Should you grow your assets or should you grow your income? I recently came across an article that looked at that very question. What struck me about it was that it framed the question in such a way as to suggest that people need to make a choice between the two. Either you choose to grow your assets or your income. Personally, I don’t believe the two to be mutually exclusive. In fact, I was a bit surprised that none of the respondents to that question made the case that you can do both! But it all depends on what kinds of assets you are buying.
For example, if you buy a lot of gold you would be growing your assets but certainly not your income as gold does not pay any interest or dividends. Likewise you can buy a house, but unless you plan on renting it out don’t expect to get any income from it.
For me one of the main takeaways from Rich Dad, Poor Dad is that cash flow is critical. You can own a collection of what appears to be some really great assets but if none of them provide any sort of regular income then that can be a problem.
For the vast majority of people, their biggest problem is that they don’t have enough money. I’ve found that cutting down on wasteful spending and trying to lower monthly expenses will only get you so far. Unfortunately, there’s only so much that we can cut back on which is why I focus on investing for cash flow.
For most people, their cash only flows once they get paid. Then they wait for the next paycheque, and the cycle repeats itself. Even if you save some of that paycheque you still need to wait for the next one to save a bit more. If you quit or lose your job and your paycheques suddenly stop, then what? You’re forced to rely on savings, which for many people are too meager to really provide any kind of a financial cushion.
On the other hand, if you own a collection stocks, bonds, mutual funds, exchange-traded funds (ETFs) and rental property then you may receive cash flow on a regular basis in the form of dividend, distribution, interest and rental income. If you re-invest this income then you can effectively grow your assets and your income at the same time.
I’ve spent the past 7 years building my assets and I’ve now reached a point where I receive thousands of dollars each year in passive investment income. So even if I don’t contribute anything at all from my regular paycheque I am still building my assets – automatically – by re-investing that income.
I can’t stress how important it is to start building income producing assets as soon as possible. I’ve always been able to save a large portion of my paycheque to invest, but this year life just got a whole lot more expensive due to a combination of moving into a new home and some renovation work. So basically I won’t have a lot of that extra money that I depend upon to build my assets and grow my passive income.
But that’s OK…at least for this year because my passive income is still being reinvested and will continue to increase my assets, passive income and net worth without any active effort on my part. In other words, if I do nothing at all this year, I will still increase both my asset base and my income.
If you’re lucky enough to have income from a variety of sources then it gives you lots of financial flexibility. Most of the individual stocks I own are dividend aristocrats: meaning that they pay a regular dividend and increase it at least once a year and have done so for many years. Usually the annual increase averages about 5%-7% which is a lot more than I ever get at my job (I’m lucky to get 2%). What’s more is that dividend income is taxed more favorably than earned income from employment. So dividend increases mean more to me in terms of real dollars in my pocket than a small pay raise which will be taxed at my marginal rate.
That’s an important distinction between the two kinds of income and it’s easy to see how the owners of capital (ie. investors) have benefited more than the middle class during the recovery from the Global Financial Crisis. On the investment side, I’ve done pretty well – the value of my holdings as well as the income they produce has risen steadily. On the other hand, my wages have barely budged and in real terms may have actually fallen a bit due to a combination of inflation and the increases to the Canada Pension Plan and Employment Insurance program.
As you can see, it is possible to grow your assets and your income. It just depends on what kinds of assets that you’re focusing on building.
Check out my other articles on building assets: