Assets: what they ARE and what they ARE NOT
I want to begin each of the posts in the “4 Financial Keys” blog series with a reason you should continue reading. One reason. I’m going to try to pack every reason I love this important financial concept in to one sentence. You’re welcome people.
Okay, here's my reason:
Like it or not, you will make a limited about of income during your life, and I want you to know the “secret” to making your money grow all by itself, because you also only have so many hours on this Earth and I want you to spend them really living this beautiful life.
I hate to be the bearer of bad news, but it’s true. You only have so many hours in the day, therefore you can only spend so many of those working, therefore you can only make so much money. (Should I have said spoiler alert before stating the obvious?)
Granted, some people do make a higher salary and that will increase their total limited amount. For example, if Person A with a $25,000 salary and Person B with a $100,000 salary both work from the time they are 22 until they are 65 the total money they earned will be very different, $1,075,000 and $4,300,000 respectively. But at the end of the day, that’s it. And I haven’t taken out taxes (you can bet that will be about 25% of the total) or expenses (usually the other 75%).
Doesn’t this make you ask, “Then what is the point of all that work?” I asked that question. Actually, I more demanded an answer than politely asked the question. I’ve got much bigger plans for my life than working away half of it only to have nothing left at the end of the day. Or worse, have nothing left at the end of my working life when I want to retire.
The second question this realization made me ask is, “How do those people who weren’t born into wealth get ahead?”
For the sake of your good mood and precious time, here's the simple answer: They bought assets instead of everything else people usually buy.
The difference between an asset and everything else, is that assets make money (or at least give the owner an opportunity to make money). When people buy assets, the money they spend goes to work for them. As their investment grows they can reinvest that money back into more assets. Eventually, a person could gain so many assets that their money does all the work for them and they can sit back and enjoy the rewards.
Sounds great right? I wish I could say that's it. Just buy more assets. But instead, reality has to get involved...
The main thing I'm trying to communicate through this whole post is that the choices we make early in our lives set up our financial situation for the rest of our lives, for good... or for bad.
A common and socially acceptable thing to do after college graduation is buy many of the expensive things we've always wanted. After all, we are college-educated, employed, grown-ups now so we can afford them right??
Yes and no. Yes I sincerely hope that you can afford the payments on anything you buy, but the reality of the situation is that if you're spending your paycheck on loan payments (or credit cards), you're not buying assets. This is where the problem lies.
For a more thorough and amazing explanation, please read the book Rich Dad, Poor Dad (RDPD). I promise it's so worth it! For a shorter, more basic explanation, I'll give you examples from my own life.
- Asset #1: I love taking pictures but I didn't love the price tag on the camera I wanted. After reading RDPD, I knew that at this point in my life I shouldn't spend that much money on a hobby. Using my "how-can-I?" attitude, I dreamed up the possibility of starting a small photography business and taking pictures of my friends and family to help offset the costs of my equipment and get a chance to do what I love for people I love. It's so win-win. And to top it off, my camera became an asset instead of an expense.
- Future Asset #2: I want to be a land lord! :) I hate pests and cleaning up after people and I pretty much stink at fixing things. But I really want to be a land lord! Why?? Rental houses are extremely useful assets. They bring in steady monthly revenue, theoretically cost less than they bring in, and will hopefully put money in my pocket every month*. So I've traded my dreams of a luxury sedan and a wardrobe full of name brand everything for dreams of small family houses, tenants, and a passive income stream. And as a result I'm still driving my old pickup and saving as much as I can for down payments and renovation costs.
- Future Asset #3: As soon as I can get my first real paycheck, I plan on putting as much money as I can into my retirement accounts. (You need to talk to a financial advisor for the specifics of this.) Retirement accounts work by taking your money and investing it in many companies in the stock market. When those companies grow, they give you some of their profit. You put money in your account, some dude in a suit does all the hard work of growing a business, your account grows. Your money working for you. Boom. Assets. The important thing here is that you get your money invested soon enough for compound interest to work its magic (come back in next week for more on that).
*It's not that quite that simple, but they are a great tool if used correctly. Message me if you're interested in why I love rental properties and their advantages.
One of my favorite bloggers says, "You can't have everything, but you can have anything."
I agree with her! I believe you can have anything you want in this life, but it will undoubtedly require trade-offs. In the beginning you can't have huge expenses and buy assets. Building wealth takes time and being willing to accept delayed gratification. But I, for one, know that my hard work and sacrifices now are going to be soo worth it when I have a life that is financially secure and abundant.
For those like me who are just starting to lay the bricks of our financial foundation, I encourage you to spend some time thinking about the life you dream of. And dream big! You can have anything! But you'll need to really think about what you are willing to sacrifice now for what you want most.
For those who are already past this stage in life, share your financial lessons-learned with the younger generation. We need your wisdom!
Thank you so much for making it to the end of this post! I hope next week's topic will compound your interest! ;)
(Sorry for the nerd joke, I couldn't help myself...)