Welcome to the part two of my series Personal finance tips-the rich becoming richer and the poor poorer. I started part 1 a few days ago if you miss that you can quickly access it before you continue from our today’s personal finance tips which will be focusing on investing.
Tip #2 investing
Firstly what is investing?
Investing is not a new word to many and yet when it comes to investing, the rich are making the difference. Investing by definition is devoting one’s time, effort or money on something with the hope of a profit at the end. In other words, investing is what gives or brings value to the owner at the end of the day.
Investing can come in various forms; it can be in knowledge, business, in people and so on. But for the sake of these tutorials, am going to focus on the money aspect.
The investment pattern
Investing normally is a plan. It start on paper and translated into action. But here are some of the things people buy and think its investment.
- Personal house
- Electronics (TV, cell phones, Radio etc)
- Clothes and shoes etc
The above are not an investment, but liabilities because once acquired, the value depreciates on a daily basis and keeps on taking money out of your pocket. A car as an example will never be sold at that same prize or higher after the purchase.
It also keeps on taking your money because you need to buy diesel and continue to do general maintenance for the car to continue to function. Their instances where these things above can be used as investments, but for personal use, it’s certainly regarded as liabilities.
How the rich and poor invest
An investment is expected to bring in profit over and over. But when it comes to investing, the rich and the poor do it differently. While the rich invest for cash flow, all others invest for capital gain. That is the rich invest to get passive income (that is the income that keeps coming after one investment) while others will only invest for some time and move out (sell it out).
For instance, the middle-class person buys a piece of land and keep, when it appreciates in value, the owner sells it and he’s happy he has double or triple his money he used in buying it. While it might be a good sum of money, it’s really inflation that pushes the prize up.
On the other hand, the rich buys a land and keeps it for life and rents it out which keeps the money coming in for as long as it’s his property that is cash flow. Whether there is inflation or not, his money keeps coming in.
Between cash flow and capital gain?
As a person who wants to be financially free, choosing the cash flow over the capital gain is the best option. Besides, cash flow is permanent with minimum risk while the capital gain is temporal with more risk.
Then what should I invest in?
Having established the facts above, here are some of the investments the rich venture into and these have been an old age tradition of the rich. In my opinion, no technology can kill it.
- Real estate
- Paper asset
The rich build business first, then invest their profits in buying real estate (land, buildings, hotels etc) and invest in other companies by buying their shares (paper asset).
The rich don’t just invest like that; they invest with control, especially with the paper asset. That is to say, they buy a certain percentage of the business like 5% or even 50% stake or even buy up the business. Whichever percentage he has, the investor gets the percentage of the company profit every time they declare a profit.
Yet to still decide on the path to go? Well the decision is all your, it’s better to follow the rules and in no time you’ll be financially free and a savvy personal finance person.
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