The recipe for creating true freedom in your life is simple.
The first step is to make sure that your expenses are lower than your income. You can either adjust your expenses or increase your income. Then you can invest the difference in assets.
What are assets? An asset is something that will give you an income. You can think of assets like money machine.
I like the term money machine because it takes all confusion away from the concept. If it does not make money for you, it is not an asset. If it is costing you money, it is the opposite of an asset and that is called a liability. An asset can be stocks, bonds, real estate that you rent out or a firm that you own. Your car, your house and all the loans attached are liabilities.
Vending and pinball machines
It is almost only your imagination that set the limit of what an asset can be.
It could, for example, be a vending machine in your local gym. Before you laugh at this idea, please remember that the famous investor Warren Buffett began his adventure as a business man with chewing gum and pinball machines. He bought his first pinball machine for 25 dollars and placed it at the local barber shop.
On the first day, it earned him four dollars. Gradually, the coins trickled in and he invested in more machines, placing them in other hair dressers and barber shops.
The local shop keeper received half of the revenue from the machines which motivated them to take good care of the machine, but it also made them eager to have more installed since they had no investment or maintenance costs. They only enjoyed benefits.
Warren Buffett pretended to be a local errand boy, employed to take care of the machines. When the barber asked him to install yet another money-making machine, Warren Buffett simply answered that he would ask his manager.
Little did the barber know that the skinny kid was the CEO himself.
By the next visit, Warren Buffett would politely explain that the big boss had said no.
The machines created a passive income for Warren Buffett and became his first asset. Before he was 17, he had mad 53.000 dollar mainly on candy and pinball machines.
No. Your home is not an asset
A lot of people think that their home is an asset.
“We will invest in property” people say when they buy a home. But your own private house is not an asset unless you rent it out and live somewhere else.
If you live in it, it’s a liability. It’s a drain on your finances.
Consider this: Does your home provide you with an income? Some people try to justify it, explaining that the price of real estate in that exact area has doubled and will continue to double.
Maybe, maybe not.
There are such things as real estate bubbles, and who knows what the value of your home will be when you are ready to downsize. How much did your home cost you in maintenance, taxes, electricity, heating, insurance and interest on loans last year? Unless you have exceptionally high Airbnb rates that surpass the cost of all your costs, your home is a liability.
If you want it to become an asset, move out and rent it out.
