Why should you build assets?
That is because building income-generating assets is the surefire way to wealth building.
However, before wondering how to build assets there are preliminary queries that you should consider.
Do you have a secured, constant reliable income?
Are you managing your income the right way in terms of expenses and saving?
Let’s dig deeper:
How to build assets? How does the process of asset building go?
As we noted above to be able to build assets you need to:
- Secure a reliable income to cover your expenses and set aside a small amount of money to save.
- Saving small amounts of money regularly can lead to a substantial amount that enables you to think seriously about investment.
- Investment means buying assets at low or even fair prices to get more money back.
- Holding assets for quite a long time allows them to accumulate and hence the process of asset building occurs.
- The income generated from the accumulated assets may entirely or partly be invested through acquiring more assets.
As a result of asset accumulation, the process of wealth building goes at an exponential rate.
How to secure a reliable income
You may be just a fresh graduate who looks for a job or any source of income to start your career. Or even better you look for your passion and dream to be a budding entrepreneur. Read more about the secrets to success behind great entrepreneurs.
Anyway, in both cases, you will get a low to moderate income as a beginner. No matter what you’ll get, managing your income is the key secret here.
Be wise enough, don’t dream of living the life of celebrities. Be satisfied by the standard of living that you can afford.
Living a humble life at the beginning of your life journey will help you make miracles later on.
It’s important to know that if your current source of income can’t enable you to save some amount of money regularly. You should look for a supplement source or any other solution.
Why should you save money?
Saving money is the first step on the way to how to build assets. Also, you need to save money for emergencies and to cover unexpected financial hardships or for a better life in the future.
According to Bankrate, there is a growing percentage of Americans who have no emergency savings whatsoever.
Below a graph that shows the average annual household expenditure in the United state from 2010 to 2019 (in U.S. dollars).
We save money to initiate the cycle of building yielding assets. To illustrate how to build assets.
Keep in mind that your ability to save money and to manage your financial affairs is a litmus test about how your financial future would be.
So always be careful and keep your eye on your expenses. Don’t pay an extra penny for something that you can get at less price.
In other words, always look for ways to buy things at a discount rather than getting them at a full price.
Saving is one of the most important aspects that always Warren Buffet advises those who want to be successful entrepreneurs. As he refers to the importance of saving by saying pay for yourself first.
Buffett gives saving the priority to ensure your financial security and financial independence later on in your life.
“Don’t save what is left after spending; spend what is left after saving” Warren Buffett
How to save money – It’s essential in the asset-building process
To be honest the saving habit seems as if a personal qualification that varies among people.
So if you feel that saving money is money, easier said than done.
Then you need first to develop the saving habit to the extent that you spend what is left after spending as Buffett said.
So the most important question in this regard is:
How do you develop a saving habit?
Saving is a tough habit and requires self-discipline. However, it can be easier when you build a belief about the importance of saving and how that helps others to achieve their big goal.
And that can happen through:
- Reading more about saving and the stories of successful people who recommend saving as the cornerstone in the journey toward financial security and wealth building.
- Keep track of your expenses to find ways for more control.
- Set a tight budget for living expenses and stick to it.
- Set saving goals that suit your budget.
- Celebrate your saving progress.
Investing in income-generating assets is at the heart of how to build assets
Investing is critical in asset building.
As you’ve saved some of your hard-earned money and want to take an advanced step towards growing your money through investment. Right?
However, investment isn’t a game to go if you haven’t the right playbook, or else you’ll lose your money.
Of course, I don’t want to discourage you as that goes against the purpose of my article. All that I want to emphasize is knowing the right principles of investment before doing it. Read more about how to invest like pros.
If you don’t know what you’re doing in investment don’t ever do it yourself and look for other ways where professionals are running the process.
Always remember that:
“ Risk comes from not knowing what you do” Warren Buffett
There is no optimal asset to invest in yet there are investment opportunities that are a good fit for your situation.
So you need to choose the investment that best suits your situation in terms of:
- If you want to do it yourself.
- How knowledgeable you’re about the type of investment.
- How soon you’ll need the invested money.
With that said let’s dive deeper into what is common of investments in our world today:
Stocks are the most common type of investment. They are shares of businesses that trade in the stock market where you can buy and sell easily in whatever publicly traded company you want.
However, investment in the stock market is a game where the majority of participants lose their money in favor of sophisticated investors.
So don’t rush following the crowd. Read more about value investing and how to do it like the most successful investors.
