The key to building wealth and increasing your net worth is to generate long-term income over and above your normal, job-based income. The best way to do this is through a combination of savings, investments and income-generating assets.
Assets can be divided into two categories – tangible and intangible assets. Tangible assets are those you can physically touch, while intangible assets are those you can’t see. An example of this is the education you’ve received – although you have a certificate to prove your qualifications, you can’t actually see the knowledge inside of you.
The road to financial freedom will be easier once you understand the difference between good and bad assets. Choosing between them will be hard at times, but it’s always important to keep that end goal in mind – financial freedom!
Good assets are those assets whose value will increase over time and/or generate a positive cash flow. Your house or an empty plot of land could be a good asset if surrounding property prices have been increasing consistently over a period of time. You can generate a positive cash flow by renting/selling it for a higher price in future.
Bad assets are those assets whose value decreases over time and/or result in a negative cash flow (this is you paying out cash). A car or cellphone is a good example of a bad asset. The AA estimates that on average, new cars lose around 40% of their value by the end of their first year. A study from the iPrice Group found that one can expect to purchase an iPhone for just under half its price three years after launch.
The key takeaway to remember is that if you have to put more money into the asset than what you’re getting out of it, you’re holding a bad asset!
Funding the good assets
Good debt vs bad debt is a discussion which usually follows on from the good vs bad asset debate – luckily, we’ve written about this here. Essentially, you can fund purchases of assets through cash you have on hand or through taking on debt.
It’s recommended to fund your assets through cash rather than taking out debt, especially if you’re purchasing bad assets. But it’s also okay to fund good assets with good debt – think about student loans and home loans. These assets are likely to increase your future income-earning ability and increase your future cash flow through renting or selling.
Examples of good assets
Some other good assets we haven’t mentioned include the following: shares (these either pay dividends and/or increase in value over time), starting a small business, investing in various money market instruments (these pay out coupons or interest over time), investing in alternative assets (e.g. art or cattle) and investing in yourself.
Always be aware of new trends emerging and be open to learning new things. In life, physical assets (good or bad) come and go, but no one can take away the knowledge you have inside of you.