There are easy ways to build assets with little money. But less people in this world can build assets. Why? What is the problem?
The problem is, people do not realise the enormity of the power of asset building process. Hence it gets ignored.
What one must do? First step should be to understand the “concept of asset building”.
What is the concept of asset building? Simple…
Invest money to accumulate assets.
But it is also important to understand the relationship between the following:
- Accumulation, and
- Asset building.
Investment: When we invest money, we buy assets.
Accumulate: When assets are gradually acquired over time, and held for pretty long term, assets starts to accumulate.
Building assets is nothing but the “process of gradual purchase of assets, with the purpose of its accumulation“.
Here the word “accumulation” has been intentionally repeated over and over again.
What is the point? Buying assets without the bigger purpose of its accumulation, is almost a meaningless activity.
So focus must be on buying assets and its accumulation.
But there is a big catch here. Try answering the below question…
What is the difference between “buying assets” and “asset building”?
How we buy assets? We invest our money.
So does it mean that if we are investing money, we are also building assets? No. Why?
Please remember that, investment is not same as asset building. What is the difference?
Throwing money here-and-there in the name of investment is not enough.
Investment is only one leg of the asset building process. There are 2 more legs.
Jointly, all 3 legs in tandem can build asset over time.
Try to take a print-out of the below simple-looking photo and paste it on your work table.
I personally believe that this simplistic picturisation of “asset building” has powers to change lives of people. How?
Anybody who has learnt the process and benefits of asset building will eventually become filthy rich.
What is represented by the above infographic?
To build assets over time, one must do the following all together:
- Gradual Acquisition.
- Holding for lifetime.
The whole story of “asset building” stands on these 3 legs.
It is important to “align” our thoughts in such a way that we see all three (investment, holding time, and accumulation of assets) in unison.
Do we think like this? Perhaps no. For us, if we are investing and earning decent returns, that is more than enough.
But focusing only on investment and returns is not enough. Why? Because it does not assure “asset building”.
But if the primary focus is on asset building, investment and earning returns will automatically happen.
Let’s dig deeper into the concept of making asset building as our primary focus…
Focus on asset building…
Why we normally invest money? To earn high returns, right? But investing money with this motive has rather shorter life.
To give longitivtiy to investment journey, focus point should be elsewhere. Why?
Because goals focused only on returns loses its steam soon.
Example: When goal of a new driver is to drive car @200Kmph, such goals are never realised.
As he does not know to drive a car, he just cannot drive @200Kmph at that moment.
What is the result? His interest in driving will eventually fade away, forget about driving @200Kmph.
But if the same driver can fix an alternative goal, he will succeed. How?
Drivers focus should be on acquiring the driving skill. How to do it? Accumulate more and more driving-hours.
The more he will practice, the more he will learn. This way he will become a skilful driver. Moreover, fast driving will happen as a by-product of skilful driving.
The same analogy is applicable for investors as well.
Focusing on high returns is like focusing on “speedy driving” without the necessary skill.
Instead, if the focus is on asset accumulation, high returns will happen as a by-product.
So now we know that, focusing on asset building is a better choice.
But why at all build assets?
Why not live a simple life. Do work, earn money, save some, spend and invest.
Isn’t this good enough? No.
Asset building is a priority which cannot be ignored if one wants to become rich.
But becoming rich is not as simple. To become rich, one must first achieve financial independence.
Why to build assets? For financial independence…
Do you love doing your job? I know not many will raise hands to this question.
But if we do not love our jobs, why we continue to linger on to it? Because there is no choice.
To continue to earn money, doing job is a compromise that we have choosen voluntarily.
We are totally dependent on our jobs to earn money.
There is a way to remove this dependency? Yes there is a way. How?
Become financially independent. How to do it? Follow this approach:
First, realise that you are financially dependent on your job.
Second, start reducing your financial dependency step-by-step.
What it means by reducing financial dependency? Generating an alternative source of income.
Alternative source of income will come from where? From assets that you will accumulate.
The bigger will be the asset base, larger will be alternative income. Larger alternative income means, less dependency on income from job.
How to read the above infographic?
Out of the total 100% expense, 20% is getting served from alternative source of income.
The balance 80% is coming from Job.
Hence this person is 20% Financially independent.
If this person wants to improve his financial independence, then he must increase his asset base.
Increasing asset base means what? Accumulation of more assets.
How to accumulate more assets? Invest more, and hold on to those investments for long term.
