There are assets that can make you rich. And there are those that make you poorer.
A fundamental difference between the rich and the poor is that rich people understand the concept of assets and liabilities; poor people don’t. Thus, while the rich buy assets, the poor amass liabilities in the name of acquiring assets.
Unfortunately, the majority of the population don’t understand this. Any wonder why we have more poor people in the world. In fact, more than half of the world population live under $10 a day, according to some studies.
If you don’t want to be part of that statistics, buy assets rather than liabilities. Buy assets that can make you rich.
What then are assets and what are liabilities?
Simple: Anything that generates money for you is an asset and anything that takes away money from you is a liability.
Whether an item is an asset or a liability depends on how it correlates with the owner’s income generating capacity. If the item doesn’t generate any income, it’s a liability.
Thus, to a farmer, a tractor is an asset because he uses the tractor to generate income. A laptop will be an asset to a blogger because it’s essential to his work. To an Uber driver, the vehicle is an asset.
But a man who acquires a vehicle just to drive around has just bought himself a liability. Unless your income directly depends on the car, buying one is a liability.
The monetary outflow arising from the use of the car: fueling, repairs, maintenance and statutory expenses, takes your finances many steps back.
Then is owning a car for your pleasure bad? Or building a house to live in unnecessary because they take money out of your pocket?
So often people confuse these things and so mismanage their finances. There is no need buying an expensive mobile phone, for example, if all you do with it is watch YouTube videos or social media gossip.
Or buy a very expensive car just to drive, so people know you own a good car.
In his best selling book, Rich Dad, Poor Dad, Robert Kiyosaki explains vividly how a supposed asset can be a liability and encourages us to buy assets rather than liability.
Again, here’s the rule: Asset brings money to your pocket, liability takes money out of your pocket. Buying assets makes you rich, acquiring liability, makes you poor.
Here are the types of assets that rich people buy; the assets that can make you rich also
And they get even richer by buying these assets. You too can become rich by investing in these kinds of assets.
Stocks have made people rich for years and they are not as complicated as the guys on Wall Street will want you to believe. Someone who bought just one unit of Apple stock in 1980 for $220 will be worth over $180,000 now.
Stocks present an easy way for ordinary folks to own a fraction of a publicly traded company. If a company issues 100,000,000 units of its shares and you buy 1,000,000 units, you own 1% of the company. This means that whenever the company makes a profit, you are entitled to 1% of that profit. Similarly, if the company is making losses, bear 1% of the loss.
Apart from earning part of the profit, called dividend another way stock investors make money is through capital appreciation. Capital appreciation is the increase in the prices of stocks over time
Stocks are a breakthrough in financial instruments that allows the average person to own part of a very large organization without being directly involved in the day to day running of the business.
Buying stocks and getting invested in the big companies you admire is now easy. If you want to get invested in stocks, talk to a stock broker now or check out any of the many investment apps that allow you to buy and sell stocks using your mobile phones.
#2. Mutual and Index Funds
Mutual funds bring many companies together into one basket so that by just buying a unit of the fund, you become part owner of all the companies in the basket. This is unlike stocks which allows you to invest in companies one by one.
Why are mutual funds better?
Basically you are more diversified. It is also a safer investment because the responsibility of selecting stocks to buy rests with the fund manager. And statistically, mutual and index funds are the best performing asset classes in terms of returns.
If you want to be buying stocks one at a time, you are more likely to make mistakes because you lack the knowledge and access the expert traders have. You don’t have the information and strength to compete with the big boys on Wall Street; that’s where mutual funds and index funds come in.
By the way index funds are a type of mutual funds that track the component of a stock market index such as the S&P 500.
These funds may bring together the top 500 companies and when one company in the basket becomes less attractive it is replaced with a more promising one.
Mutual and index funds should be in the portfolio of everyone who wants to build enduring wealth over time.
When the government and businesses need cash, they can issue bonds which are sold to interested investors.
Through these bonds the investor lends money to the government or business who now promises to pay to the investor a certain amount of money periodically. Generally, bonds have expiry dates on them which may range from one year to 30 years.
Bonds are risk-free investment. They are very safe because they are backed by the government. But as you probably know, investments that have little or no risk yields very low returns.
Thus, bond yields are usually low though they can still be better than what your bank gives on a regular savings or fixed deposit account. But it may not be high enough to get a beginner investor excited.
When the bond gets to its maturity, the issuer pays the investor the principal amount invested. The major ways people buy bonds are through the Government’s Treasury Department (in Nigeria, it is the Debt Management Office) and through approved brokerage firms.
