I had a consultation with a client recently. He was extremely proud of his achievements and informed me that over the past three years he had invested and accumulated assets. He was convinced that he was well on the way to wealth creation. When I prodded further about what he had invested in he proceeded to inform me about his humongous home (for two) in Runda, a brand new VolksWagen Toureg, and a bunch of complicated electronics for his house that I must admit I am not equipped to elaborate on. I actually thought the list would go on but it stopped there. I was actually waiting for the investment bit of his actions to come out such as “ownership in companies traded on the stock exchange, rental property, land etc.A lot of us are caught up buying what a good friend of mine labels as “Things that make us look good in front of our friends but don’t add true value”Flossets” in the name of investments. You can never invest in a car or a Plasma TV. Investment and car just don’t belong in the same sentence. So what exactly is an investment or an asset?
An asset or real investment will do either of two things.
It will earn you an income. There are various examples of assets that will earn you an income: A property you buy to rent out. Instruments such as Fixed Deposit Accounts, “Financial instruments used by the government to borrow money from us. They return a fixed interest rate. Treasury Bills, Treasury Bonds. These instruments, commonly referred to as Money Market Instruments earn you guaranteed interest. A business that you own or have invested in and is earning you a regular income.
It will increase in value and therefore you can sell it at a profit. Examples of this include shares, property, business, certain types of unit trusts etc. The objective is to sell the asset and realise the profit or the gain. When we become emotionally attached and do not sell and realise the profits, we do not benefit from the intended purpose of the asset.
Whether your home is an asset or not is always a tricky and highly emotional question. Though most people do not like to be told this, a house you live in and intend to live in for the unforseeable future is in fact not practically an asset. It may be something that is important for you to have and give you a sense of security particularly if you have a family but as long as it is not generating an income or being sold for profit it is not an asset. Some people have been able to transform their houses into assets by renting out certain sections. I am in no way averse to buying a home but it is important look beyond it as a path to wealth creation.
As to how my client had actually paid for his ‘Flossets’ is in itself another story to be explained in one of my subsequent articles when we delve further into debt. He did not go home a happy man as at the end of the day he realised that through his Flossets he had become bonded to his employer for the unforeseeable future, but the good news is that realisation had come. Real Assets are the things that will educate your children, let you retire comfortably and also let you buy your dream home. Assets and Not Flossets create wealth!
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