How to generate income and what is an asset

Kids, one of the books that you should read very early on in preparing for investing is the 'Rich Dad Poor Dad'-series by Robert T. Kiyosaki. There are a number of books written by him and they are all fairly easy to read. As always, with anything you read or hear, you need to be critical and have your own thinking and opinions about the material. But you should always also open your mind to new and interesting ideas and not shut them out before thinking about them critically.

For me there have been two key take-aways from reading these books; a) one about how to think about different structural options to generate income and b) one about what is an asset and what is not.

A) Regarding the structural options to generate income, Kiyosaki introduces a concept of a 'CASHFLOW Quadrant', which basically lists four type of ways to generate income.

Most people in today's society live their lives mainly on the left-hand side of the quadrant, i.e. as employees or as self-employed (e.g. small-practice lawyer, doctor or similar). Even though it is possible to reach financial independence on the left-hand side, most people who have reached it have done it on the right-hand side (as business owner and/or as investor). Please however remember that there are also many failures on the right-hand side, not everyone who tries that side will succeed.

I strongly believe that you should try to find your the passion in your life from which you can also generate a healthy income to live off and to invest. This can be in any of the four quadrants. However, I also strongly believe that you should as early on as possible develop your skills as Investor to have your excess money work for you. This will give you financial independence at some point in time and give you many additional degrees of freedom in your life. Even if you do not think investing is fun, you should at least try to acquire knowledge of the basic concepts within investing, so that you at least can challenge and potentially judge the advisors that you want to have to help you with the investor quadrant.

Personally, I have spent most of my time after university in the E square, but for the last 15 years also allocated capital in the B quadrant. After reading 'Rich Dad Poor Dad' I have for the most of my career sought after job positions where I can combine E with B in order to get some of the financial upside of the B quadrant and also to get as much understanding of how successful people in the B quadrant think and operate and to learn things that I can also use in the I quadrant. I have, however, never been the majority shareholder and/or founder of a business, so in essence I have not really given that quadrant a proper go. In parallel, also for nearly 15 years, I have started to build my skills in the I quadrant. Most of the posts in this blog relate to the learnings and ideas I have about being an investor and those I want to pass onto you, no matter what you choose to do in life for a living.

B) The other key take-away is regarding what is an asset and what is not. Until my early 30's I was so 'brain-washed' from school and university with the concept of assets being such things as the apartment or the house where we live or even the car we own, i.e. things that have a market value. It was not until I read 'Rich Dad Poor Dad' that it struck me that an asset is 'anything that produces a positive cash flow'. Our house will only produce a negative cash flow as long as we use it to live in and the same goes for our car. Hence they are not assets, they are only 'liabilities' and have a huge alternative cost... The most practical example of this is that we today could sell our existing house and move to a much cheaper house somewhere on the countryside or a smaller town, become debt-free and have all the cash-flow from real assets that we need to live a comfortable life without needing to work. But with the current 'assets' (mainly our house) I still need to work as it consumes cash (rent payments, running costs and maintenance costs) and hence is NOT a true asset (that generates a positive cash-flow). A share in a company is however most often generating cash to the owner through dividends or share redemption programs and this is in my world a true asset.

As a final remark, I think one should focus most of the attention on how one can generate the most income rather than spending as little as possible. The reason is that it (at least for me in relative terms) is so much easier to spend little money, whereas the effort to increase income (through getting a higher-paying job, starting and driving a business or learning how to invest successfully over time) is much, much tougher. Naturally one should keep costs low, but it is only a (smaller) part of the key to achieve financial independence.

Setting goals - and one recommended book to read

I believe that one important part regarding investing is to set a clear goal for yourself. I did so somewhat more than ten years ago. Then I was in my early 30's, and though fairly successful in my career there was still no way that I would be able to have financial independence in the near future. Still, I made some bold career moves and even more importantly, I set a very clear goal regarding my financial status in the future.

I did this after quite many months of thinking of how to formulate the goal, and inspired by the classical book 'Think and grow rich' by Napoleon Hill. Kids, read it when you get old enough. The rich part is not really important for me, I translate it to free (free in time to do what you want with your most precious and limited resource: time). Today I do not remember much of the book's content, but one thing that it inspired me to do was to think about my goal EVERY day during that time period I set my goal for.
What I did was that I calculated roughly what I would need in assets to live a good (but not fancy according to my own standards) life and not have to work for the rest of my life (i.e. freeing up time for myself). I came (then) to the conclusion and goal that I wanted to have 2 MUSD in assets (in the more traditional accounting-style definition) and being completely debt-free. The assets should be distributed as 2/3 for investable assets (cash-generating assets) and 1/3 for housing (cash-consuming 'asset'). The starting point was around 0,1 MUSD in assets. I set a very clear time-limit on that goal: to reach this by June 30th 2013. I failed.

However, I came a long way. Today (one year late) I have reached more than 2/3 of my goal in terms of assets, and as inflation has been much lower than I anticipated back then, I am in a very favourable position regarding my time. I will write more about this in upcoming posts.

I am now considering a new major goal in my life, but I am not sure yet what it will be. I am starting to lean towards becoming a 'mid-tier millionaire' 20 years from now (i.e. having investable assets of 5 MUSD or more by June 30th 2034) and to be completely debt-free. This is fairly ambitious, so I am still considering how realistic it is, and what it would take for me to be able to achieve it in such a time period. The key thing I am considering is how the plan should look where I balance/optimize between additional definite positive cash-flow (i.e. having a job or similar), spend my time on improving expected return on my investments and having more free time, all while having a financial independence with a fair margin of safety.