Wealth creation 101: Buy assets, not liabilities

Invest MoneyBy Eamon
Buy assets, not liabilities

There’s a common misconception when it comes to building wealth. Because despite the obvious goal of making more money, even huge earners who look successful tend to be broke. You may see their fancy cars and opulent lifestyle, but under the surface there’s a deeper issue. Many are using their income to keep up the illusion of wealth and have nice things but losing all their money to do so. Even worse, they are likely saddled with debt obligations that force them to keep running tirelessly on a hamster wheel to prevent everything crashing and burning.

Instead, you want to be smart and make your money work for you so you can have the freedom to do the things you love without being a slave to it. Whether that entails quitting your job, traveling the world or pursuing a passion, the way you achieve this, fundamentally, is to buy assets not liabilities. We’ll explain this in more detail but in short:

An asset is something that holds or increases in value over time. On the other hand, a liability is an expense that decreases in value. Spending money on assets contributes to a higher net worth, which is the total value of everything you own.

A key distinction between becoming rich and staying poor isn’t the difference in income. It’s the ability to spend money on maximising high growth assets and minimising liabilities by cutting costs and excessive consumption habits. In fact, only 31% of surveyed millionaires averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career, according to Ramsey.

This is why it’s important to develop a ‘money mind’. Mastering money isn’t just about output to reach a goal, and should first be adopted as a mentality, and then your actions will reflect that to build wealth instinctively. For example, here are some of the top millionaire habits successful people practice.

What assets to buy

At this point you’re probably wondering what assets to buy if you want to grow your wealth. Well, everyone has different strengths and abilities. You should gain a few areas of competence and learn to spot opportunities that are relevant to your life rather than jump on bandwagons. What you can buy will be dependent on how much money you have in the bank. So the first thing you need to do is save money before you can start investing in assets.

Although all assets can fluctuate in value and come with the risk of losing money, some of the more stable assets include:

  • Treasury bonds
  • Dividend stocks
  • Money market funds
  • Savings in high interest ISA’s
  • Property
  • Gold

Safer assets often return lower growth but can be great alternatives to storing money in the bank where it will underperform. This is because inflation drives prices up by 2.56% each year on average, so you can buy less and less with cash as time passes.

Riskier assets you can buy include:

  • Cryptocurrency
  • Ownership stakes in start-up companies
  • Paintings
  • Music rights
  • Vintage cars
  • Websites and domain names
  • Collectors items
  • NFTs

How to reduce liabilities

This is the crucial but often ignored part of building wealth. You need to live below your means so your net cash flow is positive aka more money is coming in than going out. Cash outflow is great when it’s going towards investments but unfortunately a lot of the things that can bring you momentary joy such as nights out, holidays, cars, rent, shopping etc are liabilities. That’s not to say you should ditch them all, but rather cut consumption or be smarter about what you pay for. For example, you may need a car to travel to work but as soon as you buy one its resell value plummets, for the most part. Leasing a car is cheaper but you can get tied into contracts that cost £400 monthly and you don’t own anything so you get nothing back from that spend. However, if you spent £2000 on a used car in good condition then you can end up saving a lot more over the years. Or even better, you might find public transport routes that offer discounted season tickets.

The point is, you make short-term sacrifices by reducing liabilities to invest in your future. You don’t want to reach your 40s and have nothing to show for it but fond memories and worthless clutter. Your family or partner desires financial stability. Your energy levels and physical ability will start to wane. Younger and cheaper graduates become preferred for many job roles. Don’t let the world move on without you because you didn’t prepare.

So here’s the plan of action to say goodbye to liabilities:

  1. Get a budget planner so you know all your expenses (and subsequently what to cut back on).
  2. Check out the 50/30/20 rule to understand how your income spend can be split into needs, wants and savings. 
  3. Work on getting rid of bad or unhealthy habits such as smoking, alcohol, and gambling.
  4. Optimise costs with a value for money mindset.
  5. Fill your time with more free activities.
  6. Look into minimalism and stoicism as a philosophy to be content living in moderation and overcoming discomfort.

Keep repeating ‘buy assets not liabilities’ until this becomes a normal way of thinking in your daily life. You’ll find this to be life-changing and a giant leap towards financial freedom.