Ever wondered how wealthy people get their wealth? The answer is by building assets. Whether inherited or not, at some point someone took the time to acquire assets that allowed them to build wealth. The truth is that simply working all of your life won’t make you wealthy. Instead, you should also focus on creating and acquiring things that have a monetary value. So, exactly how do you build assets? Keep reading!
What is asset building?
Building assets is simply increasing the amount of money, or access to money, that you have. This is done by acquiring things that have present or future monetary value.
In general, the more assets that you acquire, the higher your net worth is. This is only true if you have significantly more assets than you have liabilities or debt. So when acquiring assets, it’s important to minimize the amount of debt that you use and maintain.
When it comes to building assets, each one builds on the other. For instance, you need money to buy land and land to build a home. You can also leverage one to acquire another. For example, you can sell shares in a company to fund a car purchase. It’s important to understand this because asset-building does take time and some strategy.
Why does building assets matter?
Asset building is about much more than increasing your net worth. Having access to money allows you to improve your quality of life and even build generational wealth. Just think of what you would be able to do if you have had access to more money. You could save for emergencies, start a business, and even pay for your child’s college tuition. Assets allow you to do more and have access to more in life.
What types of assets can you use for asset building?
Assets can be categorized in several ways, but we'll just focus on the three most popular categories. These are financial assets, tangible or physical assets, and intangible assets.
Financial assets can be best defined as something representing ownership of an entity or a claim to future payment. Aside from cash, financial assets aren’t physical in nature and their value can fluctuate based on market conditions. They are also considered liquid assets, which means that they can be easily converted into cash.
Here are some examples of financial assets:
- Cash equivalent (Ex. a savings account)
- Certificates of deposit
- Retirement account
Tangible assets are also known as physical assets. These are things that are physical in nature. Examples of tangible assets include:
- Homes and real estate properties
- Fine art and collectibles
- Precious metals and coins
There are also assets that are intangible. This means that they aren’t physical in nature, but aren’t necessarily financial either. Examples include:
- Intellectual property
- Patents and copyrights
Appreciating assets vs. depreciating assets
When considering which assets to invest in, it’s important to understand assets change in value over time. Ultimately, this impacts how much money you actually have available to you at a given time.
Appreciating assets are things that go up in value over time. An example would be a home or in most cases, an investment portfolio. Depreciating assets are things that go down in value over time. An example would be a car or any kind of mechanical equipment. The idea is to put your money into things that appreciate in value or time and minimize things that depreciate.
How do you get started with building assets/asset creation?
As a reminder, asset building takes time. Start where you are now and begin as soon as possible. The sooner you start, the more time you’ll have to acquire assets and for them to increase in value. Here are some things that you can do to build assets.
Increase your income
Remember that cash is an asset. So the first and easiest step that you should take in building assets is to get more cash. You can do this by increasing your income. There are many ways to increase your income, including asking for a raise or starting a side hustle. The idea is to bring more money in so that it can be used to acquire more appreciating assets.
Put your money into savings
Remember that assets aren’t just about building future wealth. It’s also about improving your quality of life today. One important way to do that is to have money readily available to cover expenses.
Begin putting money aside in a savings account to cover things like emergencies and to also fund large expenses. Any savings accounts intentionally meant to fund future purchases are called sinking funds.
You also want to begin saving for retirement. Your retirement account is an asset that will benefit your future. The sooner you start saving, the more time your money has time to grow. When saving for retirement, be sure to take advantage of any company matches. These matches are essentially free money toward your retirement savings.
Invest in the stock market
Once you’ve acquired more cash, you need to allow it to work for you. This means that you should put your money in a place where it will appreciate, or grow, over time. The best place for this is investing long-term in the stock market.
Equities are a type of income-producing asset that can benefit you now or in the future. You can use the dividends earned from stocks to acquire other assets or for other financial goals. Contrarily, you can simply let your money grow over time for future use. You can check out our free investing courses to learn how to get started.
Invest in real estate
Buying a real estate investment property or land is another step in building your assets. Real estate is important because it will increase in value over time. As more people populate the earth, space becomes even more limited—making property more valuable.
When it comes to real estate, though, the key to it being an asset is equity. In simple terms, it just means that the property is worth more than what you owe or purchased it for. This is the only way that your property will be an asset and not a liability.
Reduce your debt
Debt can completely undo all of the work that you’ve done to build your assets. That’s why a part of asset building is also debt elimination. Debt can slow down your ability to acquire assets because it ties up your cash.
Mortgage lenders even take your debt into account when determining if you qualify for a loan. If your debt to income ratio is too high, you won’t be able to get approved. This is just one example of debt hindering you from asset building.
In the case of a mortgage loan, you can leverage debt to build assets. However, this should be done very strategically. You don’t want to end up in more debt than you can afford to quickly pay off.
Start building assets today
Asset building takes time, so start today! You don’t have to do everything at once, but you can start where you’re at to create a better future for yourself. Keep in mind that this is just one part of building wealth. You also need to have the right mindset and community. We’ve provided the tools to help with all three! Be sure to check out our free courses and community as you start your journey to building wealth.