How To Use Passive Income From Assets To Buy Liabilities!
A simple strategy everyone should follow on how to build wealth. It’s amazing how easy this is to do yet so few people do it.
Following the strategy will guarantee that you invest your money correctly throughout your lifetime and get it to work for you.
It’s important to remember that long-term strategic investing is the way to build wealth. If you don’t find a way to make money while you sleep, you will work until you die.
Today I’ll share a strategy that will do exactly that and give you some real life examples to help envisage how you can do this in your own.
The first strategy is known as the other people’s money strategy and is explained in the book rich dad poor dad by Robert Kiyosaki. It is a book that I recommend for any investor starting out.
It is a must read for anyone wanting to learn about investing and building wealth. So how does this strategy work? Let’s take a real life example and imagine that you want to buy a car.
The car itself is a liability meaning that rather than generate you money over time, it takes money out of your pocket. Owning one is a liability on your finances.
A car won’t generate you wealth because it is a liability. Let’s say the car is worth a hundred thousand dollars, it’s a nice car and you’re a bit of an enthusiast who likes finer things in life.
So you’ve saved up for a long time and finally amassed the $100,000 to buy your dream car. Most people would go out and buy the car outright. You’ve taken your hard-earned cash and asset and you’ve sunk it all into a fast depreciating liability.
The second you drive that car out of the car dealership showroom, it’s value falls by 30%. Meaning it is now worth $30,000 less. This is what most people do and doesn’t help you build wealth at all and in fact massively hinders it.
Most people don’t try to be wealthy and are simply content with appearing wealthy. So let’s talk about how to build wealth.
You’re going to need to do something first instead of buying that car directly for a hundred thousand dollars. First, invest that capital into an income generating asset.
This could be anything from real estate, shares or bonds. Invest the money in anything that will make money for you. Have that income generating asset work for you over time.
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By doing this, somebody else is making money for you even when you’re asleep. Remember, you’re no longer trading your time to make money.
You can use the passive income generated from your assets to pay for your liability in this case the car.
For instance, let’s say you invest that $100,000 into a buy to let property to get cash flow. You’ll probably want to take out an interest-only mortgage.
Once you’ve found a tenant and they’re now paying you monthly rent, that monthly income you get from the property can be used to fund the lease of your car.
You may have to physically pay the monthly fees but you’re using other people’s money to do this. The money comes in and flows straight back out as an expense.
You purchased a liability in the car but you’re not having to pay for it, your tenant is. The car will depreciate over time and you might hand it back or trade it in for an upgrade years down the line.
Your assets will still be generating you a steady stream of passive income. The asset you invested in will appreciate over time giving you appreciation on your invested capital.
You will be making money passively while at the same time growing your net worth. This concept of buying assets to buy liabilities should transform the way you look at investing and where you spend your money.
Now you may be thinking, what can you do with the money you’re making off the asset? You can choose to save for a rainy day, go on holiday, or to reinvest it to make more passive income.
This is just an example of how you can use assets to buy liabilities. I’m a firm believer that investing and building wealth shouldn’t always be about cost cutting, penny pinching, and spending as little as possible.
You should still be able to enjoy the things you want in life. How much you yield from an investment depends on what you invest in.
The risk reward payoff of what you invest in is dependent on your ability and willingness to take on risk.
So if you’re trying to finance a liability like a car on a monthly basis, you would ideally want to find a source of income that equals this payout frequency.
You could still have an equity that pays biannually to fund this. I would probably recommend a buy to let property that pays monthly or even a monthly paying ETF or equity.