Lesson 4. Investing and Savings

[Brother]

We're moving on to a very interesting section of financial literacy. Like the previous ones, this lesson invites you to study a simple sequence of actions that, quite possibly, in a couple of years can make you a wealthy person.
In the introductory lesson, we already talked with you that you can become a millionaire without investing (such are, for example, actors and athletes), but these people usually do not have financial literacy and, as a result, lose all their money. This is all because they do not know or do not want to know the two rules that we will now study.

Content:
Without investing and saving, it is almost impossible to become a wealthy person for life. Even if you have a lot of money, this does not guarantee you a comfortable future. That is why the two rules “Accumulate” and “Invest” are so important.
What is accumulation? Accumulation is putting aside a portion of your income. This alone is better than buying unnecessary things. If you are saving a third or half of your income, looking for new sources and increasing your capital, after a short period of time (three to six months) you can start investing.
However, accumulation is, in fact, a lifelong process and there is nothing wrong with it. Even when you start to invest successfully, you still have to accumulate in order to have a more solid amount for serious investment. When you stop saving, your financial literacy, and with it your income, falls. So this is the first and very simple rule : from today until the end of your life, be engaged in the accumulation of your financial resources.
This does not mean that you cannot afford a nice car or home. You can, but not if it's all your money. Many wealthy people believe that a $ 200,000 home can only be affordable when you have a million and a half, half of which brings you extra income. Otherwise, you will have to work your whole life to pay the bills for this one.
Accumulation is a three-step process: cutting back on unnecessary spending, accumulating finance from all of your income, and preparing to invest.
Therefore, our second rule is: invest.
Investing - investing capital for the purpose of making a profit. An investor can be a person who invests money in something, watches how his income grows and at the same time, in fact, does nothing else. Investing is preceded by serious analysis.
Investment theory would be incomplete without a cash flow quadrant. Renowned entrepreneur and writer Robert Kiyosaki has clearly shown that any person works in one of the four sectors of this quadrant. Each sector is very different from the other. Kiyosaki says that every sector has its merits and demerits, however, he still recommends that everyone be on the right side of the quadrant.

Cash flow quadrant​

Kiyosaki divides the quadrant into two sides - left and right. Let's take a look at each sector separately:

1	Left side: workers. They trade their time for money. Workers usually have a fixed rate and some government guarantees. Such people believe that they are safe - they have a stable salary, when they get old they will have a pension. However, this is actually the most dangerous sector. These people usually do not save any money and if there is a big crisis in the country or in the world, they lose everything and even more - their houses and cars.
2	Left side: self-employed. These can be freelancers, small businessmen, bloggers and even dentists who have started their own business. These people also trade their time for money. They are their own bosses, because they do not like being led. Nevertheless, they spend all their time on their own business and practically have no free time due to the fact that no one else will do their work. This sector tends to have more income than workers, but still not enough for a wealthy and secure life.
3	Right side: big businessmen. These are already quite wealthy people and some of them can afford to temporarily retire from business, traveling and doing what they love. They have people who can do all the work, and they need to keep an eye on their company and do long-term planning. However, you may not work in this sector and focus on the most profitable and main sector, which will be discussed below.
4	Right side: investors. This is exactly the sector to which every person should ideally strive. In addition to the fact that investors are wealthy people, they are also the most protected from all possible crises. They own a wide variety of assets, and even if there is a global crisis, they do not go bankrupt, and some are even more enriched. As a rule, investors cooperate with large businessmen. They invest their money in big business and just wait for their profits. Investors also play in the securities market and very often win, because they know much more than ordinary people.

