How to Build Wealth

How you choose to spend or invest your money can have an impact on your net worth. Many of you are familiar with the net worth equation which is Assets – Liabilities = Net Worth. In other words, what you own, minus what you owe, equals what’s yours.

However, what is conventional wisdom isn’t always what’s best. What I mean is, just because something is generally known as an “asset” doesn’t mean it’s going to help your wealth. Here are a few examples.

1. Your house. While generally considered an asset, and to some, an investment, your home can also drain you of net worth and cash flow. Homes need upkeep, repairs, insurance, utilities, taxes, and many have mortgage payments. Additionally, your home does not produce any free cash flow. There’s also no guarantee your home will appreciate (it may even depreciate). However, paying down your mortgage will generally help your net worth.
2. Your car. Let me be blunt. Your car is a wasting asset. It depreciates over time and in many cases, ends up costing you more that you paid for it. Vehicle loans aside, cars need insurance, gas, maintenance, and upkeep. A loan on a vehicle is making payments on a depreciating asset. Like your home, your vehicle produces zero cash flow.
3. Your things. Your things include furniture, knick-knacks, toys, appliances, etc. Like vehicles, they generally do not appreciate. Like your home and vehicles, they produce zero cash flow.

The reason I mention the above examples is to encourage you to think of buying true assets, if your goal is to increase your wealth. True assets appreciate and may provide cash flow. Here are some examples.

1. Stocks and bonds. Stocks represent ownership of a company and provide cash flow via dividends. Bonds represent owning a company’s debt and provide cash flow in the form of interest payments. Additionally, you can own multiple stocks and bonds with mutual funds or ETFs – which pass the cash flows and appreciation to their investors.
2. Real estate. By real estate, I do not mean your home. I mean real estate that produces cash flow such as commercial properties or residential rental real estate. Real estate also provides tax advantages through depreciation, like-kind exchanges, and other business expenses.
3. A business. Owning a business may provide opportunities to create cash flow and potential tax advantages through business deductions. Additionally, businesses that provide value (in addition to cash flow) can also be sold for profit.
4. Education via college, internships, or self-education can increase your knowledge, human capital, and can increase your cash flow through promotions, pay increases, and intellectual capital.

By focusing on true assets – those that can provide cash flow and potential for appreciation can have a beneficial impact on your net worth and wealth. While it’s not a bad thing to have a home, furniture, vehicles, etc. (I own these), if your goal is to increase your wealth and net worth, consider focusing on true assets.