Would you rather buy things that make you richer or poorer? It may seem a contradiction that the things you spend money on can make you money, but it is possible it can be what separates the truly wealthy from the rest of us.
The key concept to understand is that there are things that you buy that generate income, which are called assets. Depending on who you talk to, there are five or six asset categories: stocks, bonds, real estate real estate investment trusts, cash or money market funds, futures or currency trading, and alternative assets like gold, artwork, cryptocurrency, stamps, etc.
Some of these assets are more profitable than others, and some take specialised knowledge to make money from. But with these, you have the chance to make income without going to work for eight hours a day. If you have enough assets that generate enough income to cover your expenses, you don’t ever have to work again.
If you buy assets, you are making your money into employees. Each dirham goes to work every day, creating more dirhams. If you give your assets enough time, and choose good assets, this process compounds, so that the money makes more money which makes more money forever. You don’t get rich overnight, and you especially won’t get rich if you spend the money your assets generate instead of buying more assets with that. But if you’re patient and consistent, eventually you will have an army of dirham employees making more money in a month than you can in a year at your 9-5 job.
In the Financial Independence (FI) movement, many people use index funds, which track the entire stock market for almost no cost. Vanguard is extremely popular with funds like VTSAX and VTI which buy shares in the entire American stock market and charge you 0.04 per cent fees.
The US stock market has historically generated returns of between 10-12 per cent depending on which calculation you look at. Vanguard and their competitors like Fidelity and iShares also have low-cost funds for other countries as well, or even the entire world.
You can easily create a portfolio of low-cost index funds, allowing you to skip the massive fees UAE financial advisers traditionally charge. In the UAE, many investors buy their own index funds through brokers such as Saxo Bank, International Brokers, and Swiss Quote. The great thing about index funds is you don’t need specialised knowledge about individual companies, and if you give it enough time, and past history continues, the stock market will continue to make you money, which will compound and make you wealthy.
Sadly, most people spend all their money on things that end up costing them even more money, crushing any hopes of wealth or financial independence. Clothes, shoes, phones, TVs, spa treatments, cars, and even your own house fall into this category of “liabilities”.
The money you spend on them is just gone, and for cars and houses, the cost of purchasing them is just the beginning. After that you have insurance, repairs, petrol, etc, which make these liabilities a never-ending drain on your bank account. Liabilities are financial vampires, and they’re attached to your wallet.
"But wait," you may be saying. "My house is an asset. It gains value and I can sell it later for a profit." To that I say, “um, maybe, if you’re lucky”. Housing does sometimes appreciate in value, if you buy where a lot of people want to live. But there is no guarantee of this. A lot of people lose money on housing, like my parents, who always seemed to move just before the prices went up.
It can get especially devastating if you’re trying to sell after an economic downturn like we had in 2008, when millions of people often lost half the value of their property nearly overnight. You really need a crystal ball to determine if your house will appreciate in value more than the thousands and thousands of dirhams you will pay out to maintain it.
This changes if you own a house you then rent to others. Then the house becomes an asset that generates income. But if the house is your personal residence, it’s a cost, a liability, and you need to realise to ensure you make more rational financial decisions.
I’m not saying that buying assets is without risk. You can buy stock in a company that goes bankrupt (a risk minimised by buying index funds which contain thousands of companies). You can buy a rental property that burns down and your insurance decides not to pay out (make sure your insurance is from a good broker).
Assets can burn you. The key distinction is that while it’s possible you’ll lose money buying assets, it is pretty much guaranteed you will lose money by buying liabilities.
Wouldn’t you rather buy things that made you rich?
Dubai school teacher Zach Holz documents his journey towards financial independence on his personal finance blog The Happiest Teacher