When it comes to your personal finances, assets would make up a huge portion of your net worth. This is because fiat currency (e.g. dollar bill) shouldn’t be where all your wealth is stored. If most of your wealth is in fiat currency then I hope this post will help you understand why you should convert that pile of fiat currency into assets. Among the many things out there to help you become wealthy, owning assets is one of the top ways for you to become wealthy. So, let’s find out why owning assets is important.
What Is an Asset
First of all, let’s define what exactly is an asset in the context of this post. An asset is something that has value or brings you cashflow. For the most part, when I talk about asset I am usually referring to one of the following:
- stocks
- bonds
- real estates
- precious metals
- fiat currency in your checking/saving account (short-term)
- fiat currency in your CD (certificate of deposit) or high-yield savings account
- a business that generates income
1. You Want to Achieve Financial Independence
Being financially independent means you have enough income to pay for your daily living expenses for the rest of your life without having to work. It is a goal that many working individuals would love to achieve, but getting there is another story. To reach the point of financial independence through your own hard work usually involves acquiring assets not renting your time for money.
Maybe you started a business and it was a smashing success. Maybe you spotted a high potential company and decided to invest in the company before the company took off. Or maybe you found yourself some undervalued properties and now their value has increased significantly. What do all those have in common? It is about delivering or identifying value.
2. The Wealthiest People in the World Owns Asset
If you look up how some of the world wealthiest people get to where they are you’ll find out that they got to where they are through owning assets. Some of them started businesses, while others made successful investments through stocks and or real estates. For some people, it is a mixture of all three. The main point is that they all own assets.
In addition, the wealthiest people in the world hold close to half of the world’s total wealth.
Why is this important you might be wondering? This means the wealthy are doing something right to amass such a high amount of wealth. By owning assets like the wealthy, it will help you get a slice of the wealth out there.
3. During Difficult Times the Wealthy Are the Ones Getting the Most Help
This might sound counterintuitive but if you really give it some thought you’ll realize that in times of crisis it is the wealthy that gets more help than others. For example with the current state of COVID-19, the central bank (Federal Reserve) is printing trillions of dollars, but most of that doesn’t make it to those that need income to survive. Instead, most of it was injected into the stock market by offering liquidity in the bond market. The result of this is that there is a larger disparity between the stock market and the state of the economy. The price of assets (stock) is reaching their highest point ever in history for some companies and a massive amount of wealth was generated except only those who own stocks reap the benefit.
Now, if you have the means to own assets and given the choice to own them or not, which would you pick? It should be pretty obvious why owning assets will generate wealth for you.
4. Assets Protect and Preserve Your Wealth
You work hard for your money and the last thing you would want is for your money to be valued less than it was. Keeping your money in a savings or checking account lets this exact situation happens due to something call inflation. With inflation, each year your money (fiat currency) loses 2% of its value. What this means is that for every year your money is sitting in your savings account it is worth less and less. This gets a bit terrifying when you compound the devaluation of your money over a longer period. For example, if you let 10,000 sit still for 10 years at an inflation rate of 2% per year, you’ll end up with 8,170.
If you want to try out different numbers with the compound interest calculator used for this example it is available at http://www.webmath.com/compinterest.html.
So, you know you don’t want to lose money, but how can assets help you with that? Well, assets just like the food you buy at a grocery store increase in price with inflation. In the worst case, you’ll break even with inflation by owning assets in the longterm. However, the most likely outcome is that you’ll come out on top by growing your money more than the inflation rate. For example, investing in the stock market via index fund yields around a 7% annualized return adjusted for inflation. So, assuming you don’t panic sell your assets at the lowest point and you hold them through volatility the worst outcome is you will break even with inflation.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
To learn more about actionable steps you can take during a bear market you can check out my post on navigating a bear market. If you’re new to investing and need a guideline to help you start your investment journey you can check out my post on setting yourself up for financial success.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.