The Best Income Generating Assets

2009 January 14
by Kyle Bumpus
from → Passive Income

The key to financial independence (or “findependence” if you hate two-word phrases), is not a high-paying job or even a high net worth.  Sure, having a high-paying job will help you obtain a high net worth quicker, which in turn will allow you to invest more in income-generating assets to fuel future spending (sans job).  But it is those income-generating assets, not the high-paying job, that will secure your financial future. Assets that generate cash flow are the best assets to acquire. Why? Because you need income to retire, not wealth. A total-return approach to wealth-building is more tax-efficient, to be sure, but an income approach is far more flexible. Stocks? Bonds? Real estate? Small businesses? All are a part of well-rounded wealth-building (and income-producing) strategy.

Most people instinctively understand this concept:  after all, in the end an asset is only worth the income it produces for you, right?  But what most people don’t understand is you don’t have to start off a multi-millionaire to begin accumulating income-generating assets.  In fact, starting early in accumulating these income producing assets just happens to also double as the quickest and easiest way to achieve a high net worth, especially if you reinvest all your excess earnings into other assets rather than spending them.

Introducing The Inverted Income-Generating Asset Matrix

As long as we’re inventing ridiculous financial phrases such as “findependence” and “cash flow quadrant” (of Robert Kiyosaki fame), I thought I’d invent my own based on the principles set out in my previous post The 8 Levels of Passive Income.  Here’s how the Inverted Income-Generating Asset Matrix works:  the more effort required to generate a given amount of income, the less desirable it is, ultimately.  The ideal would be to have enough cash that you could simply invest in a simple target or balanced fund and live a life without worries.  However, the more passive the income stream, the less income it has the potential to generate, in general.  The more work required, the easier it is to obtain and the more it tends to pay.  For instance, the vast majority of individuals will start at levels 1-3 (running a small business, self-employment, working for somebody else), which will allow them to accumulate the financial resources necessary to start moving further up the ladder.

After saving $20,000 or so at your job, you might decide to move up the ladder to step 4 and invest in rental properties, or perhaps start a blog or side business online.  While step 4 doesn’t necessarily take gobs of cash to break into, it would be very difficult to get into real estate without a day job to pay the bills.  Similarly, blogging may not take much of an initial investment but also won’t generate enough income to pay the bills for years, if ever, and requires a lot of work to get there.  What step 4 does allow, however, is for you to generate extra cash to reinvest in other income-producing assets and grow your net worth over time.

Eventually, as you accumulate more and more income-producing assets and a higher and higher net worth, you can begin to shift into more passive investments further up the ladder, including index funds, hiring an investment manager to do most of the work for you, or simply investing in a good balanced or target-retirement fund.  By this point, all your accumulated income-producing assets should work together to form a sizable income stream without much more than a token involvement from you.  Welcome to findependence!

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