Bonds allow large organizations to borrow your money to fund their projects. The defining characteristic of investing in bonds is the high safety margin and stability. As it is considered a type of fixed-income investment.
The risk and the interest rate of bonds depend on how creditworthy the borrowers are.
Bonds are safer than stocks however, their returns are not appealing when the economy is doing well. So be wary when you resort to bonds. You have to make sure that their yields can beat inflation.
In an investment fund, you purchase a portion of the fund holdings while the fund managers are running the investment process of all the fund capital collected from the contributors.
Investment in funds is the most recommended way of investment for beginners who are still unfamiliar with the investment principles. As you’ll pay investment fees for fund managers who have enough experience to manage the whole process.
Funds often tend to diversify their investments in wide-based investment assets. For example, mutual funds, exchange-traded funds, and index funds invest in different asset types that align with the fund’s stated goal.
Real estate is a lucrative investment strategy that generously pays off to those who know what they do. There are different ways to invest in real estate based on the amount of your invested capital.
What is encouraging about real estate investing is that you can start with any amount of money you have.
Just like investing in mutual funds to buy stocks and bonds, there are similar funds, groups, or platforms that you use to invest in real estate without the hassle of running the processes.
For example, REITs (real estate investment trusts) that pool together money from investors to purchase and operate properties. Then the investor gets regular income in the form of dividends.
Some savvy investors see that investing in real estate has the virtues of both stocks and bonds.
As it could provide a high return as that of equities while keeping your investment more safe and less volatile.
Gold is the # 1 safe-haven investment over the ages. Why do investors put such all faith in gold?
Because gold has proved that it’s almost the only commodity that could weather the market changes during economic instabilities.
The history of gold shows that it holds its value and even gets better in the circumstances of downturn and recession. That is of course when compared to other assets.
Now the question is:
How can you invest in gold?
There are different ways to invest in gold and deciding on the best choice depends on how much capital you have and how long your investment strategy will be.
Let’s break down the available types of gold investments:
- Acquiring the physical gold bullion outright from a reputable gold dealer.
- Buying shares through gold funds like mutual gold funds or exchange-traded funds (ETFs).
- Buying gold certificates.
- Trade gold options.
- Acquire jewelry, however, that option often requires paying extra cost than in exchange for manufacturing.
- Also, buying shares in mining companies or other industries that revolve around the gold industry.
Below is a chart from the gold price that illustrates 30 years of the gold price history in the US dollar per ounce.
Asset building and accumulation – How to build assets
Once the highly selected, income-generating assets start to accumulate, your wealth will start to grow at a significant rate.
When do you as an investor think about acquiring other assets?
Since you’re running successful investments then there is a free cash flow (FCF) generated. That is because the operating cash flow (OCF) is needed for running the processes more than the capital expenditure (The capital required for acquiring and maintaining fixed assets).
This surplus in cash is known as free cash flow and should be reinvested in the best possible way otherwise it’s better given to shareholders as dividends.
The key here is reinvesting the FCF in acquiring new assets for the sake of accumulating other income-generating assets. And the process goes on.
How the different assets classes have performed over more than a century
How was the rate of return on the invested capital in each asset over this long period?
It’s appealing to me to shed light on one of the most valuable researches in this regard. It’s a new paper from economists at the University of California, University of Bonn, and the central bank of Germany.
The study has shown that real estate investments (housing in particular) can get you high returns as equities while providing low volatility as of bonds. That of course over a very long period.
You can download the PDF of the study here.
Historical returns could help us get some ideas of what to expect in the future. Right?
However, when listening to the great investors we can figure out that there is an important secret behind their success.
What is that secret?
It is the focus on what they fully understand. They put most of their focus on what they understand and what best suits their situation.
Buffett has long said “ risk comes from doing what you don’t know”
Final thoughts on how to save money
If you want to build wealth you have to think seriously about acquiring valuable assets at or less than their true value.
The process of acquiring the right assets is all about knowing the basics of investing and following the path of successful investors.
That requires a lot of self-discipline to curb yourself from following the crowd.
It takes knowledge about the industry you would like to invest in to do things you already understand.
So you need to read a lot about what you’re going to do to make informed decisions on time.
Always be reminded that success takes time and there are no shortcuts to it so always be armed with patience to do the right things at the right time.
Just do what you know and in case you want to be venturous do that after building the required knowledge about what you want to venture into.