Have you ever seen those commercials on TV that tell you how much money you will “save” if you buy their product or service? It’s been said that only in America can a person save money by spending it. That’s the power of consumerism. You must buy, and the only way to save, is by buying at a discount.
In our consumer driven economy, millions of people load up on stuff and pay little attention assets. But if you look at anyone who is financially independent, you can bet that they know the difference between investing in assets – or in stuff.
What are assets?
Let’s start with a third party definition of the word “assets”. Investopedia.com defines it this way:
A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
We want to focus on two terms contained within that definition – economic value, and especially future benefit. These are the descriptions that make assets substantially different from everyday stuff.
Economic value implies that an asset is something that isn’t just useful, but something that represents value, typically a monetary form. Future benefit implies that the asset will provide lasting value, and if we’re talking about money, that becomes especially important.
From a financial standpoint, an asset is anything that:
- Is essentially financial in nature (or can be readily converted to cash)
- Is likely to provide a stream of future income, or
- Is likely to increase in value over time.
By this definition, assets are primarily investments. This can include stocks, bonds, real estate, a business, mutual funds, exchange traded funds, or retirement plans. All are vehicles that are likely either to increase in value, provide a stream of future income, or some combination of both. Try out a free online Personal Capital Account to manage your money.
Since assets improve your financial situation over time, they are where the great majority of your money should be at any given time.
What is stuff?
For the most part, stuff is everything that assets aren’t. Typically, stuff does not increase in value, nor does it produce a stream of future income. Stuff is mostly things that we need to use in everyday life.
That doesn’t mean that stuff is a bad thing. We do need a certain amount of stuff in order to get by in life. This can include furniture, clothing, entertainment equipment, jewelry, and even cars. All of it has very important utility – for example, we need cars to get to work, so a car is an important tool in the production of income. We can even say the same thing about computers, if they are used for business purposes.
One of the problems with stuff however is that it can give the impression that we are successful financially, at least on the surface. For example a large home, an expensive car, and a tasteful wardrobe can make others think that we’re successful.
And this is where stuff gets complicated.
“Investing” in Stuff That Looks Like Assets
It’s easy to tell yourself that living in a nice home in a nice neighborhood (even if you can’t afford it) puts you close to people who could help you on the road to success. It’s also easy to convince yourself that you need a high-end luxury car in order to look successful in a way that will draw other successful people to you. Similar arguments can be made when it comes to clothing, and even to how you entertain yourself.
There may be a grain of truth in all of it, but it’s also very easy to get carried away investing in stuff, all the while convincing yourself that stuff is really assets that will help you on the road to financial success.
But too much stuff can actually have the opposite effect. If you put too much money into stuff, and not enough into assets, you will never achieve financial success no how much stuff you have. In part this is because stuff produces no income, and no future increase in value. In fact, they generally tend to decline in value over time. Your money is always draining away as your pile of stuff grows.
How Stuff Keeps You Trapped…
But perhaps the biggest trap of stuff is debt. For better or for worse, debt is intimately connected with stuff. You generally find that the more stuff people have, the deeper they are in debt. That’s the exact opposite of what you need to do in order to achieve financial success, and certainly financial independence.
There are important psychological traps as well. Not only can you convince yourself that stuff is more important than actual assets, but you can flatter yourself into perpetually buying more of it, precisely because it is so emotionally gratifying to do so. After all, a lot of stuff is also intimately connected with the good life.
Worse, you can get caught up in the vicious cycle of always competing with other collectors of stuff. There’s something of an arms race that takes place between stuff oriented people. For example, whenever one person on the street trades up on a car, others in the neighborhood often follow shortly after.
This is how stuff turns into a trap and why it‘s often true that no matter how much money you make, you always seem to be falling behind, at least on a financial level.
…And How Assets Set You Free
Accumulating assets has the exact opposite effect. Since they only become more valuable over time, the committed saver/investor becomes wealthier over time. As the value of their assets grows, so does the cash flow from those assets. Your financial situation improves, even if it doesn’t necessarily appear to be the case from the outside.
People who recognize the difference between assets and stuff early in life usually outdistance the pack when it comes to wealth, or even financial security. While others are outpouring money into stuff, they are busy saving and investing their money. In 10 or 20 years, they have a fat bankroll and a large and growing investment portfolio, even if they don’t have a lot of stuff to decorate their lives.
Even if you have been a stuff person up this point in life, it’s never too late to make the shift over to assets. Commit to living life on a lower level, and with a lot less stuff. Use the money that you save to invest in income producing assets, that will improve your finances as the years pass.
You can almost think of it as winning by default. While others are spending their money on consumer oriented stuff, you’re investing money in income generating assets that will only improve your life in the future.