Your ability to accumulate wealth or the extent to which you have accumulated wealth depends on your wealth conversion ratio. Of the money that comes into your hands every month, how much remain as wealth, and how much leave, never to return? This is a very good question we need to ask ourselves at a regular basis, at least once a year.
The wealth conversion ratio can be defined as the percentage of your income that returns to you in a month. For example, if you earn N50,000 a month, what percentage of that amount returns back to you as income in a month? Following this definition, if you save say N20,000 per month, and invest it for a monthly cash flow of N1,000, then your wealth conversion ratio is
N1,000/N50,000 x 100 = 2%
It effect, this measures to what extent is your money working for you. For most, that is a very strange concept. Our money does not work for us. We work hard for our money and spend everything that comes in, saving nothing and hoping for more. This definition of wealth assumes you know what to do with your money.
Let me break it down further, and bring it down to the first principle – savings. For your money to work for you, it means you had to set some aside as savings rather than spend it all. If you spend all your income, no matter how much you earn, you will live from hand to mouth, paycheck to paycheck. That means there is nothing left of your income after you are done spending each month. Most people box themselves into this position by spending first, hoping to save what is left, which is often zilch – rather than save first and spend what is left.
Can you give an account of all the money that passed through your hands in the past 5 – 10 years?
How much money passed through your hands say in the past 5 years?
How much can you account for?
The last time I carried out this exercise was a week ago. I was amazed at how much money passed through my hands in the past 5 years. By the time I added up how much went into assets (not their current value, which has appreciated), I was able to account for 75%. I went further by trying to account for the ‘missing’ 25%. By the time I added up living expenses and holiday expenses, it added up. I was a good feeling. Unlike 10 years ago when my past income seemed to have disappeared into a black hole when I attempted to account for it, I could trace where 75% went – not only that but where it is working hard to make me more money.
If your money is not working for you, you are left with no choice but to work for money. Our job as income earners is to convert our income to assets as soon as possible. If all our income goes on items that perish with time and never generate any cash flow, we become like the person working hard to fill a basket with water. With leaking hands, we cannot hold unto money long enough to put it to work for us. We become like the farmer who consumes his harvest and then prays and fasts for a miracle harvest.
How have you been converting your income to assets?
What is your wealth conversion ratio?
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