Why to accumulate more assets?
- To generate higher alternative income.
- Higher alternative income means, improved financial independence.
The bigger purpose of “asset building” is, to achieve financial independence.
For me, the “asset building process” has a deep meaning.
It cleverly deals with lots of prejudices that we carry in our mind. How?
- It helps us to delay gratifications.
- It helps us to practice frugality.
- It force people to do future planning.
There are huge benefits of “asset building”.
Sum-total of all those benefits are so huge that, I often compare it with spirituality.
I know, this may be sounding as an overstatement, but for me “asset accumulation” is like preaching a wiser motive. What is the motive?
“Financial independence” for my family.
When we talk about “financial independence”, we cannot forget to mention passive income.
Accumulated assets generate passive income.
The reason why majority in this world are financially dependent on their job/work is because, they have virtually zero passive income.
But they have salary income, right? So why they need passive income.
One shall never confuse between passive income and salary income. Why?
Let’s read more…
How passive income is different from salary income?
There can be no better alternate source of income than passive income.
Higher passive income is what can make a person achieve financial independence.
The above infographic represents a difference between “passive income” and “salary income”.
Salary income comes from doing a job and building a reputation for self in the company.
So basically it is the reputation that triggers “income growth” for a salaried person.
But “income sustainability & growth“, dependent on ones reputation, is like walking a tight rope.
Till one is balancing, all is well. But all days will not be the same.
What is the point? Income growth in job is more dependent on luck.
But growth of passive income is dependent less on luck and more on “mathematical formula”. Hence it is more certain. How?
Passive income is generated from the accumulated assets.
The bigger will be the asset base, higher will be the passive income.
The higher will be the passive income, more financially independent will be the person.
Passive income is different from salary income in many other ways. How?
The difference lies in the way both these incomes “effects us”:
- As passive income grows, financial independence improves.
- As salary income grows, financial dependency increases.
To generate passive income we need NOT work full time (as we do in our jobs). But to generate salary income, one must work full time.
What is the point? Why we are discussing passive income instead of “asset building”?
Only accumulating assets will not serve the purpose. The accumulated assets must also generate passive income.
How a common man can generate passive income?
By buying income generating assets.
These assets in turn will yield passive income.
People who are rich has a portfolio FULL of income generating assets.
People who have become wealthy has done it this way.
They use their regular income (from business, job) to buy assets. Assets accumulated in this way generates passive income.
It is not our income from job/business that can make us rich. It is the ever increasing passive income that can make us rich.
Accumulating quality assets regularly, year after year is the key. Over time, this is what can make one rich.
How a common man can build assets?
Now let’s get down to the main topic.
For people who are already affluent, their way to wealth building is different.
How a common man can start building wealth? Where to start? What is the process?
How a common man should see the whole process of asset building?
Yes, it is important to see the whole process of asset building in a phased and systematic manner. Why?
Because following this process (steps) will give a sense of achievement. Asset building process is a time taking activity.
Hence, it is essential to follow a rule, otherwise people do become disillusioned, and lose patience.
So let’s break down the process of asset building into 3 important steps.
What is shown in the above infographics?
THE ASSET BUILDING PROCESS
- Step #1: Save Money
Keep building savings each month.
- Step #2: Invest Money
Invest money systematically.
- Step #3: Lock Money
Use investment money to buy “hard assets”.
It is the step #3 that is most important. This is what is going to make all the difference.
Locking money in income generating assets is essential.
This should be the final step of asset building process.
But they are not “any” asset. They are special. How?
These asset are not easy to liquidate (sell). Why? Because of the following reasons:
- The process of selling is tough.
- Their yield is high (hence people do not sell them).
- It also gives a sense of “ownership”.
It is the accumulation of these “assets” that should be the real focus of we common men.
So let’s start the process of wealth building with Step #1: Savings.
#Step 1. Save…
The first step of “asset building” is to save money.
Saving money is more important than investing itself. If we know the right tricks of saving money, our half job is done.
The easiest way to save money is to put aside part of income.
Reducing needless spending will also increase free-cash in hand.
Even richest men in the world has to save money to stay rich.
As a rule of thumb, if one saves 25% of total income, it is called a decent saving.
Give standing instruction to salary account to divert 25% money to saving account. This should happen on the first day every month.
Before spending even a single penny, 25% must vanish from the salary account. It should be as if it never existed.
