Here is a tricky question for you – What’s your greatest asset? Is it your house, car, jewelry, or investment portfolio? Ha! You’re thinking – I know the answer to this one. It’s me! I’m my greatest asset. Yes, that’s a great answer to this trick question. Many successful people like Warren Buffett would support that answer. You need to invest in yourself so you can increase your earning potential. The ability to earn and grow your income is better than any passive income.
Here is a quick and dirty example. If you invest a million dollars in a dividend portfolio, you’d receive around $30,000 in dividends this year. That’s a lot of money, but almost anyone can earn more than $30,000 by working. And you don’t need to invest a million dollar to work and earn money. Invest in yourself and you’ll earn more every year. The best investment is to improve your skills and learn more. That’s a great optimistic answer, isn’t it?
Well, today I’m going play the devil’s advocate and tell you that Warren Buffett is wrong. You are not your greatest asset. You’re thinking – Joe is out of his mind! Did he forget to take his medication? Okay, let’s see if I can make my case.
You are your biggest liability
One takeaway I learned from Robert Kiyosaki’s Rich Dad, Poor Dad is how to evaluate assets and liabilities. An asset puts money in your pocket. Anything that takes money out of your pocket is a liability. That’s a simple concept which is misunderstood by a lot of people.
That’s my first argument – you are your biggest liability. Yes, you earn money, but you also consume most of it, too. Some people make six figures every year, but their debt keeps growing. That mean they are a liability. If your net worth is trending downward, then you are probably a liability, not an asset.
Let’s look at a theoretical example – Joe. Joe made about $30,000 last year. He was self employed so he had to pay the $&%!y self employment tax. That’s about $3,500, so he brought home around $26,500. His family spent $54,000 in 2016 and his share is half of that.
- Joe made $26,500
- Joe spent $27,000
In this case, Joe is a liability to his family. He’d need to earn more money or spend less this year to become an asset. So you see? You are not always your greatest asset. If you don’t control your spending, you will be a liability no matter how much money you make. In Joe’s case, he probably needs to make a little more income.
The 4th dimension – time
My second argument is that earnings can’t last. Joe used to make six figures per year, but he doesn’t anymore. You will face the same scenario sooner or later. No matter how smart you are or how much money you make, there will come a time when your earned income starts to decline and then stops altogether. Time is an unstoppable force and you will get old. It is inescapable.
A lot of people don’t pay attention to the future and just focus on the present. That might work while you’re younger with more options, but it’s exactly the reason why so many people won’t be able to retire comfortably. You need to look ahead and figure out how to support yourself when you can’t work anymore.
Let’s go back to the dividend example.
Most people will be able to earn more than $30,000 per year, but at some point the dividends will surpass your earnings. If the dividend portfolio is invested in a good low cost dividend index fund, it will throw off dividend in perpetuity. No matter how much money you earn, there is no way to compete with perpetuity. Unless a big meteor crashes into earth or the US economy completely melts down, a dividend portfolio will eventually make more money than you earned.
The problem with earning money is the limited time you can work. Most of us can work for 40-50 years and that’s it. A good dividend portfolio will pay out much longer than that. When you factor time into the equation, the dividend portfolio wins.
Plan for passive income
“Invest in as much of yourself as you can, you are your own biggest asset by far.” –Warren Buffet
I agree to a certain extent. It’s best to invest in yourself when you’re young. That way you can increase your earning potential and make a ton of money over your working life. However, you also need to control your expenses and plan for the future as well. You need to figure out how to support yourself when you can’t earn money anymore.
My strategy is to increase our passive income and wind down my earned income slowly. Last year, I was a liability to our household, but we still came out ahead. Our passive income more than made up for that $500 short fall.
Mrs. RB40 is a big net positive for our household last year. She is making great income and doesn’t spend a lot of money. Even after she retires, we should still be fine financially. Our household income would drop, but we should be able to continue to increase our net worth over time. You can see how we’re doing with passive income so far this year. If we get it right, our portfolio will outlive us and benefit future generations for years to come.
What do you think? Are you your greatest asset?
*Update – Al’s comment below is what I was trying to verbalize. Our creations are our best asset. If you create something lasting, then it will keep giving back. That’s a great way to look at it.