Almost every millionaire was in one of four sectors. He could start his way as a simple bank clerk, then he tried to work for himself, created his own large company and eventually became an investor. Some millionaires missed one of the left sectors. And the smallest part began immediately from the right side. So if you are on the left side at the moment, it does not mean that you are doomed. Many went through this and became incredibly wealthy people. This is a normal process.
Investors generate the best possible income - passive or residual income. This is the kind of income that brings you profit over the years and at the same time requires almost no your time and participation. Your goal is to ensure that your assets begin to generate passive income, and preferably more than you need (so that you can continue to save). It is at this stage that you can buy yourself a house, a car and other goods that suck money out of you. Now you can afford it not to be afraid that these benefits will disappear from you.
Investing requires diversification. This is another golden rule of any businessman and investor: don't put all your eggs in one basket. The external environment and economy are fluid, and due to the repetitive cycles, you cannot be sure that even one area will flourish for decades. When we further talk about ways to earn extra money and investments, you should understand that it is extremely important to generate income and invest in several different areas.
Diversification is a very logical and correct tool. If one investment brings you 25% profit per year and almost all your money is there, your responsibility is to find two or three more sources of passive income with no less (ideally) percentage of profit. This way you minimize your risks and losses. Investors are generally very fond of saying these last two words. For them, this is not an empty phrase. Another two words they love are profit and time. Any investor, before investing his money, should know what profit and for how long he will receive, as well as what the risks and possible losses are. Only after that a decision is made on the appropriateness of the investment. Diversification insures them against a crisis and the collapse of one area.
Before we start examining the sources of passive income, let's turn our attention to the loan and see if it is so unambiguously bad.

Credit as a controversial income generator​

Credit is a misunderstood and undervalued instrument in financial relationships. Skillful handling of credit distinguishes a financially literate person from an illiterate person. An illiterate person uses credit in order to drive himself into a vicious financial circle, that is, into poverty or the Kiyosaki rat race. A literate person uses credit to his advantage, with the help of it he makes new money.
Buying a car or apartment on credit is the most controversial transaction, while investing credit money in an investment or business is considered a correct, albeit risky step.
Robert Kiyosaki calls buying a house or a car a liability. In this case, the word "liability" does not have a canonical financial meaning, it means a certain product you are buying that does not make new money. Buying a car and a house for cash or on credit is a liability because you lose your own money and have to pay interest. According to various estimates, when buying a car, you lose from 10 to 20% of its value after leaving the car dealership.
The banks call your car an asset and they are right. But this is their asset. For you, the car is a liability, because it sucks your own money. Gasoline, insurance, winter tires, maintenance and repairs, possible minor accidents - write down all these costs on paper and calculate how much it will cost you in one year. In the case of buying a car on credit, the situation is even more aggravated.
Many people believe that these days it is much more profitable to use taxi services. You not only save money and get rid of headaches due to possible accidents, but also do not waste your time on repairs and washing the car. You do not wake up at night from the fact that the alarm in the yard howls. However, when you become a wealthy person, you can afford a car, but only from passive income.
Are there any advantages to a loan? Of course, but only in one case. The goods that you purchased on credit should bring money, and almost from the moment of purchase. A laptop for a designer and programmer, a tractor for a farmer, an iPhone for a developer, a ready-made website for online sales - in this case it makes no sense to wait a whole year if you can earn money here and now. Of course, there are risks, but when it comes to money, there is always a risk. Someone advises in this case to borrow from relatives and friends, but you yourself understand what this can lead to.
In addition, you can take money to start your own business. This is a more risky venture, because it is one thing to work as a designer and quite another to be a businessman. However, of course it's up to you to decide.
We cannot but touch upon the topic of financial stability of the state when it comes to loans.
At low interest rates, the number of debtors increases, at high interest rates, it falls. If we talk about the country's economy as a whole, then it grows along with the increase in debtors, because this allows financial flows to move through the financial system, like blood in the circulatory system.
Spending stimulates the economy, which is why the lending system is so important for any country. The consumer society is mercilessly criticized in our time, but if you think carefully, then it is this process that gives impetus to the development of the economy and so far nothing better has been invented. One's spending is another's income. No spending - no income. If everyone obeys the critics of the consumer society, it will lead to disastrous consequences.
That is, on the one hand, when you buy a car, you get new items of expenditure for yourself, and on the other hand, you move the economy of your country forward, because someone creates these cars, as well as parts for them. This means that people working in manufacturing plants receive salaries and bonuses. That is why many treat the consumer society so ambiguously: it has its advantages for society, but at the same time its disadvantages for an individual person.
Since our course is called Financial Literacy, we do not recommend that you buy anything that does not bring you additional income. But we could not help but tell you that this situation has the other side of the coin. There are many contradictory and confusing things in economics.
Let's try to consolidate what was said above.

