to break that statistics and improve every day. Have objectives for short term, medium term and long term. When I started at the stock market I always had an objective of how much money I will have for end of the year. Every month I checked how much I have (not every day!) and If saw that it was difficult to reach my end of the year objective, then I tried to change what I was doing. Always have everything written in a text book to keep track of your improvements.

Another interesting thing is to learn or identify if you are a reactive or proactive people.

  • Reactive people: This are the ones who are affected by economic cycle and most of the times complains everything like down oil prices, china des acceleration, etc.
  • Proactive people: This one's tries to make investments, learn new things, understand the risks that are taking and adapt to changes more fast than reactive people.

Try to identify if your beauvoir if reactive or proactive, sometimes will be proactive and sometimes reactive. What makes you reactive or proactive is the total times of being reactive or proactive.

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