More On Productive Assets
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.