Another post in my Teaching my kids series
As frequent reader of my blog post you know that I’m writing some posts to try to financially educate my kids. I know they are still very young (6 and 8) but it is never too early to start. And they can read these blog posts later on in life 😉 (This is probably the case, because they don’t speak or read English very well at this moment – You got to love an understatement!).
This is another blog post to keep the “snowball of knowledge” rolling.
I think when you educate kids about money, they will benefit from it for the rest of their lives. Or as the saying goes: “What is learned in the cradle is carried to the tomb”. And to educate your kid is your responsibility as a parent.
This blog post is a post for my kids when they are a little bit older. I did not talk to my kids about this subject (yet).
In the years since I’ve been a Dividend Growth Investor (DGI) I’ve learned a very important lesson. This lesson I want to share with you.
It is so simple and once I finally understood it, it changed my perspective on life. I think that this is why the rich are getting richer and the poor get poorer. But to understand the real secret on getting wealthy, you have to redefine some important words.
Income – This is money you bring in
Expenses – This is money you spend
Liabilities – This something that costs you
Assets – This something that you own
This is what we all have learned in school. An asset is something you own, like a car or a house. And if you ask your financial planner, or your tax advisor they’ll tell you that you’re right. But I’ve learned that this is wrong!
These first three definitions are commonly used and everyone has the same definitions. The real secret is in the last definition. To become wealthy you’ll have to have a different definition of an asset.
Assets – This something that you own pays you
And this is the definition I’ll use.
Now with these definitions in the back of our mind, lets look at our own personal finances. If you own the house you live in, in which category is your house?
Lets see: Do you have to pay your mortgage for the house you own and live? Yes (and I think most of use will answer this question with yes), then the house cost you money, and therefore is a liability. Did you get it right? This is very important to understand! If not just read this paragraph again.
Can a house be an asset you asked me? Yes of course, that is a house that you own and rent out. This house pays you (the rent income). So then the house is an assets
The secret of getting wealthy
I once heard that it is not about what you do but about what you buy! And that’s really true.
Most people buy stuff with the money from their paycheck. They take the money from their income and spend it. They buy stuff that doesn’t pay them money, e.g. a car, thingys, furniture, etc. And when they save money, they save money to buy something big (and lets hope they don’t use personal loans). Therefore they are buying liabilities. Remember the definition of liabilities? Something that costs you.
When years go by and they keep buying liabilities that make them happy, then they have little or none total equity at the end. So by acting this way you will never get wealthy.
So if you want to be wealthy, you have to change your way. Break the chain.
Instead of buying stuff and liabilities you have to let your money work for you. Let your money create more money. To do this you have to buy assets with your money. Remember the new definition of an asset?
An asset is something that pays you (passive income).
And with this passive income you buy more assets. And so on. By doing this you’ll get your snowball of passive income rolling. Keep buying new assets with your passive income, and let the magic of compound interest do the rest.
Examples of assets you might have heard of:
- Dividend stocks
- Products that generate passive income
- Real estate
These assets are assets that pay out every month.
Try to think of your portfolio as a business, a business that works for you and pays you money. And when you get paid, buy some more assets, and so on and so on. This will make your business grow.
I have my own business. My Vrijheid Fonds is my own business. My Vrijheid Fonds consists of Bonds, Mutual Funds and Dividend Stocks, all of them pay me dividends. A few months back I referred to it as my Dividend Factory (see here).
When you business pay you more than your current (daytime) job, you are financially free. This is the whole idea and that is what I’m working towards with my Vrijheid Fonds.
This is my fifteenth blog post about teaching my kids. I hope my kids at the age of say 18, have all the financial knowledge I’m having right now. This would be a huge advantage for them! And that’s why I started these blog post series.
What do you tell your kids about money and investing? Do you have a business? And what do you think of the secret?
I like to hear from you!
Help me get the “snowball of knowledge” rolling and share this post.