Keys to success #2: Invest in income generating assets

How often do you hear how someone had inherited a substantial amount of money or had a substantial lottery win or windfall, and within a few years they have none of it left?

I personally know a few such families that have blown hundreds of thousands of dollars each because they did not understand money, assets, income, expenditure etc.

Now, as I have mentioned in Lesson #1, when I first started to make excess profits in my business, I took them and invested in ......... negatively geared residential investment properties, and immediately began to kill my cashflow!!! (I bet you thought I was going to say "positive cash flow producing assets"!)

For the first few years, I managed to get some capital capital gains, but the negative gearing was taking money out of our monthly paycheque and killing our cashflow.

This went on for a few years before I realised how futile it was.

I remember reading a book called "Rich Dad, Poor Dad" by Robert Kiyosaki, which talked about the exact scenario I was experiencing. His book made so much sense to me.

As a result, I sold the negatively geared properties, and reinvested the money into positively geared properties with higher yield, and the cashflow isues were gone! In fact, the extra cashflow generated by the investments were used to build equity and pay down the investment mortgage debt. That book made a huge difference to my thinking and future investment strategies!

The book completely changed my thinking about investing for income, and I realised that with the change in investment strategy, that if one day I was unable to work, or decided to retire early, I could live off the rental incomes that they produced. The great thing about this plan was that while I continued working, I did not need to use the income produced by the investments, so as it built up, I just then reinvested that income and paid down loans and purchased more assets - all from the rents paid by tenants.

While I continued working, the original properties, plus extra property purchased using the rental incomes kept building up even more income, so I used the extra income to buy another property! This is compounding - reinvesting the profits of the assets to buy more assets! If you do this long enough, you will ride out the ups and downs of the market and end up being worth a lot more than you ever imagined - simply by using the compounding laws!

We remained focussed on building income producing assets for many years which included the business and properties.

We only ever borrowed to buy income producing assets - afterall, the interest on asset purchases is a tax deduction!

We never, ever, borrowed for luxuries, our motor yacht, caravan, holidays etc were all paid for by income from our assets.

If you spend all your money to have a good time today, you will never have excess for tomorrow, which means you will have to work until you die!

If you don't want to work forever, if you want to retire on your own terms with financial security, then you need to build income producing assets that will fund your lifestyle in the future!

Lessons:

• Compounding is your friend, use it to grow your assets.

• Understand the difference between positive cashflow assets and negatively cashflowed liabilities.

• Understand the difference between assets (things that put money into your pocket) such as income producing property, divedend yielding stocks etc, and liabilities (things that take money out of your pocket) such as cars, boats, holidays, negatively geared property etc.

• Work out how you will fund your lifestyle if you no longer can work, or choose not to work.

Further Lessons (books/references to help you understand the above concepts better):

• Rich Dad Poor Dad by Robert Kiyosaki

• The Richest Man in Babylon by George Samuel Clason