Assets, Not Income Is What Make People Wealthy
Updated: Sep 5, 2020
Breaking down the difference between being rich and wealthy and what you can do to get there
Pass Go and Receive $200.
Some of the best financial lessons are learned in the simple board game of Monopoly. Everyone knows you can’t win Monopoly by just collecting the $200 and hoping you never land on someone’s property. But why do so many of us end up employing that strategy in our adult lives?
Ask yourself how many ways could you pay your rent/mortgage this month?
My guess is probably only one. That means you are employing the Pass Go and Recieve $200 wealth strategy. That strategy doesn’t work in Monopoly, and it doesn’t work in real-life.
Nobody Becomes Wealthy Off One Salary
There is a difference between being rich and being wealthy. Being rich means, you can go on a nice vacation a couple of times a year, drive a nice car, and live in a big house. But if you lose your job, your way of life dramatically changes like you have to sell your home. In this instance, you are rich, not wealthy. I know there are probably many people who would say that it is a high-quality problem. Still, most people desire that freedom that being wealthy provides, not just the luxuries being rich makes available. The reason I say that is most Americans are rich, based on global standards, and we are still looking for something else.
Being wealthy means you are not tied to one job, and you can weather volatile economic conditions without dramatically restructuring your life. That is the reason wealthy people generally get wealthier in tough times. They have multiple ways to pay their “rent,” so when one of their business is doing poorly, they have other ways to cover the bill. They are also generally able to buy things at a discount from people who have been forced to sell assets to cover expenses.
Also, people who rely on one salary for their wealth leave themselves exposed to workplace disruption. In America, for a long-time, the path to a rosy retirement was to work on the assembly line, make a steady income, and then retire with a pension.
But, what happened when those jobs moved out of the country? The income engine of an entire region of the US was taken away and still hasn’t come back. We call it the Rust Belt now.
A lot of people are doing the same thing now, except they traded assembly lines for cubicles. COVID-19 and advances in white-collar automation look to unseat people from their income at a rate not seen since the Great Depression.
Assets are the Foundation of Wealth Creation
Now that I have shattered your preconceived notion that a steady job or a high salary is the key to becoming wealthy, you are probably wondering what is?
The answer is assets. If the goal is building wealth, we want appreciating assets. These are things that not only hold value but tend to grow in value.
For this, you need to start thinking about real estate, stocks, or equity in a business/franchise. All of these have the potential to increase in value over time, and can also generate additional income for you to buy more assets. You take income and buy assets, then you buy more assets with the revenue generated by these assets and on and on. Wealth generation has kind of a snowball effect.
You buy ten shares of stock A at $100 per share. It pays a 3% dividend that you reinvest into the stock, and it grows 6% annually. That initial $1,000 investment will be worth $75,000 in 50 years!
Imagine if you are investing like that every quarter or every year. That is how people with average to below-average salaries can amass wealth and financial freedom.
I talk to so many people who say they will start worrying about finances once they have more money. That line of thinking doesn’t make sense. I understand that not everyone can put a lot of money down at first, but that doesn’t mean you shouldn’t start.
That is like saying I will start working out when I am in better shape.
The earlier you can start investing in assets, the better. Having cash in a bank account is not an appreciating asset. The money you put in will stay the same and probably be worth less when you try to spend it because of inflation. Having a cash safety net is essential, but if your goal is to build wealth all of your cash can’t be sitting in a bank account.
Start early and be consistent. No matter how much it is. The best time is to start when you are young. Don’t buy into the notion that you can always save later—people who say that have to work in a job they disdain until they are 80.
Being reliant on an income alone at best can make you rich, but it will never make you wealthy. You must take this income and invest it in appreciating assets if you plan to grow wealth and reach financial freedom.
Passing Go and Collecting $200 is a lousy strategy to win Monopoly and build wealth in the real world.
Stay tuned for more articles on how to build wealth and gain financial freedom, until next time!