A lot of folks read the word ‘wealth’ and think ‘rich’ or the 1%. When I have a conversation with folks about wealth, some of them give me a stare and ask me if i thought they were Jeff Bezos! Do I look like I am wealthy to you? People associate the word ‘wealth’ with sprawling mansions, trust funds, yachts and the list can go on. Well, technically the word ‘wealth’ does mean an abundance of money. But in financial parlance, we are going to think of it in more down-to-earth terms – the ability to have assets that generate income for you.
Wait a minute! Assets that generate income for me? How on earth does that happen? Let me begin by saying that what i am about to say is not some get-rich-quick scheme or for that matter a trade secret. All I am going to do is provide a framework to think about asset accumulation and a certain mindset to approach it. You may be someone who already owns assets that generate income – so this may be a bit repetitious or it might give you further food for thought.
One more thing – I do want to acknowledge that a lot of us who are reading this have been privileged in many ways and I don’t want to sound tone deaf to people who have been badly impacted economically by the pandemic. If you are out of a job and struggling to meet rent or put food on the table, then I understand that you probably want to get to a more stable position before you can consider this article.
What do we mean by wealth creation?
Let me repeat what I said above – wealth creation happens when you have assets that generate income for you. The book ‘Rich Dad, Poor Dad’ by Robert Kiyosaki does a fantastic job laying this out and I would strongly encourage you to read it.
Lets first make a fundamental distinction – most of us work jobs to generate income. We are trading our time in return for money. That is not what we are talking about here. People who earn high incomes are not necessarily wealthy. But people who own income producing assets become wealthy. We have heard of examples of janitors who have retired with millions of dollars. They did not necessarily have high incomes. We will talk about how that happens here.
What assets produce income and how?
The most common assets include stocks, bonds, REITs, Real estate, commodities and then you have some uncommon and/or new age assets like cryptocurrency, art etc. There are one or two different ways to generate income from assets:
- Continuous ongoing payments like dividends, interest or rents. Traditionally, assets like cash, stocks, bonds, REITs, Real estate will provide this. These generate continuous cash flow.
- Sale of the asset – these assets typically have underlying values and you can sell them at the prevailing market rate.
| NOTE: One asset I don’t mention here is owning a business. Most of the billionaires and multi-millionaires got there by owning a business. Remember this guy by name Jeff Bezos? But you don’t have to be a billionaire to own a business. At a basic level, it follows the same ways of generating income – businesses produce ongoing profits and it can also be sold for a prevailing market rate. |
So if you stack your portfolio with enough of these assets, you can eventually earn enough income through these assets and potentially replace your W2 income.So instead of trading your time to earn money, you can now earn money passively and have re-captured your time to do what you want with it.
But if this is so straightforward, why isn’t everyone generating all these income producing assets? The answer, a lot of times lies in a more behavioral part of personal finance. Not all assets are created equal and money is a scarce resource. Some people tend to use their limited resources to buy assets that don’t create income.
Before I go into this, let me warn you that I am wading into controversial territory here. So I ask you to stay open-minded and bear with me for a bit.
“..why isn’t everyone generating all these income producing assets? The answer, a lot of times lies in a more behavioral part of personal finance. Not all assets are created equal and money is a scarce resource. Some people tend to use their limited resources to buy assets that don’t create income.”
What ‘assets’ do we buy that dont produce income?
The term ‘asset’ is defined technically as something that has value. Your house that you live in, the cars you own, even your TV, laptop/computers, clothes all have some value and are technically called an asset. But these don’t produce income for you.
Now, at this point, you are probably like – this is crazy – I need to buy these things to live. I agree with you. We all need a roof above our heads, we need clothes, want to be entertained and watch TV and so on.
But remember what I said earlier – our money is limited. So ultimately, the choice in front of us is how much of my money am I going to spend on assets that generate income vs don’t generate income? A hotly debated asset is your personal residence – nobody debates the need for a house to live in. But it does not generate income for you. Not unless you are renting out a portion of your house or house-hacking. If anything, a house requires you to continue to spend money on it without it generating any income. What about a car? Unless you are renting out your car or using it to drive for Uber, it is definitely not an income producing asset and to top it, a depreciating asset – meaning the asset loses value over time.
So then the question is how much money do you want to spend on a house? (Btw, you have to make this choice relative to the location you live in – $1M in San Francisco gets you a small house vs a sprawling mansion in Huntsville, AL). How much money do you want to spend on depreciating assets like a car or TV or laptop? Do you need the fancy, luxury car or will a cheap, used car do? Do you need the fancy new macbook or will a simple laptop do? Only you can answer that – that is a personal choice and decision.
| NOTE: If you have a LOT of money and are ultra-rich, these choices probably don’t mean anything to you because you simply have enough money to buy everything in cash. But even lots of high income earners probably feel they can afford to do both. If you are able to comfortably acquire a sufficient amount of income-producing assets and still buy non-income producing assets without hardly any debt, then you are probably fine. |
Are you suggesting I can stop working if I buy income producing assets?
Eventually, absolutely yes! But the question is how much should I acquire. The answer to that requires more discussion and I will reserve that for a separate article. But needless to say, the more income producing assets you buy, the more passive income you generate for yourself. This obviously does not happen overnight. It requires time (ref my article on compounding), diligence and as I noted above, a certain mindset for acquiring income producing assets.
What about investing in myself?
This is an interesting final point in this topic. In my opinion, investing in yourself is the ultimate income producing investment. Investing in yourself to build skills and knowledge can be the superpower to generate more wealth. Formal ways of investing in yourself include getting an advanced degree, taking a course or attending a workshop. But often people overlook the less formal ways of investing in yourself by voraciously reading books and articles or listening to podcasts. Often, the latter kind of investments don’t require money investment but time investments. From personal experience, I can say I have been a beneficiary of both, and truly believe in this. It is not easy to often quantify the financial benefits of this but I am convinced, this can be the most impactful of all investments.
I will close by summarizing all this – Wealth is created by acquiring income-producing assets and you can make your money work for you, rather than you work for your money.
I hope this article spurs you to ask some questions and drives you to be more intentional in your financial decision making. Thank you for reading and I wish you all the best in your financial well being journey!
Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.
