Did you know that only a fraction of the world’s population truly understands the art of building assets? Picture this: more than 75% of people around us suffer due to the complexities of financial struggles. It’s all because they do not realize the importance of asset creation. In a world where financial independence remains an unknown goal, allow me to ask a bigger question. Why do some individuals effortlessly amass wealth while others continue to struggle financially?
The answer lies in demystifying the process of asset building.
Join me on a journey to uncover the significance of transforming our financial landscape. As we can understand more about the elusive art of asset creation, we can slowly liberate ourselves from the shackles of financial constraints.
This article can be your gateway to financial freedom. Let’s learn and welcome to the key principles of ‘How to Build Assets.’
There are easy ways to build assets with little money. But fewer people in this world can build assets. Why, what is the problem? The problem is that people do not know the process and importance of asset building. Hence it gets ignored. [Also check this free online Net Worth Calculator.]
What one must do? It is not rocket science. If one can understand the ‘process of asset building‘, the rest will be simple. What is the process of asset building? [Also read about the process of investing successfully.]
‘Invest’ money to ‘accumulate assets’.
Though the statement looks simplistic, to better understand it we must know the relation between ‘investment’ and ‘asset accumulation’.
If one can establish this relation in the head, the balancing process becomes much easier.
Point #1: Process of Asset Accumulation
- Investment: This is a process of buying assets. The purchased assets can generate returns over time. Read more about Warren Buffett’s 3 rules of investing.
- Asset Accumulation: When assets are gradually acquired over time and held for pretty long term, assets start to accumulate. To make an investment process successful, one must buy assets with the intention of accumulation. Read more about the advantages of long-term investment.
- Asset Building: It is the “process of gradual purchase of assets, with the purpose of its accumulation“.
The important keyword for us is “accumulation”. Buying assets without the intention of accumulation is almost a meaningless activity. The focus must be on buying assets and their accumulation.
Now that you know the process of asset building, let’s ask a more basic question. Why build assets?
Point #2: Why build assets?
Do it for financial independence. What is the necessity? Let’s dig deeper.
Do you love doing your job? I know not many will raise their hands to this question. But if we do not love our jobs, why do we continue to linger on it? Because there is no choice.
To continue earning money, doing the job is a compromise that we have chosen voluntarily. But today a time has come where most of us are completely dependent on our job for the money.
There is a way to remove this dependency? Yes, there is a way. Become financially independent. How to do it? Follow this approach:
- First, realize that you are financially dependent on your job. Most of the people who are in a job do not realize that there is a thing called financial independence. Know more about financial independence.
- Second, start reducing your financial dependency step-by-step. What does it mean to reduce financial dependency? Generating an alternative source of income. An alternative source of income will come from where? From assets that one accumulates. Read more about investing for monthly income.
The bigger the asset base, the larger the will be alternative income. Larger alternative income means less dependency on income from the job.
So, build assets to liberate yourself from the clutches of your job. Make this your ‘priority number one’. It is a goal worth following.
Point #3: Why ‘alternative income’ is preferred over ‘income from job’?
We have more control over our alternative income. But the same cannot be said about the income from a job.
Alternative income generation should always get priority over ‘income from the job’, why? Because of the roots from which they originate. To understand this, we will have to look deeper within ourselves…
Why do we need money? Mainly to support our standard of living and manage other living expenses. For a human being these expenses are basic and uncompromisable.
How do we ensure that these expenses are met? For most people, one has to work hard (like in a job) to generate an income. This income in turn helps us to meet our expenses.
But the problem is, our expense grows with time. Hence our income must also grow. So here comes the distinction between ‘income from the job’ and ‘alternative income’. How the income will grow in these two cases?
Income Growth (Two Cases)
- Income growth in job: This income comes from doing a job and building a reputation for oneself in the company. It is the reputation that triggers ‘income growth’ for a salaried person. But reputation building is only partly in our control. Outside entities have a bigger say in reputation growth over time. Which means? We have less control over income growth in jobs. Read more about building millions in your first job.
