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More On Productive Assets

27 October 2010 12 Comments

In the last article, I mentioned productive assets as a part of different asset types.  I’d like to expand on this topic.  It’s truly amazing how the vast majority of people have little to no productive assets – and the few that do have some stocks and that’s about it.

Let’s first consider the difference between a productive asset and its extreme opposite, a debt-financed consumer product.  Unfortunately, most people are way more familiar with debt-financed consumption that investing in productive assets.  Debt-financed products are essentially the opposite of a productive asset.  A productive asset generates value or a return, and a debt-financed consumer product is a black hole of money while losing value.

The prime example here is a car bought with debt.  Amazingly, hardly anyone buys a car cash anymore.  As a result, they are typically upside-down on their car two minutes after driving off the lot.  Such items are a black hole of money – requiring you to put money into a “payment” each month.

Turning for a second to my personal situation, I’m in a decent financial position.  I have no debt and have a little bit of savings and investments.  If you read my blog, you also know that I’ve built a second income stream with this website (and other sites).  As such, I’m piling up a little bit of extra cash these days.  As such, I’ve started considering the idea of maybe buying an inexpensive boat possibly next year – maybe something in the $7,000 – $10,000 range.

The reality is that I can probably afford this purchase (or will be able to in six months or so) even while saving and investing as usual.  With that said, is this the best financial move?  No.  A boat is not a productive asset.  That $10k invested into a productive asset will help get me to another level financially, even though I really want a small boat.  It’s a question of an increase in lifestyle versus an increase in investing into productive assets.  I’m still torn on this and will keep you updated with the decision process.

Your wealth is generated by the gap between your production and your consumption.  Widen the gap, the wealthier you become.  You can widen the gap by reinvesting money generated from that gap.  For example, a DRIP plan is a easy, cheap way to reinvest dividends from a investment in a company (like Wal-Mart).  The reinvestment is what grows the asset and helps you widen that gap.

By plowing $10k into more productive assets rather than into a boat that will decrease in value over time, I can accelerate the widening of my productive gap.  The earlier in your life, and the harder you work to widen that gap, the more wealth you will generate in your life.  The reason doing this early in your life is impactful is because your wealth has longer time to compound.

So, to sum up, productive assets are the emphasis of your financial strategy.  You can take that to mean that it is definitely a priority or you could take it to mean you should go crazy and forego everything imaginable in the name of investing in productive assets.  You can determine the degree to which you will pursue this idea, but remember the degree to which you pursue it could determine the degree of how wealthy you become.

Thoughts? Reactions?

12 Comments »

  • TaJ said:

    Boat is just an acronym for "break out another thousand". 🙂

    Regardless, it's really hard to find the balance between enjoying life now and making sure that you'll be able to enjoy life later. Personally, though, I'd say right now is a bad time to spend money on stuff you're not sure about. That boat's not going anywhere after all, but if you find you've made the wrong choice you may have trouble selling it in this environment without taking a hard hit.

  • darla_serrano said:

    @ TaJ I like the acronym!

    You bring up an interesting discussion… What is the balance between what I call "fun" spending and your growth/investment spending. I think in the end it all depends on your personal goals and the current financial conditions but the most important thing to consider is what phase in the Financial Life Cycle you are in. Are you in an Asset Accumulation phase? Protection phase? Spending phase? The answer to those questions should determine what ratio of your money goes to investing and what goes to fun. I think in every phase you should have both it's just the ratio that changes.

    As for your specific case I would have to go with plowing into investments and growth. As a 20 something in the Asset Accumulation Phase most of your extra income should go towards growth. This is based on what you mentioned, you have an extra 10 grand and you want to spend all of it on a fun purchase. Now if the ratios were different that MIGHT be a different story. Example: Maybe having an extra 25 grand, spending 7 or 8 on a boat and then investments and savings for the rest. << Just an example.

  • Andy Lapointe said:

    As with everything else, this depends on your goals. Do you want to pile up a big investment account to enjoy retirement or retire as soon as possible? Leave an inheritance for your kids to squander?

    My best weekends have been spent on a boat and the times have been worth the cost. I would recommend paying cash up front though.

    If you have met or are exceeding your goals for long term savings and can continue to do so considering the operating costs of the boat, go for it. You can't take money with you when you die.

  • Tom said:

    Life is what you make of it. "Play Well" and then work harder. We all are driven to play and then to work. Some get enjoyment out of work and others don't because they are not doing what they truly love.
    Find a job that you love and you will find that you will succeed and become financily independant.
    Taking a ski trip , buying a new pair of shoes or even a new or sporty car is all up to the person and what motivates them to work . If you really don't like work or to make money then your needs could be somewhat simpler and the material things in life become less desirable.

    Look at Bill Gates and Warren Buffet , they love what they do and neither one have a boat , although they could buy buy the largest yacht in the world. So what drives them ? It's their work , Warren loves to make money . He loves to turn something no one else can see into a printing press for dividends. His material needs are minimal , and he does not believe in waste.

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  • Tom said:

    On the other hand Bill Gates loves to change the world with the PC . His drive is not generated from playing but working , taking over a market , ect . He lives a simple life however is enjoying the fruits of his work with comfort but not over the top , unlike his partner Paul Allen who has many yachts, some of the largest in the world.

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  • tom said:

    All of us have an inner drive of what motivates us, if buying a boat drives you harder to work because you can escape the cell phones , the rat race of traffic , the crowded beach's and gives you quality family time with your kids and wife then do it. Pay cash by all means, buy wise which is pre-owned as there is no better time to purchase such as asset . The values are down and the fun factor is up . We all need an descape and we need family time. We need to clear our minds of the daily work even if you love it , you need a break of some sort . Sometimes we get intrenched too deep . too much of any one thing is not good. Live in Moderation and live with new experiences. You can sit back and count your dollars and sense and look what you made in a month and then sit back and say , wow that was really fun and enjoyable or was it?

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  • tom said:

    Again we have a need to have fun and we all want to enjoy life and having fun is healthy . Boating is one of the best and most relaxing things on this earth that allow you to experience nature , be close with our family and friends see some of the most beautiful things mother nature has created for us to enjoy .

    There is no tax to use our waterways and lakes, unlike some foregin counties that charge to bring your yacht into a certain area, like Croaita. As a matter of fact there is a tax advantage of buying a larger boat as all sales tax on boats is now capped at $ 18,000.00 no matter how big your yacht or boat is . To take advanatge of this however you would need to spend more then $ 300,000 for that Yacht or boat . There is not another sport that gives you a tax break other than yachting I know of .

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  • tom said:

    .

    So if you enjoy skiing , go skiiing , you may not have to go to the swiss alps, but go to NC or Utah. Some of the best skiing in the world is in Utah .. you can do it for a 1/3 of the cost compared to Aspen , Vail , ect .

    I very famous poet wants wrote , " You will not be disappointed by the things you have done or tried in life only by the things that you did not do or did not try " Travel, Explore Dream and throw your bow lines off and set sail as the world is yours to explore .

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  • Tyler said:

    Get that boat! You only live once. You are debt free and the purchase is neither extravagent nor leveraged. My philosphy is that you save 10% first for yourself, then use the rest of your money to enjoy life. I paid cash for a 99' Jeep Wrangler (my land boat) six years ago. I paid 10K with most of the depreciation already out of the vehicle. The memories I have had with my kids on long mountain drives during the Utah summers are priceless. The gold, silver and savings that I have are lifeless objects that cannot provide me the moments and time to spend with family and friends.

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