Personal Finance Basics Article 2

The Larousse defines investment as the “Decision by which an individual, […] allocates his own resources or borrowed funds to increase his stock of productive goods”. Investment therefore pursues the objective of increasing an individual’s assets.
In this podcast we mainly talk about real estate investment because it is our hobby. But there are multiple investment possibilities:
•                      The most important and most profitable, investment in yourself!
•                      Investing in the stock market
•                      Investing in crypto
•                      Investing in collectibles (cars, watches, bags, etc.)
•                      Etc.

LEARN MORE : Personal Finance Basics Article 1

Now that we have seen the concepts of debt, assets/liabilities and investment, it is important to explain another fundamental nuance to you, namely: good and bad debts.
Yes, we are going to be binary but there really are good and bad debts.
First of all, I would like to point out that as an individual, you have several options when it comes to buying something:

1. You don’t have cash but you can borrow and therefore you can buy on credit
2. You have cash and you don’t know how to or don’t want to borrow and you can buy in cash
3. You have cash and you can borrow and therefore you can buy on credit or buy in cash
4. You don’t have cash and you don’t borrow and therefore you don’t know how to buy Among these four options, and now that you know what a liability and an asset are, the choice of whether or not you will take on a debt (meaning paying cash) depends precisely on the nature of your purchase.
   To be categorical, if you buy a liability such as a new car, a sofa, a new smartphone, a game console or a vacation, I’m sorry but it is not possible to take out a loan and therefore a debt for it (whatever the interest rate). You see where I’m going with this, if you have a debt that is linked to a liability then yes it is a bad debt.
   You will say to me: you are very kind but how do I pay for my car then? If you do not have the capacity to pay cash for this car it is because you do not have the capacity to buy this car at all. And if you are in this situation I invite you to first look at all the solutions (carpooling, public transport, etc.) that you could find while waiting for your savings to be sufficient to pay cash for your car.
   When I discussed this with an acquaintance she replied: but I am not going to take 40,000 euros out of my savings account to pay for a car? So if I understand correctly, the person is ready to take out a 4-year loan for a car that is losing its value day after day and, in addition, pay interest on it, but they are not ready to pay 40,000 euros in cash.
   The car is still worth 40,000 euros new.
   And if you are not ready to see your savings decrease by 40,000 euros, it would be good to think about the reason behind this reflection.
   This purchase, although it pleases you at the time and the first months of driving, is it really worth it? If you are not ready to pay 40,000 euros in cash, what amount would you be ready to pay out of your savings? 20,000 euros instead?
   Haven’t we then found the envelope you have to find your new car even if it is used?
   This is also what we say when we repeat that we must think about our purchases rather than going to a dealership and jumping at the chance to quickly and easily get a car loan even if it is at 0%.
   So of course extreme situations make credit interesting to get you out of the sh*t of no longer having a car to go to work (this reasoning does not apply to a TV, vacations or other things that you can’t afford, you don’t buy period). When you are in this type of situation, which does not concern the majority, of course you will borrow but that does not harm the reasoning: first consider other solutions than borrowing, if not possible then borrow as little as possible and especially once the loan is made, why not set yourself the goal of quickly saving to repay this loan early?
   But remember that liabilities must either not be purchased or purchased in cash and that’s it.
   That’s it for bad debts, good debts are the opposite. These are debts that are linked to the acquisition of an asset. The distinction is easy.
   

Financial independence is when you have assets that bring you enough net income to support yourself without depending on a job or a regular source of income. That is to say, being able to support yourself financially without trading your time for money.
Financial freedom is the next step. We take a quote from – T Harv Eker (the author of the book “Secrets of a Millionaire Mind”): “My definition of financial freedom is simple: it is being able to live the lifestyle you want without having to work or rely on someone else’s money.”
As you can see, the word freedom is very important in the definition of financial freedom. It is about being free from a salary or another person to finance the life you dream of.
But before addressing the themes of independence and financial freedom, we want everyone to be financially responsible. One of the excesses we see on social networks is that most of the discourse in the field of personal finance is quite Manichean, it’s either black or white. In other words, you are either financially free or you are in the rat race. Whatever your situation and ambitions, I think the most important thing is to be financially responsible. It is our mission to give you back your sovereignty over your finances so that you can take control of your life.
If everything we have told you in this article about the basics of personal finance seemed abstract, incomprehensible or difficult to put into practice, we encourage you to continue trying to understand what we are talking about by reading books, consulting websites, listening to other podcasts, getting coaching, etc.
And if the things we have told you have interested you, if investing appeals to you, if you want to put in place a better management of your personal finances, then go ahead! Learn! Because as Leonard says, learning is a great wealth for the human spirit.

