Buy Assets Instead of Liabilities
“Make your money work for you”. We have all heard this line from every single investment guru that pops up on our screens. But they rarely go on to tell you how to do this seemingly easy task. Quite simply put, your money works for you when you buy assets instead of liabilities. When you invest, it is essential to take a step back to analyze the potential of said investment, before committing any money towards it.
What are Assets?
Assets can be described as anything that has economic value while also having a future benefit. It is often a misconception that the rich can afford luxuries purely off of their capital. However, often these luxuries come from the profits from the assets. For example, if you were in the market for a fancy new car, it would be advisable to buy a piece of real estate first. The investment in the real estate would in turn generate enough cash flow to finance the vehicle. This practice of generating more cash flow through planned and calculated investment stabilizes your finances and allows you to spend without disturbing your safety net all that much.
Assets include stocks, bonds, real estate that can be rented out as well as items that will appreciate in value. However, the appreciation should be less than the inflation in the market and the cost of upkeep of the item itself. Here are some classic examples of assets that can prove to be beneficial financially.
Stocks are shares in companies that have been made available to the public. These pieces of a company earn you money in two ways. The first is through the dividends of the profits that the company makes. The second is through the resale value of the stock itself. That means that when the value of the company increases, the value of the stock does too. If you plan to buy assets, investing in stocks can prove beneficial.
Bonds are essentially loans that you make to a company that they are then liable to pay back with interest. Similarly, to stocks, bonds can also vary in value and are hence a means of generating cash flow. There are many different types of bonds such as fixed-rate bonds, inflation-linked bonds, floating-rate bonds, zero-interest bonds, and many more.
Historically, real estate has proven to be one of the safest investments because of its unparalleled ability to generate cash flow through rent as well as its constant appreciation. In addition to buying properties, you can also invest in real estate investment trusts (REITs) to purchase, sell, or operate income-producing properties. You can buy and sell REITs on major exchanges just the same way you buy and sell stocks. There are plenty of real estate investment groups that are similar to that of small mutual funds. They help you own rental properties that eliminate the hassle of you having to be the landlord.
Time is regarded as one of the most important and invaluable assets that you can possess. It is not something that you can buy more of at any given juncture. Thus, making smart use of your time is the best asset you can have as it allows you to first invest that time into upskilling yourself and then selling those skills to generate cash flow in the future.
What are Liabilities?
Liabilities can be bluntly described as anything that loses you money. These include luxury purchases like TVs, pricey cars and haircuts, and a whole host of other things.
Some of these items may be unavoidable. But, to have a stable financially stable situation, it is essential that your assets outweigh your liabilities. There are certain unavoidable liabilities that almost every individual invests in. One of such investments is a vehicle. While there are several options to have a vehicle to meet the purpose, many people incline towards purchasing a vehicle.
No matter how you look at it, a vehicle is a liability as it is almost certain to depreciate in value with time and costs a considerable amount for its operation and upkeep. The second of these unavoidable liabilities is the house in which you reside. As long as you are occupying a piece of real estate that you have purchased, it is not earning you money and is hence a liability.
Liabilities That Can Be Converted Into Assets
In the technology-driven world that we live in, it is easier than ever to turn liabilities into assets. Property owners all over the world have taken to generating cash flow through their spare rooms, apartments, and condos by renting them out for short periods on renting platforms. One can even rent out a spare couch to travelers looking for a short stay. Just like that, an object that was previously considered to be a liability is now earning you money.
With ride-hailing companies allow you to turn your vehicle into a source of income through rideshares. One of the most common ways of turning a liability into an asset is through time. Every minute that is spent idly, is for all intents and purposes a liability. Many working individuals look for side hustles and small businesses apart from their regular jobs as a way of better utilizing their time to make more money.
Advantages of Buying Assets
It is quite clear that it is advantageous to invest money in assets rather than in liabilities. The primary one of these advantages is financial stability in the long term. While short-term gains are important, planning for when regular income in the form of a salary is no longer a part of your life. The individuals who remain affluent after retirement are often the ones who have invested smartly to earn passive income for the remainder of their lives.
In a Nutshell
Buying assets can be a smart investment choice as its value grows over time. On the other hand, investing in liabilities may meet certain ends for the time being but can lead to financial burnout in the long run. So, make sure that you buy assets, not liabilities.