Building Assets: What Are They And Why Should I Want Them?

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In this post, I want to highlight one of the most amazing things that I think everyone must add to their “money MDT“:

ASSETS

(aka investments)

Now why do I want to highlight this? Because this is the only thing that will ensure you can gather together enough money to have a decent retirement. I’m afraid straight forward savings just won’t cut it, and let me show you why.

What Are Assets?

According to Investopedia, assets are:

“anything of value that can be converted into cash”….this includes cash, property, other property and equities (stocks and shares)

I think that definition is a little bit too simple at face value, because “anything you can convert to cash” could include your old shoes that you put on ebay. Hardly what I would call an “asset”.

I like to think of assets being your personal little money-making machines. They are things that have the capacity to make money for you to live off. The money you spend on an asset is hopefully going to continue to make more money for you in the long run.

The Cambridge Dictionary also says an asset is:

“a useful or valuable quality, skill or person”

I think this is very true, and actually, we often overlook our own assets as a person!

What Types of Assets Are There?

Asset classes include:

Stocks and Shares
Property
Bonds
Commodities (like gold)
Businesses
Royalties (for photos and music etc)
Our pensions
Ourselves

Now assets can be liquid or illiquid (how quickly you can get your hands on the cash if you needed it). Pensions are only available until you hit retirement age, but when you do, it will produce an income for you. Stocks and shares can be sold quickly, but they can also produce an income through dividends if you set them up to do this. Property on the other hand, takes a while to sell, but if rented out, can produce an income for you straight away.

Your own home can be described as an asset (and often is), but we have to be careful with this.

Why Your Home Is Not A Money-Making Asset….Yet

Gurus like Robert Kiyosaki (Rich Dad, Poor Dad) and Ann Wilson (The Wealth Chef) have highlighted that until you sell your home, it is not an asset, contrary to what a lot of people believe. For many, their home is their “pension plan”, so they work really hard to pay off the mortgage ready for retirement. This is great!

So what’s the problem?

Until you sell your home, you are needing to put money into it – bills, insurances, council tax, repairs. This is the definition of a liability. The house then needs to be sold (hopefully at the value you think it is worth, AND perfectly timed when the property market is at it’s best), then you need to find a smaller property to move into, and then hopefully any profit you make will last you through your retirement. It may well do, but there are a lot of potential pitfalls with this.

The only exceptions I can see, is if you are renting our part of your home to produce an income, or using your home to run a business. In these situations, your home can be described as an asset.

The same goes for your car. Using investopedia’s definition, it is an asset, but until you sell it, it doesn’t make you money, and in fact, the moment you drive it away, it loses money for you, and you have to keep spending money on it to make it run (definition of a liability again). If however you become an taxi or delivery driver, or you rent out your car to start producing you an income, then yes, it is a valuable asset to keep your business running.

Why Do I need Assets?

Did you read where I said “money making machines?” – who doesn’t want that?!

If you have a pension, then you have already started building assets. A pension is there so that one day you can stop working and retire in your old age!

Many people aspire to be “wealthy” and have an amazing lifestyle jetting all around the world. And how do genuinely rich people do this? Through ASSETS!

They put money into things that produce them an income which they then live off. The assets pay their bills for them and allow them to chillax on the beach. Rich people don’t need to work as hard because they have assets working for them instead.

For example, if you own 5 x rental properties, and each one brings in a profit (after expenses) every month of £500, then 5x £500 is £2500. Could that be enough to live off for you?

This is all very well and good, but I don’t have money to buy 5 rental properties. So what do I do instead?

How To Get Started

If you have little to no money to invest, one of the easiest ways to get going with asset creation is to start investing in stocks and shares. Now before you go running to do this, make sure you educate yourself properly first. Investing in this asset class can lose you money as well as make it for you, and it should not be seen as a “get rich quick” kind of deal. If you are being made to believe it is, then be very very careful before you do anything. It may well be a scam or some kind of pyramid scheme.

Equities is a huge subject area. You can use stocks and shares to produce an income straight away (through dividends etc), or you can grow your investments to use later on. This is how pensions are created – the money you have taken out of your pay check goes to an investment company who chooses where to invest the money for you. When you retire, they start giving the money back to you (all for a fee of course).

What Are Stocks And Shares?

They are essentially little pieces of ownership of a company. The money you use to buy them goes to the company to help it to grow and develop. The more faith people have in a company, the more expensive their shares become. When faith subsides, the price goes down.

This “up and down” cycle is what generates money for people – if you buy the shares when they are cheaper, and then the company does well, your shares will steadily climb in value. The same is true the other way around. This is also the bit that causes the most anxiety and is what puts a lot of people off. However, if you hold shares for the long run (like 10+ years), they have the best chance of growing into a nice nest egg ready for when you need it. The “downs” are correct with time.

It’s Not The End Of The Story

Now investing isn’t for everyone, and for some people, saving is all they want to do, and that’s fine. Just be aware, that money saved in the bank is losing money with time, because inflation (how stuff we buy just keeps getting more expensive) gradually makes your money worth less.

So for younger people (*cough*…like me), we have plenty of time to learn and get started, and potentially have a lot to lose on our money if we keep it saved in the bank doing nothing.

It takes time to build assets. The more money you can plough into them, the faster you will reach your goal. But do you even know what your goal is? How much do you need in “assets” that means you can then retire and chillax on the beach? It’s a very good question, and depends entirely on what you aspirations are, how old you are when you start and when you want to retire. Our work pensions are designed for when we reach our 50s/60s, but if you want to retire sooner, or leave a legacy for your children, then you absolutely need to be branching out and learning how to build assets like stocks and shares.