Source of Investment Funds

Many people think that to be an investor you need either to be loaded or to just happen on some miracles provisions. But from the definition of investment, you have to use current resources meaning that you start with what you have. I can almost hear someone shut down saying I do not have anything to invest. Just wait a moment. Bear with me and you will discover that you either have something already in your hand that can be invested or else you can create a surplus from what you have so that you can invest your surplus.

One of the most important principles for investment that I learnt was: Expenses rise to the level of available income. Once you understand this principle it holds the key to your wealth creation mechanism. After a salary increase one enjoys the benefits for a month or two and then suddenly one needs another salary increase because the money suddenly is not enough. What happened? Available income levels rose and so expenses increased to the level of available income resulting ion no excess cash. That is why trying to invest excess cash is a no winner as this violates the principle we are discussing here. Another example once you suffer a loss of a certain portion of your income, you will struggle for awhile and then within a few months you find that the lower income is sufficient for your needs. What happened? Expenses shrunk to the level of available resources. So what does this all mean? It means you can decide the level of available resources to take care of your expenses to be less than your total income e.g. decide that you will always separate before expenses say 10% of your income for investments. Once you create a stop order of sorts for your investments, the expenses will shrink down to the available resources and you now have excess funds to invest. My wife and I learnt this principle in 1992 and this has become the bedrock of our investment philosophy. As our income increased, we also increased the investment income. This has helped us along the way to our dream. Set the level at which your expenses will play by deciding to pay your investment portfolio fund first. If you are a tither, you will understand that the first time you started tithing you thought you would die, but after a month or two your expenses shrunk to fit within the 90% of your income. Now imagine you can still declare both your tithe and your investable income – as unavailable income and hence reduce your available income for expenses.  This is the principle that has been spoken of by most wealth creators: Pay yourself first. Investments are done intentionally and deliberately. Its not the quantum that you set aside to invest that matters as much as it is they consistency.

So what you have done is to: Predetermine the available income so that irrespective of your income level you start creating wealth. You have thus control your expenses and created an investment fund. Remember: Wealth is the money left after deducting your expenses. In banking terms your networth is equal to your assets minus your liaibilities.

Because the portion you set aside  to invest is no longer important for your daily requirements it becomes money that you can afford to lose. This leads to the second important investment principle: Invest money that you can afford to lose. It is critical because investments are cyclical so if the cycle is down you can afford to ignore your investments because you can afford to lose them. However if it was funds that were critical for survival if you have to liquidate the investment during a down cycle you lose money.

If you have to invest funds that you cannot afford to lose then invest them in stabler and lower earning money market investments options. A friend of mine disregarded this principle to his detriment some 15 years ago. He played on the stock exchange by buying and selling shares successfully. This led him to consider himself a pro and so would be immune to this basic principle. The next time he sold his only house believing that he would make a killing then turn around and buy a bigger and better house. Unfortunately the market took him by surprise and the share prices dipped instead of plummeting. His investment was halved. HE COULD NOT AFFORD A HOUSE.  He invested money he could not afford to lose and so he lost it.

On the other hand I am invested on the stock exchange which is currently not performing – but I am not moved because I know the underlying value of the assets. It will turn around. I can afford to ignore these investments because I am a long term investor. I will call in my harvest at an opportune moment. I invested funds that I can afford to lose. So I can sleep at night without developing ulcers from the market watching syndrome.

The Principle of delayed gratification states that I can delay my consumption to create wealth so that I then pay for luxuries out of investment income. Remember that one definition of investment is to delay consumption until the funds have generated more investment income. This allows me to buy luxuries or holidays out of investment income rather than active income. Most non-investing people have a strong consumptive appetite and hence cannot delay their gratification.

Another source of investment income is to either get a second job or start a small business of buying and selling some commodity with the express purpose of using the revenue from this job for investment funds. Currently the stock exchange is Zimbabwe is underperforming – which means that it is very cheap to buy some shares. Average shares are below US0.1. That means that with just about every can of coke one could buy 10 shares from the market. So if one was to decide to fast lunch ever work day for a few months and set aside that money for wealth creation – it would take them quite some distance. Start now. Delay gratification and create wealth. Its easier than you think.

By applying the above principles: You can create wealth from the funds already flowing through your hands. You can develop excess funds for investments.

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  • Reply tb July 27, 2010 at 2:46 pm

    This is pure wisdom.I have savored the article and it is so relevant to me even now.Delayed gratification is the key to my breakthrough .I have taken your encouragement to heart and i am on the way to wealth, true wealth.Please recommend a good stock broker Doc?
    Many Thanks

    • Reply nurturingchampions July 27, 2010 at 4:36 pm

      Thanks TB. I am excited for you as you start on your journey to wealth creation. There are lots of good stockbrokers in Zimbabwe. But I would prefer those linked to banks. In this case Kingdom Stockbrokers and ABC Stockbrokers and FMI Securities would be good starting points. It also depends on what is available in the Falls.

  • Reply Barrack Otieno August 6, 2010 at 11:30 am

    Interesting read, emphasises on the point that discipline and delayed gratification are the hallmarks of wealth creation.

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