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Lesson: 2.1 Asset Classes
So now you understand the basic difference between Assets and Liabilities. Assets put money into your pocket weather you work or not while liabilities will take money out of your pocket. This is a simple definition of the asset.
You also know that, Rich focus their time and energy to create and acquire assets. While middle class don’t buy assets but they actually buy liabilities to look cool and rich.
So if you want to become rich in your life than you will have to acquire more assets in your life. You will have to work hard to grow the asset column of your financial statement if you really want to become rich one day in your life.
Diagram: 42: Financial Statement Showing 4 Basic Asset Classes
In this article, we will discuss about various types of asset classes. Here are the 4 basic types of asset classes in the world.
01) Business
02) Real Estate
03) Paper Assets (Stocks, Bonds, Mutual Funds, Pension Plans..etc…)
04) Precious Metals (Gold & Silver)
There are several types of assets in this world. But the above are the 4 basic types of assets.
Other Assets -
- Intellectual properties (Books, Music, Movies, Novels, Patents, Inventions, Copyrights…etc..)
- Web Properties (Domain names, Websites, Blogs, Forums..etc..)
- Art & paintings
- Rare Wine
- Vintage Cars
- Collectibles (Stamps, coins, old coke bottles…etc..)
Business -
First of all let me tell you that, Business is an Asset class. A Business is an asset because it puts money into your pocket weather you work or not. And that’s why a Business is the asset. In fact, a business is the most valuable asset class in this world. This is because the owners of the business can get rich much faster than the owners of any other asset classes.
Diagram: 43 – Middle Class work hard for Money (Active Income) while Rich Work hard to create & Acquire new assets and grow the asset column of their financial statement (Passive Income)
Developing a Business is all about creating new assets in the asset column of your financial statement. Bill Gates (Microsoft), Larry Page (Google), Mark Zuckerberg (Facebook), Dhirubhai Ambani (Reliance), Henry Ford (Ford Motors), Ray Kroc (McDonalds), Michael Dell (Dell Computers), Steve Jobs (Apple) have created their own Assets – Their own businesses which are multi-billion dollar empires today making them billionaires.
Business (& Real Estate) is the preferred asset class of the rich people. In fact, 99.99% of world’s rich people own at least one business in the asset column and that’s why they are rich and ultra-rich. So if you want to become very rich in your life than develop at least one successful business in your life.
Real Estate -
This is the second asset class which is preferred by Rich people. This is because the rich can acquire this asset class by using good debt (Mortgage Loan). Say for example, if the real estate property is worth of $ 5 Million than a rich can acquire it just by putting $ 1 Million down (20%). This is the main advantage of real estate investments.
You can use debt to acquire this asset and ultimately become more richer than ever.
Paper Assets -
These are basically the assets of the Middle class and Upper middle class. This is because these are the assets for capital gains only. The Examples are – Stocks, Bonds, paper Gold and Mutual Funds or any other kind of paper assets.
Rich also invest in these assets but not from their hard earned money but from the passive income generated by their other cashflow assets (Businesses & Real Estate). Thus, for Rich paper assets are the last asset classes to acquire while for the middle class this is the first asset class to acquire.
Today all the employees and self-employees around the world invest in this asset class mainly for the capital gains. But unfortunately, investing for the capital gains is the risky form of investing. While rich invest for both cashflow and capital gains.
Precious Metals (Gold & Silver) -
After 1971, the US Government has removed the gold standard and the US Dollar became free float currency means the US Government can print as much money as it want according to the need of the economy after 1971. And subsequently all the countries of the world have removed the gold standard.
Thus, the more money the banks and governments from all around the world will print, the price of the precious metals will go up more.
Well, of course Rich Invest in Gold. But the gold is not their primary asset class. This is because it is the Capital gains asset class. It doesn’t provide you any cashflow.
The problem with middle class people is that they invest in gold as a primary asset class and that’s why they will have to depend on only one kind of profit and that is capital gain. This is really a risky Investment strategy.
Diagram: 44 – Difference between Middle class and Rich Investing (Middle Class Invest for the Capital Gains while Rich Invest for Cashflow & Capital Gains Both.)
The Difference between Rich & Middle class investing -
The rich and middle class both invest in all of the above asset classes but in the different way. After all, all of the above are the assets and as we have learned in the previous lesson that to become rich, all you need to do is to acquire more assets. So the more assets you will acquire, the more rich you will become.
Thus, all of the above are after all the assets and can make you rich and richer. But the only problem with the middle class is that, they buy mainly Capital gain assets (Paper Assets & Precious Metals) from their hard earned money which is a risky thing. This is because the middle class have been taught in the school that Business is risky.
While Rich people mainly buy (or create) Cashflow (+ Capital Gain) Assets (Businesses & Real Estate). And from the income generated by their cashflow assets, they buy the capital gain assets like Gold and Paper Assets (Stocks, Bonds & Mutual Funds).
This is the single difference that can make you rich or middle class in the long run. Many middle class accumulate lots of assets in their Financial statements but most of them are paper assets & Gold – the capital gain assets only. And that’s why they will have to wait for years until the price of the asset goes up.
While Rich primarily buy the cashflow (+ Capital gains) assets so the day they acquire these assets, their income and cashflow also improves immediately. Thus, they can enjoy their life very well as well as acquire more assets from their increased income very easily.
Online Assets - Information Age Assets -
After the birth of the Internet in 1990, the entirely new asset class has been created in world known as – Web Assets or Web Properties.
The Examples are – Websites, Blogs, Forums & Domain Names.
These web properties tend to appreciate so much fast that even high school going kids started becoming millionaires before leaving their high schools. In fact, today many self-made billionaires are in their twenties and thirties only because of the web properties.
The founders of Facebook, Amazon, Google & eBay are the billionaires today. The reason why web properties appreciate so much faster is because the entire world is connected to the internet today which makes exponential growth of the web properties in its valuations as well as the cashflow.
If you want to become very rich in your young age than try this asset class. This is because it is the only fastest appreciating asset class in the world which can make even a school going kid a millionaire or multi-millionaire before leaving his high school.
Summary:
If you want to become rich than acquire any kind of assets. Keep accumulating more and more assets out of your money. If you want to become rich than the only thing you need to focus is on the asset column of your financial statement and nothing else.
However, there is a huge difference between the middle class and rich investing. Middle class invest primarily in the paper assets and gold while the rich invest primarily in the businesses and real estate and after that acquire other capital gain assets like paper assets and gold.
So if you want to become rich than it is advisable to start a Business or real estate investing first. This is because these are the cashflow assets which can acquire other assets afterwards without much efforts.
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