UNDERSTAND MONEY

According to a study by Wolf Street, nearly one-third of U.S. lottery winners declare bankruptcy, often within just a few years of their big win. Let's look at some examples cited by the study. 

Alex and Rhoda Toth, $13 million. The couple accepted payments of $666,666 over a 20-year span in 1990, but filed for bankruptcy in 2006 after living lavish lifestyles in Vegas and enduring a sleuth of legal expenses resulting from family drama. The couple was later charged with tax evasion. Rhoda was sentenced to two years in prison and was fined $1.1 million.

Janite Lee, $18 million. An entrepreneur in St. Louis, Lee donated wads of money to the Democratic National Committee, as well individual political candidates. She also donated to Washington University and its law school, according to Bankrate. In 2001, after extensive spending, Lee filed for bankruptcy with only $700 left to her name. She had reportedly lost roughly $350,000 gambling.

It breaks my heart when I read these stories and many more like it of how people are lucky enough to win millions of dollars in lottery but lose it after a few years because of financial recklessness. That will never be me. Why won't such money come to me? For some reason free money finds it hard to go to people like me who have a fairly good idea of what to do with it. To know what to do with money you need to understand money. You can only control what you understand. What you don't understand will control you. 

I have found that there are 3 stages to money. At every point in time you should know what stage you are in. I will explain these stages in very simple terms so you can figure out where you are. The 3 stages of money are the Transactional stage, the Precautionary stage and the Speculative stage. Stay with me. 

Before I explain I want to state that understanding money requires you have a source of income or plan to get one. Without a source of income there will be nothing to apply the explanation I will give you on. I am a practical person but it's also good to learn and be ready for when you get a source of income. 

The transactional stage of money is the stage where our basic needs are met. The basic human needs are food, shelter, clothing, utilities, bus pass, repairs etc. When you have money you can exchange for these basic needs then you are in the transactional stage of money. At this stage you have very little or no money left after you have met the basic needs. At this stage your priority is to increase your income. You can't really save if you have nothing left after meeting basic needs. You can't really do without food, clothing and shelter. But I have seen people who eat just one major meal a day so they can save. It is up to you to do what you need to do. If you do not increase your income while you are at this stage you cannot create wealth. 

If you are able to increase your income and keep your needs basic you move to the Precautionary stage of money. At the stage you can start saving. At this stage saving is a priority since your basic needs are met. The problem with most people at this stage is that because they see extra money after meeting their basic needs they feel the urge to start spending on things they want. Please know the difference between wants and needs. You can live without the things you want like a bigger phone, a tablet, faster internet, new sneakers, alloy wheels and other things. You know what I mean. You can avoid spending money on these things then save. As your savings increase you can start thinking about things like life insurance. You should keep trying to increase your income. That's always a constant. 

As you continue to increase your income and keep your needs basic, your savings will grow. This is when you move to the Speculative stage of money. This is where you create wealth. At this stage you can meet your basic needs and have extra to invest. At this stage you can buy a slightly bigger phone. Nothing extravagant. Just small improvements on the quality of your life. Then stay the course. Given time your investments will start yielding returns and you are set. 

You should have a personal balance sheet of your financial life. I have seen people who are excellent managers and build businesses from scratch but their personal finance is not so good. Start treating your life like it's a business that has income, expenses and products. You will be better off in the end. Excel is a good product you can use as a balance sheet. At the end of the week or month you can do some calculations and see if you made profit or not. This means it's time to record every penny you spend. Wealth creation starts from accounting for pennies. If you can account for pennies you can handle your lottery win. The people who lost their lottery wins didn't know what you know now. Don't be like them. See you at the top.