The US$100 000 / 2 Million Dollar Lessons — Part 3

Personal Financial Strategy — How to Handle the Money You Are Getting

Dear Entrepreneur,

We recently asked our WhatsApp Channel community a simple question:

“Would you rather be given US$100,000 now, or wait to be given US$2 million 5 years from now?”

The results were striking. Out of 325 votes, 69% chose to take the $100,000 now. Only 31% were willing to wait 5 years for the $2 million.

In Part 1, we discussed delayed gratification — the ability to resist an immediate reward for a larger future reward. In Part 2, we discussed the time value of money — the principle that money in your hand today is worth more than the same amount in the future because it can be invested and grown.

These two lessons are interlinked. At first glance, they may seem like they are opposing each other. Delayed gratification says wait. Time value of money says act now. But they are not in conflict. They are two sides of the same coin, and you must apply them together as you develop your personal financial strategy.

This lesson is for entrepreneurs and those who want to achieve financial independence.

The Question That Brightens Our Minds

The $100,000 / $2 million question does something powerful. It forces us to think about what we would do with money if we had it. How would we use it? Many people immediately think of buying houses, shares, starting a business, luxury cars, and so on.

That is exactly what we will discuss in this lesson — financial strategy from a personal finance perspective.

But here is the reality: you do not need $100,000 or $2 million to develop a financial strategy. You need a strategy for how to handle the little money you are getting right now. The person who cannot manage $500 wisely will not suddenly become wise when they receive $100,000. The habits you build with small amounts are the habits you will carry into larger amounts.

Understanding Your Expenses

We all have expenses. The principle of delayed gratification encourages us to cut out unnecessary expenses so that we can reap a greater future reward.

You should limit your expenses to a certain proportion of your income. Some people use 60%. Some use 70%. There is no universal figure for the right proportion, but the principle is clear: minimize expenses and stick to a budget. Do not spend everything you earn. Do not spend more than you earn. And do not lie to yourself about what is “necessary.”

Saving Towards a Goal

In Part 2, we said money should not lie idle in the bank. Does that mean you should take all your money and invest it immediately? No. Sometimes you need to save first.

Let me give you an example.

Let us say I am earning $500 a month, and I want to start a peanut butter making business. I estimate that I need $1,200 in capital to start. I plan to save $100 every month for 12 months to accumulate the required capital.

Yes — if you do not have enough capital, have the patience to save for even a year before starting a business. Do not borrow money at 30% interest per month because you are impatient. Save.

During those 12 months, I will keep the money in my bank account, even though the time value principle suggests that money should not lie idle. But I am saving towards a goal. I am looking at the bigger picture. After 12 months, I will use the $1,200 to start my business, putting my money to work in accordance with the principle of time value of money.

Do you see what happened? I used both principles. Delayed gratification allowed me to save the money month by month instead of spending it. Time value of money guided me to eventually deploy that capital into a productive investment.

The lesson is this: some proportion of the money you receive should always be directed towards investing, starting a business, or growing your existing business. And sometimes, it is necessary to first save that money for a period of time until you have enough to fund your investment properly.

Use ZimLedger’s Personal Ledger to track your income and expenses, and set savings goals that you can monitor every month.

The War Chest — Your Emergency Fund

You also need what is known as a war chest, or emergency fund.

This is money you should always have available for unforeseen situations. Life is unpredictable. Sickness and death may befall your family. You may lose your job on short notice. You may be sued and need money for a lawyer or even bail. Natural disasters can damage your property. Your car tyre might burst. Your roof might leak. Your child might need emergency medical attention.

These situations are unpredictable, and they all require money.

Always have a war chest in the bank — money you do not touch except when one of these unforeseen circumstances occurs. This is not investment money. This is not business capital. This is survival money. It sits there, waiting, protecting you from the unexpected.

How much should your war chest contain? A common guideline is 3 to 6 months of living expenses. If your monthly expenses are $400, your war chest should be between $1,200 and $2,400. Build it up gradually if you cannot fund it all at once.

You should also have insurance packages — medical aid, funeral assurance policies, and so on — to help you when such things occur. Insurance is not a waste of money. It is protection against catastrophic expenses that could wipe out everything you have built.

