Updated: Apr 5
Understanding and acquiring wealth producing assets is a sure way to increase your net worth
You were probably taught that saving money leads to financial security. Work hard. Get a good job. Set aside a portion of your earnings for the future. If that's what you learned, I've got some bad news for you. Saving money doesn't build wealth. There are certain things the rich buy to create, sustain, and grow their wealth. If you want to want to learn what those things are, keep reading.
There are only two things you can buy. Things that cost money and things that make money.
Liabilities vs Assets
The first thing to know is the difference between liabilities and assets. An asset is anything you can buy that makes money. A liability is anything you buy that costs money. Or, to paraphrase Robert Kiyosaki's Rich Dad Poor Dad, assets put money in your pocket, and liabilities take money out of your pocket.
Think about it this way. You've probably purchased a drink or snack from a vending machine. You took money out of your pocket and put it in the machine. In return, you got something you value. But once the finish your tasty snack, the value is gone. And you have to buy more if you get hungry again. Money is leaving your pocket and going into the pocket of the person who owns the vending machine. That's a liability.
But what if you approach this same situation differently? What if you buy the vending machine instead? Then you would own something that puts money in your pocket instead of something that takes money out of your pocket. If you own the vending machine, other people will be buying drinks and snacks from you. That means money leaves them and comes to you. If you buy snacks, you buy liabilities, and you lose money. If you buy a vending machine, you sell snacks, and you make money. That's the difference between assets and liabilities. That's the best way to build wealth.
Buy assets to buy assets
Now here's the next thing you need to know. Start with one asset, but don't stop with one asset. Let's go back to the vending machine example. Say you buy one. And you start to make money. You can then do one of two things. You can go spend that extra money on liabilities, or you can go buy another asset. You decide it's smarter to buy another asset. So you use the money from the first vending machine to buy another vending machine. Now you have two assets instead of one. And the money to buy the second one came from the money made by the first one. This process can be repeated infinitely. If you learn this lesson, you'll have learned one of the most important secrets to building wealth. Buy assets to buy assets. That's how you compound growth.
What kinds of assets?
Now you may be wondering what kind of assets are out there. If so, you're on the right track. Here are a few different kinds of assets that you can purchase. Some cost more than others. Some are riskier than others. But all of them are used to build wealth.
Paper Assets - In the world of investing, paper assets are pieces of paper that represent ownership. These are things like stocks, bonds, and currencies. If you buy a stock, you are buying a share of ownership in that company. They used to actually give you a piece of paper to represent your share. Now the records are usually maintained digitally. The paper itself is worthless, but the ownership it represents could be extremely profitable. Or maybe you decide to buy different kinds of foreign currencies because you expect them to go up in value. Currency is usually printed on paper. That's why it's a paper asset.
Hard Assets - Hard assets are things you can put your hands on that contain real value - gold, silver, oil, land. People purchase these assets when they expect to be able to sell them later for a higher price.
Real Estate - Real estate is a popular asset for two reasons. First, it pays multiple ways. If you buy a house and rent it out to someone, you gain value through (1) cashflow from rents, (2) appreciation as the house goes up in value, and (3) capital gains, which are the profit you make when you sell the house. Second, real estate comes with some unique tax benefits that save you money on your tax bill every year.
Cryptocurrency - Cryptocurrency is a newer digital asset that also has potential to pay you in multiple ways. For one, it has potential to go up in value. For another, many platforms pay you interest your crypto holdings. Digital currency markets are known for their volatility, though. And it's very easy to lose a big part (or all!) of your investment.
Businesses - Another asset is a cash flowing business. That's right. You can buy an established business that creates significant income for you. And if you apply the "buy assets to buy assets" principle, then that first business may be able to buy another business later.
Change your focus
If you want to build wealth, it takes focus and determination. Where do the rich focus? They focus on acquiring assets that create multiple income streams and build wealth. It's not complicated. But it does take education and energy. So, which asset will you acquire next?
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