Where does most of your money go? Do you use it to buy stocks, bonds, real estate or interest in private businesses? Or do you buy new clothes, tech gadgets, jewelry and cars? You can categorize pretty much anything that holds value as either an asset or a toy. Buying assets will increase your net worth and passive income and put you closer to reaching financial independence. Buying toys will do exactly the opposite.
If you look at how wealthy people got to where they are, you will see a common trend – they all focus on buying assets first. Only when their portfolio generates enough passive income, do they consider purchasing anything else.
So What is an Asset?
The precise definition of an asset can be debated, and some may disagree with how I define it. To me, an asset is something of value that has a potential to appreciate in value or to generate income. In other words, an asset is an investment – it allows you to use the money you already have to make you even more money.
There are many different types of assets you can buy. Examples include stocks, bonds, commodities (basic goods like gold, oil or corn), real estate or private businesses. As long as there is a potential for it to appreciate in value or to generate income, it’s an asset in my book.
Stuff that doesn’t fit this description is not an asset – I call it a toy. Your car is a toy – it depreciates in value and doesn’t generate any income. Your electronics, clothes, furniture and other “stuff” are not assets either. I would classify your home as an asset, since it has a potential to appreciate in value, although Robert Kiyosaki may disagree :)
Buying Assets Makes You Wealthy – Buying Toys Doesn’t
You may look at your friend who drives a nice car, wears expensive clothes and goes to trendy restaurants and night blubs, and think he is wealthy. While there is a possibility that he is, chances are – he’s not. In fact, most people who have a lot of toys are not wealthy at all – they are actually poor.
They buy a lot of crap, but they don’t buy any assets. Worse, they buy most of their possessions on credit. It’s very likely that with all the debt, they actually have a negative net worth. Most of their income goes to repaying debt on things that decrease in value every day (like your car, for example). And if they lose their job and their income – they can lose everything they own.
Wealthy people spend their money buying assets. They have large stock portfolios, they own real estate, and they are business owners. They focus on growing their net worth with every purchase, because they know that the more assets they have, the more passive income they will be able to generate. And growing their different streams of passive income is what allows them to stop working and retire.
$10,000 Today or $193,581 in 10 Years
I think one of the biggest reasons people don’t embrace buying assets is because they are not willing to delay their gratification. If they want something, they want it now. We are all brainwashed and bombarded by advertising from an early age and are led to believe that buying things is supposed to make us feel good. The entire media industry revolves around satisfying people’s materialistic wants.
So when you see something you want, you probably don’t even think about how your purchase is going to affect your financial future – you just go ahead and buy it. But consider this – if you buy a toy today for $10,000, that money will be gone forever. It will never be able to make you more money, and whatever it is you bought will eventually be thrown away.
Now, if instead you used that $10,000 to buy an asset that grew at 10% per year, you will have over $27,000 in 10 years. If the asset grew at 20% per year, you will have over $72,000. And if it grew by 30% a year, you will have $193,581 in 10 years. That’s enough to buy a house in most parts of the US!
I hope you think about that the next time you are about to buy some useless toy that you will get bored of in a few weeks. If you still go for it, that’s your choice. I know I would rather invest the money and buy a great asset, so I can retire earlier and wealthier than the vast majority of the population.
Look at your last major purchase. Was it an asset, or a toy?
Image source: Mark Herpel