Cash flow is basically an accounting indicator that measures net cash flow within a company over a given period of time. There are several more or less precise definitions because different factors can be considered (taxation, depreciation, etc.).
It was Robert Kiyosaki who transposed this term from the business world to personal finances. The goal is to visualize how money is earned and how it flows through your various expense items. This will also allow us to distinguish whether the money goes to assets and/or liabilities and especially whether there is a cash deficit or surplus in the end. And as you can see, the deficit will show expenses greater than your income and the surplus will define the amount that you can use to finance either other liabilities (not recommended) or other assets or simply save.
You may hear about CF in the context of rental property investment, cash flow represents the net income that you can obtain each month from your investment. This is the amount remaining once all the costs associated with your property have been removed from the rents that your tenants pay you. These costs can be: taxation on rents, taxation on real estate, condominium fees, insurance, etc. This cash flow can be positive or negative. In the event of negative cash flow, we will say that the investment requires a savings effort. Here we mean that every month you will have to put money back into your investment and not that the property brings you money every month into the account.

Personal balance sheet and net worth

The personal balance sheet is a snapshot of your assets on a specific date. Its purpose is to give your net worth. It involves listing the value of your financial wealth, your assets, namely the value of your assets minus your debts.
This table precisely lists all your assets and liabilities.
Drawing up this table from the start will make it easier for you to set the objectives to be achieved and will allow you to make informed decisions about the arrangements to be made. This table will answer the questions:

• What do you own (liquidity – investments – assets)?
• How much do you owe (debts)?
• Is the value of your assets positive or negative?
  

To go a little further on assets and their financing: When acquiring an asset, you may have the dilemma of “I buy cash” or “I buy on credit”.
For example, you want to buy an apartment for 100,000 dollar and you have more than 100,000 dollar in your accounts. What do you do then? A new concept comes into play here, which is “leverage”.
To easily explain leverage, I’ll take my example again.
I buy an apartment for 100,000 that is worth 110,000 dollar (yes, I’m buying a good deal). This apartment gains 5% every year and I sell it after 5 years (for tax reasons).
IF I finance it in cash, I simplify it, I don’t put the fees but the logic remains the same. I pay $100,000 the first year and I resell it for $140,000 after 5 years, rounding it up. So I have $40,000 of capital gain in 5 years, or 40% of the money I put in.
IF I finance it on credit, I have to put in $20,000 and I borrow $80,000 from the bank in 20 years, which it lends me at a rate of 4%. So I sell the apartment still 140,000 – 20,000 dollars that I put down, -80,000 that I borrowed from the bank – 8,600 interest approximately that I paid on the loan – 4,000 fees plus or minus for the application and mortgage fees (you don’t have these fees if you pay cash). So I arrive at +- 27,000 capital gain to compare to the 20,000 that I put down, or 137%.
So 137% rather than 40%. So we are talking about leverage in this case. With the leverage of bank credit, my money has made + 137% in 5 years rather than + 40%…
This is also why we talk about good debt, a good debt enriches you, a bad debt impoverishes you and finances something that loses value and therefore also impoverishes you. So there is a virtuous circle with good debts and a vicious circle or over-indebtedness with bad debts.

For Robert, savings are all the sums set aside or used to create capital.
Precautionary savings are a reserve of money that you build up to deal with unforeseen expenses. These precautionary savings must be easily and quickly accessible (in a savings account/passbook A, etc.).
Generally speaking, it is recommended to save as a priority in a passbook the equivalent of 2 to 3 months’ salary to be able to easily access it in the event of an emergency and without constraints.

But this obviously depends on your personal and professional situation. If you have two vehicles in your household, you need more precautionary savings for this item than the person living in the city and using public transport. The same goes for if you own an old house rather than renting.
To give our example, our precautionary savings are impacted by the fact that we have real estate investments. In fact, our principle is to keep approximately 1 year of rent aside per property.
For example, if we rent an apartment for 500 dollar, we know that we must increase our precautionary savings by 6,000 dollar.