Not all assets are created equal. Some make you wealthier. And others make you look wealthy but really make you poorer over time.
Assets are things that have value. Look around you. What do you own? You might have a lot of clothes, a smartphone, a big-screen TV, and even a car you’re paying off. You could consider all of these things to be assets, but some are good and some are bad.
Take your car, for example. Most people think of their car as being an asset. But the minute you drive it out of the dealership, it’s no longer worth its original value (just try selling it). What’s more, if you didn’t use cash to pay for it upfront, then you’re still paying it off, which means it’s actually costing you money to own. And that makes your car a bad asset.
So, good assets are things you own that increase in value over time when simply left alone or that generate an income for you (called a passive income). Examples are shares, a flat you’ve paid off and rent out for a profit, a business you own, an original piece of art by a successful artist, or even something like your grandmother’s engagement ring.
Bad assets make you poorer. They destroy wealth, either by costing you money to own them or by becoming less and less valuable over time. Examples of bad assets are your car, your cellphone or your clothes.
In a perfect world, we’d say that you should only spend your money on getting good assets, but that’s just not realistic. You can’t avoid having to spend money on bad assets because you’re unlikely to get a job that earns you money to live if you rock up at the interview naked. But, you can avoid overspending – for example, by buying reasonably-priced clothing that’ll last you a long time instead of the latest fad from a designer label.
Knowing the difference between good and bad assets is half the battle.
If you’ve already gotten yourself into some bad debt by acquiring bad assets, your first priority should be to eliminate your bad debt ASAP. You can do that by spending less than you earn and putting as much cash as possible every month toward paying off the bad debt. The sooner you can get rid of the bad debt, the better.
Remember, not all debt is bad. If you took out a student loan to finance the degree you needed to get the job you wanted, or you have a home loan, it’s actually good debt because it usually makes you wealthier in the long run. It might make economic sense to keep paying off the good debt slowly, so you can free up cash to put towards good assets. For advice about your specific situation, speak to a financial planner.
When you’re ready to start putting money toward good assets, a great place to start is a retirement fund (if you don’t already have one).
This depends on your life goals, but ideally you want to get as many good assets as you can, because of something we call a virtuous financial cycle. This is involves collecting more and more assets that increase your wealth over time.
The cycle looks like this:
In your fight for financial freedom, mindless spending (consumerism) is your biggest enemy. Shops (the retail industry) and banks (the credit industry) are designed to make you want more stuff, usually bad assets, or worse, stuff you’ll get yourself into debt to have.
So now that you know what an asset is, you might want to take a look at our article on your best asset. Here’s a hint: it’s something you were born with and, if handled right, it has the potential to create a whole lot of wealth for you.
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