Assets and liabilities​

An asset is anything that brings you income. These are all your good investments, stocks, business, website, apartment or house for rent. Precious metals can also be classified as assets, but they have a significant drawback - extremely low liquidity. That is, it is quite possible that it will take you several weeks to sell the precious metal profitably. Pawnshops are filled with such illiquid goods simply because a person needs money here and now. Therefore, he is forced to sell at a loss. Nevertheless, precious metals are increasing in value every year.
A liability is anything that does not bring you income or that also requires expenses. This is a car, a new big house, interest on a misplaced loan, as well as anything you buy that does not generate income. When an investor or economist teaches you that a car is your asset, turn around and walk away. Because he is actually a banker or he thinks like a banker.
Get rid of liabilities and create assets. This is a very simple rule.
Finally, the time has come to dwell on investments in more detail. In a lesson on investing, we simply cannot ignore the advice of one of the best investors in the world, Warren Buffett.

Warren Buffett's investment rules​

Never confuse price and value​

This is the most important rule of a good investor, while a businessman and a trader can change these two things in the client's mind.
You, as a future investor, are simply obliged to look for a product whose value is higher than its price. This is the cornerstone of any investment thinking. Of course, if you buy an item for a price higher than its value, you may end up selling it for a higher price. However, in this course we are talking about how to become an investor, not a trader.
People lose millions, and sometimes their lives, not understanding the difference between price and value. Ask yourself the questions: "How much should I actually pay for this business?", "What is the value of this thing and is it not less than its price?" ... It is extremely difficult to calculate the true value of any asset, but at least you should be clearly aware that its price is adequate to its value. Businessmen who buy and sell real estate know the difference between price and value and use it very competently.
Let's digress from investing for a second and take a simple example - a book. One book, worth two kilograms of oranges, can change your life so that over time you will become a successful person. In this case, the value of the book is a thousand times higher than its price. Therefore, when investing in business and stocks, do not forget about the main object that needs investment - your brain.

Get out of the game on time​

Buffett says that trouble doesn't come alone. If you have invested money in a business and only losses come from it, feel free to sell it and do not regret the losses, otherwise you will lose even more. Many financially illiterate people continue to scoop water out of a leaky boat and end up losing even more.
Loss aversion is a well-known psychological phenomenon that affects all areas of life. A person will watch a terribly boring film just because he has already spent a whole hour watching it. Likewise, a bad investor will invest more and more money, because he regrets very much about the money he has already lost.

Long-term stocks are better than bonds​

We will talk in more detail about the stock exchange and shares in the next lesson, here we will give the values of a stock and a bond.
A bond (bond) is a loan and in this case you are a bank. You can lend a certain amount of money to a commercial or government organization at interest and get your hands on a bond that will be your security. In this case, you agree with the organization about how long the repayment is calculated for. During this period, you will receive interest, and when it expires, the company will give you the amount that you lent it.
A share is a security that entitles its owner to receive a portion of the company's profits, and sometimes to participate in its management.
The similarity between a stock and a bond is that you can sell them to someone else (this is the so-called secondary market). The difference is that the owner of the bond does not have the right to a part of the company's profits and does not participate in its management.
It's all about the risks. Bonds are safer and slower in generating income, while holding stocks for a long time can make a person incredibly rich. Or maybe not enrich. If the company goes bankrupt, the investor will lose all money invested in the shares. Therefore, you need to choose a company wisely, as well as learn to understand the laws of economics, business and the securities market.
In this case, Buffett is engaged in diversification - he buys shares in a large number of companies and many of them bring huge profits in 10-15 years.