- Alternative income growth: This is dependent more on a ‘mathematical formula’. Hence it is more certain. Alternative income comes from accumulated assets. The bigger the asset base, the higher will be the passive income. The rate of income growth here is more dependent on your ‘skill’ than on other factors. Which means? We have more control over the growth of alternative income. Read more about building alternative income while on the job.
As we have more control over the growth of alternative income, hence it becomes our preferred income stream.
In the initial years, the quantum of ‘alternative income’ will be low (compared to job). But do not let it dishearten you. Keep on investing and buying more assets, alternative will grow.
Point #4: How a common man can build assets?
For already affluent people, their way to asset building is different. How a common man can start building assets? These are the three steps:
- Save: Saving money is more important than investing itself. The easiest way to save money is to put aside part of the income. Reducing needless spending will also increase free cash in hand. Even the richest men in the world have to save money to stay rich. As a rule of thumb, if one saves 25% of total income, it is called a decent saving. Give standing instruction to the salary account to divert 25% of the money to the savings account. This should happen on the first day of every month.
- Invest: Why to invest? Why not keep building savings, and then use savings to directly buy “assets”? This will be nice, but keeping money as savings is not advisable. Why? Because of two reasons, (a) savings get spent too easily, and (b) invested money multiplies faster. Where common men can invest in savings? Mutual funds, stocks, real estate, gold, etc.
- Lock Funds: This is the most essential step. Generally, we stop at step two. But we must take this extra step. In this step, we are converting ‘all assets’ into ‘income generating assets’. How we can do it? My best avenues are (a) dividend-paying stocks, (b) rental properties, and (c) REITs.
The whole asset-building process can be realized by following the above three steps. There is nothing new that I have told, but what is worth remembering here is the chronology of the steps and step #3 itself (Lock Funds).
Let’s discuss slightly in more detail about how we can successfully implement the above 3 steps:
#4.1 Save Money
It is important to save money in the right way. The target should be to save sufficient money which can later be diverted to buy investments. How one can save money? In the following ways:
- 1.1 Build Emergency Fund: Nothing eats our assets faster than an emergency. When emergency strikes, money gushes down the drain. Example: a medical emergency. Hence it is advisable to keep a sufficient backup, to handle emergencies. Emergency funds must be composed of at least 2 things: (a) insurance and (b) cash. Read more about where to keep emergency funds.
- 1.2 Put Funds in Recurring Deposit: In this step, the priority is to save money. Do not think about returns here. Recurring deposits have a few clear advantages: (a) saving is automatic, (b) money is safe, and (c) Money remains in front of our eyes (bank). Read more about recurring deposits here.
Please note that in step 1.1 we are ensuring that we are well prepared to meet emergencies of life. When it comes, we can find refuge in our savings.
In step 1.2, what we are saving will be used further for investments.
#4.2 Invest Money
The savings accumulated in step 1.2 must be invested wisely. But the problem that common people face is a lack of investment know-how. So in a case like this, where one can invest money?
- 2.1 Hybrid Funds: SIP in hybrid funds is a useful tool for investment. It has multiple benefits. It can give exposure to equity and debt from a single window. Think of your SIP like this, ‘I will continue investing in this fund through SIPs till eternity’. Yes, this should be the mindset. Keep purchasing units of mutual funds month after month, without a break. This money will be eventually used to lock funds. Read more about types of mutual funds.
- 2.2 Index ETFs: Exchange Traded fund (ETF) is another excellent investment product. ETFs carry with them the advantages of both stocks and mutual funds. ETFs offer great investment diversification within the equity portfolio. Every time there is a 3% or more dip in the index, try to grab a handful of ETF units. Read more about ETFs.
- 2.3 Gold: Gold is a decent long-term investment vehicle. When I say long-term, I mean a minimum holding time of 10-12 years. The price appreciation of gold is not as predictable as equity. But in time bands of 10 years, gold price appreciates decently. For example: in the last 65 years, gold prices increased every 10 years. In the long term, it beats inflation. Read more about gold investment.
Gold Price History (10-Year Time Bands)
|Year Band of 10 Years
- 2.4. Buy Land: Land is an asset that is becoming more and more scarce. Consider the case of cities like London, New York City, Los Angeles, Paris, Tokyo, Mumbai etc. Probably, a piece of land in these cities is the rarest of rare items. One great idea of investing in land is, to keep buying land ‘just on the outskirts’ of important cities.
