If
you can understand that concept it is time to learn the
"Guns & Butter" theory. Years ago, before
the advent of commercial credit life was much simpler. With
a little luck you earned a living, then made purchases with
those earnings, according to your needs. As is still true
today, about 96% of the people would spend most or all of
their earnings to get the things they needed, and the rest
on little luxuries. (The big difference today is that now
we spend it before we earn it.)
These expenditures on the little "extras" would
serve to keep these people living on a day-to-day basis,
with little saved for the future. Since these "extras"
were used to add a little flavor to life they were referred
to as "butter" items. Unfortunately, butter gets
used up and needs to be replenished regularly, which keeps
draining the persons' resources. One day, when these people
grew old, they would have nothing - nothing was saved to
make up for income lost through old age or poor health,
and the "butter" items had been used up. The other
4% of the people were a little different. They did not spend
their "extra" cash on butter. Instead, they went
without these little pleasures and bought guns and powder.
They believed that, if worst came to worst, they could always
hunt for food. The guns gave them power and security.
Now I ask you: if you buy butter, can that butter sustain
you for the rest of your life? However, if you have enough
guns you can get all the butter you want.
The point is: the only difference between the "haves"
and the "have-nots" is that the "haves"
use their cash sparingly, using their extra cash to invest
in their future security. Before long, with steady investing,
the "haves" can earn a comfortable living just
from their investment income, and no longer worry about
financial matters, thanks to the magic of compounding interest.
Now, these people not only can get all the butter they want,
they can get all the butter that ordinary folks could never
have. They know that if a person is willing to do for a
few years what most people are unwilling to do, they can
spend the rest of their lives enjoying the things others
never can. In short, they give up the weekly pizza. Instead,
they invest the money until, eventually, they can afford
to own the pizza parlor and get all the pizza they want,
whenever they want.
Now that you have a better understanding of the basics
involved, it is time to discover how credit fits in. First
understand that you cannot provide for tomorrow's security
by spending tomorrow's income today, unless that income
is invested, rather than spent. In short, a wise person
uses credit only when there is a profit to be made in using
it. After all, if you are going to pay 18% interest on the
money, you really should be making more than 18% from it.
If not, you are losing money - your money, your future income,
your future security. When you use credit you are selling
your future income at a discount (because you pay interest
for having the money now.) This is no way to generate wealth
for yourself.
Credit is the most valuable tool in the world today. Cash
doesn't even come in a close second - but knowledge does.
With credit you can obtain just about anything, including
investments that will create even greater wealth. Knowledge
allows you to make the right choices. For example, for just
a few thousand dollars down you can take advantage of the
appreciation and tax advantages of owning a house. You control
$100,000 worth of real estate (and profit from the entire
$100,000) while only investing a few thousand.
Without the right knowledge, however, you can never hope
to make the financial system work for you. When 96% of the
population fails to achieve financial security it is not
due to a lack of money - again, money is only a tool. Rather,
they suffer from a shortage of knowledge that could have
helped them to amass wealth. Understand this important concept:
Achieving wealth has nothing to do with collecting dollars,
nor is it connected to how much you earn. All that matters
is how you use what you have.
I know people who earn over $100,000 a year and still live
from paycheck to paycheck. I also know people who earn less
than $12,000 a year who are regularly investing in their
future and will someday have financial security. So do not
use the excuse that you just don't make enough money. Fortunes
can be built on very little seed money, and if you really
have what it takes to achieve wealth, you will find a way.
Move
on to "Rules of Wise Credit Use". |