Stock volatility doesn't mean risk​

Volatility is a measure of the volatility of a stock's price, that is, the maximum and minimum values.
Buffett draws attention to the fact that when a person becomes the owner of a stock and sees how its value begins to rise and fall, he begins to get nervous and make mistakes, although in reality this process does not mean anything. A fall in the value of a stock is normal and does not mean that you should get rid of them. Of course, the company may eventually go bankrupt, but Buffett again advises diversification. It is possible to generate very large returns even if three out of four companies you own are not doing very well. It is only important to recognize where the volatility is high and where there are signs of the company's collapse.

Invest for a long period of time​

This is another habit that distinguishes a financially literate person from an illiterate person. A financially illiterate person cannot wait. When he sees that he can get 25% profit a year after the purchase, he instantly sells all his shares. A financially literate person will wait much longer and end up making huge profits. It makes no sense to invest in securities if your ultimate dream is 25% profit. This can be achieved in less risky financial transactions.
This rule applies not only to the securities market, but to business and money in general.

There is not much difference between a large and a small investor​

This refers to both psychological behavior and the threshold for entering this sphere. In addition, small investors can unite. Which, however, leads to some understandable disadvantages.

Avoid high-value purchase companies​

When a company lists its shares on the stock exchange, everyone starts buying them up and this company makes huge profits. Then human psychology begins to work again . Heads of companies or CEOs become blind and do not understand the difference between the already mentioned price and value. They see that people buy their shares for a lot of money and think that this is what speaks about their success, although who, if not the head of companies, should know how things really are?
Therefore, such companies begin to soar in the skies, allow themselves large spending, inflate their staff and behave as it should be to those who have fallen on their heads with huge and other people's money - that is, it is unreasonable. You should always observe how the company will behave after placing its shares on the exchange. You need to recognize a competent leader and then buy shares in his company.
These seven rules of Warren Buffett will help everyone to succeed not only in investing their money in stocks, but in any business, as the two areas are inextricably linked. Now let's move on to the formation of passive income. First of all, we will touch upon investments.
It should be said right away that in many cases you will have to work and think a lot before you start earning passive income. In order to reflect on this, you need financial literacy. This is why you need to complete the entire course, because simply listing the ways to make money will not work. You need to develop a financial mindset before trying to invest your money.
The good news is that before you accumulate the amount required for an investment, your thinking can and should undergo many changes during this time. Determine in advance the amount of passive income you need to leave your five-day job and start doing what you've always dreamed of. And the best part is that you can engage in self-development, which many people do not do, because they work from morning to night. So, let's begin.

Sources of passive and conditionally passive income​

Bank deposit​

This is the simplest and least profitable investment. On the other hand, with compound interest, things get much more interesting.
Compound interest is when you receive interest on the percentage of your deposits. That is, if you put 100 thousand dollars in the bank at 10% per annum, then in a year you have 110 thousand dollars. Suppose that you have not withdrawn your interest - then a year later the interest is calculated from 110 thousand and will be 121 thousand dollars. In two years, your income will be equal to 21 thousand dollars. If you keep your deposit for 5 years, then the amount will be 161 thousand dollars. The longer the term, the larger the amount will be.
Sometimes the amount of interest is charged every month, which means that there will be even more money. In this case, the amount in five years will be 165, not 161 thousand dollars. Enter in Google "Online calculator of compound interest" and in a few seconds calculate your potential profit at a specific rate. In some cases, you can put additional money on your deposit and they will also work for you. Online calculators are capable of calculating this too.
The advantages of compound interest are also an extension of their disadvantages. Compound interest is only good for long-term investments. Long-term investments are very risky. However, economists say that after the global crises, the world economy is recovering and you can put money in the bank for a long time without fear of the consequences.
You can consider bank deposits from a diversification perspective. If you have the opportunity, put your money in the bank, but not in the first place, but when you create several other sources of passive income.