Saving for Major Goals

Sometimes you will need to buy assets or build a house. You may need to save towards your own education or your children’s education. You may be saving for a wedding, a car, or a major business expansion.

For these purposes, you should open a separate savings account — different from your transactional account. The separation is important. When your savings are mixed with your spending money, they disappear. When they are in a separate account, they are protected.

Do not take money out of your savings account except for the intended purpose. If you are saving for school fees, that money is for school fees. If you are saving to build a house, that money is for building a house. Discipline yourself.

The Fear of Investing

Investing your money is risky. You may lose it. However, you cannot get a return without taking risk. This is a fundamental truth of finance and business. There is no reward without risk.

Some people are so risk averse that they are not willing to invest their money at all. They want a perfect investment opportunity where the probability of losing money is zero. They will always find excuses for why they cannot start that business. Some have numerous business ideas, but they will never act. Too much theory. Action? Zero percent.

They would rather keep cash in the bank. And that is acceptable — but keeping cash in the bank will not make you wealthy. This lesson is for those who want to be wealthy. For your money to grow, it has to multiply. You have to put it to work.

The Trap of Pseudo-Assets

Some people will hide their extreme risk aversion by buying “assets.” It sounds good. “I am buying assets.” But let us examine this carefully.

A real asset brings money into your pocket. It generates income. It pays you.

You will hear people say, “I do not have a business, but I have stands in Westgate, Norton, Gweru, and Kadoma.” Four residential stands. No income. Just pieces of land sitting there, appreciating slowly — maybe — while the owner pays rates and guards them against land invaders.

If you do not want to start a business, then sell three of those stands, build a house on the fourth one, and rent it out. Now it becomes a real asset because every month you are receiving cash. The property is working for you.

Know that you are extremely risk averse if you have a residential stand in Bluffhill worth $60,000, yet you are living in a rented house. The stand will likely lie idle for the next 5 years because you do not have enough money to build on it. You are not running any business. You are just depending on your salary. And you call yourself a property owner.

Some will say, “I am making progress because I am buying assets. I now have 2 cars which I use to go to work.” Yet those cars are not bringing you any income. They are actually increasing your expenses — fuel, insurance, service, tyres, repairs. And you are not running any business. Those are not assets. Those are liabilities disguised as assets.

Real Assets vs Pseudo-Assets

Let us be clear about the difference.

Real assets generate income:
– A rental property that pays you rent every month
– A business that generates profit
– Equipment that you hire out for fees
– Shares that pay dividends
– A taxi or commuter omnibus that earns fares

Pseudo-assets consume money while giving the illusion of wealth:
– A residential stand you cannot afford to develop
– A car you use only for personal transport
– A second house that sits empty instead of being rented out

The question is not “What do I own?” The question is “What is paying me?”

Bringing It All Together

Here is your personal financial strategy framework:

1. Budget your expenses. Limit them to a fixed proportion of your income. Track everything. Use ZimLedger’s Personal Ledger to see exactly where your money is going.

2. Save towards investment goals. Set aside money every month for starting or growing a business. Be patient. Sometimes you need to save for a year before you have enough capital.

3. Build your war chest. Have 3 to 6 months of expenses set aside for emergencies. Do not touch this money unless there is a genuine emergency.

4. Get insurance. Protect yourself against catastrophic events that could wipe out your savings and destroy your progress.

5. Invest in real assets. Put your money to work in things that generate income — businesses, rental properties, income-producing equipment. Do not accumulate pseudo-assets that consume money while making you feel wealthy.

6. Accept risk. You cannot grow wealth without taking calculated risks. Study your opportunities, make informed decisions, and act. Paralysis by analysis will keep you poor forever.

The Questions You Must Answer

As we close this lesson, ask yourself honestly:

Do you have a budget, or do you spend without tracking?

Do you have a savings account separate from your transactional account?

Do you have a war chest for emergencies?

Are you investing your money, or are you piling up pseudo-assets that do not bring you income?

Are you waiting for the perfect opportunity with zero risk — an opportunity that will never come?

The $100,000 / $2 million question is hypothetical. But the money in your pocket right now is real. What is your strategy for it?

With respect for your growth,

ZimLedger Admin