Tuesday, March 08, 2016

How to build capital

Last Saturday, I attended a seminar where the speaker talked about Hernando De Soto. I later found that De Soto wrote a book, The Mystery of Capital, which I am reading now.

 

The main idea of the book is that people are poor in developing states not because they are lazy but because the legal property systems are incomplete and inaccessible to them. For example, it is hard to buy land or get a loan because registering them is too costly and information is limited.

 

So the mystery of capital must be explained so that everyone can have the chance to build wealth from the capital that they already own. I haven't finished the book yet, but here's what I think about how we can build wealth.

 

1. Labor. First, we must work. If we don't work, we can't earn money. It's tht simple. If you are a student, your job is to study. If you are job hunting, your job is to find work. If you are an employee, your job is to solve the problems of your boss, company, or organization. If you are a business person, your job is to solve people's problems for money. As you become more productive or more responsible, you can get more in pay. Salary is related to the level of responsibility.

 

2. Credit. After we work, we earn money. We can spend the money or save it. If we save it in a bank, we earn some interest, maybe less than 1%. If we invest it, we can lose our money but we can earn much more, maybe from 5% to 20%. The opposite happens when we seek a loan. Instead of earning from interest, we even pay interest to the lender. Sometimes, we need the loan to finance a business. But the rule of thumb is this: Only make a loan for something that would earn money.

 

3. Property. If you have labor and money, you can buy property. You can buy property for your business (ordinary assets) or for your family or personal use (capital assets). If you own real estate, you can sell it if you need money, or you can lease it out so you earn money. If you have personal property, like a car or jewelry, you can pledge or mortgage it if you need money for yourself or for your business.

 

4. Corporation. If you have a business, you can build a corporation to limit your liability in your business. Even if you do not have a business, you can still create a corporation to hold your property. Incorporation is a way to save on taxes and ensure that a business survives long after the founder has moved on to other things.

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