This will be a good starting point to inculcate good saving habits.
How I save money?
- I divert part of my savings to build emergency fund.
- Partly, I divert to recurring deposit scheme.
#1.1. Building Emergency Fund
Nothing eats our assets faster than emergency. When emergency strikes, money gushes down the drain.
No matter how rich is a person, when emergency strikes, it eats a big pie. Example: medical emergency.
Hence it is advisable to keep a sufficient back-up, to handle emergencies.
The best way to handle emergency is by maintaining a large enough emergency fund.
Emergency fund must be composed of at least 2 things:
- Insurance &
Idea is, when emergency strikes, one need not consume the fund accumulated in “savings” or “Investment” accounts.
Least preferable is, having to liquidate the “assets” to fund emergency needs.
The emergency shall be managed only by using emergency funds.
A healthy emergency portfolio shall have the following components:
- Life Insurance Cover.
- Medical Cover.
- Car Insurance.
- Property Insurance.
#1.2. Put Funds in Recurring Deposit.
Recurring deposit cannot even give large returns, so why to put funds here?
Because we are still in step one. Here the priority is not “returns”. In this step, one must just save money.
Few benefits of recurring deposit:
- It save’s money automatically.
- It is a debt based plan, hence is safe.
- Money remains in your bank.
How I think about recurring deposit based saving plan?
It prevent me from investing compulsively. It allows me to build funds for onward investing.
How I see my savings in my mind…
# Step 2: Invest…
Why to invest? Why not “build savings”, and then use savings to directly buy “assets”?
This will be nice, but keeping money as savings is not advisable. Why? Because of several reasons.
- Savings gets spent too easily.
- Invested money multiplies fast.
What does this conclude? In order to build a large corpus for “asset purchase”, investing the savings is a wiser move.
So where a common man can invest his/her savings?
When I have to invest my money, I only see the following:
- SIP in equity mutual funds.
- Systematic purchase of Index ETF.
- Systematic purchase of Gold.
- Buy Land.
- Financial education for self.
#2.1. SIP in Equity Mutual Funds
SIP in mutual funds is a very useful tool for investment.
SIP has multiple benefits. It can give exposure to equity, debt, real estate sectors from a single window.
But I generally use SIP route to buy equity based mutual fund units.
How to think SIP investment?
Continue investing in mutual fund, through SIP’s till eternity. Yes, this should be the mindset. Why?
Because, Mutual Fund is our “vault“. The bigger will be the vault, the better.
How to make the vault grow bigger and bigger? Keep purchasing equity mutual fund units month after month, without break.
Why to do like this? Because the fund in this vault will be eventually used to buy assets.
Remember, good assets are very capital intensive. Hence, the bigger will be the vault balance, the better.
SIPs are great way of building investment corpus.
Even those people, with zero investment knowledge, can safely invest in equity through SIP route.
#2.2. Buy Index ETFs Systematically…
Exchange Traded fund (ETF) is another excellent investment product.
ETF’s carries with it the advantages of both stocks and mutual funds.
Purchase of ETF’s can be done as easily as stocks. If one has online trading account, ETF’s can be traded like stocks.
ETF’s offer great investment diversification within equity portfolio.
Index and gold Linked ETF’s are most common in India.
I personally prefer systematic purchase of index linked ETFs.
Every time there is 3% or more dip in index, I try to grab handful of ETF units.
#2.3. Buy Gold
Gold is a decent long term investment vehicle. When I say long term, I mean a minimum holding time of 10-12 years.
Price appreciation of gold is not as predictable as equity. But in time-bands of 10 years, gold price appreciates decently.
Let me give you an example. In last 60 years, how gold price has increased every 10 years.
|SL||Year Band of 10 Years||CAGR %|
Though these are not outstanding returns, but it works well for me. Why? Because:
- Gold provides excellent diversification for equity.
- Possession of gold is almost risk free.
- Long term returns beats inflation.
#2.4. Buy Land…
Land is an asset which is becoming more and more scarce.
Consider the case of cities like London, New York City, Los Angeles, Paris, Tokyo, Mumbai etc.
Probably, a piece of land in these cities are the rarest of rare items.
But not all land can be considered as a good investment.
Just because a piece of land is available for sale does not make it a good buy.
For investors, it is essential to first quantify worth & return of a land.
Generally, which type of land will yield better returns? One that is strategically located. What does it mean?
On a piece of land, a residential or commercial property can be built, right?