In this step what we are doing is to give a faster multiplying power to our savings. The investments discussed above can generate good returns over time, with less risk. But please note that the investment horizon should be more than 5+ years.
#4.3 Lock Funds
The money locked in RD, SIP, land, etc is all done with one objective. At some point of time, it should be redeemed to ‘buy an asset’. Which asset? Income-generating assets? See the following:
- 3.1 Dividend-paying stocks: These stocks are fundamentally strong stocks that also pay regular dividends to their shareholders. It is important to buy these stocks at the right price, or else their yield will be too low. Hence, waiting for the right time to grab the best dividend-paying stocks is essential. Read more about dividend-paying stocks here.
- 3.2 Rental Property: For me, this is the best income-generating asset. Why? Because it is one asset that generates the best passive income. The rental yield from a real estate property also increases at a rate of inflation. Read more about how buying your first home is a great investment.
- 3.3 REITs: This is a new income-generating investment vehicle launched in India in Mar’19. In America and Europe REITs are one of the most preferred investment vehicles for income investors. Read more about REIT India here.
One must equally distribute one’s investment among the above three options. These are great investment vehicles for income generation.
Remember this infographic…
Throwing money here and there in the name of investment is not enough. Investment is only one leg of the asset-building process. The asset building stands on three legs:
- Gradual Accumulation of Assets
- Holding these assets for very long periods.
Jointly, all 3 legs in tandem can build assets over time.
Try to take a print-out of the below simple-looking photo and paste it on your work table. I believe that this simplistic picturization of ‘asset building’ has the power to change the lives of people.
A Real-Life Example
Allow me to narrate my own story to you. I’m sure it will highlight the transformative power of strategic financial planning. About 18 years back I started feeling myself trapped in the monotony of a 9-to-5 job. During those days I first read about the concept of financial freedom. From that moment on, I’ve started to plan and unshakle myself from the constraints of tradition employment.
How it all happened organically (step by step):
Step #1: The Starting Point
It all started with a realization that job is merely a means to an end. I wanted to lead the life on my own terms, but then there was work schedule, boss’s expectations, peer pressures leading to work anxiety. My dependency on the salary from job was so much that I was feeling like trapped. I wanted to do more in life but was stuck in the rat race.
The way to get of this rat race was to achieve financial freedom, and do get there I realized that I must start taking first crucial step towards asset building.
Step #2: Strategic Saving
With a dedicated focus on saving, I adopted a disciplined approach. I diligently set aside a significant portion of my income, creating an emergency fund that acted as a financial safety net during unexpected life events. This not only protected my assets but also allowed her to withstand economic uncertainties without compromising my long-term goals.
Step #3: Intelligent Investing
Embracing the world of investment, I navigated through various options, from mutual funds to stocks and real estate. I strategically diversified my portfolio, understanding the importance of spreading risk and optimizing returns. A significant portion of my savings found a home in well-chosen investment avenues, setting the stage for the gradual accumulation of assets.
Step #4: The Turning Point
As the years rolled by, my portfolio matured, and the seeds I planted began to bear fruit. My investments in dividend-paying stocks and rental properties became potent sources of alternative income, gradually surpassing the earnings from her traditional job.
Financial Independence Achieved: Fast forward to the present, and I stands tall as a beacon of financial independence. No longer bound by the chains of a 9-to-5 routine, I enjoy the freedom to dictate my schedule, pursue passion projects, and explore life beyond the confines of conventional employment.
My journey is a vivid illustration of the three-step process – saving smartly, investing wisely, and locking funds into income-generating assets. My success underscores the transformative potential of strategic asset building, offering a compelling narrative for those aspiring to break free from financial constraints and craft a life of true autonomy.
Is there anything more important than ‘building assets’? Yes, there are two:
I feel that, unless one has achieved the above two goals, venturing into asset building will not be effective.
So before venturing into ‘asset building’, make sure that you are debt-free, and also have a big enough emergency fund protecting your back.