Bonds: When you invest in bonds, you become a debt-collector. You collect interest just like your bank is collecting on your mortgage (if you have one). That’s how bonds generate cash.
Save enough money to live on for at least 6 months — A lump of cash is not a sign of wealth, unless you can generate more of it. Some people think “saving” is a pillar of wealth, but that’s not true. You save money to have peace of mind, so you can keep investing in yourself.
Sure, restaurant owners have the ideas, skills, and productivity to create wealth. They need to get many things right to generate wealth. But it’s not that easy. As I’m writing this article, we’re still impacted by the coronavirus crisis and most restaurants are not operating at full capacity. You see, there are always risks.
Land: A piece of land by itself will not generate cash unless you rent or lease it. If you don’t do that, you only convert your investment into cash when you sell the land. But land can definitely become cash-generating. Some investors rent the land out to solar energy companies.
Most people think of real estate when they think of assets because it’s a physical asset. Obviously, real estate is an asset because it supplies one of the most valuable things in life; shelter. Having a quality piece of property at a good location generates cash. But there are many types of assets that generate cash:
But my personal car will not generate me extra cash. It just brings me to my office. I can drive a Volkswagen or a Bentley, but my work will still be the same. The Bentley will only decrease in value faster.
And when you do get claims for any reason, you’ll be in a stronger position to handle that if you have your asset protection strategy in order. Some people also think of tax laws when they talk about asset protection. While I’m a proponent of paying taxes, you don’t want to pay more than required.
At this stage of wealth building, you’ll have lawyers and accountants who take care of these things. It’s the least interesting and exciting part of wealth building, but it deserves to be mentioned.
At some point, you’ve acquired so much wealth that the only thing you’re doing is moving around your resources. This is the fifth and final pillar. You might sell one stock and buy another one. You might liquidate a business and start a new one.
Whether we like it or not, we all need to create value with our skills. The argument that scammers make is: “Who’s wealthier? The restaurant owner or the waiters?” You can use that example for everything. Who’s wealthier? The property owner or the tenant?
For most of us, the first pillar of wealth building requires years. It’s not without reason that most wealthy people are in their 50s or older. Sometimes you see a wealthy person in their 30s, but that’s rare. Wealthy 20-somethings are almost non-existent.Warren Buffett, who had read all books on investing by age 10, was wealthy very early on. In his late 20s, he could have retired from work if he wanted. By then, he was already investing in himself for nearly 20 years, though.The third pillar of wealth building is investing in assets — anything that will increase your wealth without personal labor. This is the most popular pillar because we all want to build wealth without putting in the hours.
Businesses: This is a broad asset class. You can buy dividend-stocks on the market, and these companies will pay you a share of the profit. You can also start your own business. If the business is profitable, the capital you invest in the business will come back to you through profit. You can also buy into other private businesses. Any type of asset that can be used to grow a business falls into this category. Think of machinery, equipment, devices, etc.
Too often, we want to skip the income generation pillar of wealth. We want to start investing in assets because we know that assets generate value without our own labor. But I never understand how one can make that jump.
You want to structure your wealth in a way that minimizes your risk. This has everything to do with financial laws. The point of asset protection is that you want to mind your own business and make sure your assets are protected at the same time.
Every investor has a different appetite for risk. What matters is that we invest our money in anything of value. For example, a car, no matter how great and useful it is, will not generate cash unless it’s a direct part of a business. For transportation companies, their vehicles are their biggest assets.
Having ideas without execution is like having a bow without an arrow. You want to put your ideas to work. If you do that, you can start creating value. And when we create value, we generate income.Art: This is one of the oldest assets of the modern world. We’ve been buying and selling art for many years. But a piece of art that’s on display in your home doesn’t generate cash. Again, there are ways to generate cash with art, but that’s not a given.When you build wealth, you want to protect that from external factors. Once you’ve acquired some wealth, you’re a target. That means you want to keep your assets safe from legal situations. This is the fourth pillar of wealth building.
Music: In 2016, Sony bought half of Michael Jackon’s catalog for $750 million. That means Michael’s songs were valued at $1.5 billion. No matter how controversial Michael Jackson is, millions of people still stream his music. This generates cash for the rights holder every year. It’s the same for movies. I’ve simply mentioned books and music here to show that the only assets in the world are not stocks and bonds.
In the early 2000s, millions of people were told a lie in the US housing market. “You don’t need income, just buy houses and rent them out, the property value will increase, and you make money when you sell it.”
Books: Most of the books I buy are published years or decades ago. The authors or publishing companies who own the rights still earn money off it. A good book is timeless and will generate cash for a long time.
Some people like to classify assets as current (easily transformed into cash, like stocks) or non-current (land). I prefer to look at assets as cash-generating or not. Here are a few assets that don’t generate cash but might increase in value.