Ever wondered why the rich keep getting richer? Well, affluent people develop habits that allow them to build wealth and spend their money differently than most people. They understand the money game, and, more importantly, know how to make money work for them.
So, while the average joe might treat himself to a luxury item from the money earned from his own blood, sweat, and tears at his full-time job, a rich person, on the other hand, would buy that same luxury item from the money his assets made him.
In this blog, you’ll learn the difference between an asset and a liability, along with 3 assets that will continue to make you money over time:
- Real Estate
Difference Between Assets and Liabilities
The only way you can truly make your money work for you is by knowing the difference between an asset and a liability.
Asset: Put simply, an asset is anything that puts money in your pocket, whether through positive cash flow, capital appreciation, or both. Positive cash flow means that you’re getting a recurrent source of income flowing to you. In contrast, appreciation is a rise in an investment’s market value compared to its initial purchase price.
Liability: A liability, on the other hand, is anything that takes money out of your pocket. These include luxury purchases like TVs, expensive cars, and handbags, among many other things – which many people mistakenly assume are assets. Truth is, they’re not earning you money over time, so, what about that luxury car you own? That’s a liability, not an asset. Though some of these purchases are inevitable, in order to accumulate wealth, it is crucial that your assets outweigh your liabilities for you to actually justify and enjoy spending that money.
How The Rich Get Richer
So, you get the gist by now – rich people acquire assets whereas poor and middle-class people acquire liabilities, which they think are assets, like a car or home they live in. Now you might be wondering: But what’s the difference? Why can’t the home I live in be an asset? Well, if you’re residing in your current home, it actually consumes money, rather than earns you money, and the same applies to a luxury car, piano, and so on.
Now, let’s say you’re a frugal spender who doesn’t necessarily give into large purchases – be it an asset or a liability. Still, saving all that money in the bank is wasting your money’s potential, as inflation is ultimately eroding its purchasing power, meaning your money is being consumed without you even realizing it.
Long story short, if you want to know how the rich get richer – then it’s by acquiring assets and continually reinvesting those asset profits back into assets, otherwise known as compounding. So, if you want to build wealth, invest for a) positive cash flow b) capital appreciation c) both, by stocking up on the following assets:
Buying Real Estate
It’s a given but income-generating real estate is a top asset because it earns you steady, passive income in the form of rental returns, as well as shows constant appreciation, as home prices almost always go up. Not to mention, it’s a less volatile investment option as it acts as an inflation hedge in times of economic downturn.
Remember, important factors to consider when investing in residential real estate include the property’s location, expected return on investment (ROI), upcoming supply in the area, the property’s valuation, and the type of unit – whether it’s a short-term or long-term rental. If you’re based in the UAE, then you should definitely be looking to invest in Dubai real estate, as it ticks all the above boxes with its strategic location, high ROI, zero property tax, investor-friendly policies, and high quality of life.
In terms of where to start, some investors prefer the traditional way of investing in residential real estate, with more hands-on involvement in managing and maintaining the property as the landlord. However, some people prefer a more passive role without being a landlord, which is why real estate crowdfunding platforms work well in that case. Such platforms, like SmartCrowd, allow you to diversify your portfolio across several Dubai investment properties and earn monthly dividends – minus all the paperwork and property management hassle, as we do all the work for you. Plus, you don’t a huge amount of capital to invest, as you can invest from AED 500!
In addition to buying properties, you can also invest in many types of commercial real estate projects through real estate investment trusts (REITs) by buying and selling them on major exchanges, the same way you buy and sell stocks. There are also plenty of REIT ETFs which enable you to invest in shares of publicly traded REITs (think hybrid between stocks and mutual funds) and offer more diversification than a normal REIT. The above real estate investment options (minus traditional real estate investing) help you own residential or commercial properties and eliminate any landlord hassle.
Owning An Existing Business
If you have the capital, then owning an existing business and consistently investing in it to build its value improves cash flow significantly. For one, it removes the hassle of starting from the ground up – a process that includes developing new products, hiring and training staff, establishing relations with suppliers and business partners, along with building a customer base from scratch.
That being said, investing in an established business means that it already has the customers, trained staff, a well-established supply chain, and brand awareness. So, as long as there’s a profitable infrastructure, then there will always be recurring cash flow.
More importantly, target businesses that can operate without your daily involvement, but still be able to monetize the business to its full potential, whether by developing new products or leveraging technology to reduce costs. In time, those profits earned can be reinvested back into the business for growth in order to increase revenue and profit, though that depends entirely on your risk tolerance.
Investing In Stocks
Not everyone can own a business, especially an existing one, but you can definitely own a business through stocks. Essentially, when you buy stocks, or shares, of a public company in the stock market, then you are becoming a shareholder or owner of that company.
Owning stocks earns you money in two ways: The first is through the dividends of the profits that the company makes. The second is through the resale value of the stock itself. So if the company value goes up, the value of the stock also increases. That’s why investing in stocks has been one of the most reliable ways to build wealth over the long run as it generates cash flow and offers potential for growth, or capital appreciation.
However, keep in mind that stocks aren’t real assets, and are considered more volatile compared to real estate, for example. In that case, why not consider dollar-cost averaging? With this strategy, you invest your money in equal portions, at regular intervals, regardless of market ups and downs, taking the emotion out of investing and minimizing your risk.
In A Nutshell
“Make your money work for you” – We’ve all heard this line before, yet we never really know where to start. Quite simply, your money works for you when you buy assets that generate your long-term income, instead of liabilities. That’s how rich people get even richer, by making sound investment decisions that align with their financial goals, rather than following market movements and retail trends.
Whether you decide to invest in real estate, contribute to your stock portfolio every month, or own an entire business, one key piece of advice is to re-invest your returns into those assets, also known as compounding. This helps you take full advantage of your returns as you generate earnings on top of both the initial amount and the accumulated earnings.
At SmartCrowd, we provide you with the opportunity to invest in Dubai and compound your investments all while building a diversified portfolio of properties. Remember, financial literacy is key here, so continue to stay up to date with all the latest market trends – all of which you can do on the SmartCrowd platform by visiting our blog, our YouTube channel, and following us on our social media.
Download the SmartCrowd app to invest in Dubai real estate today!