Economic highs and lows are a fact of life for businesses, households, individuals and society in general. Almost everyone has to endure an economic slump at one point in their lives: jobs are lost and pay cuts take their toll etc. Handling multiple jobs or overtime (general considerations for a secondary source of income) may not be an option. So, how should you plan for challenging times? This is where income producing assets come in.
Income producing assets provide an opportunity to anyone looking to build a nest egg for the future or have a secondary source of income to handle cash flow issues that arise as part of life (kids going off to college) or emergency situations (accidents, medical needs).
Understanding Income Producing Assets
An asset is something that inflows cash and puts money in your pocket; for example, owning a stock in a company that pays an annual dividend. The opposite of this is liabilities which result in cash outflow and put a dent in your income even if you’re earning a good salary. Examples of liabilities are house loans. It is a common mistake for people to take loans and mortgages to “build assets” without thinking the long term effects and potential imbalances in financial situations. There is a tendency to think of liabilities as “investments in the future” without considering the effect it has on monthly income if the primary source of income is compromised.
The difference between high-income and wealth
Everyone understands income and expenses. What you have left over after meeting living expenses is the money you can use as investment. Poor households are characterized by a negative or zero balance to use as investment money. The income earned is spent almost instantaneously on rent, food and other basic expenses. If any investment is left over, it is usually used for investing in liabilities – after all, putting money in a future asset like a house or upgrading the family car is the first thing most people think of when there’s some spare cash.
The middle and upper class households have higher incomes, but the expenses are also excessive owing to a superior standard of living or an expensive lifestyle. And this is the crux of the matter: you can be rich but not necessarily wealthy. A high paying job does not translate into wealth if the resultant income is being spent on additional expenses (fancier car, remodeling, wardrobe etc). Again here we see the trend of investments in liabilities.
The differing characteristic between poor households and middle/upper class households with regards to the income producing assets therefore lies not in the ability to generate income, but the lack of a secondary source of income – namely one that brings cash inflow without investing time or labor. In other words, income producing assets break the typical domestic cash flow cycle and provide you an additional income. Use your regular job’s income for expenses and utilize the revenue generated from income producing assets to support liabilities. In the event of losing your job, your ability to pay off liabilities remains unaffected and a reduction in living expenses (cutting down) can carry you through a tough tide.
Benefits of Income Producing Assets:
- Supplemental income
The cash inflow from income producing assets acts as your safety net in case of sudden changes in financial circumstances. Moreover, it also gives you a cushion to add some quality time to your life by allowing you to take more time off or work lesser hours.
At some point in time, it is possible that the income producing assets generate enough cash flow for you to be able to quit your job and enjoy the lifestyle you have always dreamed of or pursue a course of life otherwise not compatible with the life of a working individual.
When you finally hang up the work clothes you will be able to enjoy a stable income with little or no change in lifestyle.
The additional streams of revenue generated by income producing assets can open up new avenues and growth opportunities for business owners.
Not everyone invests in income producing assets with the eventual goal of quitting their jobs and moving to Hawaii! Some people truly enjoy their work and are successful, high-income earners and still go for self-sustaining investments for the personal satisfaction and mental peace provided by having a relatively permanent and secure safety net.
Some examples of Income Producing Assets
Investing money into something that has the potential to generate income and “pay for itself” enables a household/business/individual to become financially independent. Here are some investment opportunities to watch out for when you have a little something extra in the bank:
- Rental real estate (e.g. small houses, apartments, office space, warehouse)
- Retirement homes
- Low-risk stocks and bonds
- Profit-sharing investment in small businesses
- E-commerce websites/online stores
Your Most Important Asset
Sometimes, investment is not necessary to generate income. You can capitalize on available resources to save what you already have while sourcing money from some other means. However, if your only choice is to make an investment, you should invest right.
When it comes to the most important money-producing asset, you are worth more than any chattel. And this worth does not come from the cash you hold in your bank account, but the ability you possess to earn it. Your most valuable assets include your education, intelligence, professional skills, work ethics, stamina, risk-taking ability and social skills in a workplace. Here are some points you should consider before investing in yourself.
- The latest trends in the market:You should see what is currently going on in your area that can help you shortlist some fruitful jobs.
- The kind of skills that your targeted company requires:By building these skills you can earn a place in that particular company.
- If you’re self-employed, you should focus on satisfying your customers. Keep them contented and your business will grow exponentially.
- Always have a backup plan in case your startup doesn’t work or you have to quit your job.
- Do side jobs to earn extra income. They keep the money coming.
- Don’t miss out on any opportunity. Consider all but avail some.
- See the tasks that you can take up on your shoulders easily instead of paying someone else to do them.
In conclusion, if you are at a stage in your life where you are considering investing in something, understand whether you are investing in a liability or an asset. In case of liabilities, plan carefully how you are going to pay them off, so that they do not end up becoming a drain on your monthly cash flow. When investing in income producing assets, ask yourself, what you plan to do with them in the future and how you can build up on them over time. Knowing the difference between money and wealth can have a huge impact on your current and future lifestyle. Invest wisely!
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