“A stitch in time saves nine,” said a tailor down the road.
Ever wondered “How does a stitch save nine? Why nine?”. Our reliable companion: Google, simply puts it as “solving problems when they are small rather than waiting to let them become bigger and harder to solve”.
How does this relate to wealth management?
Investment experts have taught us that one’s ability to build wealth over time depends on
one’s risk tolerance – the degree of risk one is willing and able to take to achieve one’s investment goals. As the father of modern portfolio theory, Harry Markowitz, said: “the higher
the risk, the higher the return”. Therefore, individuals with above-average risk tolerance may
become wealthier than their fellow peers at a future date.
An individual’s risk tolerance is dependent on personal situations and financial circumstances which include but are not limited to; sources of income, a measure of wealth, stage of life, number of dependencies, etc.
Focusing on sources of income, our ability to build wealth as we desire depends on our sources of income; be it the 9-5 individual working in an Oil company; the investment banker who works 24/7, or the easy-going entrepreneur looking forward to the next big deal. The amount of money we earn determines the amount of wealth we can accumulate. Therefore, having more sources of income trumps having just one. However, it’s not just the quantity of income that matters but the liabilities tied to the income. In essence, an individual might earn a lot but still be broke and unable to build wealth.
Let’s put this into perspective, Mr. A has three sources of income and earns a total of
NGN 1,000,000 monthly but spends NGN 800,000 before the next month’s receipt date while Mr. B earns NGN 400,000 monthly and spends NGN 100,000 only. Without a reasonable doubt, Mr. A is the better income earner. Based on sources of income being our factor in defining one’s risk tolerance, Mr. A fits the description of higher income earners but is still broke. Do simple math; monthly, Mr. B has NGN 100,000 more to invest and make himself wealthier than Mr. A over time.
Therefore, who would you rather be? Mr. A lives for the moment and forgets about the future or Mr. B lives moderately and creates the avenue to build wealth over time. It’s best we act now by increasing our risk tolerance, increasing our propensity to build wealth, and
avoiding outliving our wealth. It’s never too late – the time is always right to do the right thing.
A stitch does save nine.