But it will only make sense if the land must be strategically placed near to the city hub.
Land placed 30 km away from city outskirts will take years to become profitable.
One great idea of investing in land is, keep buying land just on outskirts of important cities. Why on outskirts?
Because here the land will be available at economical price.
Secondly every couple of years, the city outskirts becomes the next city hub.
#2.5. Invest in financial Education
Financial education is the best way to learn investment and wealth building.
A financially educated mind is like a money printing machine.
A financially educated mind has an uncanny ability of generating higher returns.
When it comes to making money, enhancing ones financial know-how has a long lasting effect.
In this world, majority people lead a mediocre life. Why? Because they are financially illiterate.
Learn how to manage money well, and raise self from mediocrity.
I personally feel, reading good books and online article will work.
#3. Step 3: Buy Assets to Lock Funds…
This is the most essential step. Generally we stop at step 2.
We buy investments, and sell them to meet the requirements.
But in step 3 we are doing things differently.
We are buying assets to generate an alternative source of income (passive income).
Yes, the ultimate objective of step 3 is this simple.
Buy assets to generate passive income.
All savings and investments that we have accumulated in step 1 & 2 above was for this purpose.
We wanted to buy quality assets, which in turn will generate passive income for us, till eternity.
So which are these assets?
When it comes to creating an asset base, my favourite ones are these:
- Dividend paying stocks.
- Rental Property.
#3.1 Dividend paying stocks…
Do not buy any stock. Buy only dividend paying stocks.
I have written a separate blog post about dividend paying stocks. You can read this here.
Dividend paying stocks are fundamentally strong stocks which also pays regular dividends to its shareholders.
It is also important to buy these stocks at right price, else its yield will be too low.
Hence, waiting for the right time to grab best dividend paying stocks is essential.
- Stocks are the asset.
- Dividend is the passive income.
#3.2. Rental Real Estate Property
The money locked in RD, SIP, land etc is all done with one objective. At some point of time, it should be redeemed to “buy an asset”.
Which is the best “asset”? Rent yielding real estate property.
Idea of doing this is simple, keep more of those assets in portfolio which can generate quality passive income.
Quality passive income is one that is predictable and which increases with time (beating inflation).
Income from real estate can do both.
This is why there can be no better investment option than a real estate property.
Rental income is the best passive income. It is even better than dividend income. How?
Predictability of rental income & its growth is more than dividend.
In the process of building assets, keeping real estate component heavier is suggested.
If it is so then why more people invest in stocks, instead of real estate property?
Because real estate property is very capital intensive.
So what a common man can do? Build sufficiently large corpus which is good enough to fund a property purchase.
How to build this corpus? Save and invest as shown in step #1 and #2 above.
- Real estate property is the asset.
- Rent is the passive income.
Is there anything which is more important than “building assets”?
Yes, there are two:
I personally feel that, unless one has achieved the above two goals, venturing into asset building will not be effective.
Whether to use debt to fund asset purchase?
What is an asset? Asset adds money into our pocket.
Suppose one bought a property which yields a rent @Rs.10,000 per month. But this property was purchased using home loan.
Home loan EMI is say Rs.25,000 per month.
Is this property adding money, or consuming money? It is consuming extra Rs.15,000 as EMI from investors pocket.
Hence this property is not an asset.
Generally, properties bought by common men using loans yields negative returns (like above).
Hence using loan to fund investment will be a bad decision.
Self occupied property is an asset?
Investors must focus on Yield generated by an asset before buying it.
If yield is low (or negative), look for alternative options.
Using this logic, a self occupied home is not an asset.
If our focus is to accumulate asset, we cannot consider a self occupied home as an asset.
Self occupied property is a liability. It is not an asset as it does not add money to our pocket.
Instead of adding money, it adds to the expense.
People often concentrate too much on single asset.
Common questions we ask are which stocks to buy? which fund is good? Is gold a good option? etc.
Actually no investment option in isolation is safe. It is essential to keep ones asset portfolio well diversified.
Diversification will only happen if different asset class is included in the portfolio.
If I would have to diversify my asset portfolio beyond stocks and real estate, my asset composition will be like this:
- Monthly yielding fixed deposit.
- Dividend stocks.
- Rental property.
- Monthly income plan of mutual funds.
- Pension scheme.
People who are young, can afford to ignore diversification of assets.
But for aged people, who are dependent on their asset for income, diversification is a must.