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3 Stages of Money Skills You Need to Become Financially Free

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A few years ago, my friend lost his hard earned $50,000 from investing in a new cryptocurrency project. He was promised to make at least 500% return on his investment – but he lost everything. Before that he had invested and lost a substantial amount of money in MMM – a peer to peer ponzi scheme that paid people 30% of the money they contribute every month. This experience made him extremely risk averse. Now, he never wants to listen to anything about investing, no matter how authentic. He would rather have his money in his bank account where he can see the numbers. In fact, his company’s HR conducted a personality test for all staffs and his personality was so overwhelmingly risk averse, that he was called in for counselling.

Like my friend, most of us have had negative emotional experiences with money; either from not making enough or from losing what we have made. These experiences make people think of money as the most difficult thing to understand. Yet all of our life revolves around dealing with money. If you want to be the master of your financial life, there are three levels of money skills you must master. Every financially successful person masters these three levels of money skill.

In this post, I’ll share with you the three levels of financial skills and how to make them work for you. These are just common sense; it just happens that we get too emotional with money decisions that we throw common sense out of the window.

BUT BEFORE WE BEGIN,

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Let’s continue

  1. Money earning skill

This is the reason 99 percent of people went to school; to earn more money. It is why people look for jobs. You want to earn money so that you can make a living. It is also why many people become self-employed or start a business. We all want to earn enough money so that we can stop worrying about paying bills and other financial obligations.

To earn more money, you have to keep improving your value in the market place and finding out profitable opportunities. If you have a job, you have to develop your current skill, find a higher paying job or start a side hustle to earn more money.

If you have compelling writing skill, for example, you can offer freelance writing service. If you want to sell tangible products, you can register with ecommerce websites and start listing products to sell. If you are good with music, you can create soundtracks and edit audio files for people. The point is that if you want to earn more money you have to increase your options and the value you bring to the table.

The more you learn in your field and the more exposed you get, the more money you can earn. It’s easy to feel wealthy when your earning ability grows but being highly paid is not the same as being wealthy. You still work for money. And if you stop working, you stop earning.

Unfortunately, earning money is where most people’s financial intelligence stops. They adjust their lifestyle as their income increases. The problem is that it doesn’t matter how much you earn if you cannot keep it. This is where the second level of money skill comes in.

  1. Money keeping skill

“It’s not how much you make but how much you keep?”

It’s admirable to be able to earn a lot of money. But it’s common to hear about high earners who went broke as soon as they lost their ability to earn. It doesn’t matter how much you earn per month if your income is almost equal to your expenses, you are not financially intelligent. In fact, it’s a dangerous trap to earn a lot of money if you lack the ability to keep it because once something happens to your money source, it becomes impossible to keep up with your lifestyle.

Earning money is about your ability to prepare, position and take advantage of opportunities; but keeping money is more about mental strength and ability to defer gratification. It is about your ability to say no to social pressure; to choose to live below your means so that you can keep more of your money to yourself. Robert Kiyosaki in Rich Dad Poor Dad calls this ‘paying yourself first’. You have to take the responsibility to keep a percentage of the money you earn. This may be 10%, 25% or 35% depending on how much you earn and your personal responsibilities. Basically, you keep your expenses below your income.

But you cannot get wealthy from saving money. In fact, just saving money is the easiest way to lose money. For instance, if you live in Nigeria and saved N50,000 every month from the year 2000 to 2020 in a bank with 3 percent interest. In 2020, you would have saved a total of N12,000,000 and gained a total interest of about N4,506,000. That may seem like a smart way to handle your money but when you factor in the average inflation rate of 12 percent, you’ll discover that you actually lost 9 percent of your money every year. If you also consider the naira to dollar exchange rate over this period, man, you have lost big time. Not that smart right? This is why being able to keep money, while important, is not enough. You must develop the skill to grow money.

  1. Money growing skill

If you are able to master the skill to make money and are good at keeping much of what you make, this is where you move unto the grand master of wealth creation skill; making your money work for you by investing it.

You see, currency, which is what we call money, is not designed to be kept. It was designed to circulate. When you save $1,000 in the bank, you are simply giving your $1,000 to the bank to put it to use until you need it. Banks don’t store your money in the vault. They keep a small percentage as a fractional reserve – depending on the monetary policy in your country – and give out the bulk as loans for interest. In fact, from your $1000, your bank can create as much as $4,000 loan to 10 different people and make interest from all of them as long as they have an account in the same bank. You’ll want to read up how the banking system works to understand better. Let’s just stick with the topic for now.

The idea that money loses value when kept is why, for financially intelligent people, the simple reason to save or keep money is to invest it. And then maybe to have something for an emergency.

Like the friend I mentioned at the beginning of this article, people have had a terrible experience from trying to grow their money. I’ve also lost as much as what my friend lost from investing and gained as well. No one is happy to lose what they have worked hard for. But that’s life; you cannot gain if you are not willing to lose. And investing is a risky venture; the riskier the investment, the more potential reward.

Here are a few simple tips to help you get started with growing money.

  • Stay away from Ponzi schemes

This is the first step to succeeding with investing – do not lose it to fraudsters. Do not confuse risky investment with ponzi schemes. If it’s too good to be true, it’s very likely too good to be true. If you don’t understand where the money you are promised will come from, take a step back. You are better off keeping your money that losing it to money doublers.

  • Only invest in what you understand

Follow this rule of thumb from the master of investing, Warren Buffet; only invest in what you understand and what you have interest in. Take out time to study and research about any field or company you are investing in.

  • Start with Safe investments

You don’t have to take a huge risk to grow your money. The basic investment step is to grow your money at least a little above inflation rate. If the average inflation rate in your country is 10 percent, then your basic obligation as an amateur financially literate person is to invest your money where it can earn at list 11% annual return. You can invest in bonds and treasury bills, mutual funds and equity investment funds. These are often safer instruments to grow your money slowly, while you polish your investment skill.

If you own a business, the best way to grow your money is to invest it in your business. Hire more people that are smarter than you, invest more in marketing to acquire more customers and sell more. If your business works on network effect model, work on growing your user base and audience.

There is no wealthy person today who has not mastered these three levels of money skills; ability to earn more money, to keep more of it and to grow it faster. You can’t keep what you can’t make; and you can’t grow what you can’t keep. Developing these three money skills are the bedrock of your financial literacy.

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