Starting your own company​

This is a form of conditionally passive income. At first, you will have to work very hard and analyze. As in any business, serious risks are possible, and one of the main requirements is the ability to motivate and manage people. In this lesson, we talked about the cash flow quadrant, where we saw a clear difference between a small and a large businessman - the first one works only for himself, is busy almost all day and cannot even afford a vacation. Therefore, in our case, it is important to create a company that will help you, if you wish, to spend all your time there or to engage in travel and self-development.
This approach is practiced by Richard Branson. He is a British entrepreneur and owner of 400 companies of various profiles. Surprisingly, this person finds a lot of free time, travels around the world, enjoys life and is truly a happy person. This is an ideal businessman in terms of financial literacy: he has reached incredible heights, makes phenomenal profits and gets everything out of life. The corporation complements him, not he the corporation. You have probably seen other businessmen who are constantly at work and always look emotionally burnt out. This is not about Richard Branson.
However, the company can also be a website. It is good because, if properly developed, it is able to generate stable passive income and usually does not require serious intervention. If your site is popular enough, you can hire someone you trust to run the site, and then only occasionally tweak it. Some businessmen own dozens of websites, some of which only support the popularity and influence of others.

Resale property​

When is the best time to buy property? Right now. Practice shows that real estate prices are always growing. Just remember Warren Buffett's rule and don't confuse price and value.
Someone is engaged in the purchase and sale of real estate, starting with the purchase of inexpensive apartments or land. This is why you are more likely to need other sources of income.
And in order to understand how you can buy and sell real estate with little or no capital, read the book by Robert Allen "Multiple Sources of Income". Allen points to an obvious point that is often overlooked: You will have to spend many months finding the very house that costs less than it should. This is a lot of work, but the profits can be incredible. There are always and everywhere accommodating real estate sellers. It may be a person who leaves abroad and urgently needs to sell his own house. Or maybe this is a person who has been trying to sell property for too long and is ready for certain conditions.
You will need to study the real estate market very seriously and learn to distinguish a good deal from a bad deal. Make a list of the advantages that the house should have and estimate how much will suit you in this case. At first it may seem that it is impossible to find such a property, but you must understand that patience will pay off several times, you just need not give up. There will always be people who are ready to bargain and agree to your terms. Building trust will be the first step towards this.
You may ask - where is the passive income here, if you have to do this for many months or even years? The answer lies partly in the source of income under the fourth number, and partly in the fact that, having become the owner of a good house for a great price, you have already received this very passive income. You already have an asset in your hands that generates income for you, you just need to make a little more effort, perhaps wait and sell this house.
Therefore, if you managed to purchase a house, do not rush to reduce the price you declared. You have time, especially since it works for you. In the meantime, you are waiting for a buyer, you can use the following advice.

Renting out real estate​

This form of passive earnings is the easiest, if you have it, of course. In this case, you should not only rent out this property, but also monitor the market to see if it can be sold profitably.
People who resell real estate very often rent it out. She already brings passive income, and they are calmly looking for a buyer. Therefore, the most competent behavior would be to sell real estate for such an amount that will be more profitable than renting it out for a year or two.
It is difficult to say whether you need to make expensive repairs before selling, but cosmetic is simply necessary. For a small price, you can turn a bad apartment into a normal one, which will allow you to rent it out for a large fee.
This type of passive income is very attractive, moreover, it has very few risks.

Copyright​

There are four types of activities that are subject to copyright:

• Writing a book, script, manual, development of a methodology, model, computer program. This type is good because all income goes only to you. Now you can even sell your book on the Amazon website. If you publish it, you will also receive royalties for reprints.
• Writing music, lyrics, symphony, sound bank. When using Youtube, you can become very famous if you are talented. It was simply impossible 20 years ago.
• The invention of useful things, devices, structures. You don't have to be a scientist, physicist, or genius at all. Sometimes even a simple thing, but very necessary for humanity, brings its creator millions.
• Patenting of other property rights. Photos, videos, video tutorials, drawings.

We live in a very interesting world in which people are not very fond of copyrights. Perhaps this is correct. These features of the twenty-first century are used by many financially and psychologically literate people. Someone simply donates their first works to humanity and creates a name for themselves. And someone protects any of his works so that people turn away from the creator and his product. The first type of people seems to be winning. In the age of the internet and information, name and fame are incredibly important, so use copyright wisely. Otherwise, you will remain the only person on the planet who uses your invention.

