When it comes to personal finance decisions, it can be hard figuring out the right thing to do. Most people have the primary aim of boosting their bank balance and earning more money. There and several ways of achieving this goal – some ways being more efficient than others. In this article, we look at whether it is better to boost income (from pay cheques) or build assets.
Arguments for building assets:
One of my favorite personal finance authors, Robert Kiyosaki weighs in on this topic with his view. He states that “When you work for income via a pay cheque — even high and/or steady income — that income stops when you stop working. It’s you working hard for money for a lifetime. When your income — or a part of your income — comes from assets, it’s like having your money work for you 24/7 instead of you working for money and typically paying higher and higher taxes as your pay cheques increase in size.
“While there isn’t anything wrong with working for a pay cheque, it probably isn’t the best road to creating the wealth and peace of mind that so many overworked, super-stressed and stretched-to-the-max [people] sorely need. Investing in assets, even in small ways, can build wealth and deliver a lifetime of income even if or when you stop working.”
Argument for boosting income:
Sheila Walkington of Money coaches Canada leans towards the boosting income side. She states that “Your ability to earn an income is your biggest asset, so focusing on boosting your income or at least maintaining your ability to earn a good income and keeping yourself employable is very important. Increasing your income will open up more opportunities to save, pay down debt and to build the life you want.”
My View – Boost income when you are young and Build assets as you grow older:
My view on the matter is that anyone who is still young should focus on boosting income. This means that getting a good education – whether it be from university or not. Boosting your income from a typical job when you are young will help you pay-down your student debt, put down a deposit for your house early on in life and help boost your bank balance so that you can use this to build assets later on. Boosting your income early on in your working career will
ensure you’ve laid the foundation, then you can focus on expanding your income through less traditional methods.
Ideally, once you hit your early 30’s, you should focus on building assets rather than boosting income.Earning money from building a portfolio of assets is a long-term plan and hopefully by this time you will have paid of any consumer debt you have accrued and already paying a mortgage on your house.
If you looks at most of the worlds millionaires, many only made their first million after the age of 30. Most worked in industry at the start of their careers and were able to see problems their industry faced and thus build platform to eradicate this problems making themselves millionaires in the process.
The easiest way of building assets for those devoid creative ideas is by investing in the stock market. The stock market is the greatest money making machine this world has ever known – the key is to buy and hold for the long term. I am a big fan of dividend paying stocks. To get the motivation to get started on building your assets this way, just do this – look at your net income per day and then look for a diversified range of dividend paying stocks that would yield that per year, then invest in it. That is one less day you ‘must’ work next year. If you keep thinking like this, and keep re-investing dividends, over the long-term you may not even need to work and hopefully this will set you on the road to financial freedom.
An interesting point to also note is that it is way more tax efficient to build assets that to earn income. This is especially true if you are a higher rate taxpayer and re-investing dividends (or buy units in an accumulation fund) because apart from the standard 10% dividend that everyone has to pay, you will only be liable to tax once you sell your shares. And remember that you can sell shares for a profit of £11,000 a year without incurring tax due to your capital gains allowance . This £11, 000 is in addition to the £15,000 you are able to earn tax free through your ISA. Make sure you invest using your ISA first as it is the biggest tax shield available out there. This is because you will pay no tax on any dividends received (bar the 10%) nor on any capital growth.