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Leadership at the peak – Living on the edge

By George W Nyabadza

LAST weekend I had an interesting debate with some friends of mine. The whole debate was sparked off by my assertion that too many people live beyond their means as evidenced by the numb

er of luxury cars driven and plush houses a good number of up and coming middle managers live in.

We could easily guess the average income for our middle manager and assuming that they were married, we doubled this. We then tabulated monthly costs of the house, the car, insurances, pensions, medical aid, groceries and lo and behold, whilst the up and coming family still had a little left over, they were on a treadmill going nowhere fast.

I was the first to accept that this was a simplistic way of looking at things but my point, I contended, was still valid.

In order to make significant progress or create wealth this family had two options: trade in the luxury cars for decent mid range vehicles and move out of the plush home for a decent-sized home in a decent area but at significantly lower mortgage rates. This would enable them to create a reasonable excess cash-flow every month which they could then use to invest in other wealth building ventures such as property.

I had to carefully explain that a mortgage was not bad provided someone else paid it off. So this family could use their savings to raise the required deposit then raise a mortgage on a property to rent provided the rentals cover the monthly bond costs.

My friends did not agree with my wise advice. They didn’t think it wise but rather folly for an up and coming family in South Africa not to enjoy their new-found wealth on luxuries.

Here again we argued extensively. They called it wealth. I called it income. I argued that for as long as they earned a fixed salary and lived by borrowing to the hilt and barely making ends meet despite the luxury they lived in, it was tantamount to poisoning themselves slowly – they would never get out of the bind.

My friends argued that as long as they could borrow they should. I argued that only entrepreneurs who have the capacity to increase their cash inflows should borrow. They argued that as long as on a month-on-month basis they were able to cover their obligations then it was acceptable to borrow.

I argued differently. The issue to me was not about the ability to repay obligations when due but all about being visionary and being able to use what they had to create wealth or investments over and above their income into the future.

I am not sure that I convinced my friends of the need to create wealth not just for themselves but for their future generations. However, I would like to suggest they have a look at their own plans. I appreciate the impact of high inflation and eroding values of income but it is more important now to grasp the concept of creating wealth and to apply it whenever it is feasible.

If they choose to borrow to finance their current expenditure they are definitely not creating any wealth.

Borrowing to invest, which is what entrepreneurs do, is an entirely different game altogether. Their investments generate sufficient cash-flow to pay off the borrowing costs and keep the appreciation in value of the asset. It may be time to look at their free cash every month whatever that may be and do some investing in projects that will create for them disposal cash for investment.

After all, most of us were educated by wealth created by our parents from activities such as tuck shops, selling vegetables, crocheting and even selling braai and sadza. Those ladies by the roadside have something going.

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