With the new year comes new resolutions. For 2019, let your personal finance resolution be the following:
Buy More Assets. Buy Less Liabilities.
An asset is anything that puts money into your pocket. Assets tend to increase over time. Examples include stocks, bonds, real estate and businesses.
A liability is anything that takes money out of your pocket. When spending money on liabilities, the money spent is gone forever. Liabilities also tend to lose you money over time. A good example is a car.
In order to build wealth one must concentrate on acquiring cash flow producing assets. Assets work relentlessly on your behalf in order to earn you money.
A good example are my stocks which pay me cash dividends on a regular basis.
Let’s look at a share I own, BP, to Illustrate this concept
Say that you had bought 10,000 shares in BP at the beginning of 2016. For this one off purchase, you would be getting a stream of cash flowing into your account every three months.
In the first quarter of 2016, the company would have thrown just over £700 your way. In the second quarter, £691 would have hit your account. In the third quarter, you would have received £755. Just like that, every quarter, money is flowing your way.
All in all, you would have received £2,942 worth of dividends in 2016, £2,990 in 2017 and £3,056 in 2018. You would have received 30% of your initial cost in dividends alone in three years. Now that is a great deal.
As BP pumps out more oil and makes larger profits year after year, so does the amount the company sends your way. After all, you are a partial owner of the company by way of your shares. More profit for BP equals more profit for you.
You can see this trend of increasing payouts coming your way year after year. You received £48 more in 2017 than you did in 2016. You received £66 more in 2018 than you did in 2017. This is the power of owning a cash flowing asset.
So, not only do these investments pay cash money on a regular schedule, but they often increase how much they pay without any effort on your part.
That’s a pretty good deal if you ask me.
And I haven’t even talked about the capital appreciation. All the while you’ve been holding these BP shares, the underlying value of the shares have increased by 60%. This appreciation plus the dividend payment you have received gives you close to a 100% return in under three years.
Now on the other hand, say you would bought a liability such as a new car. Each year, the car will happily pay you a whopping £0 for owning it. In fact, you’ll probably spend more money over the years to repair and maintain it. And let’s not even talk about depreciation. Forget about making a profit on sale, you would have a very hard time selling the car close to the price you bought it.
That is why I say investing in an asset is like buying a gift for yourself that just keeps giving you more and more money over time.
Don’t use your money to enrich other people like the car dealer. Instead, use your money to buy more money and better your own life.
Make it your aim this year to buy lots of little money-making assets and avoid buying lots of little money-sucking material possessions.