Stop working for your money
Working towards being Financially Independent is precisely having the goal that at some point, you will have enough money working for you so that it can cover your living expenses. Until then, the only money that covers your rent, your internet, your cellphone, your cable TV … is the money that you work for.
If you do not want to work for your money forever, you have to stop working for it and start making it work for you.
The first immediate step is to limit your dependence on working for your money. Follow the guidelines on how to Become a Millionaire and increase your Savings Rate. Reduce your spend, increase your savings, decrease your dependency on having to work for a living.
The second immediate step is to get rid of all those liabilities that do nothing but eat up your wealth for as long as you have them. First on the list : credit card debt, This is like the cancer of your wealth. This essentially make you a slave to this little piece of plastic that will keep on dictating you to “work harder, because you know, if you don’t pay today, you’ll owe (a lot) more tomorrow and you’ll have to be working even harder”. Screw that! Kill it as soon as possible. Stop living beyond your means, swallow your pride, save up, pay it down and free yourself.
Now you need to invest in assets. The good ones.
Invest in Producing assets
An asset is anything of value that can be converted into cash.
Thank you Investopedia.
With this definition, there are 2 types of assets : the income-producing and the non-income producing, which includes the depreciating assets category. The assets that depreciate will keep losing value and as time goes, so does your wealth. The producing assets will return more value to you over time it in exchange for you keeping them.
- non-producing, depreciating-only assets : Owning these assets will not produce income and their value will only decrease over time. As time goes, so does your wealth. Eg: cars, furnitures, computers, phones, clothes… However those assets are important and when they enable wealth they are actual investments: eg. buying a car to be able to work more than 1/2 a mile from where you live is an investment because it is expected to return more than what it costs. When they do NOT enable wealth they are a liability: eg. buying a 80k$ fancy car where a 10k$ used car could have as reliably taken you to work every day is a liability if the extra 70k$ spent on the car are not expected to bring back more than 70k$ financial value-add (unless you are operating a limousine service business that clients are ready to pay for the extra 70k$ put in the car).
- non-producing assets that can appreciate/depreciate: Typically those are commodities, like gold, oil, currency and primary residence real-estate and collectibles. Those assets do not produce income and have no value except the value that the market attributes to them. Gold lingot and 1$ bills do not reproduce themselves, no matter how long you keep them. Staying in your primary house will not generate more cash.
- producing assets: Those assets generate cash. They reproduce reproduce themselves. And they can appreciate/depreciate in value as well. For example, stocks pay dividends, bonds pay coupons, a real-estate rental property generate rents but their value also varies with the market. Once invested in a producing assets, keeping it long enough will produce the cash needed to purchase another producing asset. The compounding effect applies here and producing assets generate exponential returns when returns are automatically reinvested. This will create a passive income and will eventually grow your wealth to reach Financial Independence.
Rich people have never been rich collecting depreciating assets that would eat their wealth away, rather they heavily invest in income producing assets because those assets work for them.
Increase your Savings Rate, Kill your credit card debt and invest as much as possible in income-producing assets to build your wealth and a passive income. Not only does it improve your current financial position, but it will actively improve your future financial perspectives!
Dear readers, what are your thoughts on the classification of these assets types? Are there other types of assets that you have invested in that generate income for you?
Nick – MoneyMiner
* Photos credits Unsplash