Let’s say you own a boat / caravan / painting that’s sat idle in your garage worth £10,000.
You didn’t use it last year and it earned you nothing. But if you’d sold it and invested the cash in a global equities tracker fund, last year you’d have made £2,200 (22%).
In a more average year, you would have made maybe £1,000 (10%). This is the opportunity cost – its the money that the asset didn’t make for you but could have.
To get rich, you need to sweat your assets and make them earn their keep.
What do I mean by assets? You can think of assets as anything that put money in your pocket (or your bank account).
Not all assets are created equal. The best assets provide you with a growing cash income and capital growth. Things like dividend paying shares, stockmarket funds and rental properties are excellent assets for long term wealth accumulation. If your portfolio were a car, these assets would be the engine that powers it.
Safe fixed income assets like UK / US government bonds act as shock-absorbers and help smooth the ride. Trouble is, right now interest rates are so low that these assets may not even keep up with inflation.
Is cash an asset? Yes…but it has no scope for capital gain and provides little or no income these days. Money held in most bank accounts (let alone under the mattress) is losing its real value everyday. Cash reminds me of an ice-sculpture at a party. You can’t see it melting away, but it is.
If assets don’t provide an income, they should at least act as a store of value with potential for capital growth and the ability to be sold for cash. On this basis, things like gold, diamonds, bitcoin, art, wine and classic cars can be considered as assets.
But with non-income producing assets like these, you are relying on other people continuing to place value on those assets. Value is in the eye of the beholder. The longer the history of being treated like an asset, the more likely that other people will continue to place value on the asset. It also helps if the supply is limited.
I’m not really a big fan of gold. Gold bars and coins don’t grow, they just sit there idle. But gold does at least have a long history of being treated as money. When the SAS operated behind enemy lines in Iraq in the Gulf War, they carried gold coins that could be used as a universal currency to buy stuff from the locals.
Compare and contrast with bitcoin. You can make a speculative case for crypto-currency: it takes money out of the control of governments which engineer inflation (a hidden tax). But my problem with bitcoin (as well as being environmentally unfriendly) is that it’s not been around long enough to count as an investment asset rather than a gambling chip. We have yet to see what would happen if governments made a coordinated effort to shut down the IT infrastructure on which bitcoin depends for its existence.
Assets should cost very little (as a percentage of their value) to store / maintain. On this score, shares beat property hands down. Lettings agents routinely charge 10% of rental income and that’s not the worst of it. Estate agents, lawyers etc can take one third of the rent with a property being actively managed on short lets. You can of course manage your own property but there are costs (your time, headspace and shoe-leather) to that.
A global equities tracker fund should only cost you about 0.2% per year in fees. Paying 2% a year fees to a wealth manager is a self-inflicted disaster. If the expected real return is say 6% a year then paying 2% a year in fees is actually paying one third of your total return (2 / 6 = 33%). Would you just give away one third of your portfolio to a wealth manager?
Assets can include anything that helps you earn or save money, thereby putting money in your pocket. If you are a plumber or electrician, then your tools and your van are assets. If you are a software engineer, your assets may include a PC etc.
Finally, we have intangible assets such as knowledge, know-how, reputation. These are hugely important for earning more money. This is why paying for books / education / coaching can be such a great investment.
A job or a business allows you to convert intangible assets into financial assets. A lawyer / accountant / plumber can turn knowledge into cash and then cash into a stockmarket fund…and now they have passive income. They have broken the link between earning money and sacrificing their time. They have started to fire up their compounding machine.
Now that we know about assets, what about liabilities? A liability is anything that takes money out of your pocket (or your bank account). This could include unlet holiday homes, cars, boats, racehorses and exes to whom you pay alimony.
What if you could convert liabilities into assets? How good would that be?!?
Well, maybe you can. The key principle is that everything in your life should earn its keep. So you need to look around and ask yourself:
What are the assets in my life…and are they earning their keep?
The classic under-utilised asset for many people is their house. Because people have this strange habit of associating status with the size of our houses, we often buy houses that are bigger than we really need (I’m guilty of this).
But my house is an asset which, although currently costing me money, is capable of being monetised if required. It’s part of my back-up plan.
Firstly, I could downsize, buy a smaller house and put the cash difference to work in productive assets.
Or secondly, I could create income from my house. In my town, there is an English language summer school where foreign students pay to stay with locals for the summer. Or I could rent out a spare bedroom on AirBNB. I’ve met a few people that do this as a second income and they’ve told me that its relatively easy money.
The next option would be getting a lodger. This could be a HUGE boost for you on the path to financial independence. If you are in a high cost of living area (e.g. London or the South East) and have a spare room, that’s a goldmine right there.
You may have a negative instinctive reaction to this. But everything comes with pros and cons. Financial independence requires us to think a little bit differently to the norm. Remember: the prize is huge.
Want to help society? People living alone make up ~33% of UK households. Many older people are rattling around in houses or large flats with spare rooms. And often these those same people don’t have enough money in their pensions. What if more of those people wanting extra income in retirement let a spare room to people looking for affordable housing?
It’s not just retirees though. Younger people with a house who want to pay off the mortgage and get to financial freedom quicker can also let out a spare room. The first £7,500 a year from renting a room out is tax free in the UK by and, thanks to the internet, its never been easier.
As another example, a TV is a liability. The costs include the purchase price, the electricity to run it, the cost of any insurance and (most important) the time-suck opportunity cost of watching bad TV. (I will allow The Walking Dead or Game of Thrones for educational purposes).
Imagine you had 2 TV’s in your house. If you sold one on eBay and got £50 for it, you have just converted a time-suck, dead space liability into an asset. There is a small monetary gain, sure, but there is also a bigger gain from this: more headspace and more living space. This is the beauty of minimalism.
Small beer you say? Now imagine you have 2 or more cars in your household. Cars are money incineration units. The bigger the car, the more money it burns. Perhaps you could sell one, convert it into cash and then invest in shares, thus turning a liability into an asset.
Or maybe you could rent your car out for some spare cash? The internet has solved the information / co-ordination problem that used to stop assets being fully utilised. You can rent almost any asset to anyone that can find you on the internet.
For example, got a driveway in a part of town with parking restrictions? That’s an asset that you could monetise. Got a garage that you’re not using? That’s another asset that you could monetise.
Sweat those assets, people!
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