What are the Keys to Building Real Wealth? Fake Assets vs Real Assets

Introduction

The net worth of a person is greatly influenced by their decision to either spend or invest money. Many people around the world are conversant with net worth equation: Assets – Liabilities = Net Worth. This means that an individual’s net worth is arrived by subtracting what they owe from what they own.

Wasting Assets

However, such conventional information isn’t usually the best. Simply because something is considered an asset does not mean that it’s going to grow one’s wealth or net worth. There are various “assets” which at times fail to help grow one’s wealth. Listed below are a few examples.

1. A house:

Generally, most people consider a house to be an asset, and others view it as an investment. However, a house can drain you of cash flow and net worth. Houses come with extra bills including upkeep, insurance, repairs, taxes, utilities, and many have mortgage payments.

At the same time, a home or a house does not generate any cash flows, and with the volatile global economy, there are no guarantees that the value of a house will appreciate. It may even depreciate. With regards to a house, paying down or clearing the mortgage improves one’s net worth.
2. A car:

To be frank and blunt, a car is a wasting asset. A wasting asset is one that depreciates over time and has little or no residual value. As a car is used, it depreciates and ends costing the owner more in repairs and other bills (car loans, insurance, gas and so on), than what he or she paid for it. Servicing a car loan is making payments on a wasting asset. Just like a house, a car produces no cash flows.
3. Personal belongings:

These include appliances, toys, furniture, expensive clothes, and so on. Personal belongings do not appreciate in value rather they depreciate over time. At the same time, they do not generate any cash flow just like a house or car.

Real Assets

The main reason for outlining the above examples is to get people thinking of “real assets”; if their goal is to create or increase wealth. A “real asset” is one that appreciates in value over time and may also generate cash flow. Listed below are a few examples of “real assets.”

a. Stocks and Bonds:

A stock is a financial security signifying ownership in a company and it provides cash flows to holders via dividends.

A bond is a financial security under which a company recognizes it has sourced for loans from investors, and it usually provides cash flow via interest rates. An investor can also own multiple bonds and stocks by investing in mutual funds which avail cash flows and appreciation.
b. Real Estate.

Real estate it different from a personal house. Here, the reference to real estate connotes residential and commercial properties that generate cash flows. Investing in real estate also comes with various tax advantages.
c. A business.

Starting and running a business avails cash flows, and there are various tax advantages in the form of business deductions. At the same time, there are businesses that in addition to cash flows, they provide value. Such businesses can be sold for profit.
d. Education.

Various forms of education via college, self-education or internship can increase one’s wealth by increasing their human capital and knowledge; which is appreciated trough promotions, pay increase, and bonuses

Conclusion

To positively build your wealth and net worth, the main point of focus should be on “real assets”; those that have the potential for appreciation and generate cash flows. Although it is not a bad thing to own a car or a house, owning real assets is the only way through which wealth is built.

If you found this post informative please share it on social media and help demystify the science of wealth creation. The post will help others understand the art of net worth and wealth creation.

Research Link

Assadi, A. (2015, February 11). 17 Examples of Income Producing Assets You Can Invest
In. Retrieved from Alexis Assadi: Investing in Entrepreneurs: https://www.alexisassadi.net/2015/02/11/17-examples-of-income-producing-assets-you-can-invest-in/

Image Credit: Pixabay

helpful? … then please share it

twitter

facebook

google+

Consumer Tips reference: