Financial Insights | April 4, 2018
Written by: Michelle Laurey, Virtual Assistant and Freelance Writer
Building a diverse investment portfolio can be a great way to generate positive cash flow. However, building assets can be intimidating for many young professionals, who might not know where to begin.
Before we start building wealth through investing, we need to understand the difference between assets and liabilities. Many people spend money on things they consider assets, thinking they will make them wealthy, and end up disappointed with additional expenses.
Liabilities produce expenses rather than passive income. For example, a car has expenses such as gas and insurance costs. A home is a liability because it requires maintenance and utility costs. If your home loses value, you are still left with utility bills and a mortgage payment, with no profit to make from the sale. Knowing this, you need to be careful not to invest all your capital in something that can cost you more in the long run.
A closer look will help you to determine why you should build real assets in your financial portfolio and how to accomplish your wealth-increasing goals.
Everything you buy that produces cash flow is essentially an asset. It could be dividend stock, bonds that pay interest and even a money-making business that you own. If a business accrues expenses and burdens you with debt, then it becomes a liability.
“If you want to be rich, simply spend your money buying assets.” Robert T. Kiyosaki
Before you make any purchases going forward, ask yourself if it truly has the potential to produce income, or might potentially become a liability that will thin your wallet.
Your goal is to acquire money-making assets so that your “things” can generate passive income for you rather than drain your cash through the expenses they generate. If you can secure passive income on a monthly basis, that’s even better as it will provide a steady cash flow.
Those who are truly wealthy have established healthy financial habits. They are disciplined with spending and patient with saving, and they know how to set smart goals. One of those goals is to save enough before investing.
Your financial freedom needs to be built on healthy foundations. Having an emergency account before raising investment capital mitigates the risk of selling your investments under value when the hard times arise.
It’s impossible to walk through life without unexpected events. Houses get flooded and businesses have slow periods. These events are likely to happen, but the big questions are when and how much they will cost.
While you might plan for your financial future with a retirement savings account, a smart idea is to have enough money to cover six months of personal expenses. That includes your salary and your mortgage. By preparing for the unexpected in this way, you reduce the chance of accruing debt no matter what setbacks the future might bring.
Having liquid assets that can easily be converted into cash without losing much value, can be obtained with stocks or government bonds. Rental property doesn’t convert to cash so easily, as it can take months to sell real estate, but it offers a different kind of financial flexibility.
When passive income from your assets is high, you do not need to pull money out of your liquid asset investments to pay for emergencies or anything else. For example, if you own income-producing real estate, you know that you will receive income from rent each month. You can rely on the cash that will arrive soon and wait for its appreciation in value and a greater return on investment. Additionally, owning real estate gives you an option to move and make a profitable sale of your own house if you see the potential.
The right combination of assets gives you the flexibility to navigate through life financially free. Use your money to purchase assets and watch your wealth grow.
While you could follow Warren Buffet’s advice to invest in what you know and stay within your circle of competence, diversification is advisable. To become investment savvy, educate yourself thoroughly so that you can develop the right strategies and make good decisions whether the market is rising or falling.
Michelle Laurey is a virtual assistant and writer who especially enjoys writing on a rainy day. She produces stories on entrepreneurship, finance, productivity, and lifestyle. Outside her keyboard, she loves going on long urban walks and exploring new places. She fights her fully embraced cheesecake addiction with spin classes. Reach out to her on Twitter.