Are you aware that there are specific differences in what the poor, the middle class and the wealthy buy on pay day or do with their money afterwards? It’s so simple yet so profound that it completely changed how I looked at things and it will for you, too. I am going to show you exactly what I’m talking about and you can evaluate for yourself why the wealthy keep getting wealthier and the poor keeps getting poorer. And why the middle class live a mediocre life trough their spending habits. After which I would briefly highlight 5 habits of highly effective investors in the Capital Market.

To understand I will need to expose you to some basic terms and how we will be using them throughout this article. Income: is money you bring in, Expenses: is money you spend, Liabilities: are things that cost you money, Assets: these are things that pay you or generate money for you.

Now let’s look at the spending habits of the poor. The poor buy inexpensive things that they don’t need to survive

The poor don’t think before they spend. Rather, they spend before they think.

The poor never invest in themselves; they never educate themselves about assets and liabilities

The poor never uses their income to produce more income.

Let’s take a look at the middle class. First and foremost, who are the middle class? The middle class are those who society perceives to be wealthy but they are not. They are fund of buying liabilities like cars, boats, credit cards etc. Let me explain how this happens. When the average man lands a big pay check,let’s say five hundred thousand Naira. They then pay their monthly bills with half and then with the other half they make a down payment on a fairly used car. Let’s say it cost them three hundred and fifty thousand Naira and after you add the insurance and maintenance, that liability cost them about four hundred and fifty thousand naira. As few months pass by, they want a boat, then a vacation, home and then a credit card. And before they realize it, their liabilities have raised their expenses level to near or above their income level. They spend more than they make every month because of their liabilities.

Another bad money habit which the poor and the average share in common is that their income is determined by their efforts, meaning they have educated themselves to exchange their time, knowledge and expertise for money for instance, a financial planner provides people with insight on how to manage their finances to achieve set goals. So people pay them to share financial knowledge on hourly basis. The problem is if they are not making money.

What the wealthy do with their money. The wealthy buy assets. If you want to be wealthy buy assets that generate passive income for you. For instance, buy assets that produce cash, and then assets that produce more cash and then buy more assets that produce more cash. For example stocks, bonds, and real estate, etc. Education is an assets if you learn how to do something and actually do it. That’s buying an asset because it produces more cash.

That said, the following are 5 Habits of highly effective investors in the labor market:

  1. Invest early

Successful investing takes time. Lots of it. Time is needed to understand the risks of the stock market that, in the short run, can devastate a portfolio. Time is also needed to enjoy the benefits of compounding interest. Forties, fifties and sixties, many People failed to invest at an early age. But putting off investing even longer surely is not the answer.

  1. Save More

Effective investors spend less then they make, then invest the difference. Here the key is to appreciate the effect of “small” expenses, you can expect to generate more cash for investment.

  1. Always stick to plan

The worst mistake investors make is to buy high and sell low. They buy with confidence when the market is rising and then sell in fear as it falls. Effective investors have an asset allocation plan, and they stick to it regardless of how the market is performing.

  1. Keep fees to a minimum

Fees are to investment what termites are to a home. While the damage may seem small at first, fees can bring down a portfolio if given enough time. By using low-cost index funds investors should be able to keep expenses extremely low.

  1. Reinvest your dividends

For the magic of compounding to work, investment returns must be reinvested. Most mutual funds make reinvesting dividends easy. Unless you want a payout, dividend are automatically reinvested.

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