How many hours did you spend growing up playing board games?
Didn’t we all want to buy the most expensive “blue” property so that we could get maximum rent?
Loved the thrill of getting a currency note of 200 from the bank every time you passed “Go”?
Did your heart skip a beat at the uncertainty of the “Chance” and “Community Chest” cards?
Strategized to get all the properties in one colour to build houses and hotels?
Feared bankruptcy and having to quit the game?
Yes, I am talking about the game of Monopoly. We’ve all spent endless hours playing this game. Every family has seen at least one incidence of someone getting upset, playing spoilsport and quitting the game midway.
In the end, priceless memories have been created.
But, hey, apart from the memories what else did you take away from this wonderful game?
Are you wondering what am I going on about?
Let me explain. The game of Monopoly teaches us some invaluable lessons on personal finance that are key to financial independence and success.
Monopoly is a game of strategy which focuses on building a secure financial future. It inculcates prudent financial and investment principles.
So, what are these takeaways that I am talking about?
- Invest Early – If you’re wise, you’ll start buying properties in the first round itself. If you fail to do so, you’ll subsequently spend all your cash on paying rent. But if you’ve been smart, you’ll have created a second source of income which will help you earn rent and multiply your earnings with each round. Your investment will pay off in the long run.
Similarly, start investing as early as possible. The magic of compound interest will secretly generate income for you, adding to your net worth. This will create a source of passive income and reduce reliability on your “pay check” or passing “Go” for survival. You can’t win with just one source of income. It is important to build assets.
- Expensive ≠ Value – Did you aim to buy all the blue properties because you thought they would attract the highest rent? But did you know that those properties rank very low in terms of visitation frequency?
Confused, aren’t you?
In reality, the orange and red property groups have the greatest chance of being landed on.
What appears to be the most expensive, may not be the most valuable in reality. For example, the expensive technology stocks are actually not the most valuable.
Warren Buffet was ridiculed for not investing in Internet companies while speculators around him were capturing triple-digit gains. We all know who eventually suffered painful losses.
It’s important to evaluate your spends on designer wear and lifestyle indulgences that are based purely on their price tag. When you focus only on the most expensive assets, odds are that you are overpaying and setting yourself up for losses.
The key is to make smart purchases that build long term wealth. Invest in stocks that have a strong and promising underlying business. Buy assets that yield cash flow and appreciate in value.
- Always Keep Cash in Hand -What happens when you land on another player’s property, or if you get the unlucky “chance” or “community chest” card asking you to pay taxes or “Go to Jail”? You need to shell out money to pay the dues. What happens if you’ve run out of cash? You end up having to sell properties at a very poor rate to generate cash. Isn’t that painful?
Similarly, in real life, it is very important to have funds for moments when life throws you a curveball. One must “save” and “budget” for these “Chance card” situations to prevent wiping out your financial assets.
- Don’t Stockpile Cash – On the other hand, it is equally important to not stash away too much cash. You can’t generate wealth by just holding onto cash. Chances are that your income from passing “Go” will eventually disappear in paying rent or taxes & charges to the Bank.
Holding Cash eventually erodes its value. It is income sitting idle doing nothing. When considering the hit of inflation, it results in reducing your purchasing power. Hence, it is important to keep just about enough cash in hand as a security cover for emergencies. Let the rest of your money make money for you. Even if that means simply keeping money in the bank to attract interest.
- Diversify – Buying property in one colour or section of the board reduces the likelihood of opponents landing on your property, thus reducing the amount of rent that can be earned.
Do not put all your eggs in one basket. Diversify and spread your investments across asset classes to reduce the risk of wealth erosion from the underperformance of a certain asset class. It is equally important to not over-diversify and spread too thin. There is ultimately no benefit from investing your money in more than 15-20 different stocks. Remember you can’t build a house if you have properties across the board all in different colours.
- Leverage – Did you buy the only pink property left on the board, that your brother needs to start building a house? This gives you an upper hand to be able to freely choose the selling price of that property.
Similarly, it’s important to develop skills and make yourself valuable. Discover a Niche and master that skill, so that you can have control of your future and prevent others from determining your worth. Invest in yourself and have the upper hand in deciding your life’s direction.
- Negotiate – Are you in a situation where you have to sell or mortgage your property to pay rent or dues?
Would you be willing to take the first offer on the plate?
Or would it be better to ask across the board and see who offers the best deal?
Negotiation is a very important life skill. This is especially critical for big long-term decisions. Always take a chance at asking for a better deal. Ask your boss for a raise. Negotiate the salary with the Hiring Manager. Ask the bank for better rates for a loan. Do not hesitate, negotiate.
- Have a Strategic Plan – If you aimlessly buy properties or skip buying properties having the “I’ll take the game as it comes” attitude, chances are that you’re not going to win. It’s important to have a plan with what to do with your money. Have a plan on which properties you’re going to buy and how you’re going to invest or spend available funds.
Without planning and properly laying down financial goals, it is highly unlikely that you will achieve financial success. It’s important to list down “SMART” (Specific, Measurable, Assignable, Realistic and Time-related) goals and work towards achieving them. Without a plan, you’ll end up buying a “Park Place” when you have funds available for “Baltic Avenue”. Scary thought, isn’t it?
- Pay Attention & Immerse yourself in the game -Get distracted in even one round and the course of the game could change drastically. You may miss banking on your investments or end up paying a huge cost or maybe miss a promising opportunity.
It’s important to set aside sometime every week to review your finances. Check your credit card statements. Analyse the movements of your stocks. Review how far you are from hitting that money goal. Pay attention and invest at least some time figuring out what to do with your money you spent hours earning.
Erect Buildings, while trying to avoid,
Being thrown in Jail and,
Running Out of Money.
The winner is always the one with the highest Net Worth.
And as Ernest Hemingway says, “I try not to borrow; first you borrow then you beg.”