Shares and securities​

Securities are commodity or monetary documents that give their owner property rights and the right to receive certain sums of money and income. ("Modern Dictionary of Economics", B. Raisberg, L. Lozovsky, E. Starodubtseva). Securities include stocks, bonds (bonds), bills of exchange, money checks.
We will not advise you on how you can make money by playing on the stock exchange. And almost no one else can guarantee you anything. Robert Allen in his book "Multiple Sources of Income" comes to the conclusion that this is a very complex type of investment, in which there is almost no one hundred percent winning strategy. Players in the market who have shown excellent results in the previous period are very likely not to show any serious result in this. Of course, there are strategies with minimal risks, but the profit will be quite small. Therefore, when starting to play on the stock exchange, be prepared for all possible scenarios.
We have already learned one rule of the stock market from Warren Buffett - stocks are worth buying for a long period of time. This is about 10-20 years. The second rule concerns the speculative value of a share, and in this case, profits can be made very quickly simply because the value of one share of a particular company can be artificially inflated. The art of gambling on the stock exchange depends on understanding where to be guided by the first and where by the second rule.
When playing on the stock exchange, there are many tools that we suggest you explore on your own. But remember: a huge number of people have crashed on the stock exchange. Some even think that the stock exchange is no different from betting on the racetrack or playing dice. This type of investment, we suggest you do the last thing when you become a fairly wealthy person. Or proceed at your own peril and risk.

Buying a franchise​

Franchising is the purchase of a developed business model and obtaining rights to a certain type of business. That is, you can buy the rights to trademarks and brands of a particular firm and make money from it. There are two drawbacks to buying a franchise - the high price and possible difficulties when transferring from another country. But there is also a significant plus: a ready-made business model. Personnel training takes place according to a pre-developed methodology, besides, you essentially do not need advertising if you bought the rights from a well-known company.
Before buying a franchise, you need to spend a lot of time studying and analyzing the activities of this company (we will touch on this topic in the fifth lesson), as well as identifying all the pitfalls in connection with the transfer of a franchise from one country to another. There can be a lot of legal subtleties.
You can pay attention to whether someone else has bought this franchise in your country. If you bought, then determine how successful the purchase was.

The license usually takes into account four points:

• Franchise cost.
• Required initial capital. It can be 10-20 times higher than the cost of the franchise.
• Royalty (monthly payments).
• Duration of the franchise agreement.

As you can see, the conditions are really very strict. For example, the cost of a McDonalds franchise is only 45-50 thousand dollars, but a large number of little things are introduced into the transfer of rights agreement, which ultimately consume an amount several times higher than the cost of the franchise itself.
But if you succeed, within 5-10 years you will begin to receive passive income and only sometimes direct your company in the right direction.
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Blog and Youtube channel​

Another type of conditionally passive income. It will take you a while to start generating income from every blog post or Youtube video. These two ways of earning money can hardly be called basic and sufficient, but it can be additional.
In this case, you need to be different from everything other people do and at the same time absorb the best strategies. Earnings may vary, but some people make around $ 200-300 per month and spend a small amount of time promoting their blog or channel.
In this lesson, we learned the importance of saving for financial stability. We also realized that this is only the first step. The second step is investing. We looked at different ways to generate passive and conditionally passive income. The value of the investment was clearly shown in the cash flow quadrant.
In the next lesson, we will learn what financial analysis is, as well as what indicators can be used to assess the effectiveness of financial results. We will touch on the work of the stock exchange and find out what the Dow Jones index is.

Test your knowledge​

If you want to test your knowledge of the topic of this lesson, you can take a short test consisting of several questions. In each question, there can be only one correct answer. After you have selected one of the options, the system automatically proceeds to the next question. The points you receive are influenced by the correctness of your answers and the time spent on passing. Please note that the questions are different each time, and the options are mixed.

Next, let's talk about financial analysis.
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