What is the simplest and most cost-effective way of creating generational wealth? Time and purpose.
This is the very stuff of generational inheritance. It takes multiple generations to create generational wealth. It is literally in the name. It is a slow and tedious process and I would argue that most people simply lack the discipline and desire that is required to successfully accomplish this goal.
When most people are confronted with the psychological and time demands for achieving generational wealth, they become despondent. Why? Because financial management, just like everything else, is psychology. We do things because of how we feel about them.
How do you feel about being tasked with the responsibility of starting a journey that others will finish? That it will most likely be your grandchild driving the Ferrari, not you. How do you feel about long-term investing?
It is nothing more than a tool. That’s all money is: a globally recognised tool that can be exchanged for things you need or perhaps want.
Remember, everything in your financial life begins with cultivating the ability to invest. All wealth comes from producing more than you consume. Unfortunately, most South Africans are better at consuming than producing.
Perhaps this is born from the prevalent misunderstanding of money. What is money? It is nothing more than a tool. That’s all money is: a globally recognised tool that can be exchanged for things you need or perhaps want. I’m not saying money doesn’t matter. It certainly does and to say otherwise is absurd.
Money can’t buy health, but it can buy health care; money cannot buy happiness, but it can buy an education for your child. Money cannot buy love, but it can be used to fund your preferred charities, creating more love in this world.
Accept that you do need money, but you do not have to become consumed by that need. Accept that money is a tool and like any tool it has a purpose. Once something has a purpose it is much more difficult to squander, which is why you need to give your money a purpose. Start to think about your future and don’t let the fear of money keep you from seeking your true dreams.
By having these dreams and goals we can prioritise our money and give it a purpose. I have given my money a purpose to fulfil three tasks in my lifetime: become debt-free, create an investment asset capable of sustaining my needs in retirement, and give my children a world-class education.
I have burdened my money with the above three tasks and in so doing have given it purpose. To achieve this purpose, I must invest. To achieve this purpose, I must enjoy investing and not see it as an obligation but as an expression of my love and values.
As human beings our brains are hard-wired for pleasure, and for many of us spending can be very pleasurable. Investing, on the other hand, is delayed gratification. It can be rewarding to see our funds grow, but investing tends to give us most pleasure when we access the funds to make a purchase or fund an experience.
Our subconscious drive for immediate rather than delayed gratification means we’re less motivated to invest and consequently less driven to budget and control our spending.
So how do we make investing a pleasurable experience? It’s all about changing perspective; choosing to see investing as empowering rather than restricting and choosing to see random spending as hindering our future success.
Once we find a motivation for holding on to our money, our focus switches towards strategies for minimising spending and maximising investing, and a great place to start with this is in the common budget.
Morgan Housel, a US personal finance columnist, once wrote, “The reason most of us don’t ever get rich is because we have conflicting desires: we want to be rich and spend a lot of money, without realising that the latter makes the former difficult to achieve.
“When most people say they want to be a millionaire, what they really mean is ‘I want to spend a million dollars’, which is literally the opposite of being a millionaire. Eventually, you must pick whether you want to be rich or buy stuff. There’s no way around it. The arithmetic will win in the end.”
Surplus income is wealth. Deferred consumption is the textbook definition of wealth, which can be used as an investment to produce additional wealth.
Financial independence comes by carefully managing your money. You need to deny yourself some of your desires now to enjoy financial security later. You must decide that what you really desire is the financial security later.
How do you feel about that? Because financial management, just like everything else, is psychology.
• Luthuli is investment manager at Luthuli Capital.
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