#4 Rental Property
In real estate, there are different kinds of properties. These are residential, office and commercial buildings as well as land which can either be developed or left to appreciate in value.
Real estate is big. And I will add further, rental property is bigger. This is because as we identified earlier, the house in which we live is more of a liability but the property that gives you constant flow of income is asset.
Rental properties form a greater portion of the portfolio of every wealthy man you see. Why? Two reasons: One is rent and two, is value appreciation.
Rental real estate is the best investment any one can possibly make because money keeps coming in for you every month with minimal amount of work. Property values also keep going up. As the population and need for housing increase, the value of property increases.
#5 Intellectual Property
Intellectual property is a general term that covers any product of the human mind (intellect) that is protected by law from illegal or unauthorized use.
Intellectual property is difficult to acquire but once don is capable of making the owner a billionaire over time. It includes inventions, literary and artistic works.
There are four ways of protecting intellectual property and that’s where the money is. These are patents, copyrights, trademarks and trade secrets.
Patents, copyrights, trademarks and trade secrets are awesome. When you invent something (machine, process or system that makes life easier), write a book or produce a good piece of work of art or create a brand; you can protect your invention, book, song, image or brand by getting a patent, copyright or trademark as the case may be.
Simply these are documents that certifies you as the inventor, writer, designer or owner and describes what the work is all about. With this protection, individuals and companies have to pay you to use the work. If they don’t, you sue them.
Patents are powerful. A single parent can make you a billionaire. Ditto for copyrights and trademarks. With copyrights, you earn royalty from the production and sale of your intellectual work for life. And if you have just one good intellectual property, you would have succeeded in creating enduring wealth for yourself and your unborn generation.
Cash in a bank fixed deposit is a good asset if you are disciplined enough not to treat it as cash in your hand. It’s pretty straight forward, it earns you interest though it may not be much. In fact the interest banks pay on deposits these days hardly keep up with inflation.
But cash has its uses.
You ask why?
Have you ever been approached to buy something so useful at a give away price and you are not able to buy it because you don’t have cash?
That’s why cash is important
And that’s why wealthy people keep some proportion of their wealth in cash. They are able to take advantage of emerging opportunities that may present themselves unexpectedly: Quick real estate deals, fantastic lending to somebody or company that needs immediate liquidity. In fact smart people are using peer to peer lending platforms these days to turn around their cash quickly.
They are also able to meet emergency needs.
Gold as a commodity is as old as mankind. It has been a very valuable commodity and instrument of wealth creation. At a time it was used as money.
It’s one of the safest investments aside from government bonds. And like real estate its value never goes down. As a matter of fact, the value of gold goes in the opposite direction of recession. In other words, when there is an economic downturn, prices of gold go up or recover very quickly.
In this other article, I highlight 6 reasons you should invest in Gold. If you are that type of person who would rather see and feel your asset, Gold is it. The other is property.
How do you invest in Gold?
You can buy a physical gold bar, store it and sell at a later day. You can also buy gold plated jewelry and store it. Values of such jewelries go up because they have gold components. Invest in the shares of gold mining companies or buy gold ETF.
It’s often said that working on a job will not make you rich but having your own business will. I think this is true because when you study the lives of billionaires, you find that every one of them created his wealth in businesses.
It could be a business or couple of businesses they started by themselves or businesses they are part of. In some other cases, it’s someone else’s business that they invested in.
Building your own business is certainly a sure way of making money. However, building a business is not easy and at the beginning it requires your total concentration and involvement. Some studies have shown that up to 80% of new businesses fail within their first five years.
But it is something worthwhile because if you succeed at it, you can become rich. And as you make progress you could begin to systemize the business so that it becomes passive and earns you tons of passive income.
Want to start your own business? Sure you should. Here are 12 effective steps you should take to start a successful business that makes you money
#9. Digital Products
Digital products are becoming high income earning assets. And what more, it is a highly passive way of making money. You only need to create the product once, and keep selling and making money year in, year out.
Another name for it is Information Products and before the internet became so pervasive, many people have used information product business to make so much money.
As long as people continue to consume information, digital products or information products will continue to be profitable.
It comes in different forms: ebooks, reports, courses, plugins, etc.
What kind of assets are you buying? If you were making expenses before like the average poor person, or buying liabilities like the average middle class, you now know the reasons you are where you are.
Start spending like the rich people. Invest in assets, cut down on liabilities and see how you grow your wealth over time.
The best time to start was yesterday, the next best time is now.
Buchi creates content and leads the Team at Stalwart Investment Partners; a business development and investment consultancy firm. He provides strategic advisory to help SME's, small business owners and HNI's grow profitable business and make informed investing decisions.